8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): July 14, 2006

RAIT Investment Trust

(Exact name of registrant as specified in its charter)

Maryland	1-14760	23-2919819
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)
c/o RAIT Partnership, L.P., 1818 Market Street, 28th Floor, Philadelphia, Pennsylvania		19103
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (215) 861-7900

Not Applicable

Former name or former address, if changed since last report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

þ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01. Other Events.

     During the six-months ended June 30, 2006, RAIT Investment Trust (“RAIT”) reclassified two properties from “held for use” to “held for sale.” In compliance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), and in connection with the joint proxy statement/prospectus RAIT expects to file with the SEC in connection with its proposed merger with Taberna Realty Finance Trust, RAIT is filing this current report on Form 8-K to provide required updating disclosure with respect to its annual report on Form 10-K for the fiscal year ended December 31, 2005 (the “Annual Report”) and its quarterly report on Form 10-Q for the quarterly period ended March 31, 2006 (the “Quarterly Report”).

     Subsequent to the filing of the Annual Report, we classified as “held for sale” a consolidated real estate interest consisting of a 110,421 square foot shopping center in Norcross, Georgia. Subsequent to the filing of both the Annual Report and Quarterly Report, we classified as “held for sale” a consolidated real estate interest consisting of a 216-unit apartment complex and clubhouse in Watervliet, New York. In accordance with SFAS 144, RAIT is updating its audited consolidated financial statements included in the Annual Report by reclassifying the results of operations attributable to these interests, for all periods presented, to “discontinued operations” and is also updating its reviewed consolidated financial statements included in the Quarterly Report by reclassifying the results of operations attributable to the interest reclassified as of May 11, 2006, for all periods presented, to “discontinued operations.” The primary changes to these financial statements resulting from these reclassifications are:

• a $207,000 increase in RAIT’s previously reported net income from continuing operations with a corresponding reduction in RAIT’s net income from discontinued operations for the year ended December 31, 2005,

• a $3.6 million and $55,000 reduction to RAIT’s previously reported net income from continuing operations with a corresponding increase to RAIT’s net income from discontinued operations for the years ended December 31, 2004 and 2003, respectively,

• an $84,000 reduction to RAIT’s previously reported net income from continuing operations with a corresponding increase to RAIT’s net income from discontinued operations for the three months ended March 31, 2006,

• a $33,000 increase in RAIT’s previously reported net income from continuing operations with a corresponding reduction in RAIT’s net income from discontinued operations for the three months ended March 31, 2005, and

• certain assets and liabilities were reclassified to consolidated real estate interests held for sale and liabilities underlying consolidated real estate interests held for sale within the balance sheet.

There is no effect on RAIT’s previously reported net income, total assets or shareholders’ equity.

     The updated financial statements from the Annual Report and Quarterly Report appear as Exhibits 99.4 and 99.5, respectively, to this report. In addition, RAIT has updated the table of selected financial data from the Annual Report, management’s discussion and analysis of financial condition and results of operations from the Annual Report and the Quarterly Report and quantitative and qualitative disclosures about market risk from the Annual Report which appear as Exhibits 99.1, 99.2, 99.6 and 99.3, respectively, to this report. RAIT believes this information may be helpful to investors in reviewing the updated financial statements. Except as described above, the information presented in this current report on Form 8-K does not include any adjustments or updates to any information presented in the Annual Report or Quarterly Report.

ADDITIONAL INFORMATION ABOUT THIS TRANSACTION

     RAIT and Taberna shareholders and other investors are urged to read the joint proxy statement/prospectus and other materials which will be filed by RAIT with the SEC. These documents will contain important information, which should be read carefully before any decision is made with respect to the merger. When documents are filed with the SEC, they will be available for free at the SEC’s website (http://www.sec.gov). These documents are also available for free by accessing RAIT’s website (http://www.raitinvestmenttrust.com) or by accessing Taberna’s website (http://www.Taberna.com).

     RAIT, Taberna and certain of their trustees, executive officers, members of management and employees, may be deemed to be participants in the solicitation of proxies in connection with the proposed merger. Information regarding the persons who may, under the rules of the SEC, be considered to be participants in the solicitation of shareholders in connection with the proposed merger, including any interest they have in the merger, will be set forth in the joint proxy statement/prospectus when it is filed with the SEC.

     This filing shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

Exhibit No.	Description
15.1	Awareness Letter from Independent Registered Public Accounting Firm (Grant Thornton LLP).
23.1	Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP).
99.1	Annual Report Item 6 — Selected Financial Data.
99.2	Annual Report Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
99.3	Annual Report Item 7A — Quantitative and Qualitative Disclosures About Market Risk.
99.4	Annual Report Item 8 — Financial Statements and Supplementary Data.
99.5	Quarterly Report Item 1 — Financial Statements.
99.6	Quarterly Report Item 2 — Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

RAIT Investment Trust

By:  /s/ Ellen J. DiStefano

Name:	Ellen J. DiStefano
Title:	Executive Vice President and Chief Financial Officer

July 14, 2006

Exhibit Index

Exhibit No.	Description
15.1	Awareness Letter from Independent Registered Public Accounting Firm (Grant Thornton LLP).
23.1	Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP).
99.1	Annual Report Item 6 — Selected Financial Data.
99.2	Annual Report Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
99.3	Annual Report Item 7A — Quantitative and Qualitative Disclosures About Market Risk.
99.4	Annual Report Item 8 — Financial Statements and Supplementary Data.
99.5	Quarterly Report Item 1 — Financial Statements.
99.6	Quarterly Report Item 2 — Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

EX-15.1

RAIT Investment Trust
1818 Market Street
Philadelphia, Pennsylvania 19103

We have reviewed, in accordance with standards established by the Public Company Accounting Oversight Board (United States), the unaudited interim consolidated financial information of RAIT Investment Trust and subsidiaries for the three-month periods ended March 31, 2006 and 2005 as indicated in our report dated May 9, 2006 (except for Note 6, as to which the date is July 13, 2006); because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Current Report on Form 8-K dated July 14, 2006 is incorporated by reference in the Registration Statements on Form S-3 (File No. 333-103618, effective on March 14, 2003; File No. 333-69366, effective on October 18, 2001; and File No. 333-78519, effective May 14, 1999) and Form S-8 (File No. 333-125480, effective on June 3, 2005; File No. 333-109158, effective on September 26, 2003; File No. 333-100766, effective on October 25, 2002; and File No. 333-67452, effective on August 14, 2001).

We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of a Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
July 14, 2006

EX-23.1

EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated March 1, 2006 (except for Note 6, as to which the date is July 13, 2006) accompanying the consolidated financial statements and schedules and our report dated March 1, 2006 accompanying management’s assessment of the effectiveness of internal control over financial reporting included in the Current Report of RAIT Investment Trust and subsidiaries on Form 8-K dated July 14, 2006 for the year ended December 31, 2005. We hereby consent to the incorporation by reference of said reports in the Registration Statements of RAIT Investment Trust on Registration Statements on Form S-3 (File No. 333-103618, effective on March 14, 2003; File No. 333-69366, effective on October 18, 2001; and File No. 333-78519, effective May 14, 1999) and Form S-8 (File No. 333-125480, effective on June 3, 2005; File No. 333-109158, effective on September 26, 2003; File No. 333-100766, effective on October 25, 2002; and File No. 333-67452, effective on August 14, 2001).

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
July 14, 2006

EX-99.1

Item 6. Selected Financial Data

     The following selected financial and operating information should be read in conjunction with Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” and our financial statements, including the notes thereto, included elsewhere herein.

	As of and For the Year Ended December 31,
	2005		2004		2003		2002		2001
	(Dollars in thousands except per share data)
Operating Data:
Total revenues (1)	$	107,372	$	82,194	$	60,739	$	51,920	$	39,680
Total costs and expenses(1)		31,886		21,421		17,643		17,495		19,221
Net income before gain on sale of consolidated real estate interests, loss on sale of unconsolidated real estate interest, gain on sale of loan, and income from loan satisfaction		75,452		60,743		43,131		34,367		20,500
Net income from continuing operations		75,254		63,146		45,503		41,347		21,035
Net income available to common shareholders		67,951		60,878		47,164		43,505		26,914
Net income from continuing operations per common share basic		2.48		2.37		2.16		2.38		2.09
Net income per common share basic		2.59		2.49		2.24		2.50		2.68
Net income from continuing operations per common share diluted		2.46		2.36		2.15		2.36		2.07
Net income per common share diluted		2.57		2.48		2.23		2.48		2.65
Balance Sheet Data:
Total assets		1,024,585		729,498		534,555		438,851		333,166
Indebtedness secured by real estate(2)		131,032		117,165		131,839		115,166		109,559
Unsecured line of credit		240,000		—		—		—		—
Secured lines of credit		22,400		49,000		23,904		30,243		2,000
Shareholders’ equity		609,235		541,710		363,402		277,595		211,025
Other Data:
Dividends per share	$	2.43	$	2.40	$	2.46	$	2.39	$	2.12

(1)	Presentation does not include revenues and costs for assets and liabilities which RAIT has classified as held for sale or as discontinued operations under Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” or SFAS No. 144.
(2)	The sum of senior indebtedness relating to loans, long-term debt secured by consolidated real estate interests and liabilities underlying consolidated real estate interest held for sale.

EX-99.2

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Overview

     We are a real estate investment trust, or REIT, formed under Maryland law. We make investments in real estate primarily by making real estate loans, acquiring real estate loans and acquiring real estate interests. Our principal business objective is to generate income for distribution to our shareholders from a combination of interest and fees on loans, rents and other income from our real estate interests, and proceeds from the disposition of real estate interests.

     During the past three fiscal years, we have achieved significant growth in our revenues and net income. Our operating revenues have grown 77% to $107.4 million in fiscal 2005 as compared to $60.7 million for fiscal 2003, while our net income has increased 44% to $68.0 million in fiscal 2005 as compared to $47.2 million in fiscal 2003. In addition, in each of the past two fiscal years, our assets have increased by over 35%. The principal reasons for this growth were:

• Increased mezzanine and bridge loans and unconsolidated real estate interests — We continued to grow our core business of making mezzanine and bridge loans and acquiring unconsolidated real estate interests in 2005 and 2004. We originated, purchased or acquired $593.4 million, $423.6 million and $242.6 million, in the aggregate, of mezzanine and bridge loans and unconsolidated real estate interests in the years ended December 31, 2005, 2004 and 2003, respectively.

• Increased use of leverage — During the year ended December 31, 2005 we leveraged our asset base by investing $121.5 million we obtained by incurring additional senior indebtedness relating to loans and $240.0 million we obtained from our unsecured revolving credit facility.

     The current relatively low interest rate environment compared to historical interest rates has had only a limited impact upon our ability to originate investments within our investment parameters, including our targeted rates of return. We attribute this to our ability to offer structured financing that accommodates senior financing sources, to respond quickly to a borrower’s requests and to tailor our financing packages to a borrower’s needs. As a result, we believe that we do not compete for a borrower’s business on interest rates alone. In addition, we are responding to the possibility of rising interest rates by making variable rate loans in certain circumstances and by entering into the unsecured revolving credit agreement described below under “Liquidity and Capital Resources.” This increases the aggregate amount available to us under our financing facilities and we anticipate that the rate of interest on amounts we borrow under this agreement will be substantially lower than those we could obtain under our secured lines of credit or that we could negotiate in connection with senior indebtedness relating to our loans.

Liquidity and Capital Resources

     The principal sources of our liquidity and capital resources from our commencement in January 1998 through December 31, 2005 were our public offerings of common shares, 7.75% Series A cumulative redeemable preferred shares and 8.375% Series B cumulative redeemable preferred shares. After offering costs and underwriting discounts and commissions, these offerings have allowed us to obtain net offering proceeds of $594.0 million. We expect to continue to rely on offerings of our securities as a principal source of our liquidity and capital resources.

     We issued 2,760,000 Series A preferred shares in March and April 2004 for net proceeds of $66.6 million. Our Series A preferred shares accrue cumulative cash dividends at a rate of 7.75% per year of the $25.00 liquidation preference, equivalent to $1.9375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series A preferred shares have no maturity date and we are not required to redeem the Series A preferred shares at any time. We may not redeem the Series A preferred shares before March 19, 2009, except in limited circumstances relating to the ownership limitations necessary to preserve our tax qualification as a real estate investment trust. On or after March 19, 2009, we may, at our option, redeem the Series A preferred shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. For the years ended December 31, 2005 and 2004, we paid dividends on our Series A preferred shares of $5.4 million and $4.2 million, respectively.

     We issued 2,258,300 Series B preferred shares in October and November 2004 for net proceeds of $54.4 million. Our Series B preferred shares accrue cumulative cash dividends at a rate of 8.375% per year of the $25.00 liquidation preference, equivalent to $2.09375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series B preferred shares have no maturity date and we are not required to redeem the Series B preferred shares at any time. We may not redeem the Series B preferred shares before October 5, 2009, except in limited circumstances relating to the ownership limitations necessary to preserve our tax qualification as a real estate investment trust. On or after October 5, 2009, we may, at our option, redeem

the Series B preferred shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. For the years ended December 31, 2005 and 2004, we paid dividends on our Series B preferred shares of $4.7 million and $1.1 million, respectively. Our Series A preferred shares and Series B preferred shares rank on a parity with respect to dividend rights, redemption rights and distributions upon liquidation.

     We also maintain liquidity through our unsecured credit facility and our secured lines of credit. At December 31, 2005, our unsecured credit facility provided for $305.0 million of maximum possible borrowings (we have the right to request an increase in the facility of up to an additional $45.0 million, to a maximum of $350.0 million, subject to certain pre-defined requirements) and three secured lines of credit, two of which each have $30.0 million of maximum possible borrowings, and the third of which has $25.0 million (as of March 2006, the maximum possible borrowing on this line increased to $50.0 million).

     The following are descriptions of our unsecured credit facility and secured lines of credit at December 31, 2005:

  Unsecured Credit Facility

     On October 24, 2005, we entered into a revolving credit agreement with KeyBank National Association, as administrative agent, Bank of America, N.A., as syndication agent, KeyBanc Capital Markets, as sole lead arranger and sole book manager, and financial institutions named in the revolving credit agreement. The revolving credit agreement originally provided for a senior unsecured revolving credit facility in an amount up to $270.0 million, with the right to request an increase in the facility of up to an additional $80.0 million, to a maximum of $350.0 million. The original amount was increased by an additional $35.0 million to $305.0 million in December 2005. Borrowing availability under the credit facility is based on specified percentages of the value of eligible assets. The credit facility will terminate on October 24, 2008, unless we extend the term an additional year upon the satisfaction of specified conditions.

     Amounts borrowed under the credit facility bear interest at a rate equal to, at our option:

• LIBOR (30-day, 60-day, 90-day or 180-day interest periods, at our option) plus an applicable margin of between 1.35% and 1.85% or

• an alternative base rate equal to the greater of:

• KeyBank’s prime rate or

• the Federal Funds rate plus 50 basis points), plus an applicable margin of between 0% and 0.35%.

     The applicable margin is based on the ratio of our total liabilities to total assets which is calculated on a quarterly basis. We are obligated to pay interest only on the amounts borrowed under the credit facility until the maturity date of the credit facility, at which time all principal and any interest remaining unpaid is due.

     Our ability to borrow under the credit facility is subject to our ongoing compliance with a number of financial and other covenants, including a covenant that we not pay dividends in excess of 100% of our adjusted earnings, to be calculated on a trailing twelve-month basis, provided however, dividends may be paid to the extent necessary to maintain our status as a real estate investment trust. The credit facility also contains customary events of default, including a cross default provision. If an event of default occurs, all of our obligations under the credit facility may be declared immediately due and payable. For events of default relating to insolvency and receivership, all outstanding obligations automatically become due and payable.

     At December 31, 2005, we had $240.0 million outstanding under the credit facility, of which $180.0 million bore interest at 5.87125% and $60.0 million bore interest at 7.25%. Based upon our eligible assets as of that date, we had $50.0 million of availability under the credit facility.

  Secured Lines of Credit

     At December 31, 2005, we had $30.0 million of availability under the first of our two $30.0 million lines of credit. This line of credit bears interest at either:

• the 30-day London interbank offered rate, or LIBOR plus 2.5% or

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• the prime rate as published in the “Money Rates” section of The Wall Street Journal, at our election.

     Absent any renewal, the line of credit will terminate in October 2007 and any principal then outstanding must be repaid by October 2008. The lender has the right to declare any advance due and payable in full two years after the date of the advance.

     At December 31, 2005, we had $30.0 million of availability under the second of our $30.0 million lines of credit. This line of credit bears interest at the prime rate as published in the “Money Rates” section of The Wall Street Journal. This line of credit has a current term running through April 2006 with annual one-year extension options at the lender’s option and an 11-month non-renewal notice requirement.

     At December 31, 2005, we had no availability under our $25.0 million line of credit. This line of credit bears interest at the 30-day LIBOR plus 2.25%. As of December 31, 2005, the interest rate was 6.64%. In December 2005, the revolving feature of this credit line expired and all amounts then outstanding ($22.4 million) are to be repaid by December 2006. In March 2006, we renewed the revolving feature of the credit line and increased the maximum borrowing to $50.0 million.

     The aggregate amount of indebtedness outstanding under the secured lines of credit was $22.4 million at December 31, 2005. As of December 31, 2005, $28.8 million in principal amount of our loans were pledged as collateral for amounts outstanding under the secured lines of credit.

     In 2005, we chose to not renew our second $25.0 million line of credit and our $10.0 million line of credit because both of the lenders who provided the lines participated in our unsecured revolving credit facility.

     Our other sources of liquidity and capital resources include principal payments on, refinancings of, and sales of senior participations in loans in our portfolio as well as refinancings and the proceeds of sales and other dispositions of our real estate interests. These resources aggregated $501.6 million, $256.9 million, and $200.1 million for the years ended December 31, 2005, 2004 and 2003, respectively.

     We also receive funds from a combination of interest and fees on our loans, rents and income from our real estate interests and consulting fees. As required by the Internal Revenue Code, we use this income, to the extent of not less than 90% of our taxable income, to pay distributions to our shareholders. For the years ended December 31, 2005, 2004 and 2003, we paid distributions on our common shares of $63.6 million, $58.5 million and $52.7 million, respectively, of which $63.2 million, $58.2 million and $52.4 million, respectively, was in cash and $354,000, $306,000 and $296,000, respectively, was in additional common shares issued through our dividend reinvestment plan. We also paid $10.1 million and $5.3 million of dividends on our Series A and Series B preferred shares, in the aggregate, for the years ended December 31, 2005 and 2004, respectively. We had no preferred shares outstanding for the year ended December 31, 2003 so we did not pay any preferred share dividends in that year. We expect to continue to use funds from these sources to meet these needs.

     We use our capital resources principally for originating and purchasing loans and acquiring real estate interests. For the year ended December 31, 2005, we originated or purchased 70 loans in the amount of $585.4 million, as compared to 57 and 23 loans in the amount of $388.6 million and $227.7 million for the years ended December 31, 2004 and 2003, respectively. For the year ended December 31, 2005, we invested $8.0 million in unconsolidated real estate interests, as compared to $35.0 million and $14.9 million for the years ended December 31, 2004 and 2003, respectively. For the year ended December 31, 2005 we invested $1.6 million in our consolidated real estate interests, as compared to $3.5 million and $246,000 for the years ended December 31, 2004 and 2003, respectively. For the year ended December 31, 2005 we invested $6.4 million in our consolidated real estate interest held for sale, as compared to $316,000 and $1.3 million for the years ended December 31, 2004 and 2003, respectively.

     At December 31, 2005, we had approximately $71.6 million of cash on hand which, when combined with $67.2 million of loan repayments we received in January and February 2006, provided for $120.4 million of loans originated through February 28, 2006. We anticipate that we will use the $79.0 million available to be drawn on our unsecured credit facility (based upon our eligible assets at February 28, 2006, we are able to borrow up to the maximum $305.0 million and currently have $226.0 million outstanding on the line) to fund additional investments totaling approximately $85.2 million that we expect to make in March 2006.

     We believe that our existing sources of funds will be adequate for purposes of meeting our liquidity and capital needs. We do not currently experience material difficulties in maintaining and accessing these resources. However, we could encounter difficulties in the future, depending upon the development of conditions in the credit markets and the other risks and uncertainties described in Item 1A — “Risk Factors” above.

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     We may also seek to develop other sources of capital, including, without limitation, long-term borrowings, offerings of our warrants, issuances of our debt securities and the securitization and sale of pools of our loans. Our ability to meet our long-term, that is, beyond one year, liquidity and capital resources requirements is subject to obtaining additional debt and equity financing. Any decision by our lenders and investors to enter into such transactions with us will depend upon a number of factors, such as our financial performance, compliance with the terms of our existing credit arrangements, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders’ and investors’ resources and policies concerning the terms under which they make such capital commitments and the relative attractiveness of alternative investment or lending opportunities. In addition, as a REIT, we must distribute at least 90% of our annual taxable income, which limits the amount of cash from operations we can retain to fund our capital needs.

     The following schedule summarizes our currently anticipated contractual obligations and commercial commitments as of December 31, 2005:

	Payments Due by Period
	Less Than		One to		Three to		More Than
Contractual Obligations	One Year		Three Years		Five Years		Five Years		Total
Operating leases	$	390,019	$	790,694	$	658,912	$	—	$	1,839,625
Indebtedness secured by real estate(1)		27,656,943		94,545,692		394,421		6,253,409		128,850,465
Unsecured line of credit		—		240,000,000		—		—		240,000,000
Secured lines of credit		—		22,400,000		—		—		22,400,000
Deferred compensation(2)		—		500,664		—		—		500,664
	$	28,046,962	$	358,237,050	$	1,053,333	$	6,253,409	$	393,590,754

(1)	Indebtedness secured by real estate consists of senior indebtedness relating to loans, long-term debt secured by consolidated real estate interests, and liabilities underlying a consolidated real estate interest held for sale.
(2)	Represents amounts due to fund our supplemental executive retirement plan or SERP. See note 10 of our consolidated financial statements.

Off-Balance Sheet Arrangements

     We do not have any off-balance sheet arrangements that we believe have had, or are reasonably likely to have, a current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources, that is material to investors.

Results of Operations

     Interest Income. Interest income is comprised primarily of interest accrued on our loans. In addition, certain of our loans provide for additional interest payable to us based on the operating cash flow or appreciation in value of the underlying real estate. We recognize this additional interest or “accretable yield” over the remaining life of the loan, such that the return yielded by the loan remains at a constant level for its remaining life. Our interest income was $80.7 million, $61.0 million and $42.3 million for the years ended December 31, 2005, 2004, and 2003, respectively.

     The $19.7 million increase in interest income from 2004 to 2005 was primarily due to:

• an additional $31.8 million of interest earned on 101 loans totaling $763.9 million originated between January 1, 2004 and December 31, 2005, partially offset by a $14.3 million reduction of interest due to the repayment of 51 loans totaling $328.6 million during the same period;

• $11.6 million of appreciation interests that were accreted into income and for which we collected cash, in the year ended December 31, 2005, relating to five loans that were repaid during the same period;

• an increase of $834,000 in accretable yield included in our interest income from the year ended December 31, 2004 to the same period in 2005, relating to two loans where we have appreciation interests and

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• a decrease of $9.9 million of accretable yield due to the consolidation of a property underlying one of our loans in accordance with FIN 46, as we describe as we describe below in “Critical Accounting Policies, Judgments and Estimates.”

     The $18.7 million increase from 2003 to 2004 was primarily due to an additional $34.1 million of interest earned on 73 loans totaling $536.2 million originated between January 1, 2003 and December 31, 2004, partially offset by a $15.4 million reduction of interest due to the repayment of 51 loans totaling $385.1 million during the same period.

     Rental Income. At December 31, 2005 we had three consolidated real estate interests (three at both December 31, 2004 and 2003) which generated rental income that is included in our financial statements. Our rental income was $13.6 million for the year ended December 31, 2005, compared to $11.1 million and $8.9 million for the years ended December 31, 2004 and 2003, respectively. The increase in rental income from 2004 to 2005 was primarily due to the consolidation of one real estate interest in August 2004, partially offset by the disposition of one consolidated real estate interest in June 2004. The interest that we consolidated in August 2004 related to a loan we acquired in June 2003, which was scheduled to mature in September 2004. Shortly before the loan’s maturity, we restructured our investment and determined that we were the primary beneficiary of the variable interest entity that owned the property. Accordingly, at that time we began consolidating the financial statements of this variable interest entity. For a further description of this investment, see “— Critical Accounting Policies, Judgments and Estimates” below.

     The increase in rental income from 2003 to 2004 was primarily due to the acquisition of a consolidated real estate interest in August 2004, partially offset by the disposition of two consolidated real estate interests, one in March 2003 and one in June 2004. The acquisition that we recorded in August 2004 related to the loan we acquired in June 2003 described above.

     Fee Income and Other. Revenues generated by our wholly owned subsidiary, RAIT Capital Corp d/b/a Pinnacle Capital Group, are generally reported in this income category. Pinnacle provides, or arranges for another lender to provide, first-lien conduit loans to our borrowers. This service often assists us in offering the borrower a complete financing package, including our mezzanine or bridge financing. Where we have made a bridge loan to a borrower, we may be able to assist our borrower in refinancing our bridge loan, for which we will earn related fee income through Pinnacle. We also include financial consulting fees in this income category. Financial consulting fees are generally negotiated on a transaction by transaction basis and, as a result, the sources of such fees for any particular period are not generally indicative of future sources and amounts. We earned fee and other income of $7.0 million for the year ended December 31, 2005, as compared to $6.7 million in 2004 and $4.9 million for 2003. Included in fee and other income for 2005 were revenues of $4.6 million from Pinnacle, financial consulting fees of $2.1 million, and application fees/forfeited deposits totaling $287,000. Included in fee and other income for 2004 were revenues of $3.9 million from Pinnacle, financial consulting fees of $2.3 million, and application fees/forfeited deposits totaling $274,000. Included in fee and other income for 2003 were revenues of $2.5 million from Pinnacle, financial consulting fees of $2.0 million, and application fees/forfeited deposits totaling $169,000. Also included in 2003 fee and other income was a facilitation fee of $100,000 paid to us by Resource America, Inc. for facilitating an acquisition, by an unrelated third party financial institution, of a $10.0 million participation in a loan owned by Resource America. We had previously owned the participation from March 1999 until March 2001 and, in order for another party to acquire it, we had to reacquire it and then sell it to them. The transaction was completed in January 2004, at which time we earned an additional $23,000 representing interest for the eight days that we had funded the participation. For a description of our relationship with Resource America, see note 14 of our consolidated financial statements.

