10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

or

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

For the transition period from              to             

Commission file number 1-14760

RAIT FINANCIAL TRUST

(Exact name of registrant as specified in its charter)

Maryland	23-2919819
State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification No.)

2929 Arch Street, 17th Floor, Philadelphia, PA	19104
(Address of principal executive offices)	(Zip Code)

(215) 243-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

A total of 63,810,889 common shares of beneficial interest, par value $0.01 per share, of the registrant were outstanding as of August 4, 2008.

RAIT FINANCIAL TRUST

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	1
	Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2008 and 2007	2
	Consolidated Statements of Comprehensive Income for the Three-Month and Six-Month Periods Ended June 30, 2008 and 2007	3
	Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2008 and 2007	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	50
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 4.	Submission of Matters to a Vote of Security Holders	52
Item 6.	Exhibits	52
	Signatures	53

PART I - FINANCIAL INFORMATION

Item 1. - Financial Statements

RAIT Financial Trust

Consolidated Balance Sheets

(Unaudited and dollars in thousands, except share and per share information)

	As of June 30, 2008			As of December 31, 2007
Assets
Investments in mortgages and loans, at amortized cost
Commercial mortgages, mezzanine loans and other loans	$	2,119,407		$	2,189,939
Residential mortgages and mortgage-related receivables		3,813,542			4,065,083
Allowance for losses		(55,473	)		(26,389	)
Total investments in mortgages and loans		5,877,476			6,228,633
Investments in securities and security-related receivables ($3,082,530 and $2,776,833, respectively, at fair value)		3,082,530			3,827,800
Investments in real estate interests		270,578			284,252
Cash and cash equivalents		59,183			127,987
Restricted cash		216,892			298,433
Accrued interest receivable		100,935			110,287
Other assets		41,736			70,725
Deferred financing costs, net of accumulated amortization of $4,206 and $3,800, respectively		33,068			53,340
Intangible assets, net of accumulated amortization of $77,609 and $64,444, respectively		42,958			56,123
Total assets	$	9,725,356		$	11,057,580
Liabilities and Shareholders’ equity
Indebtedness
Repurchase agreements	$	47,106		$	138,788
Secured credit facilities and other indebtedness		151,523			146,916
Mortgage-backed securities issued		3,564,475			3,801,959
Trust preferred obligations ($259,111 at fair value as of June 30, 2008)		259,111			450,625
CDO notes payable ($1,100,972 at fair value as of June 30, 2008)		2,532,222			5,093,833
Convertible senior notes		404,000			425,000
Total indebtedness		6,958,437			10,057,121
Accrued interest payable		68,900			65,947
Accounts payable and accrued expenses		15,464			19,197
Derivative liabilities		201,078			201,581
Deferred taxes, borrowers’ escrows and other liabilities		100,196			104,821
Distributions payable		29,350			28,068
Total liabilities		7,373,425			10,476,735
Minority interest		474,397			1,602
Shareholders’ equity
Preferred shares, $0.01 par value per share, 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		28			28
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,258,300 shares issued and outstanding		23			23
8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 1,600,000 shares issued and outstanding		16			16
Common shares, $0.01 par value per share, 200,000,000 shares authorized, 63,808,255 and 61,018,231 issued and outstanding, including 122,192 and 225,440 unvested restricted share awards, respectively		637			607
Additional paid in capital		1,602,649			1,575,979
Accumulated other comprehensive income (loss)		(132,455	)		(440,039	)
Retained earnings (deficit)		406,636			(557,371	)
Total shareholders’ equity		1,877,534			579,243
Total liabilities and shareholders’ equity	$	9,725,356		$	11,057,580

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

1

RAIT Financial Trust

Consolidated Statements of Operations

(Unaudited and dollars in thousands, except share and per share information)

	For the Three-Month Periods Ended June 30						For the Six-Month Periods Ended June 30
	2008			2007			2008			2007
Revenue:
Investment interest income	$	177,318		$	233,899		$	362,608		$	439,066
Investment interest expense		(119,823	)		(180,770	)		(252,848	)		(339,901	)
Provision for losses		(25,310	)		(845	)		(35,583	)		(4,563	)
Net investment income		32,185			52,284			74,177			94,602
Rental income		3,860			2,612			7,708			5,024
Fee and other income		4,594			1,683			12,003			9,564
Total revenue		40,639			56,579			93,888			109,190
Expenses:
Compensation expense		8,436			5,796			16,605			14,172
Real estate operating expense		3,875			2,690			7,360			5,278
General and administrative expense		6,910			5,786			11,723			12,069
Depreciation expense		1,385			1,103			2,766			1,871
Amortization of intangible assets		6,094			14,289			13,165			28,578
Total expenses		26,700			29,664			51,619			61,968
Income before other income (expense), taxes and discontinued operations		13,939			26,915			42,269			47,222
Interest and other income		59			4,891			1,172			9,356
Losses on sale of assets		(142	)		(2,760	)		(142	)		(2,760	)
Gains on extinguishment of debt		8,662			—			8,662			—
Change in fair value of free-standing derivatives		—			1,846			(37,203	)		5,042
Change in fair value of financial instruments		97,056			—			352,906			—
Unrealized gains (losses) on interest rate hedges		(66	)		429			15			517
Equity in income (loss) of equity method investments		981			(4	)		944			(8	)
Asset impairments		(9,629	)		—			(20,323	)		—
(Income) loss allocated to minority interest		4,712			(6,111	)		(99,347	)		(11,875	)
Income before taxes and discontinued operations		115,572			25,206			248,953			47,494
Income tax benefit		2,293			4,657			2,434			5,080
Income from continuing operations		117,865			29,863			251,387			52,574
Income from discontinued operations		—			52			—			208
Net income		117,865			29,915			251,387			52,782
Income allocated to preferred shares		(3,415	)		(2,527	)		(6,821	)		(5,046	)
Net income available to common shares	$	114,450		$	27,388		$	244,566		$	47,736
Earnings per share—Basic:
Continuing operations	$	1.84		$	0.45		$	3.97		$	0.79
Discontinued operations		—			—			—			—
Total earnings per share—Basic	$	1.84		$	0.45		$	3.97		$	0.79
Weighted-average shares outstanding—Basic		62,350,803			60,937,911			61,593,350			60,539,584
Earnings per share—Diluted:
Continuing operations	$	1.83		$	0.45		$	3.97		$	0.79
Discontinued operations		—			—			—			—
Total earnings per share—Diluted	$	1.83		$	0.45		$	3.97		$	0.79
Weighted-average shares outstanding—Diluted		62,426,136			61,185,851			61,633,724			60,801,424
Distributions declared per common share	$	0.46		$	0.84		$	0.92		$	1.64

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

2

RAIT Financial Trust

Consolidated Statements of Comprehensive Income

(Unaudited and dollars in thousands)

	For the Three-Month Periods Ended June 30						For the Six-Month Periods Ended June 30
	2008			2007			2008			2007
Net income	$	117,865		$	29,915		$	251,387		$	52,782
Other comprehensive income (loss)
Change in fair value of interest rate hedges		39,119			119,079			585			107,220
Reclassification adjustments associated with unrealized losses (gains) from interest rate hedges included in net income		66			(429	)		(15	)		(517	)
Realized (gains) losses on interest rate hedges reclassified to earnings		2,405			(1,875	)		4,915			(3,082	)
Change in fair value of available-for-sale securities		(5,838	)		(101,654	)		(12,530	)		(100,544	)
Realized (gains) losses on available-for-sale securities reclassified to earnings		2,728			2,760			4,542			2,760
Total other comprehensive income (loss) before minority interest allocation		38,480			17,881			(2,503	)		5,837
Allocation to minority interest		(826	)		5,222			(433	)		(3,743	)
Total other comprehensive income (loss)		37,654			23,103			(2,936	)		2,094
Comprehensive income	$	155,519		$	53,018		$	248,451		$	54,876

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

3

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

	For the Six-Month Periods Ended June 30
	2008			2007
Operating activities:
Net income	$	251,387		$	52,782
Adjustments to reconcile net income to cash flow from operating activities:
Minority interest		99,347			11,875
Provision for losses		35,583			4,563
Amortization of deferred compensation		4,453			5,737
Depreciation and amortization		15,931			30,551
Amortization of deferred financing costs and debt discounts		7,272			16,384
Accretion of discounts on investments		(3,329	)		(4,245	)
Losses on sale of assets		142			2,760
Gains on extinguishment of debt		(8,662	)		—
Change in fair value of financial instruments		(352,906	)		—
Unrealized gains on interest rate hedges		(15	)		(517	)
Equity in (income) loss of equity method investments		(944	)		8
Asset impairments		20,323			—
Unrealized foreign currency gains on investments		(313	)		(1,479	)
Changes in assets and liabilities:
Accrued interest receivable		8,869			(16,424	)
Other assets		22,050			5,087
Accrued interest payable		2,953			4,952
Accounts payable and accrued expenses		(1,135	)		(5,415	)
Deferred taxes, borrowers’ escrows and other liabilities		(18,137	)		(4,703	)
Cash flows from operating activities		82,869			101,916
Investing activities:
Purchase and origination of securities for investment		(62,637	)		(1,833,178	)
Proceeds from sale of other securities		—			606,363
Purchase and origination of loans for investment		(60,055	)		(1,076,231	)
Principal repayments on loans		348,522			515,807
Investment in real estate interests		2,139			(64,169	)
Proceeds from dispositions of real estate interests		26,625			—
(Increase) decrease in restricted cash		71,211			(124,152	)
Decrease in warehouse deposits		—			9,816
Cash flows from investing activities		325,805			(1,965,744	)
Financing activities:
Proceeds from repurchase agreements and other indebtedness		25,000			1,120,658
Repayments on repurchase agreements and other indebtedness		(112,074	)		(1,377,367	)
Proceeds from issuance of residential mortgage-backed securities		—			616,542
Repayments on residential mortgage-backed securities		(242,978	)		(263,064	)
Proceeds from issuance of CDO notes payable		56,775			1,414,020
Repayments on CDO notes payable		(151,512	)		—
Proceeds from issuance of convertible senior notes		—			425,000
Repayments on convertible senior notes		(11,858	)		—
Acquisition of minority interest in CDOs		(70	)		(11,529	)
Distributions to minority interest holders in CDOs		—			(12,337	)
Payments for deferred costs		(36	)		(41,849	)
Proceeds from cash flow hedges		—			1,930
Common share issuance, net of costs incurred		22,247			367,284
Repurchase of common shares		—			(74,381	)
Distributions paid to preferred shares		(6,821	)		(5,046	)
Distributions paid to common shares		(56,151	)		(89,832	)
Cash flows from financing activities		(477,478	)		2,070,029
Net change in cash and cash equivalents		(68,804	)		206,201
Cash and cash equivalents at the beginning of the period		127,987			99,367
Cash and cash equivalents at the end of the period	$	59,183		$	305,568
Supplemental cash flow information:
Cash paid for interest	$	224,392		$	299,418
Cash paid for taxes		294			12,421
Non-cash decrease in goodwill		—			2,761
Non-cash increase (decrease) in trust preferred obligations		(88,125	)		(199,648	)
Non-cash increase (decrease) in convertible senior notes from extinguishment of debt		(9,142	)		—
Series C preferred shares, net of costs, subscribed as of June 30, 2007		—			38,340
Distributions payable		29,350			51,239

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

4

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 1: RAIT FINANCIAL TRUST

RAIT Financial Trust is a specialty finance company that provides a comprehensive set of debt financing options to the real estate industry, including investors in commercial real estate, real estate investment trusts, or REITs, and real estate operating companies and their intermediaries, throughout the United States and Europe. References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires. We manage and invest in commercial mortgages, including whole and mezzanine loans, commercial real estate investments, preferred equity interests, residential mortgage loans, trust preferred securities and subordinated debentures. We originate and invest in real estate-related assets that are underwritten through our integrated investment process. We conduct our business through our subsidiaries, RAIT Partnership, L.P., or RAIT Partnership, and Taberna Realty Finance Trust, or Taberna, as well as through their respective subsidiaries. We and Taberna are self-managed and self-advised Maryland REITs. Our objective is to provide our shareholders with total returns over time, including quarterly distributions and capital appreciation, while seeking to manage the risks associated with our investment strategy.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2007 included in our Annual Report on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year. Certain prior period amounts have been reclassified to conform with the current period presentation.

b. Principles of Consolidation

The consolidated financial statements reflect our accounts and the accounts of our majority-owned and/or controlled subsidiaries. We also consolidate entities that are variable interest entities, or VIEs, where we have determined that we are the primary beneficiary of such entities. The portions of these entities that we do not own are presented as minority interest as of the dates and for the periods presented in the consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

c. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

d. Investments

We invest in commercial mortgages, mezzanine loans, residential mortgages and mortgage-related receivables, debt securities and other types of real estate-related assets. We account for our investments in securities under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as amended and interpreted, or SFAS No. 115, and designate each investment as a trading security, an available-for-sale security, or a held-to-maturity security based on our intent at the time of acquisition. Under SFAS No. 115, trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings. Available-for-sale securities are recorded at fair value with changes in fair value reported as a component of other comprehensive income (loss). See “i. Fair Value of Financial Instruments.” Upon the sale of an available-for-sale security, the realized gain or loss on the sale will be recorded as a component of earnings in the respective period. Held-to-maturity investments are carried at amortized cost at each reporting period.

5

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

On January 1, 2008, we adopted Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or SFAS No. 159. See “k. Recent Accounting Pronouncements.” In applying SFAS No. 159, we classified certain of our available for sale securities as trading securities on January 1, 2008. Trading securities are carried at their estimated fair value, with changes in fair value reported in earnings.

We account for our investments in subordinated debentures owned by trust VIEs that we consolidate as available-for-sale securities. These VIEs have no ability to sell, pledge, transfer or otherwise encumber the trust or the assets of the trust until such subordinated debenture’s maturity. We account for investments in securities where the transfer meets the criteria as a financing under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, or SFAS No. 140, at amortized cost. Our investments in security-related receivables represent securities that were transferred to issuers of collateralized debt obligations, or CDOs, in which the transferors maintained some level of continuing involvement.

We use our judgment to determine whether an investment in securities has sustained an other-than-temporary decline in value. If management determines that an investment in securities has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and we establish a new cost basis for the investment. Our evaluation of an other-than-temporary decline is dependent on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the estimated fair value of the investment in relation to our cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery of the fair value of the investment.

We account for our investments in commercial mortgages, mezzanine loans, other loans and residential mortgages and mortgage-related receivables at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income on a level yield basis over the terms of the loans. Mortgage-related receivables represent loan receivables secured by residential mortgages, the legal title to which is held by our consolidated securitizations. These residential mortgages were transferred to the consolidated securitizations in transactions accounted for as financings under SFAS No. 140. Mortgage-related receivables maintain all of the economic attributes of the underlying residential mortgages and all benefits or risks of that ownership inure to the trust subsidiary.