     Investment Income. We derived our investment income from the return on our unconsolidated real estate interests, and from interest earned on cash held in bank accounts.

     At December 31, 2005, we had nine (nine and eight at December 31, 2004 and 2003, respectively) unconsolidated real estate interests. Our investment income was $6.0 million for the year ended December 31, 2005, compared to $3.4 million and $4.6 million for the years ended December 31, 2004 and 2003, respectively. The $2.6 million increase from the year ended December 31, 2004 to the corresponding period in 2005 was primarily due to an additional $3.7 million of investment income accruing on six unconsolidated investments in real estate totaling $36.4 million acquired between January 1, 2004 and December 31, 2005, partially offset by a $1.1 million reduction of investment income due to the disposition of four unconsolidated investments in real estate totaling $17.6 million during the same period. Cash held in bank accounts generated investment income of $557,000, $428,000 and $421,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Most of the investment income we earned on cash deposits was generated from our bank accounts with The Bancorp Bank. For a description of our relationship with The Bancorp Bank, see note 14 of our consolidated financial statements.

     The decrease of $1.2 million from the year ended December 31, 2003 to the corresponding period in 2004 was primarily due to a decrease of $2.5 million of income relating to our appreciation interests, partially offset by a $1.4 million increase in income from our

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unconsolidated real estate interests. In 2003 we recognized income of $2.5 million relating to our realization of appreciation interests in five of our unconsolidated real estate interests. In 2004 we recognized $2.4 million relating to our appreciation interest in one of our investments, but due to the structure of the investment, the income was not included in the “Investment income” line item in our financial statements. See — “Gain on Sale of Real Estate Interests” below for a discussion of this transaction.

     Gain on Sale of Real Estate Interests. In June 2004 we recognized $2.4 million relating to our appreciation interest in one of our investments. Because we had a controlling interest in the entity that owned the real estate, we accounted for our equity interest on a consolidated basis. Accordingly, when our appreciation interest was realized (with the economic intent of generating additional interest income), under generally accepted accounting principles in the United States, we recognized income as gain on sale of real estate interest. As of September 30, 2004 we had restructured this investment into a mezzanine loan, and as of December 31, 2004 it had been fully repaid.

     In March 2003, we sold a 40% limited and sole general partnership interest in a limited partnership that owns a property to an unrelated party. We retained an 11% limited partnership interest. The limited partnership interest we sold had a book value of negative $1.4 million. The buyer paid $914,000 and we recognized a gain of $2.4 million.

     Loss on Sale of Unconsolidated Real Estate Interest. In December 2005, the general partner of a limited partnership in which we held an 11% limited partnership interest entered into an agreement to sell the apartment building that it owned. Our share of the net sales proceeds was approximately $2.0 million and the book value of our unconsolidated interest was $2.2 million, thereby resulting in a loss on sale of $198,000.

     Interest Expense. Interest expense consists of interest payments made on senior indebtedness relating to loans, long term debt secured by consolidated real estate interests and interest payments made on our credit facility and lines of credit. We anticipate our interest expense will increase as we increase our use of leverage to enhance our return on our investments. Interest expense was $13.4 million for the year ended December 31, 2005, as compared to $5.9 million and $5.1 million in 2004 and 2003, respectively. The $7.5 million increase from the year ended December 31, 2004 to the same period in 2005 was primarily attributable to the establishment and utilization of $443.5 million in additional availability on new and existing lines of credit and senior indebtedness relating to loans partially offset by a $444,000 reduction of interest expense on long term debt secured by consolidated real estate interests, due to the disposition of a consolidated real estate interest in June 2004, and a $336,000 reduction of interest expense on senior indebtedness relating to loans due to our repayment, during 2005, of $32.6 million of senior indebtedness relating to loans.

     The $800,000 increase in interest expense from the year ended December 31, 2003 to the corresponding period in 2004 resulted primarily from the following:

• $660,000 of increased interest expense due to the utilization of a new $25.0 million credit facility commencing in February 2004, combined with an increase in both the interest rate and the periods for which amounts drawn remained outstanding on our credit lines; and

• a net increase of $920,000 of interest expense paid on a net increase of $20.5 million of senior indebtedness relating to loans between January 1, 2003 and December 31, 2004; partially offset by

• $785,000 decrease in interest expense due to the disposition of two consolidated real estate interests; one in March 2003 and one in June 2004.

     Property Operating Expenses; Depreciation and Amortization. Property operating expenses were $7.7 million for the year ended December 31, 2005, compared to $5.7 million and $5.1 million for 2004 and 2003, respectively. Depreciation and amortization was $1.5 million for the year ended December 31, 2005, compared to $1.1 million for both 2004 and 2003. The increases in property operating expenses and depreciation and amortization from year ended December 31, 2004 to the corresponding period in 2005 were due to the net effect of the consolidation of one real estate interest in August 2004, partially offset by the disposition of one consolidated real estate interest in June 2004, as discussed in “Rental Income” above.

     The increase in property operating expenses and depreciation and amortization from the year ended December 31, 2003 to the year ended December 31, 2004 was partially due to the net effect of the acquisition of one consolidated real estate interests and the disposition of two consolidated real estate interests during 2003 and 2004. The other factor was an overall increase of 5-10% in property operating expenses at all properties. The increased expenses had little effect on the overall operations of the properties however, as rental income had generally increased at the same pace as the property operating expenses.

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     Included in property operating expenses are management fees paid to Brandywine Construction & Management, Inc., an affiliate of the spouse of our chairman and chief executive officer, for providing real estate management services for the real estate underlying our real estate interests. Brandywine provided real estate management services to four, five and six properties underlying our consolidated real estate interests at December 31, 2005, 2004 and 2003, respectively. We paid management fees of $525,000, $634,000, and $545,000 to Brandywine for the years ended December 31, 2005, 2004 and 2003, respectively. In addition, at December 31, 2005, 2004 and 2003, Brandywine provided real estate management services for real estate underlying seven, nine and eleven, respectively, of our unconsolidated real estate interests (whose results of operations are not included in our consolidated financial statements.) We anticipate that we will continue to use Brandywine to provide real estate management services.

     Salaries and Related Benefits; General and Administrative Expense. Salaries and related benefits were $5.1 million for the year ended December 31, 2005, as compared to $4.6 million and $3.5 million for 2004 and 2003, respectively. General and administrative expenses were $4.2 million for the year ended December 31, 2005, as compared to $4.2 million and $2.8 million for 2004 and 2003, respectively. The increases in salaries and related benefits and in general and administrative expenses were due to:

• the grant of 2,744 phantom units pursuant to our equity compensation plan in 2004, as compared to the grant of 1,392 phantom shares and 11,316 phantom units pursuant to our equity compensation plans in 2005;

• increased personnel and occupancy expenses which reflect the expansion of our staff to support the increased size of our portfolio, due to the significant infusion of new capital, primarily from our public offerings;

• increased compliance costs relating to new regulatory requirements and

• increased costs for directors’ and officers’ liability insurance.

     Included in general and administrative expense is rental expense relating to our downtown Philadelphia office space. We sublease these offices pursuant to two operating leases that provide for annual rentals based upon the amount of square footage we occupy. The sub-leases expire in August 2010 and both contain two five-year renewal options. One sub-lease is with The Bancorp, Inc. We paid rent to Bancorp in the amount of $295,000, $251,000 and $244,000 for the years ended December 31, 2005, 2004 and 2003 respectively. The other sublease is with The Richardson Group, Inc. Our relationship with Richardson is described in note 13 of our consolidated financial statements. We paid rent to Richardson in the amount of $43,000, $56,000 and $55,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Effective April 1, 2005, Richardson relinquished to the landlord its leasehold on a portion of the space they had subleased to us. Simultaneously, Bancorp entered into a lease agreement with the landlord for that space. We then entered into a new sublease with Bancorp for that space at annual rentals based upon the amount of square footage we occupy. Also included in general and administrative expenses is $60,000 that we paid in each of the years ended December 31, 2005, 2004 and 2003 to Bancorp for technical support services provided to us.

     Discontinued Operations. As of October 3, 2005, we classified as “held for sale” one of our consolidated real estate interests, consisting of an 89% general partnership interest in a limited partnership that owns a building in Philadelphia, Pennsylvania with 456,000 square feet of office/retail space. As of March 31, 2006, we classified as “held for sale” a consolidated real estate interest consisting of a 110,421 square foot shopping center in Norcross, Georgia. Also, as of May 11, 2006, we classified as “held for sale” a consolidated real estate interest consisting of a 216-unit apartment complex and clubhouse in Watervliet, New York. The results of operations attributable to these interests have been reclassified, for all periods presented, to “discontinued operations”.

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     The following is a summary of the aggregate results of operations for the consolidated real estate interests held for sale for the years ended December 31, 2005, 2004 and 2003. These amounts have been reclassified to discontinued operations in the Company’s consolidated statements of income for all periods presented:

	For the Years Ended December 31,
	2005		2004		2003
Rental income	$	17,294,045	$	16,879,139	$	15,451,688
Less:
Operating expenses		8,253,441		8,546,855		7,673,541
Interest expense		3,866,681		3,932,432		3,632,333
Depreciation and amortization		2,041,145		2,670,550		2,484,678
Net income before gain on involuntary conversion		2,772,778		1,729,302		1,661,136
Gain on involuntary conversion		—		1,282,742		—
Net income from discontinued operations	$	2,772,778	$	3,012,044	$	1,661,136

     The increases in rental income from 2004 to 2005 and from 2003 to 2004 were due to our successful negotiation of expansions and renewals of leases with existing major tenants. The decrease in depreciation and amortization for the year ended December 31, 2005 was due to the cessation of our recognition of depreciation expense at the property that we considered “held for sale” as of October 3, 2005.

     On June 18, 2004, a fire involving one of our consolidated real estate interests held for sale (a 110,421 square foot shopping center in Norcross, Georgia) resulted in extensive damage to an 8,347 square foot building on an out-parcel of land located in the parking lot of the shopping center. Our insurance carrier settled the claims related to the fire. As a result of settling these claims, we received total cash proceeds of $1.7 million and recorded a gain on involuntary conversion of $1.3 million.

Inflation

     In our three most recent fiscal years, inflation and changing prices have not had a material effect on our net income and revenue.

Critical Accounting Policies, Judgments and Estimates

     Our accounting and reporting policies conform with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires that we make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements. We have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions.

     Basis of Financial Statement Presentation — The consolidated financial statements include our accounts and the accounts of our qualified REIT subsidiaries, our wholly owned subsidiary, RAIT Capital Corp., our majority-owned and controlled partnerships, OSEB Associates L.P. and, until June 30, 2004, Stobba Associates, L.P. (we no longer consolidated Stobba Associates as of June 30, 2004, when we exchanged our 49% limited partnership interest for cash of $750,000 and an $8.2 million mezzanine loan), our majority-owned and controlled limited liability companies, RAIT Executive Boulevard, LLC and RAIT Carter Oak, LLC. We have eliminated all significant intercompany balances and transactions. As of and for the year ended December 31, 2005 and 2004, our consolidated financial statements include the accounts of a variable interest entity, or VIE, of which the we are the primary beneficiary. For a description of this entity see “— Fin 46” below.

     We consolidate any corporation in which we own securities having over 50% of the voting power of such corporation. We also consolidate any limited partnerships and limited liability companies where:

• we have either the general partnership or managing membership interest,

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• we hold a majority of the limited partnership or non-managing membership interests and

• the other partners or members do not have important rights that would preclude consolidation.

     Further, we account for our non-controlling interests in limited partnerships under the equity method of accounting, unless such interests meet the requirements of EITF:D-46 “Accounting for Limited Partnership Investments” to be accounted for under the cost method of accounting. In accordance with EITF 03-16, “Accounting for Investments in Limited Liability Companies,” our accounting policy for our non-controlling interests in limited liability companies is the same as it is for our non-controlling interests in limited partnerships.

     Revenue Recognition — We consider nearly all of our loans and other lending investments to be held-to-maturity. We reflect held-to-maturity investments at amortized cost less allowance for loan losses, acquisition discounts, deferred loan fees and undisbursed loan funds. We recognize interest income using the effective yield method applied on a loan-by-loan basis. Occasionally, we may acquire loans at discounts based on the credit characteristics of such loans. We account for the discount by first measuring the loan’s scheduled contractual principal and contractual interest payments over its expected future cash flows to determine the amount of the discount that would not be accreted (nonaccretable difference). We accrete the remaining amount, representing the excess of the loan’s expected future cash flows over the amount paid, into interest income over the remaining life of the loan (accretable yield). Over the life of the loan, we estimate the expected future cash flows from the loan regularly, and record any decrease in the loan’s actual or expected future cash flows as a loss contingency for the loan. We use the present value of any increase in the loan’s actual or expected future cash flows first to reverse any previously recorded loss contingency not charged off for the loan. For any remaining increase, we adjust the amount of accretable yield by reclassification from nonaccretable difference and adjust the amount of periodic accretion over the loan’s remaining life. We also defer loan origination fees or “points,” as well as direct loan origination costs, and recognize them over the lives of the related loans as interest based upon the effective yield method.

     Many of our loans provide for accrual of interest at specified rates which differ from current payment terms. Interest is recognized on such loans at the accrual rate subject to our determination that accrued interest and outstanding principal are ultimately collectible, based on the operations of the underlying real estate.

     We recognize prepayment penalties from borrowers as additional income when received. Certain of our loans and unconsolidated real estate interests provide for additional interest based on the operating cash flow or appreciation in value of the underlying real estate. We accrete projected future cash flows relating to these additional interests into interest income over the remaining life of a particular loan. We review the projected future cash flows on a regular basis and we record any decrease in the loan’s actual or expected future cash flows as a loss contingency for that particular loan. We apply the present value of any increase in the loan’s actual or expected future cash flows first to any previously recorded loss contingency for that particular loan. We account for any remaining increase by reclassifying that amount from the nonaccretable difference, thereby adjusting the amount of periodic accretion over that particular loan’s remaining life.

     In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP 03-3 addresses the accounting for acquired impaired loans, which are loans that show evidence of having deteriorated in terms of credit quality since their origination. SOP 03-3 is effective for loans acquired after December 31, 2004. Our adoption of SOP 03-3 did not have a material effect on our financial condition, results of operations, or liquidity.

     Provision for Loan Losses — Our accounting policies require us to maintain an allowance for estimated loan losses at a level that we consider adequate to provide for loan losses, based upon our quarterly evaluation and analysis of the portfolio, historical and industry loss experience, economic conditions and trends, collateral values and quality, and other relevant factors. We have a reserve for loan losses of $226,000 as of December 31, 2005. This reserve is a general reserve and is not related to any individual loan or to any anticipated losses. In accordance with our policy, we determined that this reserve was adequate as of December 31, 2005 and 2004 based on our credit analysis of each of the loans in our portfolio. If that analysis were to change, we may be required to increase our reserve, and such an increase, depending upon the particular circumstances, could be substantial. Any increase in reserves will constitute a charge against income. We will continue to analyze the adequacy of this reserve on a quarterly basis.

     If we determine that a loan is impaired, we establish a specific valuation allowance for it in the amount by which the carrying value, before allowance for estimated losses, exceeds the fair value of collateral, with a corresponding charge to the provision for loan losses. We generally utilize a current, independently prepared appraisal report to establish the fair value of the underlying collateral;

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however if we are unable to obtain such an appraisal we will establish fair value using discounted cash flows and sales proceeds as well as obtaining valuations of comparable collateral. We do not currently have any specific valuation allowances. If we considered a loan, or a portion thereof, to be uncollectible and of such little value that further pursuit of collection was not warranted we would charge-off that loan against its specific valuation allowance.

     Consolidated Real Estate Interests — Our consolidated real estate interests include land, buildings and improvements, and escrows and reserves on deposit with the first mortgage lender. We carry buildings and improvements at cost less accumulated depreciation. Depreciation is computed using the straight-line method over an estimated useful life of up to 39 years (non-residential) and 27.5 years (residential). We account for the impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS No. 144. SFAS No. 144 addresses the requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. As of December 31, 2005 we believe that there is no impairment of any of our consolidated real estate interests.

     SFAS No. 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. As of October 3, 2005, we classified as “held for sale” a consolidated real estate interest consisting of a building in Philadelphia, PA with 456,000 square feet of office/retail space. In accordance with SFAS No. 144, the assets and liabilities of this real estate interest have been separately classified on our balance sheet as of December 31, 2005 and 2004, and the results of operations attributable to this interest have been reclassified, for all periods presented, to “discontinued operations”. Additionally, depreciation expense was no longer recorded for this asset once it was classified as “held for sale”.

     As of March 31, 2006, we classified as “held for sale” a consolidated real estate interest consisting of a 110,421 square foot shopping center in Norcross, Georgia. Also, as of May 11, 2006, we classified as “held for sale” a consolidated real estate interest consisting of a 216-unit apartment complex and clubhouse in Watervliet, New York. The results of operations attributable to these interests have been reclassified, for all periods presented, to “discontinued operations”.

     See note 6 for a description of these consolidated real estate interests and the results of their operations that have been reclassified as “discontinued operations.”

     Federal Income Taxes — We qualify and we have elected to be taxed as a real estate investment trust, or REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with our taxable year ending December 31, 1999. If we qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on our taxable income that we distribute to our shareholders. As a REIT, we are subject to a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our annual taxable income. As of and for the years ended December 31, 2005 and 2004, we were in compliance with all requirements necessary to qualify for taxation as a REIT.

     FIN 46. We have adopted Financial Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” and revised FIN 46 (“FIN 46(R)”). In doing so, we have evaluated our various interests to determine whether they are in VIEs. These variable interests are primarily subordinated financings in the form of mezzanine loans or unconsolidated real estate interests. We have identified 23 variable interests, having an aggregate book value of $182.4 million, that we hold as of December 31, 2005. For one of these variable interests, a first mortgage loan with a book value of $40.8 million at December 31, 2005, we determined that we are the primary beneficiary and such variable interest is included in our consolidated financial statements.

     The VIE we consolidated is the borrower under a first mortgage loan secured by a 594,000 square foot office building in Milwaukee, Wisconsin. We purchased the first mortgage loan in June 2003 (face value and underlying collateral value are both in excess of $40.0 million) for $26.8 million. At the time we purchased the loan, we determined that the entity that owned the property was not a VIE.

     Before the loan’s maturity date, in August 2004, we entered into a forbearance agreement with the borrower that provided that we would take no action with regard to foreclosure or sale of the building for a period of three years, with two one-year extension options, subject to our approval. The agreement also gave us operational and managerial control of the property with the owner relinquishing any right to participate. We also agreed to make additional loan advances to fund outstanding fees and commissions (some of which fees were owed to an affiliate of the owner), and to fund shortfalls in operating cash flow, if necessary, during the forbearance period. The loan remains outstanding in its full amount and, aside from extending the maturity date of the loan, no other terms were adjusted.

     We concluded that entry into the forbearance agreement was a triggering event under FIN 46(R) and thus the variable interest had to be reconsidered. Because the actual owner of the property no longer had a controlling financial interest in the property and we had

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the obligation to make additional advances under our loan to fund any potential losses, we determined that the borrower was a VIE and that we were the primary beneficiary due to our absorption of the majority of the probability weighted expected losses, as defined in FIN 46(R). We continue to hold a valid and enforceable first mortgage loan and the value of the property exceeds our carrying value for the loan. However, as the primary beneficiary, we are required to consolidate this variable interest entity pursuant to FIN 46(R).

     Our consolidated financial statements as of and for the years ended December 31, 2005 and 2004 include the assets, liabilities, and results of operations of the VIE, which we summarize below:

			For the Period from
	For the Year		August 29, 2004
	Ended		(consolidation) through
	December 31, 2005		December 31, 2004
Total assets	$	47,052,000	$	45,618,000
Total liabilities	$	743,000	$	576,000
Total income	$	8,826,000	$	4,591,000
Total expense		5,547,000		1,748,000
Net income	$	3,279,000	$	2,843,000

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EX-99.3

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     The following table contains information about our cash held in money market accounts, principal amounts outstanding on loans held in our portfolio, principal amounts payable on senior indebtedness relating to loans and long-term debt secured by real estate owned and the principal amount outstanding on our lines of credit and credit facility as of December 31, 2005. The presentation, for each category of information, includes the assets and liabilities by their maturity dates for maturities occurring in each of the years 2006 through 2010 and the aggregate of each category maturing thereafter. None of these instruments has been entered into for trading purposes.

	2006			2007			2008			2009			2010			Thereafter			Total
Interest earning assets:
Money market accounts	$	71,419,877																	$	71,419,877
Average interest rate		3.75	%																	3.75	%
Fixed rate first mortgages		185,325,794			62,811,626			—			—			—			—			248,137,420
Average interest rate		8.1	%		8.2	%		—			—			—			—			8.1	%
Variable rate first mortgages		65,273,871			36,820,559			73,866,426												175,960,856
Average interest rate		8.5	%		9.2	%		8.5	%											8.6	%
Fixed rate mezzanine loans		64,167,600			19,133,475			8,084,002			17,026,986			9,277,768			147,610,183			265,300,014
Average interest rate		13.5	%		13.1	%		11.9	%		13.0	%		12.3	%		11.8	%		12.4	%
Variable rate mezzanine loans		—			15,858,706			10,000,000												25,858,706
Average interest rate		—			10.4	%		9.7	%											10.1	%
Interest bearing liabilities:
Fixed rate senior indebtedness related to loans		19,000,000			35,000,000			—			—			—			—			54,000,000
Average interest rate		4.9	%		6.0	%		—			—			—			—			5.6	%
Variable rate senior indebtedness related to loans		7,500,000			5,000,000			—												12,500,000
Average interest rate		7.1	%		6.5	%		—												6.9	%
Long-term debt secured by consolidated real estate interests		186,498			198,066			1,086,118			191,497			202,924			8,253,408			8,118,511
Average interest rate		6.9	%		6.9	%		7.4	%		5.7	%		5.7	%		5.7	%		6.9	%
Unsecured credit facility		—			—			240,000,000			—			—			—			240,000,000
Average interest rate		—			—			6.2	%		—			—			—			6.2	%
Secured lines of credit		22,400,000			—			—			—			—						22,400,000
Average interest rate		6.6	%		—			—			—			—						6.6	%

Market Risk

     Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, equity prices and real estate values. At December 31, 2005, $513.4 million of our real estate loans were at fixed rates. At December 31, 2005, our credit facility, lines of credit and credit lines and $12.6 million of the senior indebtedness related to our loans were subject to floating interest rates. As a result, our primary market risk exposure is the effect of changes in interest rates on the interest cost of outstanding draws on our lines of credit and floating-rate borrowings. From time to time, we may enter into interest rate swap agreements for our floating rate debt to manage our interest rate risk.

     Changes in interest rates may also affect the value of our investments and the rates at which we reinvest funds obtained from loan repayments. As interest rates increase, although the interest rates we obtain from reinvested funds will generally increase, the value of our existing loans at fixed rates will generally tend to decrease. As interest rates decrease, the amounts available to us for investment from repayment of our loans may be re-invested at lower rates than we had obtained on the repaid loans. However, the value of our fixed rate investments will generally increase as interest rates decrease. We may have some market risk exposure relating to the effect of changes in interest rates on our loans that have floating rates.

     Under current market conditions, we do not believe that our risk of material potential losses in future earnings, fair values and/or

cash flows from near-term changes in market rates that we consider reasonably possible is material.

     The following tables describe the carrying amounts and fair value estimates of our fixed and variable rate real estate loans, fixed and variable rate senior indebtedness relating to loans and long term debt secured by consolidated real estate interests as of December 31, 2005 and 2004. These accounts have been valued by computing the present value of expected future cash in-flows or out-flows, using a discount rate that is equivalent to the estimated current market rate for each asset or liability, adjusted for credit risk.

     For cash and cash equivalents, the book value of $71.6 million and $11.0 million as of December 31, 2005 and 2004, respectively, approximated fair value. The book value of restricted cash of $20.9 million and $22.9 million approximated fair value at December 31, 2005 and 2004, respectively. The book value of the unsecured line of credit ($240.0 million at December 31, 2005) and of the aggregate outstanding balance of the secured lines of credit of $22.4 million and $49.0 million at December 31, 2005 and 2004, respectively, approximated the fair value of the amounts outstanding.

	At December 31, 2005
	Carrying		Estimated		Discount
	Amount		Fair Value		Rate
Fixed rate first mortgages	$	248,137,000	$	249,200,000		7.75	%
Variable rate first mortgages		175,961,000		178,713,000		7.75	%
Fixed rate mezzanine loans		265,300,000		282,551,000		10.0	%
Variable rate mezzanine loans		25,859,000		25,903,000		10.0	%
Fixed rate senior indebtedness relating to loans		54,000,000		53,885,000		5.9	%
Variable rate senior indebtedness relating to loans		12,500,000		12,644,000		5.9	%
Long-term debt secured by consolidated real estate interests		8,119,000		7,802,000		6.75	%

	At December 31, 2004
	Carrying		Estimated		Discount
	Amount		Fair Value		Rate
Fixed rate first mortgages	$	196,561,000	$	198,049,000		8.5	%
Variable rate first mortgages		37,270,000		37,107,000		7.5	%
Mezzanine loans		257,478,000		257,930,000		12.5	%
Fixed rate senior indebtedness relating to loans		31,165,000		31,973,000		5.25	%
Variable rate senior indebtedness relating to loans		20,140,000		20,116,000		5.25	%
Long-term debt secured by consolidated real estate interests		8,294,000		8,290,000		5.9	%

     Our fixed rate interest earning assets increased $59.4 million from December 31, 2004 to December 31, 2005, and our variable rate interest earning assets increased $164.6 million for that same period. Our variable rate interest bearing liabilities increased $205.8 million from December 31, 2004 to December 31, 2005. As discussed above in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” the reasons for these increases are the continued growth of our core business of making mezzanine and bridge loans from 2004 to 2005 and our increased use of leverage from 2004 to 2005.