We maintain an allowance for losses on our investments in commercial mortgages, mezzanine loans, other loans and residential mortgages and mortgage-related receivables. Our allowance for losses is based on management’s evaluation of known losses and inherent risks, for example, historical and industry loss experience, economic conditions and trends, estimated fair values, the quality of collateral and other relevant factors. Specific allowances for losses on our commercial and mezzanine loans are established for impaired loans based on a comparison of the recorded carrying value of the loan to either the present value of the loan’s expected cash flow, the loan’s estimated market price or the estimated fair value of the underlying collateral. Our allowance for loss on residential mortgage loans is evaluated collectively for impairment as the mortgage loans are homogenous pools of residential mortgages. The allowance is increased by charges to operations and decreased by charge-offs (net of recoveries).

e. Transfers of Financial Assets

We account for transfers of financial assets under SFAS No. 140 as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale. Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings, or security-related receivables.

f. Revenue Recognition

1) Net investment income—We recognize interest income from investments in commercial mortgages, mezzanine loans, residential mortgages and debt and other securities on a yield to maturity basis. Upon the acquisition of a loan at a discount, we assess the portions of the discount that constitutes accretable yields and non-accretable differences. The accretable yield represents the excess of our expected cash flows from the loan over the amount

6

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

we paid for the loan. That amount, the accretable yield, is accreted to interest income over the remaining life of the loan. Many of our commercial mortgages and mezzanine loans provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible. Management evaluates loans for non-accrual status each reporting period. Payments received for loans on non-accrual status are applied to principal until the loan is removed from non-accrual status. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. For investments that we did not elect to record at fair value under SFAS No. 159, origination fees and direct loan origination costs are deferred and amortized to net investment income, using the effective interest method, over the contractual life of the underlying loan security or loan, in accordance with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Origination or Acquiring Loans and Initial Direct Costs of Leases”, or SFAS No. 91. For investments that we elected to record at fair value under SFAS No. 159, origination fees and direct loan costs are recorded in income and are not deferred. We recognize interest income from interests in certain securitized financial assets on an estimated effective yield to maturity basis. Management estimates the current yield on the amortized cost of the investment based on estimated cash flows after considering prepayment and credit loss experience.

2) Structuring fees—We receive structuring fees for services rendered in connection with the formation of CDO securitization entities. The structuring fee is a contractual fee paid when the related services are completed. The structuring fee is a negotiated fee with the investment bank acting as placement agent for the CDO securities and is capitalized by the securitization entity as a deferred financing cost. We may decide to invest in the debt or equity securities issued by securitization entities. We evaluate our investment in these entities under Financial Accounting Standards Board, or FASB, Interpretation No. 46R, “Consolidation of Variable Interest Entities”, or FIN 46R, to determine whether the entity is a VIE, and, if so, whether or not we are the primary beneficiary. If we are determined to be the primary beneficiary, we will consolidate the accounts of the securitization entity and, upon consolidation, we eliminate intercompany transactions, specifically the structuring fees and deferred financing costs paid. During the three-month and six-month periods ended June 30, 2007, structuring fees of $5,788 and $11,413, respectively, were received and eliminated upon consolidation of securitization entities. No structuring fees were received during the six-month period ended June 30, 2008.

3) Fee and other income—We generate fee and other income through our various subsidiaries by providing (a) ongoing asset management services to investment portfolios under cancelable management agreements, (b) providing or arranging to provide financing to our borrowers, and (c) providing financial consulting to our borrowers. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. Asset management fees are an administrative cost of a securitization entity and are paid by the administrative trustee on behalf of its investors. These asset management fees are recognized when earned and are paid quarterly. Asset management fees from consolidated CDOs are eliminated in consolidation. During the three-month periods ended June 30, 2008 and 2007, we earned $6,710 and $7,160, respectively, of asset management fees, of which we eliminated $4,172 and $5,750, respectively, upon consolidation of CDOs of which we are the primary beneficiary. During the six-month periods ended June 30, 2008 and 2007, we earned $14,793 and $12,810, respectively, of asset management fees, of which we eliminated $8,561 and $10,238, respectively, upon consolidation of CDOs of which we are the primary beneficiary.

g. Off-Balance Sheet Arrangements

We maintain warehouse financing arrangements with various investment banks and engage in CDO securitizations. Prior to the completion of a CDO securitization, our warehouse providers acquire investments in accordance with the terms of the warehouse facilities. We are paid the difference between the interest earned on the investments and the interest charged by the warehouse providers from the dates on which the respective investments were acquired. We bear the first dollar risk of loss, up to our warehouse deposit amount, if (i) an investment funded through the warehouse facility becomes impaired or (ii) a CDO is not completed by the end of the warehouse period, and in either case, the warehouse provider is required to liquidate the securities at a loss. These off-balance sheet arrangements are not consolidated because our risk of loss is generally limited to the cash collateral held by the warehouse providers and our warehouse facilities are not special purpose vehicles. However, since we hold an implicit variable interest in many entities funded under our warehouse facilities, we often consolidate the Trust VIEs while the trust preferred securities, or TruPS, they issue are held on the warehouse lines. These warehouse facilities are considered free-standing derivatives and are recorded at fair value in our financial statements. Changes in fair value are reflected in earnings in the respective period.

7

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

h. Derivative Instruments

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.

In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, or SFAS No. 133, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record such amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives designated as cash flow hedges associated with debt for which we elected the fair value option under SFAS No. 159, the changes in fair value of the derivative instrument is recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges are recognized in earnings.

i. Fair Value of Financial Instruments

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, or SFAS No. 157, which requires additional disclosures about our assets and liabilities that we measure at fair value. As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Beginning in January 2008, assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:

• Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.

• Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables, CDO notes payable and certain financial instruments classified as derivatives where the fair value is based on observable market inputs.

• Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset. Generally, assets carried at fair value and included in this category are TruPS and subordinated debentures where observable market inputs do not exist.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the

8

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3.

Many financial institutions have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that we and others are willing to pay for an asset. Ask prices represent the lowest price that we and others are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value.

Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with SFAS No. 157, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.

j. Income Taxes

RAIT and Taberna have each elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Accordingly, we generally will not be subject to U.S. federal income tax to the extent of our distributions to shareholders and as long as certain asset, income and share ownership tests are met. If we were to fail to meet these requirements, we would be subject to U.S. federal income tax, which could have a material adverse impact on our results of operations and amounts available for distributions to our shareholders. Management believes that all of the criteria to maintain RAIT’s and Taberna’s REIT qualification have been met for the applicable periods, but there can be no assurances that these criteria will continue to be met in subsequent periods.

We maintain various taxable REIT subsidiaries, or TRSs, which may be subject to U.S. federal, state and local income taxes and foreign taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by us with respect to our interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. We evaluate the realizability of our deferred tax assets (e.g, net operating loss and capital loss carryforwards) and recognize a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast our business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of income.

From time to time, these TRSs generate taxable income from intercompany transactions. The TRS entities generate taxable revenue from fees for services provided to CDO entities. Some of these fees paid to the TRS entities are capitalized as deferred financing costs by the CDO entities. Certain CDO entities may be consolidated in our financial statements

9

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

pursuant to FIN 46R. In consolidation, these fees are eliminated when the CDO entity is included in the consolidated group. Nonetheless, all income taxes are accrued by the TRSs in the year in which the taxable revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

Certain TRS entities are domiciled in the Cayman Islands and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in our income on a current basis, whether or not distributed. Upon distribution of any previously included income, no incremental U.S. federal, state, or local income taxes would be payable by us. We maintain a TRS entity in the UK that is subject to income tax in that jurisdiction. In addition, in June 2008, we formed a TRS entity in Ireland which will be subject to income tax in Ireland. The income from these entities is not included in our income for U.S. tax purposes until it is distributed.

k. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The statement also establishes a framework for measuring fair value by creating a three-level fair value hierarchy that ranks the quality and reliability of information used to determine fair value, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. The adoption of SFAS No. 157 did not have a material impact on our approach to fair valuing our assets, derivative instruments and certain liabilities. See further discussion below on the impact of adopting SFAS No. 159.

In February 2007, the FASB issued SFAS No. 159, which provides entities with an irrevocable option to report certain financial assets and liabilities at fair value, with subsequent changes in fair value reported in earnings. The election can be applied on an instrument-by-instrument basis. SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. As of January 1, 2008, we adopted SFAS No. 159 and we recorded at fair value certain of our investments in securities, CDO notes payable and trust preferred obligations used to finance those investments and any related interest rate derivatives. Subsequent to January 1, 2008, all changes in the fair value of such investments in securities, CDO notes payable, trust preferred obligations and related interest rate derivatives are recorded in earnings. Upon adoption of SFAS No. 159 on January 1, 2008, we recognized an increase in shareholders’ equity of $1,087,394.

The following table presents information about the eligible instruments for which we elected the fair value option and for which adjustments were recorded as of January 1, 2008:

	Carrying Amount as of December 31, 2007			Effect from adoption of SFAS No. 159			Carrying Amount as of January 1, 2008 (After adoption of SFAS No. 159)
Assets:
Trading securities (1)	$	2,721,360		$	—		$	2,721,360
Security-related receivables		1,050,967			(99,991	)		950,976
Deferred financing costs, net of accumulated amortization		18,047			(18,047	)		—
Liabilities:
Trust preferred obligations		(450,625	)		52,070			(398,555	)
CDO notes payable		(3,695,858	)		1,520,616			(2,175,242	)
Deferred taxes and other liabilities		(6,103	)		6,103			—
Fair value adjustments before allocation to minority interest					1,460,751
Allocation of fair value adjustments to minority interest		—			(373,357	)		(373,357	)
Cumulative effect on shareholders’ equity from adoption of SFAS No. 159 (2)				$	1,087,394

(1) Prior to January 1, 2008, trading securities were classified as available-for-sale and carried at fair value. Accordingly, the election of the fair value option under SFAS No. 159 for trading securities did not change their carrying value and resulted in a reclassification of $310,520 from accumulated other comprehensive income (loss) to retained earnings (deficit) on January 1, 2008.

(2) The $1,087,394 cumulative effect on shareholders’ equity from the adoption of SFAS No. 159 on January 1, 2008 was comprised of a $310,520 increase to accumulated other comprehensive income (loss) and a $776,874 increase to retained earnings (deficit).

10

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51”, or SFAS No. 160. SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The statement is effective for fiscal years beginning after December 15, 2008. Management is currently evaluating the impact that this statement may have on our consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions”, or FSP No. 140-3. FSP No. 140-3 provides guidance on accounting for a transfer of a financial asset and a repurchase financing. FSP No. 140-3 presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under SFAS No. 140. The statement is effective for fiscal years beginning after November 15, 2008. Management is currently evaluating the impact that this statement may have on our consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133”, or SFAS No. 161. SFAS No. 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The statement is effective for fiscal years beginning after November 15, 2008. Management is currently evaluating the impact that this statement may have on our consolidated financial statements.

In May 2008, the FASB issued Staff Position No. Accounting Principles Board 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”, or APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. APB 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The equity component is presented in shareholders’ equity and the accretion of the resulting discount on the debt is recognized as part of interest expense in the consolidated statement of operations. APB 14-1 requires retrospective application to the terms of instruments as they existed for all periods presented. The statement is effective for fiscal years beginning after December 15, 2008. Management is currently evaluating the impact that this statement may have on our consolidated financial statements.

11

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 3: INVESTMENTS IN LOANS

Our investments in mortgages and loans are accounted for at amortized cost.

Investments in Commercial Mortgages, Mezzanine Loans and Other Loans

The following table summarizes our investments in commercial mortgages, mezzanine loans and other loans as of June 30, 2008:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans	Weighted Average Coupon		Range of Maturity Dates
Commercial mortgages	$	1,426,195		$	—		$	1,426,195		120	7.7	%	Aug. 2008 to Aug. 2012
Mezzanine loans		529,297			(3,227	)		526,070		159	10.5	%	Aug. 2008 to Aug. 2021
Other loans		177,761			861			178,622		11	6.2	%	Dec. 2008 to Oct. 2016
Total		2,133,253			(2,366	)		2,130,887		290	8.3	%
Unearned fees		(11,480	)		—			(11,480	)
Total	$	2,121,773		$	(2,366	)	$	2,119,407

The following table summarizes the delinquency statistics of commercial mortgages, mezzanine loans and other loans as of June 30, 2008:

Delinquency Status	Principal Amount
30 to 59 days	$	86,041
60 to 89 days		20,379
90 days or more		9,350
In foreclosure or bankrupt		38,858
Total	$	154,628

As of June 30, 2008, approximately $42,250 of our commercial mortgages and mezzanine loans were on non-accrual status and had a weighted-average coupon of 12.2%.

Investments in Residential Mortgages and Mortgage-Related Receivables

The following table summarizes our investments in residential mortgages and mortgage-related receivables as of June 30, 2008:

	Unpaid Principal Balance		Unamortized (Discount)			Carrying Amount		Number of Loans and Mortgage- Related Receivables	Weighted Average Coupon		Average Contractual Maturity Date
3/1 Adjustable rate	$	103,434	$	(795	)	$	102,639	267	5.6	%	August 2035
5/1 Adjustable rate		3,139,173		(11,653	)		3,127,520	6,507	5.6	%	September 2035
7/1 Adjustable rate		528,327		(2,911	)		525,416	1,162	5.7	%	July 2035
10/1 Adjustable rate		58,431		(464	)		57,967	68	5.7	%	June 2035
Total	$	3,829,365	$	(15,823	)	$	3,813,542	8,004	5.6	%

12

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

Our residential mortgages and mortgage-related receivables are pledged as collateral with mortgage securitizations. These mortgage securitizations have issued mortgage-backed securities to finance these obligations with a principal balance outstanding of $3,593,375 as of June 30, 2008. These securitization transactions occurred after the residential mortgages were acquired in whole-loan portfolio transactions. In each of these residential mortgage securitizations, we retained all of the subordinated and non-rated mortgage-backed securities issued. These securitization entities are non-qualified special purpose entities and are considered VIEs. Because we retained all of the subordinated and non-rated residential mortgage-backed securities, or RMBS, issued, we are the primary beneficiary of these entities and consolidate each of the residential mortgage securitization trusts. Approximately 45.1% of our residential mortgage loans were in the state of California as of June 30, 2008.

The following table summarizes the delinquency statistics of our residential mortgage loans as of June 30, 2008:

Delinquency Status	Principal Amount
30 to 59 days	$	37,879
60 to 89 days		19,152
90 days or more		37,061
In foreclosure, bankrupt or real estate owned		86,489
Total	$	180,581

As of June 30, 2008, approximately $142,702 of our residential mortgages and mortgage-related receivables were on non-accrual status and had a weighted-average coupon of 5.9%.

For the six-month period ended June 30, 2008, we recorded asset impairments of $8,509 associated with certain investments in commercial and residential loans. In making this determination, management considered the estimated fair value of the investments to our cost basis, the financial condition of the related entity and our intent and ability to hold the investments for a sufficient period of time to recover our investments. For the identified investments, management believes full recovery is not likely and wrote down the investments to their estimated net realizable value.

Allowance For Losses

We maintain an allowance for losses on our investments in commercial mortgages, mezzanine loans, residential mortgages and mortgage-related receivables and other real estate related assets. Specific allowances for losses are established for impaired loans based on a comparison of the recorded carrying value of the loan to either the present value of the loan’s expected cash flow, the loan’s estimated market price or the estimated net realizable value of the underlying collateral. The allowance is increased by charges to operations and decreased by charge-offs (net of recoveries). Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, historical trends in adjustable rate residential mortgages (if applicable), the estimated value of underlying collateral, and current and expected future economic conditions.