 2 

EX-99.4

Item 8. Financial Statements and Supplementary Data

RAIT INVESTMENT TRUST AND SUBSIDIARIES

INDEX TO ANNUAL REPORT FINANCIAL STATEMENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROLS		3
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2005 AND 2004		4
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE YEARS ENDED DECEMBER 31, 2005		5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 2005		6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 2005		7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		8
SCHEDULE IV — MORTGAGE LOANS ON REAL ESTATE		31

     All other schedules are not applicable or are omitted since either (i) the required information is not material or (ii) the information required is included in the consolidated financial statements and notes thereto.

Report of Independent Registered Public Accounting Firm

Board of Trustees
RAIT Investment Trust

     We have audited the accompanying consolidated balance sheets of RAIT Investment Trust (a Maryland real estate investment trust) and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RAIT Investment Trust and Subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

     Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule IV Mortgage Loans on Real Estate of RAIT Investment Trust and Subsidiaries is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of RAIT Investment Trust and Subsidiaries’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 1, 2006, expressed an unqualified opinion thereon.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
March 1, 2006 (except for Note 6,
          as to which the date is July 13, 2006)

2

Report of Independent Registered Public Accounting Firm on Internal Controls

Board of Trustees
RAIT Investment Trust

     We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that RAIT Investment Trust (a Maryland real estate investment trust) and Subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the RAIT Investment Trust and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005, and our report dated March 1, 2006 (except for Note 6, as to which the date is July 13, 2006), expressed an unqualified opinion on those financial statements.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
March 1, 2006

3

RAIT INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2005			2004
ASSETS
Cash and cash equivalents	$	71,214,083		$	10,685,878
Restricted cash		20,892,402			22,947,888
Accrued interest receivable		13,127,801			9,728,674
Real estate loans, net		714,428,071			491,281,473
Unconsolidated real estate interests		40,625,713			44,016,457
Consolidated real estate interests		55,054,558			54,220,432
Consolidated real estate interest held for sale		94,106,721			89,317,707
Furniture, fixtures and equipment, net		590,834			639,582
Prepaid expenses and other assets		13,657,244			5,773,230
Goodwill		887,143			887,143
Total assets	$	1,024,584,570		$	729,498,464
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued liabilities	$	3,259,360		$	2,636,762
Accrued interest payable		2,213,639			182,109
Tenant security deposits		3,185			—
Borrowers’ escrows		15,981,762			18,326,863
Senior indebtedness relating to loans		66,500,000			51,305,120
Long-term debt secured by consolidated real estate interests		8,118,511			8,294,268
Liabilities underlying consolidated real estate interest held for sale		56,413,644			57,565,837
Unsecured line of credit		240,000,000			—
Secured lines of credit		22,400,000			49,000,000
Total liabilities	$	414,890,101		$	187,310,959
Minority interest		459,684			477,564
Shareholders’ equity:
Preferred shares, $.01 par value; 25,000,000 shares authorized;
7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share; 2,760,000 shares issued and outstanding		27,600			27,600
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share; 2,258,300 shares issued and outstanding		22,583			22,583
Common shares, $.01 par value; 200,000,000 authorized shares; issued and outstanding 27,899,065 and 25,579,948 shares		278,991			255,799
Additional paid-in-capital		603,130,311			540,627,203
Retained earnings		6,250,150			1,900,274
Loans for stock options exercised		(263,647	)		(506,302	)
Deferred compensation		(211,203	)		(617,216	)
Total shareholders’ equity	$	609,234,785			541,709,941
Total liabilities and shareholders’ equity	$	1,024,584,570		$	729,498,464

The accompanying notes are an integral part of these consolidated financial statements.

4

RAIT INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	For the Year Ended December 31,
	2005			2004			2003
REVENUES
Interest income	$	80,727,929		$	60,985,829		$	42,319,360
Rental income		13,578,729			11,060,674			8,924,217
Fee income and other		7,043,634			6,727,795			4,938,158
Investment income		6,021,826			3,419,645			4,557,590
Total revenues		107,372,118			82,193,943			60,739,325
COSTS AND EXPENSES
Interest		13,430,693			5,864,998			5,078,918
Property operating expenses		7,674,797			5,743,688			5,063,476
Salaries and related benefits		5,116,953			4,570,183			3,511,943
General and administrative		4,212,224			4,173,924			2,844,322
Depreciation and amortization		1,451,595			1,068,528			1,144,137
Total costs and expenses		31,886,262			21,421,321			17,642,796
Net income before minority interest	$	75,485,856		$	60,772,622		$	43,096,529
Minority interest		(33,420	)		(29,756	)		34,542
Net income before gain on sales of consolidated real estate interests and loss on sale of unconsolidated real estate interest	$	75,452,436		$	60,742,866		$	43,131,071
Gain on sales of consolidated real estate interests		—			2,402,639			2,372,220
Loss on sale of unconsolidated real estate interest		(198,162	)		—			—
Net income from continuing operations	$	75,254,274		$	63,145,505		$	45,503,291
Net income from discontinued operations		2,772,778			3,012,044			1,661,136
Net income	$	78,027,052		$	66,157,549		$	47,164,427
Dividends attributed to preferred shares		10,075,820			5,279,152			—
Net income available to common shareholders	$	67,951,232		$	60,878,397		$	47,164,427
Net income from continuing operations per common share — basic	$	2.48		$	2.37		$	2.16
Net income from discontinued operations per common share — basic		0.11			0.12			0.08
Net income per common share — basic	$	2.59		$	2.49		$	2.24
Weighted average common shares — basic		26,235,134			24,404,168			21,043,308
Net income from continuing operations per common share — diluted	$	2.46		$	2.36		$	2.15
Net income from discontinued operations per common share — diluted		0.11			0.12			0.08
Net income per common share — diluted	$	2.57		$	2.48		$	2.23
Weighted average common shares — diluted		26,419,693			24,572,076			21,190,203

The accompanying notes are an integral part of these consolidated financial statements.

5

,

RAIT INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Years Ended December 31, 2005

														Retained
								Loans for						Earnings			Total
	Common		Preferred		Additional			Stock Options			Deferred			(Accumulated			Shareholders'
	Stock		Stock		Paid-In Capital			Exercised			Compensation			Deficit)			Equity
Balance, January 1, 2003	$	188,035		—	$	274,606,899		$	(1,068,972	)	$	(1,210,618	)	$	5,079,319		$	277,594,663
Net income		—		—		—			—			—			47,164,427			47,164,427
Dividends		125		—		295,840			—			—			(52,696,746	)		(52,400,781	)
Stock options exercised		373		—		423,050			292,623			—			—			716,046
Warrants exercised		188		—		281,722			—			—			—			281,910
Compensation expense		—		—		—			—			259,748			—			259,748
Common shares issued, net		43,351		—		89,742,136			—			—			—			89,785,487
Balance, December 31, 2003	$	232,072		—	$	365,349,647		$	(776,349	)	$	(950,870	)	$	(453,000	)	$	363,401,500
Net income		—		—		—			—			—			66,157,549			66,157,549
Dividends		117		—		305,480			—			—			(63,804,275	)		(63,498,678	)
Stock options exercised		434		—		577,442			270,047			—			—			847,923
Compensation expense		—		—		—			—			333,654			—			333,654
Preferred shares issued, net		—		50,183		120,968,860			—			—			—			121,019,043
Common shares issued, net		23,176		—		53,425,774			—			—			—			53,448,760
Balance, December 31, 2004	$	255,799	$	50,183	$	540,627,203		$	(506,302	)	$	(617,216	)	$	1,900,274		$	541,709,941
Net income		—		—		—			—			—			78,027,052			78,027,052
Dividends		130		—		353,749						—			(73,677,176	)		(73,323,297	)
Stock options exercised		69		—		(63	)		242,655			—			—			242,661
Compensation expense		—		—		—			—			406,013			—			406,013
Common shares issued, net		22,993		—		62,149,422			—			—			—			62,172,415
Balance, December 31, 2005	$	278,991	$	50,183	$	603,130,311		$	(263,647	)	$	(211,203	)	$	6,250,150		$	609,234,785

The accompanying notes are an integral part of these consolidated financial statements.

6

RAIT INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended December 31,
	2005			2004			2003
Cash flows from operating activities:
Net income	$	78,027,052		$	66,157,549		$	47,164,427
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest		33,420			29,756			(34,542	)
Gain on sale of consolidated real estate interests		—			(2,402,639	)		(2,372,220	)
Loss on sale of unconsolidated real estate interest		198,162			—			—
Gain on involuntary conversion		—			(1,282,742	)		—
Depreciation and amortization		3,852,740			3,739,078			3,628,815
Accretion of appreciation interests		(4,033,240	)		(9,325,616	)		(8,259,300	)
Amortization of debt costs		966,673			595,741			341,334
Deferred compensation		406,013			333,654			259,748
Employee bonus shares		21,895			—
Decrease (increase) in tenant escrows		45,522			(7,133	)		223,574
Increase in accrued interest receivable		(5,979,633	)		(3,947,592	)		(5,309,376	)
(Increase) decrease in prepaid expenses and other assets		(11,953,845	)		3,434,641			(11,584,999	)
Increase in accounts payable and accrued liabilities		357,991			3,534,389			454,563
Increase (decrease) in accrued interest payable		2,057,689			41,042			(158,782	)
(Decrease) increase in tenant security deposits		(12,583	)		80,595			(211,673	)
Decrease in borrowers’ escrows		(289,615	)		(8,078,754	)		(1,208,867	)
Net cash provided by operating activities		63,698,241			52,901,969			22,932,702
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment		(90,954	)		(156,010	)		(107,390	)
Real estate loans purchased		(35,208,706	)		—			(34,844,298	)
Real estate loans originated		(550,223,592	)		(388,590,660	)		(192,860,481	)
Principal repayments from real estate loans		368,056,253			225,403,448			139,014,125
Investment in unconsolidated real estate interests		(7,974,689	)		(35,038,859	)		(14,865,448	)
Proceeds from disposition of unconsolidated real estate interests		12,050,871			14,562,497			10,539,553
Investment in consolidated real estate interests		(1,559,092	)		(3,454,296	)		(245,753	)
(Collection) release of escrows held to fund expenditures for consolidated real estate interests		(751,637	)		(1,310,874	)		270,658
Proceeds from sale of consolidated real estate interests		—			750,000			969,205
Distributions paid from consolidated real estate interests		(51,300	)		(51,660	)		(20,520	)
Investment in consolidated real estate interest held for sale		(6,448,461	)		(316,014	)		(1,250,213	)
Proceeds from involuntary conversion		—			2,110,930			—
Net cash used in investing activities		(222,201,307	)		(186,091,498	)		(93,400,562	)
Cash flows from financing activities:
Principal repayments on senior indebtedness		(106,304,580	)		(18,571,160	)		(15,110,817	)
Principal repayments on long-term debt		(1,073,734	)		(1,080,291	)		(921,903	)
Proceeds of senior indebtedness		121,500,000			14,500,000			49,550,000
Advances on unsecured line of credit		240,000,000			—			—
(Repayments) advances on secured lines of credit		(26,600,000	)		25,096,240			(6,339,395	)
Issuance of preferred shares, net		—			121,019,043			—
Payment of preferred dividends		(10,075,820	)		(5,279,152	)		—
Issuance of common shares, net		62,150,525			54,026,825			90,490,819
Payment of common dividends		(63,247,476	)		(58,219,526	)		(52,400,781	)
Principal payments on loans for stock options exercised		242,655			270,047			292,623
Net cash provided by financing activities		216,591,570			131,762,026			65,560,546
Net change in cash and cash equivalents		58,088,504			(1,427,503	)		(4,907,313	)
Cash and cash equivalents, beginning of year	$	13,331,373		$	14,758,876		$	19,666,189
Cash and cash equivalents, end of year	$	71,419,877		$	13,331,373		$	14,758,876

The accompanying notes are an integral part of these consolidated financial statements.

7

RAIT INVESTMENT TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005

Note 1 — Formation and Business Activity

     RAIT Investment Trust (the “Company” or “RAIT”), together with its wholly owned subsidiaries, RAIT Partnership, L.P. (the “Operating Partnership”), RAIT General, Inc. (the “General Partner”), the General Partner of the Operating Partnership, and RAIT Limited, Inc. (the “Initial Limited Partner”), the Initial Limited Partner of the Operating Partnership (collectively the “Company”), were each formed in August 1997. RAIT, the General Partner and the Initial Limited Partner were organized in Maryland, and the Operating Partnership was organized as a Delaware limited partnership.

     The Company’s principal business activity is to make investments in real estate primarily by making real estate loans, acquiring real estate loans and acquiring real estate interests. The Company makes investments in situations that, generally, do not conform to the underwriting standards of institutional lenders or sources that provide financing through securitization. The Company offers junior lien or other forms of subordinated, or “mezzanine” financing, senior bridge financing and first-lien conduit loans. Mezzanine and bridge financing make up most of the Company’s loan portfolio. The principal amounts of the Company’s mezzanine and bridge loans generally range between $250,000 and $50.0 million. The Company may provide financing in excess of its targeted size range where the borrower has a committed source of take-out financing, or the Company believes that the borrower can arrange take-out financing, to reduce the Company’s investment to an amount within the Company’s targeted size range. The Operating Partnership undertakes the business of the Company, including the origination and acquisition of financing and the acquisition of real estate interests.

     The Company may encounter significant competition from public and private companies, including other finance companies, mortgage banks, pension funds, savings and loan associations, insurance companies, institutional investors, investment banking firms and other lenders and industry participants, as well as individual investors, for making investments in real estate.

     The Company generally invests in mature markets in the Northeast, Mid-Atlantic, Central, Southeast and West regions of the United States.

Note 2 — Basis of Financial Statement Presentation

     The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company, its qualified REIT subsidiaries, its wholly owned subsidiaries, including RAIT Capital Corp., its majority-owned and controlled partnerships, OSEB Associates L.P. and, until June 30, 2004, Stobba Associates, L.P. (Stobba Associates was no longer consolidated as of June 30, 2004 when the Company exchanged its 49% limited partnership interest for cash of $750,000 and an $8.2 million mezzanine loan), and its majority-owned and controlled limited liability companies, RAIT Executive Boulevard, LLC and RAIT Carter Oak, LLC. All significant intercompany balances and transactions have been eliminated. As of and for the years ended December 31, 2005 and 2004, the Company’s consolidated financial statements also include the accounts of a variable interest entity (“VIE”) of which the Company is the primary beneficiary. For a description of this entity see Note 3 — “Summary of Significant Accounting Policies — Variable Interest Entities.”

     The Company consolidates any corporation in which it owns securities having over 50% of the voting power of such corporation. The Company also consolidates any limited partnerships and limited liability companies where all of the following circumstances exist:

• the Company holds either the general partnership or managing membership interest,

• the Company holds a majority of the limited partnership or non-managing membership interests, and

• the other partners or members do not have important rights that would preclude consolidation.

     Further, the Company accounts for its “non-controlling” interests in limited partnerships under the equity method of accounting, unless such interests meet the requirements of EITF:D-46 “Accounting for Limited Partnership Investments” to be accounted for under the cost method of accounting. In accordance with EITF 03-16, “Accounting for Investments in Limited Liability Companies,” the Company’s accounting for its non-controlling interests in limited liability companies is the same as it is for its non-controlling interests in limited partnerships.

8

     In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Actual results could differ from those estimates. Certain reclassifications have been made to the consolidated financial statements as of December 31, 2004 and 2003 and for the years then ended to conform to the presentation of the consolidated financial statements as of and for the year ended December 31, 2005.

Note 3 — Summary of Significant Accounting Policies

     Real Estate Loans, Net — As described in Note 4, the Company’s real estate loans include first mortgages and mezzanine loans. Management considers nearly all of its loans and other lending investments to be held-to-maturity. Items classified as held-to-maturity are reflected at amortized historical cost.

     Consolidated Real Estate Interests — As described in Note 5, the Company’s consolidated real estate interests include land, buildings and improvements, and escrows and reserves on deposit with the first mortgage lender. Buildings and improvements are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over an estimated useful life of up to 39 years (non-residential) and 27.5 years (residential).

     The Company accounts for the potential impairment of long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No. 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. As of December 31, 2005, the Company has determined that there is no impairment of any of its consolidated real estate interests.

     SFAS No. 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. As of October 3, 2005, the Company classified as “held for sale” a consolidated real estate interest consisting of a building in Philadelphia, PA with 456,000 square feet of office/retail space. As of March 31, 2006, the Company classified as “held for sale” a consolidated real estate interest consisting of a 110,421 square foot shopping center in Norcross, Georgia. Also, as of May 11, 2006, the Company classified as “held for sale” a consolidated real estate interest consisting of a 216-unit apartment complex and clubhouse in Watervliet, New York. In accordance with SFAS No. 144, the assets and liabilities of these real estate interests have been separately classified on the Company’s balance sheet as of December 31, 2005 and 2004, and the results of operations attributable to these interests have been reclassified, for all periods presented, to “discontinued operations”. Additionally, depreciation expense was no longer recorded for these assets once they were classified as “held for sale”. See Note 6 for a description of these consolidated real estate interests and the results of their operations that have been reclassified as “discontinued operations.”

     The Company leases space to tenants under agreements with varying terms. Leases are accounted for as operating leases with minimum rent recognized on a straight-line basis over the term of the lease regardless of when payments are due. Deferred rent is included in prepaid expenses and other assets.

     Unconsolidated Real Estate Interests — As described in Note 7, the Company’s unconsolidated real estate interests include the Company’s non-controlling interests in limited partnerships which are accounted for using the equity method of accounting, unless such interests meet the requirements of EITF:D-46 “Accounting for Limited Partnership Investments” to be accounted for under the cost method. In accordance with EITF 03-16, “Accounting for Investments in Limited Liability Companies,” the Company’s accounting for its non-controlling interests in limited liability companies is the same as it is for its non-controlling interests in limited partnerships.

     Most of the Company’s non-controlling interests arise out of the Company making equity investments in entities that own real estate or in the parent of such an entity with preferred rights over other equity holders in that entity. The Company generates a return on its unconsolidated real estate interests primarily through distributions to the Company, at a fixed rate, from the net cash flow of the underlying real estate. The Company generally uses this investment structure as an alternative to a mezzanine loan where the financial needs and tax situation of the borrower, the terms of senior financing secured by the underlying real estate or other circumstances make a mezzanine loan undesirable. In these situations, the remaining equity in the entity is held by other investors who retain control of the entity. These unconsolidated real estate interests generally give the Company a preferred position over the remaining equity holders as to distributions and upon liquidation, sale or refinancing, provide for distributions to the Company and a mandatory redemption date. They may have conversion or exchange features and voting rights in certain circumstances. In the event of non-compliance with certain terms of the Company’s unconsolidated interests, the Company’s unconsolidated interests may provide that the Company’s interest becomes the controlling or sole equity interest in the entity.

9

     Restricted Cash and Borrowers’ Escrows — Restricted cash and borrowers’ escrows represent borrowers’ funds held by the Company to fund certain expenditures or to be released at the Company’s discretion upon the occurrence of certain pre-specified events, and to serve as additional collateral for borrowers’ loans.

     Revenue Recognition — Management considers nearly all of its loans and other lending investments to be held-to-maturity. The Company reflects held-to-maturity investments at amortized cost less allowance for loan losses, acquisition discounts, deferred loan fees and undisbursed loan funds. Interest income is recognized using the effective yield method applied on a loan-by-loan basis. Occasionally the Company may acquire loans at discounts based on the credit characteristics of such loans. The Company accounts for the discount by first measuring the loan’s scheduled contractual principal and contractual interest payments in excess of the Company’s expected future cash flows from the acquired loan to determine the amount of the discount that would not be accreted (nonaccretable difference). The remaining amount, representing the excess of the loan’s expected future cash flows over the amount paid by the Company for the loan is accreted into interest income over the remaining life of the loan (accretable yield). Over the life of the loan, the Company estimates the expected future cash flows from the loan regularly, and any decrease in the loan’s actual or expected future cash flows would be recorded as a loss contingency for the loan. The present value of any increase in the loan’s actual or expected future cash flows would be used first to reverse any previously recorded loss contingency not charged off for the loan. For any remaining increase, the Company would adjust the amount of accretable yield by reclassification from nonaccretable difference and adjust the amount of periodic accretion over the loan’s remaining life. Loan origination fees or “points,” as well as direct loan origination costs, are also deferred and recognized over the lives of the related loans as interest based upon the effective yield method.

     Many of the Company’s loans provide for accrual of interest at specified rates which differ from current payment terms. Interest is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible, based on the operations of the underlying real estate.

     Prepayment penalties from borrowers are recognized as additional income when received. Certain of the Company’s real estate loans provide for additional interest based on the underlying real estate’s operating cash flow, when received, or appreciation in value of the underlying real estate. Projected future cash flows relating to the appreciation in value are accreted into interest income over the remaining life of a particular loan. Projected future cash flows are reviewed on a regular basis and any decrease in the loan’s actual or expected future cash flows is recorded as a loss contingency for that particular loan. The present value of any increase in the loan’s actual or expected future cash flows is first applied to any previously recorded loss contingency not charged off for that particular loan.

     In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP 03-3 addresses the accounting for acquired impaired loans, which are loans that show evidence of having deteriorated in terms of credit quality since their origination. SOP 03-3 is effective for loans acquired after December 31, 2004. The adoption of SOP 03-3 did not have a material effect on the financial condition, results of operations, or liquidity of the Company.

     Provision For Loan Losses — The Company’s accounting policies require that an allowance for estimated loan losses be maintained at a level that management considers adequate to provide for loan losses, based upon the Company’s periodic evaluation and analysis of the portfolio, historical and industry loss experience, economic conditions and trends, collateral values and quality, and other relevant factors. The Company has established a general reserve for loan losses that is not related to any individual loan or to any anticipated losses. In accordance with the Company’s policy, the Company determined that this reserve was adequate as of December 31, 2005 and 2004 based on the Company’s credit analysis of each of the loans in its portfolio. If that analysis were to change, the Company may be required to increase its reserve, and such an increase, depending upon the particular circumstances, could be substantial. Any increase in reserves will constitute a charge against income. The Company will continue to analyze the adequacy of this reserve on a quarterly basis.

     If a loan is determined to be impaired, the Company would establish a specific valuation allowance for it in the amount by which the carrying value, before allowance for estimated losses, exceeds the fair value of collateral, with a corresponding charge to the provision for loan losses. The Company generally utilizes a current, independently prepared appraisal report to establish the fair value of the underlying collateral. However, if the Company is unable to obtain such an appraisal, fair value can be established using discounted expected future cash flows and sales proceeds as well as obtaining valuations of comparable collateral. The Company does not currently have any specific valuation allowances. If management considered a loan, or a portion thereof, to be uncollectible and of such little value that further pursuit of collection was not warranted, the loan would be charged-off against its specific valuation allowance.

10

     Depreciation and Amortization — Furniture, fixtures and equipment are carried at cost less accumulated depreciation. Furniture and equipment are depreciated using the straight-line method over an estimated useful life of five years. Leasehold improvements are amortized using the straight-line method over the life of the related lease.

     Goodwill — In August 2000, the Company formed a wholly owned subsidiary, RAIT Capital Corp., d/b/a Pinnacle Capital Group, which acquired the net assets of Pinnacle Capital Group, a first mortgage conduit lender. The Company acquired these assets for consideration of $980,000, which included the issuance of 12,500 of the Company’s common shares (“Common Shares”) and a cash payment of approximately $800,000. The excess of consideration paid over net assets acquired is reflected on the Company’s consolidated balance sheet as goodwill.

     The Company measures its goodwill for impairment on an annual basis, or when events indicate that there may be an impairment As of December 31, 2005 and 2004, no impairment of goodwill was recognized.

     Stock Based Compensation — At December 31, 2005, the Company accounted for its stock option grants under the provisions of FASB No. 123, “Accounting for Stock-Based Compensation,” which contains a fair value-based method for valuing stock-based compensation that entities may use, and measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar instruments under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”

     At December 31, 2005, the Company had a stock-based employee compensation plan. The Company accounts for that plan under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Stock-based employee compensation costs are not reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying Common Shares on the date of grant. The Company has adopted the disclosure only provisions of both SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS No. 148”). Pursuant to the requirements of SFAS No. 148, the following are the pro forma net loss amounts for 2005, 2004 and 2003, as if the compensation cost for the options granted to the trustees had been determined based on the fair value at the grant date:

	For the Years Ended December 31,
	2005		2004		2003
Net income available to common shareholders, as reported	$	67,951,000	$	60,878,000	$	47,164,000
Less: stock based compensation determined under fair value based method for all awards		28,000		52,000		79,000
Pro forma net income	$	67,923,000	$	60,826,000	$	47,085,000
Net income per share — basic, as reported	$	2.59	$	2.49	$	2.24
Pro forma	$	2.59	$	2.49	$	2.24
Net income per share — diluted, as reported	$	2.57	$	2.48	$	2.23
Pro forma	$	2.57	$	2.48	$	2.22

     The Company granted options to purchase 0, 18,250 and 129,850 Common Shares during years ended December 31, 2005, 2004 and 2003, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2004 and 2003, respectively: dividend yield of 8.3% and 9.6%; expected volatility of 18% and 17%; risk-free interest rate of 4.0% and 4.9%; and expected lives of 9 and 9.5 years.

     In December, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123: "(Revised 2004) — Share-Based Payment” (“SFAS No. 123R”). SFAS 123R replaces SFAS No. 123. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements and be measured based on the fair value of the equity or liability instruments issued. The Company is allowed to implement SFAS No. 123R in the first quarter of its 2006 fiscal year. The Company does not believe that the adoption of SFAS No. 123R will have a material effect on its consolidated financial statements.

     Federal Income Taxes — The Company qualifies and has elected to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31, 1999. If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax on its taxable income that is distributed to its shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its annual taxable income. As of and for the years ended December 31, 2005 and 2004, the Company is in compliance with all requirements necessary to qualify for taxation as a REIT.

11

     Earnings Per Share — The Company follows the provisions of SFAS No. 128, “Earnings per Share.” Basic earnings per share excludes dilution and is computed by dividing income available to Common Shares by the weighted average Common Shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue Common Shares (including grants of phantom shares and phantom units) were exercised and converted into Common Shares.

     Consolidated Statement of Cash Flows — For purposes of reporting cash flows, cash and cash equivalents include non-interest earning deposits and interest earning deposits. Cash paid for interest was $15.2 million, $9.8 million and $8.9 million for the years ended December 31, 2005, 2004 and 2003, respectively.

  Discontinued operations:

     Cash flows from discontinued operations have been combined with cash flows from continuing operations within each category of the statement.

  Non-cash transactions:

     For the years ended December 31, 2005, 2004 and 2003, additional Common Shares in the amount of $354,000, $306,000 and $296,000, respectively, were issued through the Company’s dividend investment plan, in lieu of cash dividends.

     In August 2004, the Company’s real estate loans, net, decreased by $40.8 million when, after entering into a forbearance agreement with the borrower, the Company determined that the borrower had become a variable interest entity of which the Company was the primary beneficiary. In accordance with FIN 46(R) (defined below), the $40.8 million investment was included in the Company’s investment portfolio as a consolidated real estate interest.

     In June 2004, the Company received an $8.2 million note in exchange for net assets of $6.6 million (including fixed assets, long term debt and miscellaneous current asset and liability accounts) as part of a disposition of one of the Company’s consolidated real estate interests that also included cash proceeds. The $8.2 million note was fully repaid in December 2004.

     In July 2003, the Company acquired a consolidated real estate interest in satisfaction of its loan in the amount of $12.6 million.

     Variable Interest Entities — In January 2003, the FASB issued Financial Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin 51, “Consolidated Financial Statements,” to certain entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under FIN 46 if the investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns. These entities are referred to as variable interest entities. Variable interest entities within the scope of FIN 46 are required to be consolidated by their primary beneficiary. The primary beneficiary is the party that absorbs a majority of the variable interest entities’ expected losses and/or receives a majority of the expected residual returns. In December 2003, the FASB revised FIN 46 (“FIN 46(R)”), delaying the effective date for certain entities created before February 1, 2003 and making other amendments to clarify the application of the guidance. FIN 46(R) is effective no later than the end of the first interim or annual period ending after December 15, 2003 for entities created after January 31, 2003 and for entities created before February 1, 2003, no later than the end of the first interim or annual period ending after March 15, 2004. As required, the Company adopted the guidance of FIN 46(R).

     In adopting FIN 46 and FIN 46(R), the Company has evaluated its various interests to determine whether they are in variable interest entities. These variable interests are primarily subordinated financings in the form of mezzanine loans or unconsolidated real estate interests. The Company identified 23 and 18 variable interests having an aggregate book value of $182.4 million and $106.4 million that it held as of December 31, 2005 and 2004, respectively. For one of these variable interests, with a book value of $40.8 million at December 31, 2004, the Company determined that the Company is the primary beneficiary and such variable interest is included in the Company’s consolidated financial statements. For the year ended December 31, 2005, it was determined there were no additional variable interests of which the Company is the primary beneficiary.

     The variable interest entity consolidated by the Company is the borrower under a first mortgage loan secured by a 594,000 square foot office building in Milwaukee, Wisconsin. The Company purchased the first mortgage loan in June 2003 (face value and underlying collateral value are both in excess of $40.0 million) for $26.8 million. At the time the Company purchased the loan, the Company determined that the entity that owned the property was not a variable interest entity.

12

     Prior to the loan’s maturity date, in August 2004, the Company entered into a forbearance agreement with the borrower that provided that the Company will take no action with regard to foreclosure or sale of the building for a period of three years, with two one-year extension options, subject to the Company’s approval. The agreement also gives the Company operational and managerial control of the property with the owner relinquishing any right to participate. The Company also agreed to make additional loan advances to fund certain outstanding fees and commissions (some of which fees are owed to an affiliate of the owner), and to fund shortfalls in operating cash flow, if necessary, during the forbearance period. The loan remains outstanding in its full amount and, aside from extending the maturity date of the loan, no other terms were adjusted.

     The Company concluded that the entering into of the forbearance agreement is a triggering event under FIN 46(R) and thus the variable interest must be reconsidered. Because the actual owner of the property no longer had a controlling financial interest in the property and the Company had the obligation to make additional advances under the Company’s loan to fund any potential losses, the Company determined that the borrower is a variable interest entity and that the Company is the primary beneficiary due to the Company absorbing the majority of the probability weighted expected losses, as defined in FIN 46(R). The Company continues to hold a valid and enforceable first mortgage and the value of the property exceeds the Company’s carrying value of the loan. However, as the primary beneficiary, the Company is required to consolidate this variable interest entity pursuant to FIN 46(R).

     The Company’s consolidated financial statements include the assets, liabilities, and results of operations of the variable interest entity as of and for the year ended December 31, 2005, as of December 31, 2004 and for the period from August 29, 2004 (consolidation) through December 31, 2004, as summarized below:

			As of December 31,
			2004 and for the Period
	As of and for the		from August 29, 2004
	Year Ended		(Consolidation)
	December 31,		through December 31,
	2005		2004
Total assets	$	47,052,000	$	45,618,000
Total liabilities	$	743,000	$	576,000
Total income	$	8,826,000	$	4,591,000
Total expense		5,547,000		1,748,000
Net income	$	3,279,000	$	2,843,000

New Accounting Policies

     Derivative Instruments and Hedging Activities — The Company adopted SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”), on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for implementation issues raised by constituents and includes the conclusions reached by the FASB on certain FASB Staff Implementation Issues. Statement 149 also amends SFAS No. 133 to require a lender to account for loan commitments related to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. As of December 31, 2005, the Company has not entered into loan commitments that it intends to sell in the future.

     Accounting for Financial Instruments — The FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS No. 150”) on May 15, 2003. SFAS No. 150 changes the classification in the statement of financial position of certain common financial instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in fair value or redemption amount, as applicable, in earnings. SFAS No. 150 is effective for public companies for financial instruments entered into or modified after May 31, 2003 and was effective July 1, 2003. Adoption of SFAS No. 150 did not have a material impact on the Company’s financial position, results of operations, or disclosures.

     Accounting for investments in real estate partnership — In June 2005, the FASB issued FASB Staff Position (FSP) SOP 78-9-1, “Interaction of AICPA Statement of Position 78-9 and EITF No. 04-5.” This FSP provides guidance on whether a general partner in a real estate partnership controls and, therefore, consolidates that partnership. The FSP is effective for general partners of all new partnerships formed after June 29, 2005, and for any existing partnership for which the partnership agreement is modified after June 29, 2005. For general partners in all other partnerships, the consensus is effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of this FSP will have a significant effect on its financial statements.

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Note 4 — Real Estate Loans

     The Company’s portfolio of real estate loans consisted of the following at the dates indicated below:

	December 31,
	2005			2004
First mortgages	$	424,098,275		$	233,831,194
Mezzanine loans		291,158,720			257,477,540
Subtotal		715,256,995			491,308,734
Unearned (fees) costs		(602,767	)		198,896
Less: Allowance for loan losses		(226,157	)		(226,157	)
Real estate loans, net		714,428,071			491,281,473
Less: Senior indebtedness related to loans		(66,500,000	)		(51,305,120	)
Real estate loans, net of senior indebtedness	$	647,928,071		$	439,976,353

     The following is a summary description of the assets contained in the Company’s portfolio of real estate loans as of December 31, 2005:

			Average
	Number		Loan to			Range of Loan
Type of Loan	of Loans		Value(1)			Yields(2)			Range of Maturities
First mortgages		34		75	%		6.17% - 16.0	%		1/20/06 - 12/28/08
Mezzanine loans		75		83	%		10.0% - 17.9	%		1/30/06 - 5/1/21

(1)	Calculated as the sum of the outstanding balance of the Company’s loan and senior loan (if any) divided by the current appraised value of the underlying collateral.
(2)	The Company’s calculation of loan yield includes points charged.

     The properties underlying the Company’s portfolio of real estate loans consisted of the following types at the dates indicated below:

	December 31,
	2005			2004
Multi family	$351.0 million	49.1	%	$252.3 million	51.4	%
Office	146.2 million	20.4	%	73.8 million	15.0	%
Retail and other.	218.0 million	30.5	%	165.2 million	33.6	%
Total	$715.2 million	100.0	%	$491.3million	100.0	%

     As of December 31, 2005, the maturities of the Company’s real estate loans in each of the years 2006 through 2010 and the aggregate maturities thereafter are as follows:

2006	$	310,576,743
2007		138,814,887
2008		91,950,428
2009		17,026,986
2010		9,277,768
Thereafter		147,610,183
Total	$	715,256,995

     As of December 31, 2005 and 2004, $138.8 million and $164.3 million in principal amount of loans, respectively, were pledged as collateral for amounts outstanding on the Company’s lines of credit and senior indebtedness relating to loans. As of December 31, 2005 and 2004 there were $21.2 million and $11.8 million, respectively, of undisbursed loans in process.

     Senior indebtedness relating to loans arises when the Company sells a participation or other interest in one of its first mortgages or mezzanine loans to another lender. These participations and interests rank senior to the Company’s right to repayment under the relevant mortgage or loan in various ways. As of December 31, 2005 and 2004, senior indebtedness relating to loans consisted of the following:

14

	2005		2004
Loan payable, secured by real estate, monthly installments of principal and interest based on an amortization schedule of 25 years, including interest at a specified London interbank offered rate (“LIBOR”) plus 135 basis points, remaining principal due September 15, 2007; the interest rate is subject to an interest rate swap agreement entered into by the borrower which provides for a fixed rate of 8.68%. This loan was repaid on December 12, 2005		—	$	10,365,120
Senior loan participation, secured by Company’s interest in a first mortgage loan with a book value of $12,782,840, payable interest only at LIBOR plus 250 basis points (7.04% at December 31, 2005) due monthly, principal balance due July 1, 2006	$	5,000,000		5,000,000
Senior loan participation, secured by Company’s interest in a first mortgage loan with a principal balance of $2,550,000, payable interest only at 5.0% due monthly. This loan was repaid on July 22, 2005		—		1,800,000
Senior loan participation, secured by Company’s interest in first mortgage loan with a principal balance of $3,369,233, payable interest only at LIBOR plus 275 basis points due monthly. This loan was repaid on October 24, 2005		—		2,640,000
Term loan payable, secured by Company’s interest in a first mortgage loan with a principal balance of $9,000,000(1), payable interest only at 4.5% due monthly, principal balance due September 29, 2006		6,500,000		6,500,000
Term loan payable, secured by Company’s interest in a first mortgage loan with a principal balance of $9,000,000(1), payable interest only at 5.5% due monthly, principal balance due September 29, 2006		1,500,000		1,500,000
Senior loan participation, secured by Company’s interest in a first mortgage loan with a principal balance of $10,434,217, payable interest only at LIBOR plus 275 basis points. This loan was repaid on July 7, 2005		—		5,000,000
Senior loan participation, secured by Company’s interest in a first mortgage loan with a principal balance of $15,500,000, payable interest only at 5.0% due monthly, principal balance due October 15, 2006		11,000,000		11,000,000
Senior loan participation, secured by Company’s interest in a mezzanine loan with a book value of $9,323,407, payable interest only at the bank’s prime rate due monthly. This loan was repaid on November 1, 2005		—		2,500,000
Senior loan participation, secured by Company’s interest in a mezzanine loan with a book value of $4,128,776, payable interest only at the bank’s prime rate due monthly. This loan was repaid on November 1, 2005		—		2,500,000
Senior loan participation, secured by Company’s interest in a mezzanine loan with a book value of $19,468,756 payable interest only at the bank’s prime rate (7.25% at December 31, 2005) due quarterly, principal balance due January 30, 2006		2,500,000		2,500,000
Senior loan participation, secured by Company’s interest in a first mortgage loan with a principal balance of $45,252,334, payable interest only at 6.0% due monthly, principal balance due February 25, 2007		35,000,000		—
Senior loan participation, secured by Company’s interest in a first mortgage loan with a principal balance of $8,000,000, payable interest only at LIBOR plus 200 basis points (6.54% at December 31, 2005) due monthly, principal balance due September 1, 2007		5,000,000		—
Total	$	66,500,000	$	51,305,120

(1) These term loans are secured by the same first mortgage interest.

     As of December 31, 2005, the senior indebtedness relating to loans maturing over the next five years and the aggregate indebtedness maturing thereafter, is as follows:

2006	$	26,500,000
2007		40,000,000
2008		—
2009		—
2010		—
Thereafter		—
Total	$	66,500,000

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Note 5 — Consolidated Real Estate Interests

     As of December 31, 2005, the Company owned the following controlling interests in entities that own real estate. These interests are accounted for on a consolidated basis:

• 100% limited and general partnership interest in a limited partnership that owns an office building in Rohrerstown, Pennsylvania with 12,630 square feet on 2.93 acres used as a diagnostic imaging center. The Company acquired this interest for $1.7 million. After acquisition, the Company obtained non-recourse financing of $1.1 million ($959,442 at December 31, 2005), which bears interest at an annual rate of 7.33% and is due on August 1, 2008. The book value of this property at December 31, 2005 was $1.2 million.

• 84.6% membership interest in a limited liability company that owns a 44,517 square foot office building in Rockville, Maryland. In October 2002, the Company acquired 100% of the limited liability company for $10.7 million and simultaneously obtained non-recourse financing of $7.6 million ($7.2 million at December 31, 2005). The loan bears interest at an annual rate of 5.73% and is due November 1, 2012. In December 2002, the Company sold a 15.4% interest in the limited liability company to a partnership whose general partner is a son of the Company’s chairman and chief executive officer. The buyer paid $513,000, which approximated the book value of the interest being purchased. No gain or loss was recognized on the sale. The book value of this property at December 31, 2005 was $10.0 million.

• Also included in the Company’s consolidated real estate interests is a first mortgage with a carrying amount of $40.8 million secured by a 594,000 square foot office building in Milwaukee, Wisconsin. In June 2003, the Company purchased the loan, which had a face value in excess of $40.0 million, for $26.8 million. Upon entering into a forbearance agreement with the owner of the property in August 2004, the Company determined that the borrowing entity was a variable interest entity (as defined in FIN 46) of which the Company was the primary beneficiary. See Note 3, “Summary of Significant Accounting Policies — Variable Interest Entities.” The book value of this consolidated interest at December 31, 2005 was $42.6 million.

• Two parcels of land located in Willow Grove, Pennsylvania with a book value of $613,500 at December 31, 2005.

     The Company’s consolidated real estate interests consisted of the following property types at the dates indicated below: Escrows and reserves represent amounts held for payment of real estate taxes, insurance premiums, repair and replacement costs, tenant improvements, and leasing commissions.

	As of December 31,
	2005 Book						2004 Book
	Value			%			Value			%
Office		56,338,627			98.9	%		54,779,538			98.9	%
Other		613,519			1.1	%		613,519			1.1	%
Subtotal		56,952,146			100.0	%		55,393,057			100.0	%
Plus: Escrows and reserves		652,826						83,121
Less: Accumulated depreciation		(2,550,414	)					(1,255,746	)
Consolidated real estate interests	$	55,054,558					$	54,220,432

     As of December 31, 2005 and 2004, non-recourse, long-term debt secured by the Company’s consolidated real estate interests consisted of the following:

	2005		2004
Loan payable, secured by real estate, monthly installments of $8,008, including interest at 7.33%, remaining principal due August 1, 2008	$	959,442	$	983,270
Loan payable, secured by real estate, monthly installments of $47,720, including interest at 5.73%, remaining principal due November 1, 2012		7,159,069		7,310,998
Total	$	8,118,511	$	8,294,268

     As of December 31, 2005, the amount of long-term debt secured by the Company’s consolidated real estate interests that mature over the next five years, and the aggregate indebtedness maturing thereafter, is as follows:

2006	$	186,498
2007		198,066
2008		1,086,118
2009		191,497
2010		202,924
Thereafter		6,253,408
Total	$	8,118,511

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     Expenditures for repairs and maintenance are charged to operations as incurred. Significant renovations are capitalized. Fees and costs incurred in the successful negotiation of leases are deferred and amortized on a straight-line basis over the terms of the respective leases. Unamortized fees as of December 31, 2005 and 2004 were $82,600 and $77,300, respectively. Rental revenue is reported on a straight-line basis over the terms of the respective leases. Depreciation expense relating to the Company’s consolidated real estate interests for the years ended December 31, 2005, 2004 and 2003 was $1.8 million, $1.5 million and $1.4 million, respectively.

     The Company leases space in the buildings it owns to several tenants. Approximate future minimum lease payments under noncancellable lease arrangements as of December 31, 2005 are as follows:

2006	$	4,976,922
2007		3,410,593
2008		3,125,177
2009		2,980,836
2010		1,817,753
Thereafter		4,841,438
Total	$	21,152,719

Note 6 — Consolidated Real Estate Interests Held for Sale

     As of October 3, 2005, the Company classified as “held for sale” one of its consolidated real estate interests, consisting of an 89% general partnership interest in a limited partnership that owns a building in Philadelphia, Pennsylvania with 456,000 square feet of office/retail space. As of March 31, 2006, the Company classified as “held for sale” a consolidated real estate interest consisting of a 110,421 square foot shopping center in Norcross, Georgia. Also, as of May 11, 2006, the Company classified as “held for sale” a consolidated real estate interest consisting of a 216-unit apartment complex and clubhouse in Watervliet, New York. In accordance with SFAS No. 144, the assets and liabilities of these real estate interests have been separately classified on the Company’s balance sheet as of December 31, 2005 and 2004, and the results of operations attributable to these interests have been reclassified, for all periods presented, to “discontinued operations”. Additionally, depreciation expense was no longer recorded for these assets once they were classified as “held for sale”.

     As of December 31, 2005 and 2004, the consolidated interests held for sale had an aggregate book value of $94.1 million and $89.3 million respectively. Liabilities underlying the consolidated real estate interest held for sale totaled $56.4 million and $57.6 million at December 31, 2005 and 2004 respectively. Included in these liabilities, as of December 31, 2005 and 2004, are the following non-recourse, long-term liabilities secured by the Company’s consolidated real estate interests held for sale:

	2005		2004
Loan payable, secured by real estate, monthly installments of $288,314, including interest at 6.85%, remaining principal due August 1, 2008.		40,176,286		40,821,379
Loan payable, secured by real estate, monthly installments of $72,005, including interest at 7.55%, remaining principal due December 1, 2008		8,919,422		9,102,492
Loan payable, secured by real estate, monthly installments of $37,697, including interest at 7.27%, remaining principal due January 1, 2008		5,136,245		5,206,060
Total	$	54,231,953	$	55,129,931

     The Company sold the Philadelphia, PA office building in May 2006 for approximately $74.0 million. The Norcross, GA shopping center and the Watervliet, NY apartment complex were both sold in June 2006 for $13.0 million and $11.25 million, respectively.

     The following is a summary of the aggregate results of operations for the consolidated real estate investments held for sale for the years ended December 31, 2005, 2004 and 2003. These amounts have been reclassified to discontinued operations in the Company’s

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consolidated statements of income for all periods presented:

	For the Years Ended December 31,
	2005		2004		2003
Rental income	$	17,294,045	$	16,879,139	$	15,451,688
Less:
Operating expenses		8,253,441		8,546,855		7,673,541
Interest expense		3,866,681		3,932,432		3,632,333
Depreciation and amortization		2,041,145		2,670,550		2,484,678
Net income before gain on involuntary conversion		2,772,778		1,729,302		1,661,136
Gain on involuntary conversion		—		1,282,742		—
Net income from discontinued operations	$	2,772,778	$	3,012,044	$	1,661,136

Note 7 — Unconsolidated Real Estate Interests

     Unconsolidated real estate interests include the Company’s non-controlling interests in limited partnerships accounted for under the equity method of accounting, unless such interests meet the requirements of EITF:D-46 “Accounting for Limited Partnership Investments” to be accounted for under the cost method of accounting. In accordance with EITF 03-16, “Accounting for Investments in Limited Liability Companies,” the Company accounts for its non-controlling interests in limited liability companies the same way that it accounts for its non-controlling interests in limited partnerships.

     At December 31, 2005, the Company’s unconsolidated real estate interests consisted of the following:

• 20% beneficial interest in a trust that owns a 58-unit apartment building in Philadelphia, Pennsylvania and a 20% partnership interest in a general partnership that owns an office building with 31,507 square feet in Alexandria, Virginia. In September 2002, the Company received these interests, together with a cash payment of $2.5 million, in repayment of two loans with a combined net book value of $2.3 million. The Company recorded these interests at their current fair value based upon discounted cash flows and recognized income from loan satisfaction in the amount of $3.2 million. As of December 31, 2005, the Pennsylvania property is subject to non-recourse financing of $2.9 million bearing interest at 6.04% and maturing on February 1, 2013. The Virginia property is subject to non-recourse financing of $3.4 million bearing interest at 6.75% and maturing on March 1, 2013.

• Class B limited partnership interest in a limited partnership that owns a 363-unit multifamily apartment complex in Pasadena (Houston), Texas. The Company acquired its interest in September 2003 for $1.9 million. In July 2004, the Company contributed an additional $600,000 to the limited partnership. The property is subject to non-recourse financing of $8.0 million at December 31, 2005, which bears interest at the 30-day London interbank offered rates, or LIBOR, plus 3.0% (7.39% at December 31, 2005, but limited by an overall interest rate cap of 6.0%) with a LIBOR floor of 2.0%, and is due on October 9, 2006.

• 3% membership interest in a limited liability company that has a 99.9% limited partnership interest in a limited partnership that owns a 504-unit multifamily apartment complex in Sugarland (Houston), Texas. The Company acquired its interest in April 2004 for $5.6 million. The property is subject to non-recourse financing of $14.3 million at December 31, 2005, which bears interest at an annual rate of 4.84%, and is due on November 1, 2009.

• 0.1% Class B membership interest in an limited liability company that has an 100% interest in a limited liability company that has an 89.94% beneficial interest in a trust that owns a 737,308 square foot 35-story urban office building in Chicago, Illinois. The Company acquired its interest in December 2004 for $19.5 million. The property is subject to non-recourse financing of $91.0 million at December 31, 2005, which bears interest at an annual rate of 5.3% and is due January 1, 2015.

• Class B membership interests in each of two limited liability companies which together own a 231-unit multifamily apartment complex in Wauwatosa, Wisconsin. The Company acquired its interest in December 2004 for $2.9 million. The property is subject to non-recourse financing of $18.0 million at December 31, 2005, which bears interest at 5.3% and is due January 1, 2014.

• Class B membership interests in each of two limited liability companies, one which owns a 430-unit multifamily apartment

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complex in Orlando, Florida and the other which owns a 264-unit multifamily apartment complex in Bradenton, Florida. The Company acquired its membership interests in May 2005 for an aggregate amount of $9.5 million. As of December 31, 2005, the Orlando property is subject to non-recourse financing of $23.5 million bearing interest at 5.31% and maturing on June 1, 2010. The Bradenton property is subject to non-recourse financing of $14.0 million bearing interest at 5.31% and maturing on June 1, 2010.

• A 20% residual interest in the net sales proceeds resulting from any future sale of a 27-unit apartment building located in Philadelphia, Pennsylvania. The property had been part of the collateral underlying one of the Company’s mezzanine loans until the loan was repaid in full in December 2005. The book value of the Company’s interest at December 31, 2005, $883,600, is computed using an assumed sale price that is based upon a current third-party appraisal.

     The Company’s unconsolidated real estate interests consisted of the following property types at the dates indicated below:

	December 31,
	2005					2004
	Book Value		Percentage			Book Value		Percentage
Multi-family	$	19,530,016		48.1	%	$	16,981,121		38.6	%
Office		21,095,697		51.9	%		27,035,336		61.4	%
Unconsolidated real estate interests	$	40,625,713		100.0	%	$	44,016,457		100.0	%

Note 8 — Credit Facility and Lines of Credit

     At December 31, 2005, the Company had an unsecured credit facility with $305.0 million of maximum possible borrowings ($240.0 million outstanding at December 31, 2005) and three secured lines of credit, two of which each have $30.0 million of maximum possible borrowings and one which has $25.0 million of maximum possible borrowings (as of March 1, 2006, the maximum possible borrowing on this line increased to $50.0 million).

     The following is a description of the Company’s unsecured credit facility and secured lines of credit at December 31, 2005.

Unsecured Credit Facility

     On October 24, 2005, the Company entered into a revolving credit agreement with KeyBank National Association, as administrative agent, Bank of America, N.A., as syndication agent, KeyBanc Capital Markets, as sole lead arranger and sole book manager, and financial institutions named in the revolving credit agreement. The revolving credit agreement originally provided for a senior unsecured revolving credit facility in an amount up to $270.0 million, with the right to request an increase in the facility of up to an additional $80.0 million, to a maximum of $350.0 million. The original amount was increased by an additional $35.0 million to $305.0 million in December 2005. Borrowing availability under the credit facility is based on specified percentages of the value of eligible assets. The credit facility will terminate on October 24, 2008, unless the Company extends the term an additional year upon the satisfaction of specified conditions.

     Amounts borrowed under the credit facility bear interest at a rate equal to, at the Company’s option:

• LIBOR (30-day, 60-day, 90-day or 180-day interest periods, at the Company’s option) plus an applicable margin of between 1.35% and 1.85% or

• an alternative base rate equal to the greater of: (i) KeyBank’s prime rate, or (ii) the federal funds rate plus 50 basis points), plus an applicable margin of between 0% and 0.35%.

     The applicable margin is based on the ratio of the Company’s total liabilities to total assets which is calculated on a quarterly basis. The Company is obligated to pay interest only on the amounts borrowed under the credit facility until the maturity date of the credit facility, at which time all principal and any interest remaining unpaid is due.

     The Company’s ability to borrow under the credit facility is subject to its ongoing compliance with a number of financial and other covenants, including a covenant that the Company not pay dividends in excess of 100% of its adjusted earnings, to be calculated on a trailing twelve-month basis, provided however, dividends may be paid to the extent necessary to maintain its status as a real estate investment trust. The credit facility also contains customary events of default, including a cross default provision. If an event of default occurs, all of the Company’s obligations under the credit facility may be declared immediately due and payable. For events of

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default relating to insolvency and receivership, all outstanding obligations automatically become due and payable.