As of June 30, 2008 and December 31, 2007, we maintained an allowance for losses as follows:

	As of June 30, 2008		As of December 31, 2007
Residential mortgages and mortgage-related receivables	$	16,973	$	11,814
Commercial mortgages, mezzanine loans and other real estate related assets		38,500		14,575
Total allowance for losses	$	55,473	$	26,389

The following table provides a roll-forward of our allowance for losses for the three-month and six-month periods ended June 30, 2008:

	For The Three-Month Period Ended June 30, 2008			For The Six-Month Period Ended June 30, 2008
Balance, beginning of period	$	35,675		$	26,389
Additions		25,310			35,583
Charge-offs		(5,512	)		(6,499	)
Balance, end of period	$	55,473		$	55,473

13

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 4: INVESTMENTS IN SECURITIES

Our investments in securities and security-related receivables are accounted for at fair value. The following table summarizes our investments in securities as of June 30, 2008:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair Value		Weighted Average Coupon		Weighted Average Years to Maturity
Trading securities (1):
TruPS and subordinated debentures	$	3,042,503	$	(747,994	)	$	2,294,509	7.0	%	26.4
Other securities		10,000		(8,500	)		1,500	7.4	%	44.4
Total trading securities		3,052,503		(756,494	)		2,296,009	7.0	%	26.4
Available-for-sale securities		64,704		(18,805	)		45,899	8.7	%	33.5
Security-related receivables (2):
TruPS and subordinated debenture receivables		374,094		(102,372	)		271,722	7.6	%	21.7
Unsecured REIT note receivables		370,889		(44,022	)		326,867	6.0	%	8.4
CMBS receivables (3)		213,921		(84,863	)		129,058	5.8	%	34.3
Other securities		43,506		(30,531	)		12,975	4.8	%	41.7
Total security-related receivables		1,002,410		(261,788	)		740,622	6.5	%	18.4
Total investments in securities	$	4,119,617	$	(1,037,087	)	$	3,082,530	6.9	%	24.6

(1) On January 1, 2008, we adopted SFAS No. 159 and transferred certain of our investments in securities from available-for-sale to trading in accordance with SFAS No. 115 and SFAS No. 159. Subsequent to January 1, 2008, all changes in fair value associated with our trading securities are recorded in earnings as part of our change in fair value of financial instruments. See note 7.

(2) Our investments in security-related receivables represent securities owned by CDO entities that we account for as financings under SFAS No. 140. We elected to record security-related receivables at fair value in accordance with SFAS No. 159 on January 1, 2008. All changes in fair value of our security related receivables were recorded in earnings as part of the change in fair value of financial instruments. See notes 2 and 7.

(3) CMBS receivables include securities with a fair value totaling $90,851 that are rated “BBB+” and “BBB-” by Standard & Poor’s and securities with a fair value totaling $38,207 that are rated between “AA” and “A-” by Standard & Poor’s.

TruPS included above as trading securities include (a) investments in TruPS issued by VIEs of which we are not the primary beneficiary and which we do not consolidate and (b) transfers of investments in TruPS securities to us that were accounted for as a sale pursuant to SFAS No. 140. Subordinated debentures included above represent the primary assets of VIEs that we consolidate pursuant to FIN 46R.

As of June 30, 2008, approximately $311,125 in principal amount of TruPS, subordinated debentures, and subordinated debenture receivables were on non-accrual status and had a weighted-average coupon of 8.2%. As of June 30, 2008, approximately $61,983 in principal amount available-for-sale securities were on non-accrual status and had a weighted-average coupon of 6.5%.

Some of our investments in securities collateralize debt issued through CDO entities. Our TruPS CDO entities are static pools and prohibit, in most cases, the sale of such securities until the mandatory auction call period, typically 10 years from the CDO entity’s inception. At and subsequent to the mandatory auction call date, remaining securities will be offered in the general market and the proceeds from sales of such securities will be used to repay outstanding indebtedness and liquidate the CDO entity. The assets of our consolidated CDOs collateralize the debt of such entities and are not available to our creditors. As of June 30, 2008, investment in securities of $3,221,861 principal amount of TruPS and subordinated debentures and $591,432 principal amount of unsecured REIT note receivables and CMBS receivables collateralized our consolidated CDO notes payable of such entities. Some of these investments were eliminated upon the consolidation of various VIEs that we consolidate and the corresponding subordinated debentures of the VIEs are included as assets in our consolidated balance sheet.

Management evaluates available-for-sale securities for impairment as events and circumstances warrant. As of June 30, 2008, management evaluated these securities and concluded that certain of these securities were other than temporarily impaired as management does not expect full recovery of our investment. Asset impairment expense of $9,627 and $11,814, respectively, was recorded for the three-month and six-month periods ended June 30, 2008 related to these securities and other assets and was included in asset impairments in the accompanying consolidated statements of operations. This impairment reduced the amortized cost basis of these available-for-sale securities.

14

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 5: INDEBTEDNESS

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within CDOs or mortgage securitizations. The following table summarizes our indebtedness as of June 30, 2008:

Description	Unpaid Principal Balance		Carrying Amount		Interest Rate Terms		Current Weighted- Average Interest Rate	Contractual Maturity
Repurchase agreements	$	47,106	$	47,106	3.2% to 3.7	%	3.3%	Aug. 2008 (1)
Secured credit facilities and other indebtedness		151,523		151,523	4.5% to 8.1	%	6.1%	Aug. 2008 to 2037
Mortgage-backed securities issued (2)(3)(4)		3,593,375		3,564,475	4.6% to 5.8	%	5.1%	2035
Trust preferred obligations (5)		362,500		259,111	4.2% to 10.1	%	6.5%	2035
CDO notes payable – amortized cost(2)(6)		1,431,250		1,431,250	2.8% to 6.5	%	3.2%	2036 to 2045
CDO notes payable – fair value (2) (5)(7)		3,646,142		1,100,972	2.7% to 10.0	%	3.8%	2035 to 2038
Convertible senior notes		404,000		404,000	6.9	%	6.9%	2027
Total indebtedness	$	9,635,896	$	6,958,437			4.7%

(1) We intend to repay or re-negotiate and extend our repurchase agreements as they mature.

(2) Excludes mortgage-backed securities and CDO notes payable purchased by us which are eliminated in consolidation.

(3) Collateralized by $3,829,365 principal amount of residential mortgages and mortgage-related receivables. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(4) Rates generally follow the terms of the underlying mortgages, which are fixed for a period of time and variable thereafter.

(5) Relates to liabilities for which we elected to record at fair value under SFAS No. 159. See note 7.

(6) Collateralized by $1,720,057 principal amount of commercial mortgages, mezzanine loans and other loans. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(7) Collateralized by $4,178,391 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of June 30, 2008 was $3,085,062. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

Repurchase Agreements

As of June 30, 2008, we were party to several repurchase agreements that had $47,106 in borrowings outstanding. Our repurchase agreements contain standard market terms and generally renew between one and 30 days. As the assets subject to our repurchase agreements prepay or change in value, we are required to ratably reduce our borrowings outstanding under repurchase agreements. During the three-month and six-month periods ended June 30, 2008, we repaid $20,807 and $91,682, respectively, associated with our repurchase agreements.

Secured Credit Facilities and Other Indebtedness

We have secured credit facilities with three financial institutions with total capacity of $90,000. As of June 30, 2008, we have borrowed $53,494 on these credit facilities leaving $36,506 of availability. As of June 30, 2008, we have $50,200 of junior subordinated notes issued by us outstanding and $47,829 of other indebtedness outstanding relating to loans payable on consolidated real estate interests and other loans.

Trust Preferred Obligations

As of January 1, 2008, we adopted the fair value option under SFAS No. 159 and elected to record trust preferred obligations at fair value. At adoption, we decreased the carrying amount of the trust preferred obligations by $52,070 to reflect these liabilities at fair value in our financial statements. The change in fair value of the trust preferred obligations was a decrease of $12,887 and $51,319 for the three-month and six-month periods ended June 30, 2008, respectively, and was included in the accompanying consolidated statements of operations.

CDO Notes Payable – Fair Value

As of January 1, 2008, we adopted the fair value option under SFAS No. 159 and elected to record CDO notes payable that are collateralized by trading securities, security-related receivables and loans at fair value. At adoption, we decreased the carrying amount of these CDO notes payable by $1,520,616 to reflect these liabilities at fair value in our financial statements. The change in fair value of these CDO notes payable was a decrease of $143,573 and $946,701 for the three-month and six-month periods ended June 30, 2008, respectively, and was included in the accompanying consolidated statements of operations.

15

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

Convertible Senior Notes

During the three-month and six-month periods ended June 30, 2008, we repurchased, from the market, a total of $21,000 in aggregate principal amount of convertible senior notes for a total purchase price of $11,858. As a result, we recorded gains on extinguishment of debt of $8,662, net of $480 deferred financing costs that were written off associated with the convertible senior notes.

NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS

Cash Flow Hedges

We have entered into various interest rate swap contracts to hedge interest rate exposure on CDO notes payable and repurchase agreements.

We designate interest rate hedge agreements at inception and determine whether or not the interest rate hedge agreement is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of June 30, 2008, we concluded that these hedging arrangements were highly effective during their remaining term and used the hypothetical derivative method in measuring the ineffective portions of these hedging arrangements.

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of June 30, 2008:

	As of June 30, 2008
	Notional		Fair Value
Cash flow hedges:
Interest rate swaps	$	3,692,342	$	(198,789	)
Interest rate caps		51,000		658
Basis swaps		50,000		(187	)
Foreign currency derivatives:
Currency options		6,441		2
Net fair value	$	3,799,783	$	(198,316	)

The following tables summarize the effect on income by derivative instrument type for the following periods:

	For the Three-Month Period Ended June 30, 2008						For the Three-Month Period Ended June 30, 2007
Type of Derivative	Amounts Reclassified to Earnings for Effective Hedges – Gains (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness – Gains (Losses)			Amounts Reclassified to Earnings for Effective Hedges – Gains (Losses)		Amounts Reclassified to Earnings for Hedge Ineffectiveness – Gains (Losses)
Interest rate swaps	$	(2,405	)	$	(62	)	$	1,875	$	483
Interest rate caps		—			—			—		(7	)
Basis swaps		—			—			—		(24	)
Currency options		—			(4	)		—		(23	)
Total	$	(2,405	)	$	(66	)	$	1,875	$	429

16

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

	For the Six-Month Period Ended June 30, 2008					For the Six-Month Period Ended June 30, 2007
Type of Derivative	Amounts Reclassified to Earnings for Effective Hedges – Gains (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness – Gains (Losses)		Amounts Reclassified to Earnings for Effective Hedges – Gains (Losses)		Amounts Reclassified to Earnings for Hedge Ineffectiveness – Gains (Losses)
Interest rate swaps	$	(4,915	)	$	10	$	3,082	$	585
Interest rate caps		—			—		—		(54	)
Basis swaps		—			—		—		(41	)
Currency options		—			5		—		27
Total	$	(4,915	)	$	15	$	3,082	$	517

On January 1, 2008, we adopted SFAS No. 159 for certain of our CDO notes payable. Upon the adoption of SFAS No. 159, hedge accounting for any previously designated cash flow hedges associated with these CDO notes payable was discontinued and all changes in fair value of these cash flow hedges are recorded in earnings. At the time of hedge accounting discontinuance on January 1, 2008 for these cash flow hedges, the balance included in accumulated other comprehensive income that will be reclassified to earnings over the remaining term of the related hedges was $102,532. As of June 30, 2008, the notional value associated with these cash flow hedges where hedge accounting was discontinued was $2,855,261 and had a liability balance with a fair value of $155,972. During the six-month period ended June 30, 2008, the change in value of these hedges was a decrease of $31,800 and was recorded as a component of the change in fair value of financial instruments in our statement of operations.

Amounts reclassified to earnings associated with effective cash flow hedges are reported in investment interest expense and the fair value of these hedge agreements is included in other assets or derivative liabilities.

Free-Standing Derivatives

We have maintained warehouse arrangements with various investment banks. These warehouse arrangements are free-standing derivatives under SFAS No. 133. As such, our investment, or first-dollar risk of loss, is recorded at fair value each period with the change in fair value recorded in earnings.

As of June 30, 2008, we maintain a deposit of $6,058 as a first loss deposit on one warehouse facility which has been included in other assets in the accompanying consolidated balance sheet. We do not expect to recover this deposit and have fully accrued for this loss in other liabilities on the accompanying consolidated balance sheet. During the six-month period ended June 30, 2008, two of our warehouse facilities were terminated. Due to these events, $32,059 was charged to earnings through the change in fair value of free-standing derivatives during the six-month period ended June 30, 2008. The write-off of these warehouse deposits represents our only exposure under our warehouse agreements and we have no further obligations thereunder.

In addition, the option we provided a warehouse provider for us to provide credit default protection on two reference securities was terminated in May 2008 and we have no further obligation thereunder.

NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, “Disclosure About Fair Value of Financial Instruments”, or SFAS No. 107, requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages and loans, investments in securities, mortgage-backed securities issued, trust preferred obligations, CDO notes payable, convertible senior notes and derivative liabilities is based on significant observable and unobservable inputs. The fair value of investments in real estate interests, cash and cash equivalents, restricted cash, repurchase agreements, secured credit facilities and other indebtedness approximates cost due to the nature of these instruments.

17

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

The following table summarizes the carrying amount and the estimated fair value of our financial instruments as of June 30, 2008:

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Investments in mortgages and loans:
Commercial mortgages, mezzanine loans and other loans	$	2,119,407	$	2,127,317
Residential mortgages and mortgage-related receivables		3,813,542		3,298,513
Investments in securities and security-related receivables		3,082,530		3,082,530
Investments in real estate interests		270,578		270,578
Cash and cash equivalents		59,183		59,183
Restricted cash		216,892		216,892
Derivative assets		2,762		2,762
Liabilities
Indebtedness:
Repurchase agreements		47,106		47,106
Secured credit facilities and other indebtedness		151,523		151,523
Mortgage-backed securities issued		3,564,475		3,202,106
Trust preferred obligations		259,111		259,111
CDO notes payable		2,532,223		2,062,673
Convertible senior notes		404,000		222,705
Derivative liabilities		201,078		201,078

Fair Value Measurements

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of June 30, 2008, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of June 30, 2008
Trading securities
TruPS and subordinated debentures	$	—	$	—	$	2,294,509	$	2,294,509
Other securities		—		1,500		—		1,500
Available-for-sale securities		—		45,899		—		45,899
Security-related receivables
TruPS and subordinated debenture receivables		—		—		271,722		271,722
Unsecured REIT note receivables		—		326,867		—		326,867
CMBS receivables		—		129,058		—		129,058
Other securities		—		12,975		—		12,975
Total assets	$	—	$	516,299	$	2,566,231	$	3,082,530

Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of June 30, 2008
Trust preferred obligations	$	—	$	—	$	259,111	$	259,111
CDO notes payable (1)		—		1,100,972		—		1,100,972
Derivative liabilities		—		201,078		—		201,078
Total liabilities	$	—	$	1,302,050	$	259,111	$	1,561,161

(1) As of January 1, 2008, we adopted the fair value option under SFAS No. 159 and elected to record CDO notes payable that are collateralized by TruPS, subordinated debentures, unsecured REIT notes receivables, CMBS receivables and other securities at fair value.