     At December 31, 2005, the Company had $240.0 million outstanding under the credit facility, of which $180.0 million bore interest at 5.87125% and $60.0 million bore interest at 7.25%. Based upon the Company’s eligible assets as of that date, the Company had $50.0 million of availability under the credit facility.

Secured Lines of Credit

     At December 31, 2005, the Company had no amounts outstanding under the first of its two $30.0 million lines of credit. This line of credit bears interest at either: (a) the 30-day LIBOR, plus 2.5%, or (b) the prime rate as published in the “Money Rates” section of The Wall Street Journal, at the Company’s election. Absent any renewal, the line of credit will terminate in October 2007 and any principal then outstanding must be paid by October 2008. The lender has the right to declare any advance due and payable in full two years after the date of the advance.

     At December 31 2005, the Company had no amounts outstanding under the second of its two $30.0 million lines of credit. This line of credit bears interest at the prime rate as published in the “Money Rates” section of The Wall Street Journal. This line of credit has a current term running through April 2006 with annual one-year extension options and an 11-month non-renewal notice requirement.

     At December 31, 2005, the Company had $22.4 million outstanding under its $25.0 million line of credit. This line of credit bears interest at the 30-day LIBOR plus 2.25%. As of December 31, 2005, the interest rate was 6.64%. In December 2005 the revolving feature of this credit line expired and all amounts then outstanding are to be repaid by December 2006. As of March 1, 2006, the Company renewed the revolving feature of the credit line and increased the maximum borrowing to $50.0 million.

     In 2005, the Company chose to not renew its second $25.0 million line of credit and its $10.0 million line of credit because both of the lenders who provided the lines participated in the Company’s new unsecured revolving credit facility.

     As of December 31, 2005, $28.8 million in principal amount of the Company’s loans were pledged as collateral for amounts outstanding under the secured lines of credit.

Note 9 — Shareholders’ Equity

     On September 15, 2005, the Company issued 2,280,700 Common Shares in a public offering at an offering price of $28.50 per share. After offering costs, including the underwriter’s discount, and expenses of approximately $3.1 million, the Company received approximately $61.9 million of net proceeds.

     On October 5, 2004, the Company issued 2.0 million shares of its 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest (“Series B Preferred Shares”) in a public offering at an offering price of $25.00 per share. After offering costs, including the underwriters’ discount, and expenses of approximately $1.9 million, the Company received approximately $48.1 million of net proceeds. On October 29, 2004, the underwriters exercised their over-allotment option, in part, with respect to an additional 258,300 Series B Preferred Shares. The exercise price was $25.00 per share. These shares were issued on November 3, 2004 for net proceeds of approximately $6.3 million.

     The Series B Preferred Shares accrue cumulative cash dividends at a rate of 8.375% per year of the $25.00 liquidation preference, equivalent to $2.09375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series B Preferred Shares have no maturity date and the Company is not required to redeem the Series B Preferred Shares at any time. The Company may not redeem the Series B Preferred Shares before October 5, 2009, except in limited circumstances relating to the ownership limitations necessary to preserve the Company’s tax qualification as a real estate investment trust. On or after October 5, 2009, the Company may, at its option, redeem the Series B Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. For the years ended December 31, 2005 and 2004, the Company paid dividends on its Series B Preferred Shares of $4.7 million and $1.1 million, respectively.

     On June 25, 2004, the Company issued 2.0 million Common Shares in a public offering at an offering price of $24.25 per share. After offering costs, including the underwriters’ discount and expenses of approximately $2.4 million, the Company received approximately $46.1 million of net proceeds. On July 6, 2004, the Company issued an additional 300,000 Common Shares pursuant to

20

the underwriters’ exercise of their over-allotment option. The exercise price was $24.25 per share, resulting in receipt by the Company of net proceeds of approximately $6.9 million.

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     On March 19, 2004, the Company issued 2.4 million shares of its 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (“Series A Preferred Shares”) in a public offering at an offering price of $25.00 per share with respect to 2,350,150 shares and $24.50 with respect to 49,850 shares sold to certain of the Company’s trustees, officers and employees, together with their relatives and friends. After offering costs, including the underwriters’ discount, and expenses of approximately $2.0 million, the Company received approximately $58.0 million of net proceeds. On April 6, 2004, the Company issued an additional 360,000 Series A Preferred Shares pursuant to the underwriters’ exercise of their over-allotment option. The exercise price was $25.00 per share, resulting in receipt by the Company of net proceeds of approximately $8.6 million.

     The Series A Preferred Shares accrue cumulative cash dividends at a rate of 7.75% per year of the $25.00 liquidation preference, equivalent to $1.9375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series A Preferred Shares have no maturity date and the Company is not required to redeem the Series A Preferred Shares at any time. The Company may not redeem the Series A Preferred Shares before March 19, 2009, except in limited circumstances relating to the ownership limitations necessary to preserve the Company’s tax qualification as a real estate investment trust. On or after March 19, 2009, the Company may, at its option, redeem the Series A Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. For the years ended December 31, 2005 and 2004, the Company paid dividends on its Series A Preferred Shares of $5.4 million and $4.2 million, respectively. The Series A Preferred Shares and Series B Preferred Shares rank on a parity with respect to dividend rights, redemption rights and distributions upon liquidation.

Note 10 — Benefit Plans

     401(k) Profit Sharing Plan — The Company has a 401(k) savings plan covering substantially all employees. Under the plan, the Company matches 75% of employee contributions for all participants. Contributions made by the Company were approximately $212,000, $169,000 and $135,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

     Deferred Compensation — In January 2002 the Company established a supplemental executive retirement plan, or SERP, providing for retirement benefits to Betsy Z. Cohen, its Chairman and Chief Executive Officer, as required by her employment agreement with the Company. The normal retirement benefit is equal to 60% of Mrs. Cohen’s average base plus incentive compensation for the three years preceding the termination of employment, less social security benefits, increasing by 0.5% for each month of employment after Mrs. Cohen reaches age 65. Mrs. Cohen’s rights in the SERP benefit vest 25% for each year of service after October 31, 2002. The Company established a trust to serve as the funding vehicle for the SERP benefit and has deposited 58,912 Common Shares and $1.4 million in this trust since its inception. Based upon current actuarial calculations, the Company will have to fund an additional $1.0 million in cash to the trust, in order to satisfy its obligations under the SERP.

     In 2002, the Company recorded deferred compensation of $1.25 million for the fair value of the Common Shares. For the years ended December 31, 2005, 2004 and 2003, the Company recognized $947,000, $723,000 and $619,000 of compensation expenses, respectively, with regard to the required stock and cash contributions.

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Note 11 — Earnings Per Share

     The Company’s calculation of earnings per share in accordance with SFAS No. 128 is as follows:

	Year Ended December 31, 2005
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
BASIC EARNINGS PER SHARE:
Net income available to common shareholders	$	67,951,232		26,235,134	$	2.59
Effect of dilutive securities:
Options		—		176,889		(.02	)
Phantom shares		—		7,670		—
Net income available to common shareholders plus assumed conversions	$	67,951,232		26,419,693	$	2.57

	Year Ended December 31, 2004
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
BASIC EARNINGS PER SHARE:
Net income available to common shareholders	$	60,878,397		24,404,168	$	2.49
Effect of dilutive securities:
Options		—		166,144		(.01	)
Phantom shares		—		1,764		—
Net income available to common shareholders plus assumed conversions	$	60,878,397		24,572,076	$	2.48

	Year Ended December 31, 2003
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
BASIC EARNINGS PER SHARE:
Net income available to common shareholders	$	47,164,427		21,043,308	$	2.24
Effect of dilutive securities:
Options		—		146,895		(.01	)
Net income available to common shareholders plus assumed conversions	$	47,164,427		21,190,203	$	2.23

Note 12 — Stock Based Compensation

     The Company maintains the RAIT Investment Trust 2005 Equity Compensation Plan (the “Equity Compensation Plan”). The maximum aggregate number of Common Shares that may be issued pursuant to the Equity Compensation Plan is 2,500,000.

     The Company has granted to its officers, trustees and employees phantom shares pursuant to the RAIT Investment Trust Phantom Share Plan and phantom units pursuant to the Equity Compensation Plan. Both phantom shares and phantom units are redeemable for Common Shares issued under the Equity Compensation Plan. Redemption occurs after a period of time after vesting set by the Compensation Committee. All outstanding phantom shares were issued to non-management trustees, vested immediately, have dividend equivalent rights and will be redeemed upon separation from service from the Company. Phantom units granted to non-management trustees vest immediately, have dividend equivalent rights and will be redeemed upon the earliest to occur of (i) the first anniversary of the date of grant, or (ii) a trustee’s termination of service with the Company. Phantom units granted to officers and employees vest in varying percentages set by the Compensation Committee over four years, have dividend equivalent rights and will be redeemed between one to two years after vesting as set by the Compensation Committee.

     The Company granted 1,392 and 2,744 phantom shares during the years ended December 31, 2005 and 2004, respectively. The Company has been accounting for grants of phantom shares in accordance with SFAS No. 123, which requires the recognition of compensation expenses on the date of grant. During the years ended December 31, 2005 and 2004, the Company recognized $47,000 and $80,000, respectively in compensation expenses relating to grants of phantom shares. At December 31, 2005 there were 4,136 phantom shares outstanding.

     During the year ended December 31, 2005, the Company granted 11,316 phantom units and recognized $354,000 in compensation expenses relating to these units. In January and February of 2006, the Company granted an additional 54,002 phantom units.

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Stock Options

     In February and April 2002, the Company granted to its employees, executive officers and trustees options to purchase 61,100 Common Shares at the fair market value on the date of grant. These options, which were exercised in March through May 2002, had exercise prices of $16.92 and $19.85, respectively, per Common Share. The Common Shares issued pursuant to these exercises are subject to restrictions that lapse with respect to 25% of these Common Shares annually on the anniversary date of the grants for each of the next four years. At the time of exercise, the Company provided loans to each person in the amount necessary to exercise such options. Each of these loans bears interest at a rate of 6% per annum. The aggregate principal amount of all these loans was $264,000 and $506,000 at December 31, 2005 and 2004, respectively. Interest on the outstanding principal amount is payable quarterly and 25% of the original principal amount of each loan is payable on each of the first four anniversaries. The final payment on the remaining loans outstanding is due on March 31, 2006.

     The Common Shares acquired pursuant to the option exercise secure each loan and the borrower is personally liable for 25% of the outstanding balance due. Any payments of principal are deemed to first reduce the amount of the borrower’s personal liability and the Company agrees to accept as full satisfaction of amount due under the loan for which the borrower is not personally liable the return of all Common Shares purchased by borrower with the proceeds of the loan.

     The Company has granted to its officers, trustees and employees options to acquire Common Shares. The vesting period is determined by the Compensation Committee and the option term is generally ten years after the date of grant. At December 31, 2005 and 2004 there were 477,360 and 490,693 options outstanding, respectively.

     A summary of the options activity of the Equity Compensation Plan is presented below.

	2005					2004					2003
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding, January 1,		490,693		$	17.44		518,282		$	16.82		427,682		$	14.52
Granted		—			—		18,250			26.40		129,850			22.84
Exercised		(13,333	)		15.00		(45,839	)		14.09		(39,250	)		11.65
Outstanding, December 31,		477,360			17.51		490,693			17.44		518,282			16.82
Options exercisable at December 31,		422,360					392,143					374,682
Weighted average fair value of options granted during the year					n/a				$	1.22				$	0.68

	Options Outstanding					Options Exercisable
	Number		Weighted Average	Weighted		Number		Weighted
Range of	Outstanding at		Remaining	Average		Outstanding at		Average
Exercise Prices	December 31, 2005		Contractual Life	Exercise Price		December 31, 2005		Exercise Price
$9.00 - 10.75		25,682	3.63 years	$	10.36		25,682	$	10.36
$13.65 - 19.85		306,503	2.50 years	$	15.34		304,003	$	15.31
$21.81 - 26.40		145,175	7.72 years	$	23.36		92,675	$	23.47
		477,360					422,360

Note 13 — Commitments and Contingencies

Litigation

     As part of the Company’s business, the Company acquires and disposes of real estate investments and, as a result, expects that it will engage in routine litigation in the ordinary course of that business. Management does not expect that any such litigation will have a material adverse effect on the Company’s consolidated financial position or results of operations.

     On August 12, 2004, a civil action was commenced in the United States District Court of the Eastern District of Pennsylvania by Michael Axelrod and certain of his affiliates naming the Company and certain of the Company’s affiliates, among others, as defendants. The civil action arose out of the Company’s sale of a consolidated real estate interest to these affiliates and was based upon alleged misrepresentations made with respect to the condition of the property underlying this interest, which the Company denied. On March 1, 2006, the parties to this civil action entered into a settlement agreement to settle and dismiss this civil action with prejudice and to exchange mutual releases, without the admission of liability by any party. The Company expects that a stipulation to dismiss all claims and counterclaims in this civil action will be filed with the court during March 2006.

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Delegated Underwriting Program

     In 2005 and 2006 the Company has entered into program agreements with four mortgage lenders that provide that the mortgage lender will locate, qualify, and underwrite both a first mortgage loan and a mezzanine loan and then sell the mezzanine loan to the Company. The mezzanine loans must conform to the business, legal and documentary parameters in the program agreement and be in the range of $250,000 to $2.5 million. In most cases, the Company expects to acquire the mezzanine loan from the mortgage lender at the closing of the mezzanine loan. In general, if any variations are identified or any of the required deliveries are not received, the Company has a period of time to notify the mortgage lender of its election to either waive the variations or require the mortgage lender to repurchase the mezzanine loan. Each of the four program agreements provides that the Company will fund up to $50.0 million per calendar quarter of loans that fit the pre-defined underwriting parameters. From November 17, 2005 through March 1, 2006 the Company has funded six mezzanine loans totaling $8.1 million through the delegated underwriting program.

Guidance Line

     In June 2005, the Company entered into an agreement with a borrower establishing financial and underwriting parameters under which the Company would consider first mortgage bridge loans sourced by the borrower, up to an aggregate of $150.0 million, with no individual loan in an amount greater than $50.0 million. The Company expects that the credit and market risk of the potential loans will not differ from those of the loans in the Company’s current portfolio. In October 2005, the Company made a $74.5 million loan to this borrower. This loan was not made under this line, but it reduced the availability of this line while it was outstanding. This loan was repaid in December 2005.

Lease Obligations

     The Company sub-leases both its downtown and suburban Philadelphia office locations. The annual minimum rent due pursuant to the subleases for each of the next five years and thereafter is estimated to be as follows as of December 31, 2005:

2006	$	390,019
2007		395,347
2008		395,347
2009		395,347
2010		263,565
Thereafter		—
Total	$	1,839,625

     The Company sub-leases a portion of its downtown Philadelphia office space under an operating lease with The Bancorp, Inc., (“Bancorp Inc.”), at an annual rental based upon the amount of square footage the Company occupies. The sub-lease expires in August 2010 with two five-year renewal options. Rent paid to Bancorp Inc. was approximately $295,000, $251,000 and $244,000 for the years ended December 31, 2005, 2004, and 2003, respectively. The Company’s affiliation with Bancorp Inc. is described in Note 14.

     The Company sub-leases the remainder of its downtown Philadelphia office space under an operating lease with The Richardson Group, Inc. (“Richardson”) whose Chairman is the Vice-Chairman, a trustee and Secretary of the Company, and a son of the Chairman and Chief Executive Officer of the Company. The annual rental is based upon the amount of square footage the Company occupies. The sub-lease expires in August 2010 with two five-year renewal options. Rent paid to Richardson was approximately $43,000, $56,000 and $55,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Effective April 1, 2005, Richardson relinquished to the landlord its leasehold on a portion of the space they had subleased to the Company. Simultaneously, Bancorp entered into a lease agreement with the landlord for that space. The Company then entered into a new sublease with Bancorp for that space at annual rentals based upon the amount of square footage the Company occupies.

     The Company sub-leases suburban Philadelphia, Pennsylvania office space at an annual rental of $15,600. This sublease currently terminates in February 2006 but renews automatically each year for a one year term unless prior notice of termination of the sublease is sent by either party to the sublease to the other party thereto.

     Total rental expense was $351,000, $316,000 and $298,000 for the years ended December 31, 2005, 2004 and 2003 respectively.

     Employment Agreements — The Company is party to employment agreements with certain executives that provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances.

25

Note 14 — Transactions with Affiliates

     Resource America, Inc. (“Resource America”) was the sponsor of the Company. Resource America had the right to nominate one person for election to the Board of Trustees of the Company until its ownership of the outstanding Common Shares fell below 5%, which occurred in June 2003. Based upon representations made by Resource America to the Company, Resource America has not owned any Common Shares since August 2005. The Chairman and Chief Executive Officer of the Company, Betsy Z. Cohen, is (i) the spouse of Edward E. Cohen, the Chairman of the Board of Resource America, and (ii) the parent of Jonathan Z. Cohen, the Chief Executive Officer, President and a director of Resource America. Jonathan Cohen is also the Vice-Chairman, a Trustee and the Secretary of the Company and served as Resource America’s nominee to the Board of Trustees of the Company. In December 2003, the Company was paid $100,000 for facilitating an acquisition by an unrelated third party financial institution of a $10.0 million participation in a loan owned by Resource America. The Company had previously owned the participation from March 1999 until March 2001 and, in order for another party to acquire it, the Company had to reacquire it and then sell it to them. The transaction was completed in January 2004, at which time the Company earned an additional $23,000 representing interest for the eight days the Company had funded the participation. The transaction was reviewed and approved by the Independent Trustees (as defined in the declaration of trust of the Company) of the Board of Trustees of the Company and determined not to create a conflict of interest. The Company anticipates that it may purchase and sell additional loans and lien interests in loans to and from Resource America, and participate with it in other transactions.

     Brandywine Construction & Management, Inc. (“Brandywine”), is an affiliate of the spouse of Betsy Z. Cohen, the Chairman and Chief Executive Officer of the Company. Brandywine provided real estate management services to 11, 14 and 17 properties underlying the Company’s real estate interests at December 31, 2005, 2004 and 2003, respectively. Management fees in the amount of $918,000, $1.1 million and $1.2 million were paid to Brandywine for the years ended December 31, 2005, 2004 and 2003, respectively, relating to those interests. The Company believes that the management fees charged by Brandywine are comparable to those that could be obtained from unaffiliated third parties. The Company continues to use Brandywine to provide real estate management services to properties underlying the Company’s investments.

     Betsy Z. Cohen has been the Chairman of the Board of The Bancorp Bank (“Bancorp”), a commercial bank, since November 2003 and a director of Bancorp Inc., a registered financial holding company for Bancorp, since September 2000, and the Chief Executive Officer of both Bancorp and Bancorp Inc. since September 2000. Daniel G. Cohen, Mrs. Cohen’s son, (a) has been the Vice-Chairman of the Board of Bancorp since November 2003, was the Chairman of the Board of Bancorp from September 2000 to November 2003, was the Chief Executive Officer of Bancorp from July 2000 to September 2000 and has been Chairman of the Executive Committee of Bancorp since 1999 and (b) has been the Chairman of the Board of Bancorp Inc. and Chairman of the Executive Committee of Bancorp Inc. since 1999. The Company maintains most of its checking and demand deposit accounts at Bancorp. As of December 31, 2005 and 2004, the Company had $69.1 million and $7.8 million, respectively, on deposit, of which approximately $69.0 million and $7.7 million, respectively, is over the FDIC insurance limit. The Company pays a fee of $5,000 per month to Bancorp for information system technical support services. The Company paid $60,000 for each of the years ended December 31, 2005, 2004 and 2003. The Company subleases a portion of its downtown Philadelphia office space from Bancorp. See Note 13

     Daniel G. Cohen is the beneficial owner of the corporate parent of Cohen Brothers & Company (“Cohen Brothers”), a registered broker-dealer of which Mr. Cohen is President and Chief Executive Officer. In March 2003, Jonathan Z. Cohen sold his 50% equity interest in this corporate parent to Daniel G. Cohen. Cohen Brothers has acted as a dealer in the public offering the Company made of its 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (“Series A Preferred Shares”) in March 2004. In the March 2004 offering, Cohen Brothers was allocated 60,000 Series A Preferred Shares at the public offering price less a standard dealer’s concession of $0.50 per share. Cohen Brothers has acted as a dealer in the public offerings the Company made of its Common Shares in February 2003 and October 2003. In the February 2003 offering, Cohen Brothers was allocated 150,000 Common Shares at the public offering price less a standard dealer’s concession of $0.48 per share. In the October 2003 offering, Cohen Brothers was allocated 125,000 Common Shares at the public offering price less a standard dealer’s concession of $0.61 per share.

     The Company sub-leases a portion of its downtown Philadelphia office space under an operating lease with Richardson. See Note 13.

Note 15 — Concentrations of Credit Risk

     The Company believes that it does not concentrate its assets in any way that exposes it to a material loss from any single occurrence or group of occurrences. The Company has no loans or investments with cross default and or cross collateral provisions with other loans or investments in its portfolio.

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Note 16 — Fair Value of Financial Instruments

     SFAS No. 107 requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Company, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities, except for certain loans. Therefore, the Company has used significant assumptions and present value calculations in estimating fair value. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

     Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instrument. The estimation methodologies used, the estimated fair values, and recorded book values at December 31, 2005 and 2004 are outlined below.

     The following tables describe the carrying amounts and fair value estimates of the Company’s fixed and variable rate real estate loans, fixed and variable rate senior indebtedness relating to loans and long term debt secured by consolidated real estate interests as of December 31, 2005 and 2004. These accounts have been valued by computing the present value of expected future cash in-flows or out-flows, using a discount rate that is equivalent to the estimated current market rate for each asset or liability, adjusted for credit risk.

     For cash and cash equivalents, the book value of $71.6 million and $11.0 million as of December 31, 2005 and 2004, respectively, approximated fair value. The book value of restricted cash of $20.9 million and $22.9 million approximated fair value at December 31, 2005 and 2004, respectively. The book value of the unsecured line of credit ($240.0 million at December 31, 2005) and of the aggregate outstanding balance of the secured lines of credit of $22.4 million and $49.0 million at December 31, 2005 and 2004, respectively, approximated the fair value of the amounts outstanding.

	At December 31, 2005
	Carrying		Estimated		Discount
	Amount		Fair Value		Rate
Fixed rate first mortgages	$	248,137,000	$	249,200,000		7.75	%
Variable rate first mortgages		175,961,000		178,713,000		7.75	%
Fixed rate mezzanine loans		265,300,000		282,551,000		10.0	%
Variable rate mezzanine loans		25,859,000		25,903,000		10.0	%
Fixed rate senior indebtedness relating to loans		54,000,000		53,879,000		5.9	%
Variable rate senior indebtedness relating to loans		12,500,000		12,644,000		5.9	%
Long-term debt secured by consolidated real estate interests		8,119,000		7,802,000		6.75	%

	At December 31, 2004
	Carrying		Estimated		Discount
	Amount		Fair Value		Rate
Fixed rate first mortgages	$	196,561,000	$	198,049,000		8.5	%
Variable rate first mortgages		37,270,000		37,107,000		7.5	%
Mezzanine loans		257,478,000		257,930,000		12.5	%
Fixed rate senior indebtedness relating to loans		31,165,000		31,973,000		5.25	%
Variable rate senior indebtedness relating to loans		20,140,000		20,116,000		5.25	%
Long-term debt secured by consolidated real estate interests		8,294,000		8,290,000		5.9	%

Note 17 — Segment Reporting

     The Company has identified that it has one operating segment; accordingly it has determined that it has one reportable segment. As a group, the executive officers of the Company act as the Chief Operating Decision Maker (“CODM”). The CODM reviews operating results to make decisions about all investments and resources and to assess performance for the entire Company. The Company’s portfolio consists of one reportable segment, investments in real estate through the mechanism of lending and/or ownership. The CODM manages and reviews the Company’s operations as one unit. Resources are allocated without regard to the underlying structure of any investment, but rather after evaluating such economic characteristics as returns on investment, leverage ratios, current portfolio mix, degrees of risk, income tax consequences and opportunities for growth. The Company has no single customer that

27

accounts for 10% or more of revenues.

Note 18 — Dividends

     In order to maintain its election to qualify as a REIT, the Company must currently distribute, at a minimum, an amount equal to 90% of its taxable income. Because taxable income differs from cash flow from operations due to non-cash revenues or expenses (such as depreciation), in certain circumstances the Company may generate operating cash flow in excess of its dividends or, alternatively, may be required to borrow to make sufficient dividend payments.

Common Shares

     On the declaration dates in the years ended December 31, 2005 and 2004 set forth below, the Board of Trustees of the Company declared cash dividends in an amount per Common Share and in the aggregate dividend amount set forth opposite such declaration date, payable on the payment date, to holders of Common Shares on the record date set forth opposite the relevant declaration date.

					Aggregate Dividend
Declaration Dates	Record Date	Payment Date	Dividend Per Share		Amount
12/09/05	12/22/05	12/30/05	$	0.61	$	17,015,799
09/02/05	09/12/05	10/17/05	$	0.61	$	15,620,342
06/15/05	06/28/05	07/15/05	$	0.61	$	15,614,197
03/25/05	04/07/05	04/15/05	$	0.60	$	15,351,018
12/09/04	12/21/04	12/31/04	$	0.60	$	15,346,633
09/15/04	09/27/04	10/15/04	$	0.60	$	15,317,506
06/10/04	06/21/04	07/15/04	$	0.60	$	13,932,458
03/23/04	04/05/04	04/15/04	$	0.60	$	13,928,428

Series A Preferred Shares

     On the declaration dates in the years ended December 31, 2005 and 2004 set forth below, the Board of Trustees of the Company declared cash dividends on the Company’s 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Preferred Shares”) in the amount per share, payable on the payment date, to holders of Series A Preferred Shares on the record date in the aggregate dividend amount set forth opposite the relevant declaration date.