18

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

The following tables summarize additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the six-month period ended June 30, 2008:

Assets	Trading Securities – TruPS and Subordinated Debentures			Security-Related Receivables – TruPS and Subordinated Debenture Receivables			Total Level 3 Assets
Balance, as of December 31, 2007	$	2,715,155		$	425,643		$	3,140,798
Cumulative effect from adoption of SFAS No. 159		—			(17,599	)		(17,599	)
Change in fair value of financial instruments		(429,864	)		(84,773	)		(514,637	)
Purchases and sales, net		9,218			(51,549	)		(42,331	)
Balance, as of June 30, 2008	$	2,294,509		$	271,722		$	2,566,231

Liabilities	Trust Preferred Obligations			Total Level 3 Liabilities
Balance, as of December 31, 2007	$	450,625		$	450,625
Cumulative effect from adoption of SFAS No. 159		(52,070	)		(52,070	)
Change in fair value of financial instruments		(51,319	)		(51,319	)
Purchases and sales, net		(88,125	)		(88,125	)
Balance, as of June 30, 2008	$	259,111		$	259,111

Change in Fair Value of Financial Instruments

The following table summarizes realized and unrealized gains and losses on assets and liabilities for which we elected the fair value option of SFAS No. 159 as reported in change in fair value of financial instruments in the accompanying statements of operations as follows:

Description	For the Three-Month Period Ended June 30, 2008			For the Six-Month Period Ended June 30, 2008
Change in fair value of trading securities and security-related receivables	$	(171,331	)	$	(612,605	)
Change in fair value of CDO notes payable and trust preferred obligations		156,460			998,020
Change in fair value of derivatives		111,927			(32,509	)
Change in fair value of financial instruments	$	97,056		$	352,906

As of June 30, 2008, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

NOTE 8: SHAREHOLDERS’ EQUITY

Preferred Shares

On January 29, 2008, our board of trustees declared a first quarter 2008 cash dividend of $0.484375 per share on our 7.75% Series A Cumulative Redeemable Preferred Shares, $0.5234375 per share on our 8.375% Series B Cumulative Redeemable Preferred Shares and $0.5546875 per share on our 8.875% Series C Cumulative Redeemable Preferred Shares. The dividends were paid on March 31, 2008 to holders of record on March 3, 2008 and totaled $3,406.

On April 17, 2008, our board of trustees declared a second quarter 2008 cash dividend of $0.484375 per share on our 7.75% Series A Cumulative Redeemable Preferred Shares, $0.5234375 per share on our 8.375% Series B Cumulative Redeemable Preferred Shares and $0.5546875 per share on our 8.875% Series C Cumulative Redeemable Preferred Shares. The dividends were paid on June 30, 2008 to holders of record on June 2, 2008 and totaled $3,406.

On July 29, 2008, our board of trustees declared a third quarter 2008 cash dividend of $0.484375 per share on our 7.75% Series A Cumulative Redeemable Preferred Shares, $0.5234375 per share on our 8.375% Series B Cumulative Redeemable Preferred Shares and $0.5546875 per share on our 8.875% Series C Cumulative Redeemable Preferred Shares. The dividends totaling $3,406 will be paid on September 30, 2008 to holders of record on September 2, 2008.

19

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

Common Shares

On January 8, 2008, the compensation committee of our board of trustees, or the Compensation Committee, awarded 324,200 phantom units, valued at $2,448 using our closing stock price of $7.55, to various non-executive employees. The awards generally vest over four year periods.

On January 24, 2008, 14,457 of our phantom unit awards were redeemed for our common shares. These phantom units were fully vested at the time of redemption.

On March 5, 2008, the Compensation Committee awarded 26,712 phantom units, valued at $175 using our closing stock price of $6.55, to trustees. These awards vest immediately.

On March 25, 2008, our board of trustees declared a quarterly distribution of $0.46 per common share totaling $28,083 that was paid on May 15, 2008 to shareholders of record as of April 4, 2008.

On June 30, 2008, our board of trustees declared a quarterly distribution of $0.46 per common share totaling $29,350 that will be paid on August 12, 2008 to shareholders of record as of July 16, 2008.

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we registered and reserved for issuance 10,000,000 common shares. During the three-month and six-month periods ended June 30, 2008, we issued a total of 2,728,182 common shares pursuant to the DRSPP at a weighted-average price of $8.12 per share and we received $22,150 of net proceeds.

NOTE 9: EARNINGS PER SHARE

The following table presents a reconciliation of basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2008 and 2007:

	For the Three-Month Periods Ended June 30						For the Six-Month Periods Ended June 30
	2008			2007			2008			2007
Income from continuing operations	$	117,865		$	29,863		$	251,387		$	52,574
Income allocated to preferred shares		(3,415	)		(2,527	)		(6,821	)		(5,046	)
Income from continuing operations available to common shares		114,450			27,336			244,566			47,528
Income from discontinued operations		—			52			—			208
Net income available to common shares	$	114,450		$	27,388		$	244,566		$	47,736
Weighted-average shares outstanding—Basic		62,350,803			60,937,911			61,593,350			60,539,584
Dilutive securities under the treasury stock method		75,333			247,940			40,374			261,840
Weighted-average shares outstanding—Diluted		62,426,136			61,185,851			61,633,724			60,801,424
Earnings per share—Basic:
Continuing operations	$	1.84		$	0.45		$	3.97		$	0.79
Discontinued operations		—			—			—			—
Total earnings per share—Basic	$	1.84		$	0.45		$	3.97		$	0.79
Earnings per share—Diluted:
Continuing operations	$	1.83		$	0.45		$	3.97		$	0.79
Discontinued operations		—			—			—			—
Total earnings per share—Diluted	$	1.83		$	0.45		$	3.97		$	0.79

20

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

For the three-month and six-month periods ended June 30, 2008, securities convertible into 41,620,647 and 43,178,995 common shares, respectively, were excluded from the earnings per share computations because their effect would have been anti-dilutive. For the three-month and six-month periods ended June 30, 2007, securities convertible into 2,896,161 and 1,644,060 common shares, respectively, were excluded from the earnings per share computations because their effect would have been anti-dilutive.

NOTE 10: RELATED PARTY TRANSACTIONS

In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities described below. All of these relationships and transactions were approved or ratified by a majority of our independent board of trustees as being on terms comparable to those available on an arm’s-length basis from an unaffiliated third party or otherwise not creating a conflict of interest.

Our Chief Executive Officer and a Trustee, Daniel G. Cohen, holds controlling positions in various companies with which we conduct business. Daniel G. Cohen is the majority member of Cohen Brothers LLC d/b/a Cohen & Company, or Cohen & Company, a registered broker-dealer. Each transaction with Cohen & Company is described below:

a). Shared Services—For services relating to structuring and managing our investments in CMBS and RMBS, we pay an annual fee to Cohen & Company ranging from 2 to 20 basis points on the amount of the investments, based on the rating of the security. For investments in residential whole loans, we pay an annual fee of 1.5 basis points on the amount of the investments. In respect of other administrative services, we pay an amount equal to the cost of providing those services plus 10% of such cost. The agreement with Cohen & Company for these services terminated on July 1, 2008 and we did not renew or extend this agreement. During the three-month periods ended June 30, 2008 and 2007, we incurred total shared service expenses of $257 and $295, respectively. During the six-month periods ended June 30, 2008 and 2007, we incurred total shared service expenses of $519 and $595, respectively. Shared service expenses have been included in general and administrative expense in the accompanying statements of operations.

b). Office Leases—We maintain sub-lease agreements for shared office space and facilities with Cohen & Company. Rent expense during the three-month periods ended June 30, 2008 and 2007 relating to these leases were $12 and $24, respectively. Rent expense during the six-month periods ended June 30, 2008 and 2007 relating to these leases were $25 and $41, respectively. Rent expense has been included in general and administrative expense in the accompanying statements of operations. Future minimum lease payments due over the remaining term of the lease are $383.