					Aggregate Dividend
Declaration Dates	Record Date	Payment Date	Dividend Per Share		Amount
10/25/05	12/01/05	12/30/05	$	0.484375	$	1,336,875
07/19/05	09/01/05	09/30/05	$	0.484375	$	1,336,875
05/18/05	06/01/05	06/30/05	$	0.484375	$	1,336,875
01/25/05	03/01/05	03/31/05	$	0.484375	$	1,336,875
10/26/04	12/01/04	12/31/04	$	0.484375	$	1,336,875
07/27/04	09/01/04	09/30/04	$	0.484375	$	1,336,875
04/27/04	06/01/04	06/30/04	$	0.484375	$	1,336,875
03/18/04	03/24/04	03/31/04	$	0.062500	$	150,000

Series B Preferred Shares

     On the declaration dates in the years ended December 31, 2005 and 2004 set forth below, the Board of Trustees of the Company declared cash dividends on the Company’s 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series B Preferred Shares”) in the amount per share, payable on the payment date, to holders of Series B Preferred Shares on the record date in the aggregate dividend amount set forth opposite the relevant declaration date.

					Aggregate Dividend
Declaration Dates	Record Date	Payment Date	Dividend Per Share		Amount
10/25/05	12/01/05	12/30/05	$	0.5234375	$	1,182,080
07/19/05	09/01/05	09/30/05	$	0.5234375	$	1,182,080
05/18/05	06/01/05	06/30/05	$	0.5234375	$	1,182,080
01/25/05	03/01/05	03/31/05	$	0.5234375	$	1,182,080
10/26/04	12/01/04	12/31/04	$	0.4952957	$	1,118,527

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Note 19 — Quarterly Financial Data (Unaudited)

     The following represents summarized quarterly financial data of the Company which, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s results of operations:

	For the Three Months Ended
2005	December 31,			September 30,			June 30,			March 31,
Interest income	$	21,253,855		$	20,863,923		$	19,634,961		$	18,975,190
Rental income		3,360,196			3,372,043			3,438,948			3,407,542
Fee income and other		3,055,191			991,335			2,085,676			911,432
Investment income(1)		1,525,378			1,316,041			1,861,759			1,318,648
Interest expense		4,617,410			3,732,106			3,379,476			1,701,701
Property operating expenses		2,000,414			1,957,062			1,813,721			1,903,600
Other operating expenses		2,790,042			2,657,274			2,864,722			2,468,734
Net income before minority interest		19,786,754			18,196,900			18,963,425			18,538,777
Minority interest		(10,956	)		(7,209	)		(5,266	)		(9,989	)
Net income before gain on sale of consolidated real estate interest, loss on sale of unconsolidated real estate interest, and gain on involuntary conversion		19,775,798			18,189,691			18,958,159			18,528,788
Loss on sale of unconsolidated real estate interest		(198,162	)		—			—			—
Net income from continuing operations		19,577,636			18,189,691			18,958,159			18,528,788
Net income from discontinued operations		1,005,397			1,155,747			251,287			360,347
Net income		20,583,033			19,345,438			19,209,446			18,889,132
Dividends attributed to preferred shares		2,518,955			2,518,955			2,518,955			2,518,955
Net income available to common shareholders	$	18,064,078		$	16,826,483		$	16,690,491		$	16,370,177
Basic earnings per share:
Net income from continuing operations	$	0.61		$	0.60		$	0.64		$	0.62
Net income from discontinued operations		0.04			0.05			0.01			0.02
Net income	$	0.65		$	0.65		$	0.65		$	0.64
Diluted earnings per share Net income from continuing operations	$	0.60		$	0.60		$	0.64		$	0.62
Net income from discontinued operations		0.04			0.05			0.01			0.02
Net income	$	0.64		$	0.65		$	0.65		$	0.64

	For the Three Months Ended
2004	December 31,			September 30,		June 30,		March 31,
Interest income	$	17,461,081		$	15,064,880	$	15,145,385	$	13,314,483
Rental income		3,667,327			3,113,158		2,093,285		2,186,904
Fee income and other		1,503,265			2,157,903		579,419		2,487,208
Investment income(1)		724,033			740,466		1,123,362		831,784
Interest expense		1,485,573			1,279,977		1,611,321		1,488,127
Property operating expenses		2,033,368			1,250,736		1,271,410		1,188,174
Other operating expenses		2,163,630			1,856,728		3,409,718		2,382,559
Net income before minority interest		17,673,135			16,688,966		12,649,002		13,761,519
Minority interest		(12,082	)		554		1,248		(19,476	)
Net income before gain on sale of consolidated real estate interest, and loss on sale of unconsolidated real estate interest		17,661,053			16,689,520		12,650,250		13,742,043
Gain on sale of consolidated real estate interest		—			—		2,402,639		—
Net income from continuing operations		17,661,053			16,689,520		15,052,889		13,742,043
Net income from discontinued operations		1,022,128			854,269		757,171		378,476
Net income		18,683,181			17,543,789		15,810,060		14,120,519
Dividends attributed to preferred shares		2,455,402			1,336,875		1,336,875		150,000
Net income available to common shareholders	$	16,227,779		$	16,206,914	$	14,473,185	$	13,970,519
Basic earnings per share:

29

	For the Three Months Ended
2004	December 31,		September 30,		June 30,		March 31,
Net income from continuing operations	$	0.60	$	0.61	$	0.59	$	0.58
Net income from discontinued operations		0.04		0.03		0.03		0.02
Net income	$	0.64	$	0.64	$	0.62	$	0.60
Diluted earnings per share
Net income from continuing operations	$	0.59	$	0.60	$	0.59	$	0.58
Net income from discontinued operations		0.04		0.03		0.03		0.02
Net income	$	0.63	$	0.63	$	0.62	$	0.60

(1) Certain reclassifications have been made to the prior quarters to conform to the presentation of the consolidated financial statements for the year ended December 31, 2005.

Note 20 — Subsequent Events (Unaudited)

     On June 8, 2006, the Company and Taberna Realty Finance Trust (“Taberna”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which a newly formed subsidiary of the Company will, subject to the terms and conditions of the Merger Agreement, merge with and into Taberna (the “Merger”), as a result of which the Company will own all of the common shares of beneficial interest of Taberna (“Taberna Common Shares”).

     Subject to the terms and conditions of the Merger Agreement, which has been unanimously approved by the boards of trustees of both companies, upon the completion of the Merger each issued and outstanding Taberna Common Share will be converted into 0.5389 Common Shares, with cash to be paid in lieu of fractional Common Shares.

     The Merger Agreement contains customary representations, warranties and covenants of the Company and Taberna, including, among others, covenants (i) to conduct their respective businesses in the ordinary course during the period between the execution of the Merger Agreement and consummation of the Merger and (ii) not to engage in certain kinds of transactions during such period. The board of trustees of each company has adopted a resolution approving and declaring advisable the Merger, and recommending that its shareholders, with respect to Taberna, approve the Merger, and with respect to the Company, approve the issuance of Common Shares in the Merger, and each party has agreed to hold a shareholder meeting to put these matters before their shareholders for their consideration. Each party has also agreed not to (i) solicit proposals relating to alternative business combination transactions or (ii) subject to certain exceptions, enter into discussions or negotiations or provide confidential information in connection with any proposals for alternative business combination transactions.

     Consummation of the Merger is subject to various conditions, including, among others, (i) requisite approvals of the shareholders of the Company and Taberna, (ii) the absence of any law or order prohibiting the consummation of the merger, and (iii) effectiveness of the Form S-4 registration statement relating to the Common Shares to be issued in the Merger and listing of the Common Shares to be issued in the Merger on the New York Stock Exchange. In addition, each party’s obligation to consummate the Merger is subject to certain other conditions, including, among others, (i) subject to the standards set forth in the Merger Agreement, the accuracy of the representations and warranties of the other party, (ii) compliance of the other party with its covenants in all material respects, (iii) the delivery of opinions from counsel to the Company and counsel to Taberna relating to the U.S. federal income tax code treatment of the Merger and the real estate investment trust status of both parties and (iv) there shall not have occurred any event, change, effect or circumstance that has had or is reasonably likely to have a material adverse effect on the other party.

     The Merger Agreement contains certain termination rights for both the Company and Taberna.

     No assurance can be given that all closing conditions will be satisfied or waived, or that the Merger will in fact be consummated.

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SCHEDULE IV

RAIT INVESTMENT TRUST AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
December 31, 2005

Loan Type/						Periodic			Face Amount		Book Value
Property Type	Interest Rate			Maturity Date		Payment Terms	Prior Liens		of Loans		of Loans
FIRST MORTGAGES:
Multi-family		7.84	%		1/20/06	interest only		5,000,000		12,782,840		12,782,840
Multi-family		8.00	%		2/25/2007	interest only		35,000,000		45,252,334		45,252,334
Multi-family		7.50	%		8/28/2007	interest only				16,033,349		16,033,349
Multi-family		7.00	%		3/25/2006	interest only				23,300,000		23,300,000
Multi-family		8.50	%		6/3/2006	interest only				16,800,000		16,800,000
Multi-family		7.00	%		5/23/2006	interest only				21,750,000		21,750,000
Office		8.19	%		12/28/2008	interest only				20,900,000		20,900,000
Retail and other		9.00	%		10/15/2006	interest only		11,000,000		15,500,000		15,500,000
Retail and other		8.50	%		12/31/2006	interest only				33,735,000		33,735,000
Retail and other		6.00	%		6/22/2007	interest only				21,300,000		21,300,000
Retail and other		8.50	%		7/31/2008	interest only				30,000,000		30,000,000
Retail and other		8.00	%		9/30/2008	interest only				13,516,426		13,516,426
Thirteen other multi- family		6.00%-12.00	%		3/29/2006 - 10/1/2007			5,000,000		88,160,956		88,160,956
Four other office		8.00	%		3/31/2006					25,254,990		25,254,990
Six other retail & other		6.00%-9.15	%		3/11/05 - 4/26/2008			8,000,000		39,812,341		39,812,341
Total first mortgages							$	64,000,000	$	424,098,276	$	424,098,276
MEZZANINE LOANS:
Multi-family		14.50	%		7/29/2006	interest only				9,873,932		9,873,932
Multi-family		14.50	%		3/11/2019	interest only				8,841,605		8,841,605
Multi-family		10.00	%		8/9/2007	interest only				12,958,706		12,958,706
Office		15.00	%		1/30/2006	interest only		2,500,000		19,468,756		19,468,756
Office		10.50	%		5/10/2015	interest only				25,860,000		25,860,000
Office		10.00	%		6/27/2006	interest only				19,000,000		19,000,000
Retail and other		9.72	%		11/9/2007	interest only				10,000,000		10,000,000
Twenty-eight other multi-family		6.00% - 17.00	%		3/31/2006 - 9/30/2016					95,421,106		95,421,106
Eighteen other office		11.00% - 15.50	%		4/30/2007 - 5/1/2021					61,590,895		61,590,895
Fourteen other retail and other		11.00% - 15.00	%		3/11/05 - 12/15/2015					28,143,719		28,143,719
Total mezzanine loans							$	2,500,000	$	291,158,719	$	291,158,719
Grand total							$	66,500,000	$	715,256,995	$	715,256,995

31

EX-99.5

RAIT INVESTMENT TRUST
AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
FINANCIAL STATEMENTS

	PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 2006 (unaudited) and December 31, 2005		2
Consolidated Statements of Income (unaudited) for the three months ended March 31, 2006 and 2005		3
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2006 and 2005		4
Notes to Consolidated Financial Statements — March 31, 2006 (unaudited)		5
Report of Independent Registered Public Accounting Firm		17

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	MARCH 31, 2006			DECEMBER 31,
	(UNAUDITED)			2005
ASSETS
Cash and cash equivalents	$	10,801,804		$	71,214,083
Restricted cash		28,865,356			20,892,402
Accrued interest receivable		14,499,885			13,127,801
Real estate loans, net		852,257,703			714,428,071
Unconsolidated real estate interests		40,439,691			40,625,713
Consolidated real estate interests		57,174,322			55,054,558
Consolidated real estate interests held for sale		97,268,790			94,106,721
Furniture, fixtures and equipment, net		598,449			590,834
Prepaid expenses and other assets		12,233,833			13,657,244
Goodwill		887,143			887,143
Total assets	$	1,115,026,976		$	1,024,584,570
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued liabilities	$	4,316,875		$	3,259,360
Accrued interest payable		2,414,642			2,213,639
Tenant security deposits		4,185			3,185
Dividends payable		17,019,949			—
Borrowers’ escrows		24,566,383			15,981,762
Senior indebtedness relating to loans		66,500,000			66,500,000
Long-term debt secured by consolidated real estate interests		8,071,252			8,118,511
Liabilities underlying consolidated real estate interests held for sale		56,230,955			56,413,644
Unsecured line of credit		325,000,000			240,000,000
Secured lines of credit		—			22,400,000
Total liabilities	$	504,124,241		$	414,890,101
Minority interest		454,138			459,684
Shareholders’ equity:
Preferred shares, $.01 par value; 25,000,000 shares authorized; 7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share; 2,760,000 shares issued and outstanding		27,600			27,600
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share; 2,258,300 shares issued and outstanding		22,583			22,583
Common shares, $.01 par value; 200,000,000 authorized shares; issued and outstanding 27,901,556 and 27,899,065 shares		279,015			278,991
Additional paid-in-capital		603,198,057			603,130,311
Retained earnings		7,281,285			6,250,150
Loans for stock options exercised		(186,497	)		(263,647	)
Deferred compensation		(173,446	)		(211,203	)
Total shareholders’ equity	$	610,448,597		$	609,234,785
Total liabilities and shareholders’ equity	$	1,115,026,976		$	1,024,584,570

The accompanying notes are an integral part of these consolidated financial statements.

2

RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

	FOR THE THREE MONTHS
	ENDED MARCH 31,
	2006			2005
REVENUES
Interest income	$	19,570,382		$	18,975,190
Rental income		3,881,135			3,407,542
Fee income and other		5,661,224			911,432
Investment income		1,543,758			1,318,648
Total revenues		30,656,499			24,612,812
COSTS AND EXPENSES
Interest		5,494,752			1,701,701
Property operating expenses		2,079,091			1,903,600
Salaries and related benefits		1,877,986			1,250,349
General and administrative		1,171,696			861,056
Depreciation and amortization		369,684			357,329
Total costs and expenses		10,993,209			6,074,035
Net income before minority interest	$	19,663,290		$	18,538,777
Minority interest		(4,714	)		(9,989	)
Net income from continuing operations		19,658,576			18,528,788
Net income from discontinued operations		911,463			360,347
Net income	$	20,570,039		$	18,889,135
Dividends attributed to preferred shares		2,518,955			2,518,955
Net income available to common shareholders	$	18,051,084		$	16,370,180
Net income from continuing operations per common share-basic	$	0.62		$	0.62
Net income from discontinued operations per common share-basic		0.03			0.02
Net income per common share basic	$	0.65		$	0.64
Net income from continuing operations per common share — diluted	$	0.61		$	0.62
Net income from discontinued operations per common share — diluted		0.03			0.02
Net income per common share diluted	$	0.64		$	0.64

The accompanying notes are an integral part of these consolidated financial statements.

3

RAIT INVESTMENT TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	FOR THE THREE MONTHS
	ENDED MARCH 31,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	20,570,039		$	18,889,135
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest		4,714			9,989
Depreciation and amortization		535,793			1,044,747
Accretion of loan discounts		(6,194	)		(3,157,406	)
Amortization of debt costs		401,085			128,411
Deferred compensation		37,757			137,812
Decrease in tenant escrows		2,276			65
Increase in accrued interest receivable		(1,903,799	)		(3,397,278	)
Increase in prepaid expenses and other assets		(491,345	)		(2,925,134	)
Increase (decrease) in accounts payable and accrued liabilities		1,182,786			(731,067	)
Increase in accrued interest payable		168,536			239,634
(Decrease) increase in tenant security deposits		(22,199	)		1,518
Decrease in borrowers’ escrows		611,667			31,090
Net cash provided by operating activities		21,091,117			10,271,516
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures and equipment		(43,899	)		(11,112	)
Real estate loans purchased		—			(4,250,000	)
Real estate loans originated		(226,940,505	)		(104,165,748	)
Principal repayments from real estate loans		89,644,939			55,339,137
Release of escrows held to fund expenditures for consolidated real estate interests		1,140,617			603,242
Investment in consolidated real estate interests		(2,362,227	)		(10,053	)
Distributions paid by consolidated real estate interests		(10,260	)		(20,520	)
Investment in unconsolidated real estate interests		(11,892	)		(90,570	)
Investment in consolidated real estate interests held for sale		(1,004,368	)		(65,464	)
Proceeds from disposition of unconsolidated real estate interests		197,914			—
Net cash used in investing activities		(139,389,681	)		(52,671,088	)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments on senior indebtedness		—			(45,153	)
Principal repayments on long-term debt		(299,554	)		(274,364	)
(Repayments)/advances on secured lines of credit		(22,400,000	)		47,400,000
Advances on unsecured lines of credit		85,000,000			—
Payment of preferred dividends		(2,518,955	)		(2,518,955	)
Issuance of common shares, net		67,770			77,065
Principal payments on loans for stock options exercised		77,150			2,702
Net cash provided by financing activities		59,926,411			44,641,295
NET CHANGE IN CASH AND CASH EQUIVALENTS		(58,372,153	)		2,241,723
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		71,419,877			13,331,373
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	13,047,724		$	15,573,096

The accompanying notes are an integral part of these consolidated financial statements.

4

RAIT INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

     In the opinion of management, these unaudited financial statements contain all disclosures which are necessary to present fairly RAIT Investment Trust’s (the “Company”) consolidated financial position at March 31, 2006, its results of operations for the three months ended March 31, 2006 and 2005 and its cash flows for the three months ended March 31, 2006 and 2005. The financial statements include all adjustments (consisting only of normal recurring adjustments) which in the opinion of management are necessary in order to present fairly the financial position and results of operations for the interim periods presented. Certain information and footnote disclosures normally included in financial statements under accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Certain reclassifications have been made to the consolidated financial statements as of December 31, 2005 and for the three months ended March 31, 2005 to conform to the presentation as of and for the three months ended March 31, 2006.

SHARE BASED COMPENSATION

     Effective January 1, 2006, the Company has adopted FASB Statement No. 123 (R), “Share-Based Payment”. Statement 123 (R) requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

     Statement 123 (R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

     In addition to the accounting standard that sets forth the financial reporting objectives and related accounting principles, Statement 123 (R) includes an appendix of implementation guidance that provides expanded guidance on measuring the fair value of share-based payment awards.

     Statement 123 (R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting For Stock Issued to Employees”. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. The impact of Statement 123 (R), if it had been in effect, on the net earnings and related per share amounts for the years ended December 31, 2005, 2004 and 2003 was disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2005.

     Because the Company adopted Statement 123 (R) using the modified prospective transition method, prior periods have not been restated. Under this method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding as of the beginning of the period of adoption. The Company measured share-based compensation cost using the Black-Scholes option pricing model for stock option grants prior to January 1, 2006 and anticipates using this pricing model for future grants. The Company did not grant options in the first quarter of 2006. Forfeitures did not affect the calculated expense based upon historical activities of option grantees.

     Share-based compensation of $5,500 (less than $.01 per share) was recognized for the three months ended March 31, 2006, which related to the unvested portion of options to acquire the Company’s common shares of beneficial interest (the “Common Shares”) granted prior to January 1, 2006. Reported net income, adjusting for share-based compensation that would have been recognized in the quarter ended March 31, 2005 if Statement 123 (R) had been followed in that quarter is presented in the following table:

5

	FOR THE
	THREE MONTHS
	ENDED
	MARCH 31,
	2005
Net income, as reported	$	16,370,200
Less: stock based compensation determined under fair value based method for all awards		7,000
Pro forma net income	$	16,363,200
Net income per share — basic	$	0.64
as reported pro forma	$	0.64
Net income per share — diluted	$	0.64
as reported pro forma	$	0.64

     The adoption of Statement 123 (R) did not change the way that the Company has accounted for stock awards in prior periods and therefore no such change is reflected in the pro forma table above. The Company expenses the fair value of stock awards determined at the grant date on a straight-line basis over the vesting period of the award.

VARIABLE INTEREST ENTITIES

     The Company has adopted Financial Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” and revised FIN 46 (“FIN 46(R)”). In doing so, the Company has evaluated its various interests to determine whether they are in variable interest entities. These variable interests are primarily subordinated financings in the form of mezzanine loans or unconsolidated real estate interests. The Company has identified 27 and 26 variable interests having an aggregate book value of $187.2 million and $206.4 million that it held as of March 31, 2006 and 2005, respectively. For one of these variable interests, with a book value of $40.8 million at March 31, 2006, the Company determined that the Company is the primary beneficiary and such variable interest is included in the Company’s consolidated financial statements.

     The variable interest entity consolidated by the Company is the borrower under a first mortgage loan secured by a 594,000 square foot office building in Milwaukee, Wisconsin. The Company purchased the first mortgage loan in June 2003 (face value and underlying collateral value are both in excess of $40.0 million) for $26.8 million. At the time the Company purchased the loan, the Company determined that the entity that owned the property was not a variable interest entity.

     Prior to the loan’s maturity date, in August 2004, the Company entered into a forbearance agreement with the borrower that provided that the Company will take no action with regard to foreclosure or sale of the building for a period of three years, with two one-year extension options, subject to the Company’s approval. The agreement also gives the Company operational and managerial control of the property with the owner relinquishing any right to participate. The Company also agreed to make additional loan advances to fund certain outstanding fees and commissions (some of which fees are owed to an affiliate of the owner), and to fund shortfalls in operating cash flow, if necessary, during the forbearance period. The loan remains outstanding in its full amount and, aside from extending the maturity date of the loan, no other terms were adjusted.

     The Company concluded that entering into the forbearance agreement is a triggering event under FIN 46(R) and thus the variable interest must be reconsidered. Because the actual owner of the property no longer had a controlling financial interest in the property and the Company had the obligation to make additional advances under the Company’s loan to fund any potential losses, the Company determined that the borrower is a variable interest entity and that the Company is the primary beneficiary due to the Company absorbing the majority of the probability weighted expected losses, as defined in FIN 46(R). The Company continues to hold a valid and enforceable first mortgage and the value of the property exceeds the Company’s carrying value of the loan. However, as the primary beneficiary, the Company is required to consolidate this variable interest entity pursuant to FIN 46(R).

     The Company’s consolidated financial statements as of and for the three months ended March 31, 2006 include the assets, liabilities, and results of operations of the variable interest entity, which are summarized below:

	AS OF AND
	FOR THE THREE MONTHS
	ENDED MARCH 31, 2006
Total assets	$	49,190,762
Total liabilities	$	430,377
Total income	$	2,672,811
Total expense		1,505,924
Net income	$	1,166,887

6

NOTE 2 — CONSOLIDATED STATEMENT OF CASH FLOWS

     For the purpose of reporting cash flows, cash and cash equivalents include non-interest earning deposits and interest earning deposits. Cash paid for interest was $7.5 million and $2.4 million for the three months ended March 31, 2006 and 2005, respectively.

     Dividends declared during the three months ended March 31, 2006 and 2005, but not paid until April 2006 and 2005, were $17.0 million and $15.4 million, respectively.

NOTE 3 — RESTRICTED CASH AND BORROWERS’ ESCROWS

     Restricted cash and borrowers’ escrows represent borrowers’ funds held by the Company to fund certain expenditures or to be released at the Company’s discretion upon the occurrence of certain pre-specified events, and to serve as additional collateral for borrowers’ loans.

NOTE 4 — REAL ESTATE LOANS

     The Company’s portfolio of real estate loans consisted of the following at March 31, 2006:

First mortgages	$	571,241,609
Mezzanine loans		282,253,591
Subtotal		853,495,200
Unearned (fees) costs		(1,011,340	)
Less: Allowance for loan losses		(226,157	)
Real estate loans, net		852,257,703
Less: Senior indebtedness related to loans		(66,500,000	)
Real estate loans, net of senior indebtedness	$	785,757,703

     The following is a summary description of the assets contained in the Company’s portfolio of real estate loans as of March 31, 2006:

			AVERAGE
	NUMBER		LOAN TO			RANGE OF LOAN
TYPE OF LOAN	OF LOANS		VALUE (1)			YIELDS (2)			RANGE OF MATURITIES
First mortgages		37		77	%		6.5% — 16.0	%		5/23/06 — 12/28/08
Mezzanine loans		83		84	%		10.0% — 17.9	%		7/28/06 — 5/01/21

(1)	Calculated as the sum of the outstanding balance of the Company’s loan and senior loan (if any) divided by the current appraised value of the underlying collateral.
(2)	The Company’s calculation of loan yield includes points charged.

     The properties underlying the Company’s portfolio of real estate loans consisted of the following types as of March 31, 2006:

	PRINCIPAL AMOUNT	PERCENTAGE
Multi-family	$444.0 million		52	%
Office	153.6 million		18	%
Retail and other.	255.9 million		30	%
Total	$853.5 million		100	%

     As of March 31, 2006, the maturities of the Company’s real estate loans in the remainder of 2006, in each year through 2010, and the aggregate maturities thereafter are as follows:

2006	$	363,047,675
2007		183,288,397
2008		96,625,017
2009		20,208,594
2010		11,555,894
Thereafter		178,769,623
Total	$	853,495,200

7

     Senior indebtedness relating to loans arises when the Company sells a participation or other interest in one of its first mortgages or mezzanine loans to another lender. These participations and interests rank senior to the Company’s right to repayment under the relevant mortgage or loan in various ways. As of March 31, 2006, senior indebtedness relating to loans consisted of the following:

Senior loan participation, secured by Company’s interest in a first mortgage loan with a book value of $12,786,014, payable interest only at LIBOR plus 250 basis points (7.38% at March 31, 2006) due monthly, principal balance due July 1, 2006	$	5,000,000
Term loan payable, secured by Company’s interest in a first mortgage loan with a principal balance of $9,000,000(1), payable interest only at 4.5% due monthly, principal balance due September 29, 2006		6,500,000
Term loan payable, secured by Company’s interest in a first mortgage loan with a principal balance of $9,000,000(1), payable interest only at 5.5% due monthly, principal balance due September 29, 2006		1,500,000
Senior loan participation, secured by Company’s interest in a first mortgage loan with a principal balance of $15,500,000, payable interest only at 5.0% due monthly, principal balance due October 15, 2006		11,000,000
Senior loan participation, secured by Company’s interest in a mezzanine loan with a book value of $12,168,169 payable interest only at the bank’s prime rate (7.75% at March 31, 2006) due quarterly, principal balance due April 30, 2007		2,500,000
Senior loan participation, secured by Companys’ interest in a first mortgage loan with a principal balance of $45,491,623, payable interest only at 6.0% due monthly, principal balance due February 25, 2007		35,000,000
Senior loan participation, secured by Company’s interest in a first mortgage loan with a principal balance of $8,000,000, payable interest only at LIBOR plus 200 basis points (6.88% at March 31, 2006) due monthly, principal balance due September 1, 2007		5,000,000
Total	$	66,500,000

(1) These term loans are secured by the same first mortgage interest.

     As of March 31, 2006, the senior indebtedness relating to loans maturing in the remainder of 2006, over the next four years, and the aggregate indebtedness maturing thereafter, is, as follows:

2006	$	26,500,000
2007		40,000,000
2008		—
2009		—
2010		—
Thereafter		—
Total	$	66,500,000

     As of March 31, 2006, $102.9 million in principal amount of loans were pledged as collateral for amounts outstanding on the Company’s lines of credit and senior indebtedness relating to loans.

NOTE 5 — CONSOLIDATED REAL ESTATE INTERESTS

     As of March 31, 2006, the Company owned the following controlling interests in entities that own real estate. These interests are accounted for on a consolidated basis:

• 100% limited and general partnership interest in a limited partnership that owns an office building in Rohrerstown, Pennsylvania with 12,630 square feet on 2.93 acres used as a diagnostic imaging center. The Company acquired this interest for $1.7 million. After acquisition, the Company obtained non-recourse financing of $1.1 million ($952,962 at March 31, 2006), which bears interest at an annual rate of 7.33% and is due on August 1, 2008. The book value of this property at March 31, 2006 was $1.2 million.

• 84.6% membership interest in a limited liability company that owns a 44,517 square foot office building in Rockville, Maryland. In October 2002, the Company acquired 100% of the limited liability company for $10.7 million and simultaneously obtained non-recourse financing of $7.6 million ($7.1 million at March 31, 2006). The loan bears interest at an annual rate of 5.73% and is due November 1, 2012. In December 2002, the Company sold a 15.4% interest in the limited liability company to a partnership whose general partner is a son of the Company’s chairman and chief executive officer. The buyer paid $513,000, which approximated the book value of the interest being purchased. No gain or loss was

8

recognized on the sale. The book value of this property at March 31, 2006 was $9.9 million.

• Also included in the Company’s consolidated real estate interests is a first mortgage with a carrying amount of $40.8 million secured by a 594,000 square foot office building in Milwaukee, Wisconsin. In June 2003, the Company purchased the loan, which had a face value in excess of $40.0 million, for $26.8 million. Upon entering into a forbearance agreement with the owner of the property in August 2004, the Company determined that the borrowing entity was a variable interest entity (as defined in FIN 46) of which the Company was the primary beneficiary. See Note 1, “Basis of Presentation — Variable Interest Entities.” The book value of this consolidated interest at March 31, 2006 was $44.7 million.

• Two parcels of land located in Willow Grove, Pennsylvania with an aggregate book value of $613,500 at March 31, 2006.

     The Company’s consolidated real estate interests consisted of the following property types at March 31, 2006. Escrows and reserves represent amounts held for payment of real estate taxes, insurance premiums, repair and replacement costs, tenant improvements, and leasing commissions.

	BOOKVALUE			%
Office		58,700,856			99.0	%
Other		613,519			1.0	%
Subtotal		59,314,375			100.0	%
Plus: Escrows and reserves		738,239
Less: Accumulated depreciation		(2,878,292	)
Consolidated real estate interests	$	57,174,322

     As of March 31, 2006, non-recourse, long-term debt secured by the Company’s consolidated real estate interests consisted of the following:

Loan payable, secured by real estate, monthly installments of $8,008, including interest at 7.33%, remaining principal due August 1, 2008	$	952,962
Loan payable, secured by real estate, monthly installments of $47,720, including interest at 5.73%, remaining principal due November 1, 2012		7,118,290
Total	$	8,071,252

     As of March 31, 2006, the amount of long-term debt secured by the Company’s consolidated real estate interests that mature over the remainder of 2006, the next four years, and the aggregate indebtedness maturing thereafter, is as follows:

2006	$	137,298
2007		198,066
2008		1,088,058
2009		191,497
2010		202,924
Thereafter		6,253,409
Total	$	8,071,252

     Expenditures for repairs and maintenance are charged to operations as incurred. Significant renovations are capitalized. Fees and costs incurred in the successful negotiation of leases are deferred and amortized on a straight-line basis over the terms of the respective leases. Unamortized fees as of March 31, 2006 and December 31, 2005 were $6,525 and $6,364, respectively. Rental revenue is reported on a straight-line basis over the terms of the respective leases. Depreciation expense relating to the Company’s real estate investments for the three months ended March 31, 2006 and 2005 was $329,556 and $320,367, respectively.

     The Company leases space in the buildings it owns to several tenants. Approximate future minimum lease payments under noncancellable lease arrangements as of March 31, 2006 are as follows:

2006	$	2,928,677
2007		3,410,593
2008		3,125,177

9

2009		2,980,836
2010		1,817,753
Thereafter		4,841,438
Total	$	19,104,474

NOTE 6 — CONSOLIDATED REAL ESTATE INTERESTS HELD FOR SALE

     As of October 3, 2005, the Company classified as “held for sale” one of its consolidated real estate interests, consisting of an 89% general partnership interest in a limited partnership that owns a building in Philadelphia, Pennsylvania with 456,000 square feet of office/retail space. As of March 31, 2006, the Company classified as “held for sale” a consolidated real estate interest consisting of a 110,421 square foot shopping center in Norcross, Georgia. Also, as of May 11, 2006, the Company classified as “held for sale” a consolidated real estate interest consisting of a 216-unit apartment complex and clubhouse in Watervliet, New York. In accordance with SFAS No. 144, the assets and liabilities of these real estate interests have been separately classified on the Company’s balance sheet as of December 31, 2005 and 2004, and the results of operations attributable to these interests have been reclassified, for all periods presented, to “discontinued operations”. Additionally, depreciation expense was no longer recorded for these assets once they were classified as “held for sale”.

     As of March 31, 2006 and December 31, 2005, the consolidated interests held for sale had an aggregate book value of $97.3 million and $94.1 million respectively. Liabilities underlying the consolidated real estate interests held for sale totaled $56.2 million and $56.4 million at March 31, 2006 and December 31, 2005, respectively. Included in these liabilities at March 31, 2006 are three non-recourse loans consisting of the following:

Loan payable, secured by real estate, monthly installments of $288,314, including interest at 6.85%, remaining principal due August 1, 2008	$	39,998,517
Loan payable, secured by real estate, monthly installments of $72,005, including interest at 7.55%, remaining principal due December 1, 2008	$	8,871,460
Loan payable, secured by real estate, monthly installments of $37,697, including interest at 7.27%, remaining principal due January 1, 2008	$	5,109,687

     The Company sold the Philadelphia, PA office building in May 2006 for approximately $74.0 million. The Norcross, GA shopping center and the Watervliet, NY apartment complex were both sold in June 2006 for $13.0 million and $11.25 million, respectively.

     The following is a summary of the aggregate results of operations for the consolidated real estate investments held for sale for the three months ended March 31, 2006 and 2005, which have been reclassified to discontinued operations in the Company’s consolidated statement of income:

	FOR THE THREE MONTHS ENDED
	MARCH 31,
	2006		2005
Rental income	$	4,115,389	$	4,073,557
Less:
Operating expenses		2,088,950		2,062,738
Interest expense		948,867		963,054
Depreciation and amortization		166,109		687,418
Income from discontinued operations	$	911,463	$	360,347

NOTE 7 — UNCONSOLIDATED REAL ESTATE INTERESTS

     Unconsolidated real estate interests include the Company’s non-controlling interests in limited partnerships accounted for under the cost method of accounting, unless such interests meet the requirements of EITF:D-46 “Accounting for Limited Partnership Investments” to be accounted for under the equity method of accounting. In accordance with EITF 03-16, “Accounting for Investments in Limited Liability Companies,” the Company accounts for its non-controlling interests in limited liability companies the same way that it accounts for its non-controlling interests in limited partnerships.

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     At March 31, 2006, the Company’s unconsolidated real estate interests consisted of the following:

• 20% beneficial interest in a trust that owns a 58-unit apartment building in Philadelphia, Pennsylvania and a 20% partnership interest in a general partnership that owns an office building with 31,507 square feet in Alexandria, Virginia. In September 2002, the Company received these interests, together with a cash payment of $2.5 million, in repayment of two loans with a combined net book value of $2.3 million. The Company recorded these interests at their current fair value based upon discounted cash flows and recognized income from loan satisfaction in the amount of $3.2 million. As of March 31, 2006, the Pennsylvania property is subject to non-recourse financing of $2.9 million bearing interest at 6.04% and maturing on February 1, 2013. The Virginia property is subject to non-recourse financing of $3.4 million bearing interest at 6.75% and maturing on March 1, 2013.

• Class B limited partnership interest in a limited partnership that owns a 363-unit multifamily apartment complex in Pasadena (Houston), Texas. The Company acquired its interest in September 2003 for $1.9 million. In July 2004, the Company contributed an additional $600,000 to the limited partnership. The property is subject to non-recourse financing of $8.0 million at March 31, 2006, which bears interest at the 30-day London interbank offered rates, or LIBOR, plus 3.0% (7.39% at March 31, 2006, but limited by an overall interest rate cap of 6.0%) with a LIBOR floor of 2.0%, and is due on October 9, 2006.

• 3% membership interest in a limited liability company that has a 99.9% limited partnership interest in a limited partnership that owns a 504-unit multifamily apartment complex in Sugarland (Houston), Texas. The Company acquired its interest in April 2004 for $5.6 million. The property is subject to non-recourse financing of $14.2 million at March 31, 2006, which bears interest at an annual rate of 4.84%, and is due on November 1, 2009.

• 0.1% Class B membership interest in an limited liability company that has an 100% interest in a limited liability company that has an 89.94% beneficial interest in a trust that owns a 737,308 square foot 35-story urban office building in Chicago, Illinois. The Company acquired its interest in December 2004 for $19.5 million. The property is subject to non-recourse financing of $91.0 million at March 31, 2006, which bears interest at an annual rate of 5.3% and is due January 1, 2015.

• Class B membership interests in each of two limited liability companies which together own a 231-unit multifamily apartment complex in Wauwatosa, Wisconsin. The Company acquired its interest in December 2004 for $2.9 million. The property is subject to non-recourse financing of $18.0 million at March 31, 2006, which bears interest at 5.3% and is due January 1, 2014.

• Class B membership interests in each of two limited liability companies, one which owns a 430-unit multifamily apartment complex in Orlando, Florida and the other which owns a 264-unit multifamily apartment complex in Bradenton, Florida. The Company acquired its membership interests in May 2005 for an aggregate amount of $9.5 million. As of March 31, 2006, the Orlando property is subject to non-recourse financing of $23.5 million bearing interest at 5.31% and maturing on June 1, 2010. The Bradenton property is subject to non-recourse financing of $14.0 million bearing interest at 5.31% and maturing on June 1, 2010.

• A 20% residual interest in the net sales proceeds resulting from any future sale of a 27-unit apartment building located in Philadelphia, Pennsylvania. The property had been part of the collateral underlying one of the Company’s mezzanine loans until the loan was repaid in full in December 2005. The book value of the Company’s interest at March 31, 2006, $883,600, is computed using an assumed sale price that is based upon a current third-party appraisal.

     The Company’s unconsolidated real estate interests consisted of the following property types at March 31, 2006:

	BOOK VALUE		PERCENTAGE
Multi-family	$	19,343,994		47.8	%
Office		21,095,697		52.2	%
Unconsolidated real estate interests	$	40,439,691		100.0	%

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NOTE 8 — CREDIT FACILITY AND LINES OF CREDIT

     At March 31, 2006, the Company had an unsecured credit facility with $335.00 million of maximum possible borrowings ($325.0 million outstanding at March 31, 2006) and three secured lines of credit, two of which each have $30.0 million of maximum possible borrowings and one which has $50.0 million of maximum possible borrowings.

     The following is a description of the Company’s unsecured credit facility and secured lines of credit at March 31, 2006.

UNSECURED CREDIT FACILITY

     The Company is party to a revolving credit agreement that, as of March 31, 2006, provides for a senior unsecured revolving credit facility in an amount up to $335.0 million, with the right to request an increase in the facility of up to a maximum of $350.0 million. Borrowing availability under the credit facility is based on specified percentages of the value of eligible assets. The credit facility will terminate on October 24, 2008, unless the Company extends the term an additional year upon the satisfaction of specified conditions.

     Amounts borrowed under the credit facility bear interest at a rate equal to, at the Company’s option:

• LIBOR (30-day, 60-day, 90-day or 180-day interest periods, at the Company’s option) plus an applicable margin of between 1.35% and 1.85% or

• an alternative base rate equal to the greater of: (i) the prime rate of the bank serving as administrative agent, or (ii) the federal funds rate plus 50 basis points, plus an applicable margin of between 0% and 0.35%.

     The applicable margin is based on the ratio of the Company’s total liabilities to total assets which is calculated on a quarterly basis. The Company is obligated to pay interest only on the amounts borrowed under the credit facility until the maturity date of the credit facility, at which time all principal and any interest remaining unpaid is due. The Company pays a commitment fee quarterly on the difference between the aggregate amount of the commitments in effect from time to time under the credit facility and the outstanding balance under the credit facility. The commitment fee is equal to fifteen basis points (twenty five basis points if this difference is greater than 50% of the amount of the credit facility) per annum of this difference.

     The Company’s ability to borrow under the credit facility is subject to its ongoing compliance with a number of financial and other covenants, including a covenant that the Company not pay dividends in excess of 100% of its adjusted earnings, to be calculated on a trailing twelve-month basis, provided however, dividends may be paid to the extent necessary to maintain its status as a real estate investment trust. The credit facility also contains customary events of default, including a cross default provision. If an event of default occurs, all of the Company’s obligations under the credit facility may be declared immediately due and payable. For events of default relating to insolvency and receivership, all outstanding obligations automatically become due and payable.

     At March 31, 2006, the Company had $325.0 million outstanding under the credit facility, of which $180.0 million bore interest at 6.02125%, $46.0 million bore interest at 6.42625%, $79.0 million bore interest at 6.28513% and $20.0 million bore interest at 6.4725%. Based upon the Company’s eligible assets as of that date, the Company had approximately $10.0 million of availability under the credit facility.

SECURED LINES OF CREDIT

     At March 31, 2006, the Company had no amounts outstanding under the first of its two $30.0 million lines of credit. This line of credit bears interest at either: (a) the 30-day LIBOR, plus 2.5%, or (b) the prime rate as published in the “Money Rates” section of The Wall Street Journal, at the Company’s election. Absent any renewal, the line of credit will terminate in October 2007 and any principal then outstanding must be paid by October 2008. The lender has the right to declare any advance due and payable in full two years after the date of the advance.

     At March 31, 2006, the Company had no amounts outstanding under the second of its two $30.0 million lines of credit. This line of credit bears interest at the prime rate as published in the “Money Rates” section of The Wall Street Journal. This line of credit has a current term running through April 2007 with annual one-year extension options and an 11-month non-renewal notice requirement.

     At March 31, 2006, the Company had no amounts outstanding under its $50.0 million line of credit. The credit line was increased during the quarter from $25.0 million at December 31, 2005 to $50.0 million. This line of credit bears interest at the 30-day LIBOR plus 2.25%. Absent any renewal, the line of credit will terminate in February 2007 and any principal then outstanding must be paid by February 2008.

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NOTE 9 — TRANSACTIONS WITH AFFILIATES

     Brandywine Construction & Management, Inc. (“Brandywine”), is an affiliate of the spouse of Betsy Z. Cohen, the Chairman and Chief Executive Officer of the Company. Brandywine provided real estate management services to eleven properties underlying the Company’s real estate interests at both March 31, 2006 and 2005. Management fees in the amount of $240,000 and $247,000 were paid to Brandywine for the three months ended March 31, 2006 and 2005, respectively, relating to these interests. The Company believes that the management fees charged by Brandywine are comparable to those that could be obtained from unaffiliated third parties. The Company expects to continue to use Brandywine to provide real estate management services to properties underlying the Company’s investments.

     Betsy Z. Cohen has been the Chairman of the Board of The Bancorp Bank (“Bancorp”), a commercial bank, since November 2003 and a director of The Bancorp, Inc. (“Bancorp Inc”), a registered financial holding company for Bancorp, since September 2000 and the Chief Executive Officer of both Bancorp and Bancorp Inc. since September 2000. Daniel G. Cohen, Mrs. Cohen’s son, (a) has been the Vice-Chairman of the Board of Bancorp since November 2003, was the Chairman of the Board of Bancorp from September 2000 to November 2003, was the Chief Executive Officer of Bancorp from July 2000 to September 2000 and has been Chairman of the Executive Committee of Bancorp since 1999 and (b) has been the Chairman of the Board of Bancorp Inc. and Chairman of the Executive Committee of Bancorp Inc. since 1999. The Company maintains most of its checking and demand deposit accounts at Bancorp. As of March 31, 2006 and December 31, 2005, the Company had approximately $8.2 million and $66.5 million, respectively, on deposit, of which approximately $8.1 million and $66.4 million, respectively, is over the FDIC insurance limit. The Company pays a fee of $5,000 per month to Bancorp for information system technical support services. The Company paid $15,000 for these services for each of the three month periods ended March 31, 2006 and 2005.

     The Company subleases a portion of its downtown Philadelphia office space under an operating lease with Bancorp Inc. The Company sub-leases the remainder of its downtown Philadelphia office space under an operating lease with The Richardson Group, Inc. (“Richardson”) whose Chairman is Jonathan Z. Cohen, the Vice-Chairman, a trustee and Secretary of the Company, and a son of the Chairman and Chief Executive Officer of the Company. For a description of these operating leases, see Note 10 — “Commitments and Contingencies — Lease Obligations”.

NOTE 10 — COMMITMENTS AND CONTINGENCIES

LITIGATION

     As part of the Company’s business, the Company acquires and disposes of real estate investments and, as a result, expects that it will engage in routine litigation in the ordinary course of that business. Management does not expect that any such litigation will have a material adverse effect on the Company’s consolidated financial position or results of operations.

     On August 12, 2004, a civil action was commenced in the United States District Court of the Eastern District of Pennsylvania by Michael Axelrod and certain of his affiliates naming the Company and certain of the Company’s affiliates, among others, as defendants. The civil action arose out of the Company’s sale of a consolidated real estate interest to these affiliates and was based upon alleged misrepresentations made with respect to the condition of the property underlying this interest, which the Company denied. On March 1, 2006, the parties to this civil action entered into a settlement agreement to settle and dismiss this civil action with prejudice and to exchange mutual releases, without the admission of liability by any party. On March 15, 2006, the court dismissed the case as settled.

DELEGATED UNDERWRITING PROGRAM

     In 2005 and 2006 the Company has entered into program agreements with four mortgage lenders that provide that the mortgage lender will locate, qualify, and underwrite both a first mortgage loan and a mezzanine loan and then sell the mezzanine loan to the Company. The mezzanine loans must conform to the business, legal and documentary parameters in the program agreement and be in the range of $250,000 to $2.5 million. In most cases, the Company expects to acquire the mezzanine loan from the mortgage lender at the closing of the mezzanine loan. In general, if any variations are identified or any of the required deliveries are not received, the Company has a period of time to notify the mortgage lender of its election to either waive the variations or require the mortgage lender to repurchase the mezzanine loan. Each of the four program agreements provides that the Company will fund up to $50.0 million per calendar quarter of loans that fit the pre-defined underwriting parameters. In the three months ended March 31, 2006, the Company funded four mezzanine loans totaling $5.0 million through the delegated underwriting program.

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GUIDANCE LINES

     In June 2005, the Company entered into an agreement with a borrower establishing financial and underwriting parameters under which the Company would consider first mortgage bridge loans sourced by the borrower, up to an aggregate of $150.0 million, with no individual loan in an amount greater than $50.0 million. The Company expects that the credit and market risk of the potential loans will not differ from those of the loans in the Company’s current portfolio.

     In March 2006, the Company entered into an agreement with another borrower establishing financial and underwriting parameters under which the Company would consider first mortgage bridge loans sourced by the borrower, up to an aggregate of $50.0 million, with no individual loan in an amount greater than $30.0 million. The Company expects that the credit and market risk of the potential loans will not differ from those of the loans in the Company’s current portfolio.

LEASE OBLIGATIONS

     The Company sub-leases both its downtown and suburban Philadelphia office locations. The annual minimum rent due pursuant to the subleases for the remainder of 2006, each of the next four years and thereafter is estimated to be as follows as of March 31, 2006:

2006	$	302,130
2007		395,347
2008		395,347
2009		395,347
2010		263,565
Thereafter		—
Total	$	1,751,736

     The Company sub-leases a portion of its downtown Philadelphia office space under an operating lease with Bancorp Inc., at an annual rental based upon the amount of square footage the Company occupies. The sub-lease expires in August 2010 with two five-year renewal options. Rent paid to Bancorp Inc. was approximately $84,000 and $62,000 for the three months ended March 31, 2006 and 2005, respectively. The Company’s affiliation with Bancorp Inc. is described in Note 9.

     The Company sub-leases the remainder of its downtown Philadelphia office space under an operating lease with The Richardson Group, Inc. (“Richardson”) whose Chairman is the Vice-Chairman, a trustee and Secretary of the Company, and a son of the Chairman and Chief Executive Officer of the Company. The annual rental is based upon the amount of square footage the Company occupies. The sub-lease expires in August 2010 with two five-year renewal options. Rent paid to Richardson was approximately $11,400 and $14,000 for the three months ended March 31, 2006 and 2005, respectively. Effective April 1, 2005, Richardson relinquished to the landlord its leasehold on a portion of the space they had subleased to the Company. Simultaneously, Bancorp entered into a lease agreement with the landlord for that space. The Company then entered into a new sublease with Bancorp for that space at annual rentals based upon the amount of square footage the Company occupies.

     The Company sub-leases suburban Philadelphia, Pennsylvania office space at an annual rental of $15,600. This sublease currently terminates in February 2007 but renews automatically each year for a one year term unless prior notice of termination of the sublease is sent by either party to the sublease to the other party thereto.

     Total rental expense was $99,000 and $79,000 for the three months ended March 31, 2006 and 2005 respectively.

EMPLOYMENT AGREEMENTS

     The Company is party to employment agreements with certain executives that provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances.

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NOTE 11 — EARNINGS PER SHARE

     The Company’s calculation of earnings per share for the three months ended March 31, 2006 and 2005 in accordance with SFAS No. 128 is as follows:

	For the three months ended
	March 31, 2006
	Income		Shares		Per share
	(Numerator)		(Denominator)		Amount
Basic earnings per share:	$	18,051,084		27,900,276	$	0.65
Net income available to common shareholders Effect of dilutive securities:
Options		—		168,253		(0.01	)
Phanton Shares		—		53,206		(0.00	)
Net income available to common shareholders plus assumed conversions	$	18,051,084		28,121,735	$	0.64

	For the three months ended
	March 31, 2005
	Income		Shares		Per share
	(Numerator)		(Denominator)		Amount
Basic earnings per share:
Net income available to common shareholders	$	16,370,180		25,583,041	$	0.64
Effect of dilutive securities:
Options		—		168,692		—
Phantom Shares		—		2,744		—
Net income available to common shareholders plus assumed conversions	$	16,370,180		25,754,477	$	0.64

NOTE 12 — STOCK BASED COMPENSATION

     The Company maintains the RAIT Investment Trust 2005 Equity Compensation Plan (the “Equity Compensation Plan”). The maximum aggregate number of Common Shares that may be issued pursuant to the Equity Compensation Plan is 2,500,000.

     The Company has granted to its officers, trustees and employees phantom shares pursuant to the RAIT Investment Trust Phantom Share Plan and phantom units pursuant to the Equity Compensation Plan. Both phantom shares and phantom units are redeemable for Common Shares issued under the Equity Compensation Plan. Redemption occurs after a period of time after vesting set by the Compensation Committee. All outstanding phantom shares were issued to non-management trustees, vested immediately, have dividend equivalent rights and will be redeemed upon separation from service from the Company. Phantom units granted to non-management trustees vest immediately, have dividend equivalent rights and will be redeemed upon the earliest to occur of (i) the first anniversary of the date of grant, or (ii) a trustee’s termination of service with the Company. Phantom units granted to officers and employees vest in varying percentages set by the Compensation Committee over four years, have dividend equivalent rights and will be redeemed between one to two years after vesting as set by the Compensation Committee. The Company has been accounting for grants of phantom shares and phantom units in accordance with SFAS No. 123, which requires the recognition of compensation expenses on the date of grant.

     The Company did not grant any phantom shares during the three months ended March 31, 2006 and 2005. There were 4,136 and 2,744 phantom shares outstanding at March 31, 2006 and 2005, respectively, for which the Company recognized compensation expense of $0 and $6,250, respectively.

     The Company granted 54,002 and 0 phantom units during the three months ended March 31, 2006 and 2005, respectively. There were 69,454 and 0 phantom units outstanding at March 31, 2006 and 2005, respectively, for which the Company recognized compensation expense of $167,100 and $0, respectively.

STOCK OPTIONS

     In February and April 2002, the Company granted to its employees, executive officers and trustees options to purchase 61,100 Common Shares at the fair market value on the date of grant. These options, which were exercised in March through May 2002, had exercise prices of $16.92 and $19.85, respectively, per Common Share. The Common Shares issued pursuant to these exercises were subject to restrictions that had lapsed as of the fourth anniversary date of the grants. At the time of exercise, the Company provided loans to each person in the amount necessary to exercise such options. Each of these loans bore interest at a rate of 6% per annum. The aggregate principal amount of these loans was $186,497 and $263,647 at March 31, 2006 and December 31, 2005, respectively. Interest on the outstanding principal amount was payable quarterly and 25% of the original principal amount of each loan was payable on each of the first four anniversaries. The final payments on the remaining loans outstanding were made by April 30, 2006.

15

     From its inception through 2004, the Company has granted to its officers, trustees and employees options to acquire Common Shares. The vesting period is determined by the Compensation Committee and the option term is generally ten years after the date of grant. At both March 31, 2006 and December 31, 2005 there were 477,360 options outstanding.

NOTE 13 — DIVIDENDS

Common Shares

     In order to maintain its election to qualify as a REIT, the Company must currently distribute, at a minimum, an amount equal to 90% of its taxable income. Because taxable income differs from cash flow from operations due to non-cash revenues or expenses (such as depreciation), in certain circumstances, the Company may generate operating cash flow in excess of its dividends or, alternatively, may be required to borrow to make sufficient dividend payments.

     On the declaration date set forth below, the Board of Trustees of the Company declared a cash dividend in an amount per Common Share and in the aggregate dividend amount, payable on the payment date to holders of Common Shares on the record date.

							Aggregate
Declaration Date	Record Date		Payment Date		Dividend Per Share		Dividend Amount
03/24/06		04/05/06		04/14/06	$	0.61	$	17,019,949

Series A Preferred Shares

     On the declaration date set forth below, the Board of Trustees of the Company declared a cash dividend on the Company’s 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Preferred Shares”) in an amount per share and in the aggregate dividend amount, payable on the payment date to holders of Series A Preferred Shares on the record date.

							Aggregate
Declaration Date	Record Date		Payment Date		Dividend Per Share		Dividend Amount
01/24/06		03/01/06		03/31/06	$	0.484375	$	1,336,875

Series B Preferred Shares

     On the declaration date set forth below, the Board of Trustees of the Company declared a cash dividend on the Company’s 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series B Preferred Shares”) in the amount per share and in the aggregate dividend amount, payable on the payment date to holders of Series B Preferred Shares on the record date.

							Aggregate
Declaration Date	Record Date		Payment Date		Dividend Per Share		Dividend Amount
01/24/06		03/01/06		03/31/06	$	0.5234375	$	1,182,080

NOTE 14 — SUBSEQUENT EVENTS

     On June 8, 2006, the Company and Taberna Realty Finance Trust (“Taberna”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which a newly formed subsidiary of the Company will, subject to the terms and conditions of the Merger Agreement, merge with and into Taberna (the “Merger”), as a result of which the Company will own all of the common shares of beneficial interest of Taberna (“Taberna Common Shares”).

     Subject to the terms and conditions of the Merger Agreement, which has been unanimously approved by the boards of trustees of both companies, upon the completion of the Merger each issued and outstanding Taberna Common Share will be converted into 0.5389 Common Shares, with cash to be paid in lieu of fractional Common Shares.

     The Merger Agreement contains customary representations, warranties and covenants of the Company and Taberna, including, among others, covenants (i) to conduct their respective businesses in the ordinary course during the period between the execution of the Merger Agreement and consummation of the Merger and (ii) not to engage in certain kinds of transactions during such period. The board of trustees of each company has adopted a resolution approving and declaring advisable the Merger, and recommending that its shareholders, with respect to Taberna, approve the Merger, and with respect to the Company, approve the issuance of Common Shares in the Merger, and each party has agreed to hold a shareholder meeting to put these matters before their shareholders for their consideration. Each party has also agreed not to (i) solicit proposals relating to alternative business combination transactions or (ii) subject to certain exceptions, enter into discussions or negotiations or provide confidential information in connection with any proposals for alternative business combination transactions.

     Consummation of the Merger is subject to various conditions, including, among others, (i) requisite approvals of the shareholders of the Company and Taberna, (ii) the absence of any law or order prohibiting the consummation of the merger, and (iii) effectiveness of the Form S-4 registration statement relating to the Common Shares to be issued in the Merger and listing of the Common Shares to be issued in the Merger on the New York Stock Exchange. In addition, each party’s obligation to consummate the Merger is subject to certain other conditions, including, among others, (i) subject to the standards set forth in the Merger Agreement, the accuracy of the representations and warranties of the other party, (ii) compliance of the other party with its covenants in all material respects, (iii) the delivery of opinions from counsel to the Company and counsel to Taberna relating to the U.S. federal income tax code treatment of the Merger and the real estate investment trust status of both parties and (iv) there shall not have occurred any event, change, effect or circumstance that has had or is reasonably likely to have a material adverse effect on the other party.

     The Merger Agreement contains certain termination rights for both the Company and Taberna.

     No assurance can be given that all closing conditions will be satisfied or waived, or that the Merger will in fact be consummated.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Trustees and Shareholders
RAIT Investment Trust

We have reviewed the accompanying consolidated balance sheet of RAIT Investment Trust and Subsidiaries as of March 31, 2006 and the related consolidated statements of income and cash flows for the three-month periods ended March 31, 2006 and 2005. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2005, and the related consolidated statements of income, shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2006 (except for Note 6, as to which the date is July 13, 2006) we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
May 9, 2006 (except for Note 6, as to which the date is July 13, 2006)

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EX-99.6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

     In addition to historical information, this discussion and analysis contains forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “continue” or similar words. These forward-looking statements are subject to risks and uncertainties, as more particularly set forth in our filings with the Securities and Exchange Commission, including those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2005, that could cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.

OVERVIEW

     We are a real estate investment trust, or REIT, formed under Maryland law. We make investments in real estate primarily by making real estate loans, acquiring real estate loans and acquiring interests in real estate. Our principal business objective is to generate income for distribution to our shareholders from a combination of interest and fees on loans, rents and other income from our interests in real estate, and proceeds from the sale of portfolio investments.

     Our revenues increased 24.6% from $24.6 million for the three months ended March 31, 2005 to $30.7 million for the three months ended March 31, 2006, while our net income available to common shareholders increased 10.3% to $18.1 million for the three months ended March 31, 2006 from $16.4 million for the three months ended March 31, 2005. Total assets grew 41.4% to $1.1 billion at March 31, 2006 from $788.7 million at March 31, 2005.

     We believe the principal reasons for this growth were:

• Increased mezzanine and bridge loans and unconsolidated real estate interests — We continued to grow our core business of making mezzanine and bridge loans and acquiring unconsolidated real estate interests in 2006 and 2005. We originated, purchased or acquired $226.9 million in the aggregate, of mezzanine and bridge loans and unconsolidated real estate interests in the quarter ended March 31, 2006 as compared to 108.5 million in the quarter ended March 31, 2005.

• Increased use of leverage — Throughout 2005 and continuing through April 2006 we leveraged our asset base by investing over $375.0 million we have obtained by establishing new sources of debt financing.

     We have found increasing competition to make real estate investments within our investment parameters, resulting in pressure on lenders to reduce their margins. We believe that as a result of our ability to offer structured financing that accommodates senior financing sources, to respond quickly to a borrower’s requests and to tailor our financing packages to a borrower’s needs, we do not compete for a borrower’s business on interest rates alone. In addition, we are seeking to increase the return on our investments in appropriate cases by increasing our use of debt to leverage our investments while seeking to minimize the cost of this debt. We recently entered into the unsecured revolving credit agreement described below under “Liquidity and Capital Resources” that has enabled us to borrow increasing amounts at lower interest rates than those available under our secured lines of credit. We are also exploring ways to use collateralized debt obligations, or CDOs, to finance our investments. CDOs are securities supported by a pool of debt assets. We believe aggregating pools of our investments to support CDOs may enable us to increase our return on our investments and further increase our ability to leverage our investments. In order to execute this CDO strategy appropriately, we are seeking to add to our CDO expertise either through employing people that would bring that expertise to us internally or by combining or otherwise affiliating with another business with this expertise. We cannot assure you that we will be able to carry out this CDO strategy or that we will be able to achieve our goals with respect to our CDO strategy.

LIQUIDITY AND CAPITAL RESOURCES

     The principal sources of our liquidity and capital resources from our commencement in January 1998 through March 31, 2006 were our public offerings of common shares, 7.75% Series A cumulative redeemable preferred shares and 8.375% Series B cumulative redeemable preferred shares. After offering costs and underwriting discounts and commissions, these offerings have allowed us to obtain net offering proceeds of $594.0 million. We expect to continue to rely on offerings of our securities as a principal source of our liquidity and capital resources.

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     We issued 2,760,000 Series A preferred shares in March and April 2004 for net proceeds of $66.6 million. Our Series A preferred shares accrue cumulative cash dividends at a rate of 7.75% per year of the $25.00 liquidation preference, equivalent to $1.9375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series A preferred shares have no maturity date and we are not required to redeem the Series A preferred shares at any time. We may not redeem the Series A preferred shares before March 19, 2009, except in limited circumstances relating to the ownership limitations necessary to preserve our tax qualification as a real estate investment trust. On or after March 19, 2009, we may, at our option, redeem the Series A preferred shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. For the both three months ended March 31, 2006 and 2005, we paid dividends on our Series A preferred shares of $1.3 million.

     We issued 2,258,300 Series B preferred shares in October and November 2004 for net proceeds of $54.4 million. Our Series B preferred shares accrue cumulative cash dividends at a rate of 8.375% per year of the $25.00 liquidation preference, equivalent to $2.09375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series B preferred shares have no maturity date and we are not required to redeem the Series B preferred shares at any time. We may not redeem the Series B preferred shares before October 5, 2009, except in limited circumstances relating to the ownership limitations necessary to preserve our tax qualification as a real estate investment trust. On or after October 5, 2009, we may, at our option, redeem the Series B preferred shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. For both the three months ended March 31, 2006 and 2005, we paid dividends on our Series B preferred shares of $1.2 million. Our Series A preferred shares and Series B preferred shares rank on a parity with respect to dividend rights, redemption rights and distributions upon liquidation.

     We also maintain liquidity through our unsecured credit facility and our secured lines of credit. At March 31, 2006, our unsecured credit facility provided for $335.0 million of maximum possible borrowings (we have the right to request an increase in the facility of up to an additional $15.0 million, to a maximum of $350.0 million, subject to certain pre-defined requirements) and three secured lines of credit, two of which each have $30.0 million of maximum possible borrowings, and the third of which has $50.0 million of maximum possible borrowings.

     The following are descriptions of our unsecured credit facility and secured lines of credit at March 31, 2006:

UNSECURED CREDIT FACILITY

     We are party to a revolving credit agreement that, as of March 31, 2006, provides for a senior unsecured revolving credit facility in an amount up to $335.0 million, with the right to request an increase in the facility of up to a maximum of $350.0 million. Borrowing availability under the credit facility is based on specified percentages of the value of eligible assets. The credit facility will terminate on October 24, 2008, unless we extend the term an additional year upon the satisfaction of specified conditions.

     Amounts borrowed under the credit facility bear interest at a rate equal to, at our option:

• LIBOR (30-day, 60-day, 90-day or 180-day interest periods, at our option) plus an applicable margin of between 1.35% and 1.85% or

• an alternative base rate equal to the greater of:

• the prime rate of the bank serving as administrative agent or

• the Federal Funds rate plus 50 basis points,

plus an applicable margin of between 0% and 0.35%.

     The applicable margin is based on the ratio of our total liabilities to total assets which is calculated on a quarterly basis. We are obligated to pay interest only on the amounts borrowed under the credit facility until the maturity date of the credit facility, at which time all principal and any interest remaining unpaid is due. We pay a commitment fee quarterly on the difference between the aggregate amount of the commitments in effect from time to time under the credit facility and the outstanding balance under the credit facility. This commitment fee is equal to fifteen basis points (twenty five basis points if this difference is greater than 50% of the amount of the credit facility) per annum of this difference.

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     Our ability to borrow under the credit facility is subject to our ongoing compliance with a number of financial and other covenants, including a covenant that we not pay dividends in excess of 100% of our adjusted earnings, to be calculated on a trailing twelve-month basis, provided however, dividends may be paid to the extent necessary to maintain our status as a real estate investment trust. The credit facility also contains customary events of default, including a cross default provision. If an event of default occurs, all of our obligations under the credit facility may be declared immediately due and payable. For events of default relating to insolvency and receivership, all outstanding obligations automatically become due and payable.

     At March 31, 2006, we had $325.0 million outstanding under the credit facility, of which $180.0 million bore interest at 6.02125%, $46.0 million bore interest at 6.42625%, $79.0 million bore interest at 6.28313%, and $20.0 million bore interest at 6.4725%. Based upon our eligible assets as of that date, we had $10.0 million of availability under the credit facility.

SECURED LINES OF CREDIT

     At March 31, 2006, we had $30.0 million of availability under the first of our two $30.0 million lines of credit. This line of credit bears interest at either:

• the 30-day London interbank offered rate, or LIBOR plus 2.5% or

• the prime rate as published in the “Money Rates” section of The Wall Street Journal, at our election.

     Absent any renewal, the line of credit will terminate in October 2007 and any principal then outstanding must be repaid by October 2008. The lender has the right to declare any advance due and payable in full two years after the date of the advance.

     At March 31, 2006, we had $30.0 million of availability under the second of our $30.0 million lines of credit. This line of credit bears interest at the prime rate as published in the “Money Rates” section of The Wall Street Journal. This line of credit has a current term running through April 2006 with annual one-year extension options at the lender’s option and an 11-month non-renewal notice requirement.

     At March 31, 2006, we had $50.0 million of availability under our $50.0 million line of credit. The credit line was increased during the quarter from $25.0 million at December 31, 2005 to $50.0 million. This line of credit bears interest at the 30-day LIBOR plus 2.25%. Absent any renewal, the line of credit will terminate in February 2007 and any principal then outstanding must be paid by February 2008.

     There was no indebtedness outstanding under any of our secured lines of credit at March 31, 2006.

     Our other sources of liquidity and capital resources include principal payments on, refinancings of, and sales of senior participations in loans in our portfolio as well as refinancings and the proceeds of sales and other dispositions of our interests in real estate. These resources aggregated $91.0 million for the three months ended March 31, 2006, and $55.9 million for the three months ended March 31, 2005.

     We also receive funds from a combination of interest and fees on our loans, rents and income from our real estate interests and consulting fees. As required by the Internal Revenue Code, we use this income, to the extent of not less than 90% of our taxable income, to pay distributions to our shareholders. The dividend distribution for the quarters ended March 31, 2006 and 2005 (paid on April 14, 2006 and April 15, 2005, respectively) was $17.0 million and $15.4 million, respectively, of which $16.9 million and $15.3 million, respectively, was in cash and $99,600 and $78,600, respectively, was in additional common shares issued through our dividend reinvestment plan. We also paid $2.5 million of dividends, in the aggregate, on our Series A and Series B preferred shares for the both three months ended March 31, 2006 and 2005. We expect to continue to use funds from these sources to meet these needs.

     We use our capital resources principally for originating and purchasing loans and acquiring real estate interests. For the three months ended March 31, 2006, we originated or purchased 22 loans in the aggregate amount of $226.9 million, as compared to ten loans in the aggregate amount of $108.4 million for the three months ended March 31, 2005. For the three months ended March 31, 2006, we made additional investments in consolidated interests in real estate of $2.3 million and additional investments in consolidated real estate interests held for sale of $1.0 million as compared to less than a total of $100,000 invested in real estate interests for the three months ended March 31, 2005.

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     At March 31, 2006, we had approximately $13.0 million of cash on hand which, when combined with $5.7 million of loan repayments we received through May 5, 2006, $29.1 million received from the proceeds of a new first mortgage borrowing secured by one of our consolidated real estate interests, and $28.4 million drawn on our secured lines of credit provided for $40.2 million of loans originated through May 5, 2006 and to fund our first quarter dividend payments. We anticipate that we will use the $4.6 million available to be drawn on our unsecured credit facility (based upon our eligible assets at May 1, 2006, we are able to borrow up to the maximum amount $329.6 million and currently have $325.0 million outstanding on the line) combined with proceeds of approximately $30.0 million from the anticipated sale of one consolidated real estate interest and loan repayments of $56.0 million expected in May 2005, to fund additional investments totaling approximately $77.2 million that we expect to make in May 2006.

     We believe that our existing sources of funds will be adequate for purposes of meeting our liquidity and capital needs. We do not currently experience material difficulties in maintaining and accessing these resources. However, we could encounter difficulties in the future, depending upon the development of conditions in the credit markets and the other risks and uncertainties described in our filings with the Securities and Exchange Commission, including those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2005.

     We may also seek to develop other sources of capital, including, without limitation, long-term borrowings, offerings of our warrants, issuances of our debt securities and the securitization and sale of pools of our loans. Our ability to meet our long-term, that is, beyond one year, liquidity and capital resources requirements is subject to obtaining additional debt and equity financing. Any decision by our lenders and investors to enter into such transactions with us will depend upon a number of factors, such as our financial performance, compliance with the terms of our existing credit arrangements, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders’ and investors’ resources and policies concerning the terms under which they make such capital commitments and the relative attractiveness of alternative investment or lending opportunities. In addition, as a REIT, we must distribute at least 90% of our annual taxable income, which limits the amount of cash from operations we can retain to fund our capital needs.

     The following schedule summarizes our currently anticipated contractual obligations and commercial commitments as of March 31, 2006:

	PAYMENTS DUE BY PERIOD
	LESS THAN		ONE TO		FOUR TO		AFTER
CONTRACTUAL OBLIGATIONS	ONE YEAR		THREE YEARS		FIVE YEARS		FIVE YEARS		TOTAL
Operating leases	$	302,130	$	790,694	$	658,912	$	—	$	1,751,736
Indebtedness secured by real estate(1)		27,355,429		94,547,650		394,421		6,253,409		128,550,909
Unsecured line of credit		—		325,000,000		—		—		325,000,000
Deferred compensation(2)		—		2,147,932		—		—		2,147,932
	$	27,657,559	$	427,486,276	$	1,053,333	$	6,253,409	$	457,450,577

(1)	Indebtedness secured by real estate consists of senior indebtedness relating to loans, long-term debt secured by consolidated real estate interests, and liabilities underlying a consolidated real estate interest held for sale.
(2)	Represents amounts due to fund our supplemental executive retirement plan or SERP. See note 10 of our consolidated financial statements, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2005.

OFF-BALANCE SHEET ARRANGEMENTS

     We do not have any off-balance sheet arrangements that we believe have had, or are reasonably likely to have, a current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources, that is material to investors.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

     Refer to our Annual Report on Form 10-K for the year ended December 31, 2005 for a discussion of our critical accounting policies. During the three months ended March 31, 2006, there were no material changes to these policies, except for the update described below.

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     Reserve for Loan Losses. We had a reserve for loan losses of $226,000 at March 31, 2006 and 2005. This reserve is a general reserve and is not related to any individual loan or to an anticipated loss. In accordance with our policy, we determined that this reserve was adequate as of March 31, 2006, based upon our credit analysis of each of the loans in our portfolio. If that analysis were to change, we may be required to increase our reserve, and such an increase, depending upon the particular circumstances, could be substantial. Any increase in reserves will constitute a charge against income. We will continue to analyze the adequacy of this reserve on a quarterly basis. During the three months ended March 31, 2006 and 2005, the loans in our portfolio performed in accordance with their terms.

RESULTS OF OPERATIONS

     Interest Income. Interest income is comprised primarily of interest accrued on our loans. In addition, certain of our loans provide for additional interest payable to us based on the operating cash flow or appreciation in value of the underlying real estate. We recognize this additional interest or “accretable yield” over the remaining life of the loan, such that the return yielded by the loan remains at a constant level for its remaining life. Our interest income was $19.6 million for the three months ended March 31, 2006 compared to $19.0 million for the three months ended March 31, 2005. The $600,000 increase was primarily due to the following:

• an additional $11.9 million of interest accruing on 87 loans totaling $675.2 million originated between January 1, 2005 and March 31, 2006, partially offset by a $10.2 million reduction of interest due to the repayment of 44 loans totaling $264.4 million during the same period,

• a decrease of $1.4 million in accretable yield included in our interest income from the three months ended March 31, 2005 to the same period in 2006.

     Rental Income. At both March 31, 2006 and 2005, we had three consolidated real estate interests, which generated rental income that is included in our financial statements. We received rental income of $3.9 million for the three months ended March 31, 2006 compared to $3.4 million for the three months ended March 31, 2005. The $500,000 increase was primarily the result of one property’s annual reconciliation of amounts due from a major tenant for the portion of property operations expenses for which they are financially responsible, pursuant to their lease.

     Fee Income and Other. Revenues generated by our wholly owned subsidiary, RAIT Capital Corp d/b/a Pinnacle Capital Group, are generally reported in this income category. Pinnacle provides, or arranges for another lender to provide, first-lien conduit loans to our borrowers. This service often assists us in offering the borrower a complete financing package, including our mezzanine or bridge financing. Where we have made a bridge loan to a borrower, we may be able to assist our borrower in refinancing our bridge loan, for which we will earn related fee income through Pinnacle. We also include financial consulting fees in this income category. Financial consulting fees are generally negotiated on a transaction by transaction basis and, as a result, the sources of such fees for any particular period are not generally indicative of future sources and amounts. We earned fee and other income of $5.7 million for the three months ended March 31, 2006 as compared to $911,000 earned in the three months ended March 31, 2005. Included in fee and other income for the three months ended March 31, 2006 were consulting fees of $3.6 million and $2.0 million of revenue generated by Pinnacle. Included in fee and other income for the three months ended March 31, 2005 were revenues of $811,000 generated by Pinnacle. If we implement the CDO strategy referred to above in “Overview”, we anticipate that we will seek to increase fee income resulting from investments intended to support our CDOs, which may shift some income previously characterized as interest income to fee income.

     Investment Income. We derived our investment income from the return on our unconsolidated real estate interests and from interest earned on cash held in bank accounts. We received investment income of $1.5 million for the three months ended March 31, 2006, compared to $1.3 million for the three months ended March 31, 2005. The $200,000 increase in investment income from the three months ended March 31, 2005 to the corresponding period in 2006 was due to an increase in interest earned on cash held in bank accounts, resulting from both an increase in interest rates paid by banks on deposits as well as an increase in the average balance of our cash accounts. Most of this investment income was generated from our bank accounts with The Bancorp Bank. Our relationship with The Bancorp Bank is described in Note 9 to our consolidated financial statements.

     Interest Expense. Interest expense consists of interest payments made on senior indebtedness relating to loans, long term debt secured by consolidated real estate interests and interest payments made on our credit facility and lines of credit. We anticipate our interest expense will increase as we increase our use of leverage to enhance our return on our investments. Interest expense was $5.5 million for the three months ended March 31, 2006 as compared to $1.7 million for the three months ended March 31, 2005. The $3.8 million increase was attributable to the establishment and utilization of $365.0 million in additional borrowing capability from our new unsecured credit facility and other senior indebtedness.

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     Property Operating Expenses; Depreciation and Amortization. Property operating expenses were $2.1 million for the three months ended March 31, 2006, compared to $1.9 million for the three months ended March 31, 2005. Depreciation and amortization was $370,000 for the three months ended March 31, 2006 as compared to $357,000 for the three months ended March 31, 2005. Included in property operating expenses are management fees paid to Brandywine Construction & Management, Inc., an affiliate of the spouse of our chairman and chief executive officer, for providing real estate management services for the real estate underlying our real estate interests. Brandywine provided real estate management services to four properties underlying our consolidated real estate interests at both March 31, 2006 and 2005, respectively. We paid management fees of $152,000 and $155,000 to Brandywine for the three months ended March 31, 2006 and 2005, respectively. In addition, at both March 31, 2006, and 2005, Brandywine provided real estate management services for real estate underlying seven of our unconsolidated real estate interests (whose results of operations are not included in our consolidated financial statements.) We anticipate that we will continue to use Brandywine to provide real estate management services.

     Salaries and Related Benefits; General and Administrative Expense. Salaries and related benefits were $1.9 million for the three months ended March 31, 2006, as compared to $1.3 million for the three months ended March 31, 2005. General and administrative expenses were $1.2 million for the three months ended March 31, 2006, as compared to $861,000 for the three months ended March 31, 2005. The increase in salaries and related benefits expense was due to increased costs of employee benefits including those of our supplemental executive retirement plan. The increase in general and administrative expenses was primarily due to increased costs relating to directors and officers insurance and regulatory compliance costs.

     Included in general and administrative expense is rental expense relating to our downtown Philadelphia office space. We sublease these offices pursuant to two operating leases that provide for annual rentals based upon the amount of square footage we occupy. The sub-leases expire in August 2010 and both contain two five-year renewal options. One sub-lease is with The Bancorp, Inc. We paid rent to Bancorp in the amount of $84,000 and $62,000 the three months ended March 31, 2006 and 2005, respectively. The other sublease is with The Richardson Group, Inc. We paid rent to Richardson in the amount of $11,400 and $14,000 for the three months ended March 31, 2006 and 2005, respectively. Also included in general and administrative expenses is $15,000 that we paid in both three month periods ended March 31, 2006 and 2005 to Bancorp for technical support services provided to us. Our relationships with Bancorp and Richardson are described in note 9 to our consolidated financial statements.

     Discontinued Operations. As of October 3, 2005, we classified as “held for sale” one of our consolidated real estate interests, consisting of an 89% general partnership interest in a limited partnership that owns a building in Philadelphia, Pennsylvania with 456,000 square feet of office/retail space. As of March 31, 2006 we classified as “held for sale” another consolidated real estate interest consisting of a 110,421 square foot shopping center in Norcross, Georgia. Also, as of May 11, 2006, the Company classified as “held for sale” a consolidated real estate interest consisting of a 216-unit apartment complex and clubhouse in Watervliet, New York. The results of operations attributable to these interests have been reclassified, for all periods presented, to “discontinued operations”. Additionally, depreciation expense was no longer recorded for these assets once they were classified as “held for sale”. We sold the Philadelphia, PA office building in May 2006 for approximately $74.0 million. The Norcross, GA shopping center and the Watervliet, NY apartment complex were both sold in June 2006 for $13.0 million and $11.25 million, respectively.

     The following is a summary of the operations of our investments held for sale for the three months ended March 31, 2006 and 2005, which have been reclassified to discontinued operations in our consolidated statements of income for all periods presented:

	FOR THE THREE MONTHS ENDED
	MARCH 31,
	2006		2005
Rental income	$	4,115,389	$	4,073,557
Less: Operating expenses		2,088,950		2,062,738
Interest expense		948,867		963,054
Depreciation and amortization		166,109		687,418
Income from discontinued operations	$	911,463	$	360,347

     The increases in rental income from 2005 to 2006 were due to our successful negotiation of expansions and renewals of leases with existing major tenants. The decrease in depreciation and amortization for the three months ended December 31, 2006 from the same period in 2005 was due to the cessation of our recognition of depreciation expense once we reclassified the property as “held for sale”.

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