c). Non-Competition Agreement—As part of the spin-off of Taberna from Cohen & Company in April 2005 and before our acquisition of Taberna in December 2006, Taberna and Cohen & Company entered into a three-year non-competition agreement that ended in April 2008. As part of this agreement, Cohen & Company agreed not to engage in purchasing from, or acting as a placement agent for, issuers of TruPS or other preferred equity securities of real estate investment trusts and other real estate operating companies. Cohen & Company agreed to refrain from acting as asset manager for any such securities. As part of our acquisition of Taberna, we valued this non-competition agreement as an amortizing intangible asset. As of June 30, 2008, the intangible asset has been fully amortized.

d). Common Shares—As of June 30, 2008, Cohen & Company and its affiliate entities owned 510,434 of our common shares.

e). EuroDekania—EuroDekania is an affiliate of Cohen & Company. In September 2007, EuroDekania purchased approximately €10,000 ($13,892) of the subordinated notes and all of the €32,250 ($44,802) BBB-rated debt securities in Taberna Europe CDO II. We invested €17,500 ($24,311) in the total subordinated notes and earn management fees of 35 basis points on the collateral assets owned by this entity. EuroDekania will receive a fee equal to 3.5 basis points of our subordinated collateral management fee which is payable to EuroDekania only if we collect a subordinate management fee and EuroDekania retains an investment in the subordinated notes. During the three-month and six-month periods ended June 30, 2008, we incurred collateral management fees of $114 and $241, respectively, payable to EuroDekania, which have been included in fee and other income in the accompanying consolidated statements of operations.

Our Chairman, Betsy Z. Cohen, is the Chief Executive Officer and a director of The Bancorp, Inc., or Bancorp, and Chairman of the Board and Chief Executive Officer of its wholly-owned subsidiary, The Bancorp Bank, a commercial bank. Daniel G. Cohen, our Chief Executive Officer and a Trustee, is the Chairman of the Board of Bancorp and Vice-Chairman of the Board of Bancorp Bank. Each transaction with Bancorp is described below:

a). Cash and Restricted Cash—We maintain checking and demand deposit accounts at Bancorp. As of June 30, 2008, we had $1,384 of cash and cash equivalents and $15,879 of restricted cash on deposit at Bancorp. We earn

21

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

(Unaudited and dollars in thousands, except share and per share amounts)

interest on our cash and cash equivalents at an interest rate of approximately 3.0% per annum. During the three-month periods ended June 30, 2008 and 2007, we received $23 and $214, respectively, of interest income from Bancorp. During the six-month periods ended June 30, 2008 and 2007, we received $67 and $481, respectively, of interest income from Bancorp. Restricted cash held at Bancorp relates to borrowers’ escrows for taxes, insurance and capital reserves. Any interest earned on these deposits enures to the benefit of the specific borrower and not to us.

b). Office Leases—We sublease a portion of our downtown Philadelphia office space from Bancorp at an annual rental expense based upon the amount of square footage occupied. We are currently in the process of terminating this sublease agreement at final terms that have not yet been determined. Rent paid to Bancorp was $113 and $238 for the three-month and six-month periods ended June 30, 2007, respectively, and has been included in general and administrative expense in the accompanying statements of operations.

c). Participation Interests—We funded a $54,000 commercial mortgage during January 2008. At closing, Bancorp purchased a participation interest in this loan for a total commitment of $24,300. We also funded a $70,000 commercial mortgage during January 2008. At closing, Bancorp purchased a participation interest in this loan for a total commitment of $26,500. We paid Bancorp fees of $321 for their services in connection with the closing of these loans.

We had a $3,369 first mortgage loan secured by Pennsview Apartments that has junior lien against it that is held by an entity controlled by Daniel Cohen. Our loan bore interest at a fixed rate of 8.0%, was to mature on March 29, 2008 and was paying in accordance with its terms. In March 2008, we transferred our first mortgage loan to another entity controlled by Mr. Cohen for $3,500, representing the outstanding principal balance of, and accrued interest on, the loan and an exit fee.

Brandywine Construction & Management, Inc., or Brandywine, is an affiliate of Edward E. Cohen, the spouse of Betsy Z. Cohen and father of Daniel G. Cohen. Brandywine provided real estate management services to three properties underlying our real estate interests during the six-month periods ended June 30, 2008 and 2007. Management fees of $37 and $36 were paid to Brandywine during the three-month periods ended June 30, 2008 and 2007, respectively, relating to those interests. Management fees of $72 and $73 were paid to Brandywine during the six-month periods ended June 30, 2008 and 2007, respectively, relating to those interests. We believe that the management fees charged by Brandywine are comparable to those that could be obtained from unaffiliated third parties.

NOTE 11: DISCONTINUED OPERATIONS

The following table summarizes revenue and expense information for the one property sold since January 1, 2007:

	For the Three-Month Period Ended June 30, 2007		For the Six-Month Period Ended June 30, 2007
Rental income	$	510	$	993
Expenses:
Real estate operating expenses		407		683
Depreciation		51		102
Total expenses		458		785
Income from discontinued operations	$	52	$	208

Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the consolidated statements of operations.

22

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Trustees and Shareholders of RAIT Financial Trust

We have reviewed the accompanying consolidated balance sheet of RAIT Financial Trust and consolidated subsidiaries as of June 30, 2008 and the related consolidated statements of operations, other comprehensive income and cash flows for the three-month and six-month periods ended June 30, 2008 and 2007. These interim financial statements are the responsibility of the Company’s management.

We conducted our review 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 generally accepted auditing standards, 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 review, 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, 2007, and the related consolidated statements of operations, other comprehensive income (loss), shareholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated February 28, 2008, 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, 2007 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

August 4, 2008

23

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, 2007, 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, except as may be required by applicable law.

Overview

We are a specialty finance company that provides a comprehensive set of debt financing options to the real estate industry, including investors in commercial real estate, real estate investment trusts, or REITs, and real estate operating companies and their intermediaries, throughout the United States and Europe. We manage and invest in commercial mortgages, including whole and mezzanine loans, commercial real estate investments, preferred equity interests, residential mortgage loans, trust preferred securities and subordinated debentures. We originate and invest in real estate-related assets that are underwritten through an integrated investment process. We conduct our business through our subsidiaries, RAIT Partnership and Taberna, as well as through their respective subsidiaries. RAIT is a self-managed and self-advised Maryland REIT. Taberna is also a Maryland REIT. Our objective is to provide our shareholders with total returns over time, including quarterly distributions and capital appreciation, while seeking to manage the risks associated with our investment strategy.

In the first six months of 2008, we generated adjusted earnings per diluted share of $1.06 and earnings per diluted share of $3.97. Our investment portfolio continues to generate net investment income which contributed to these results, though changes in fair value of financial instruments resulting from our adoption of SFAS No. 159 described below were an important factor in our financial performance for the three-month and six-month periods ended June 30, 2008.

We continue to see opportunities for new investments generating favorable returns in our commercial real estate and European portfolios. We originated $388.7 million of gross asset production in these portfolios during the six-month period ended June 30, 2008, financed primarily through the sale of loan participations and cash available in our commercial real estate and unconsolidated European collateralized debt obligations, or CDOs, that generated fee income for us. In addition, we continued to build relationships with sources of financing while preserving our liquidity.

We continue to focus on managing our liquidity by using financing strategies that preserve our capital and by reducing our exposure to possible margin calls under repurchase agreements. In the first half of 2008, we repaid $91.7 million of repurchase agreement indebtedness through the use of available cash resources, cash flow from operating activities and repayments from investments and we expect to continue to reduce amounts outstanding under our repurchase agreements.

The significant disruptions in the credit markets, abrupt and significant devaluations of assets directly or indirectly linked to the U.S. real estate finance markets, and the attendant removal of liquidity, both long and short term, from the capital markets that began in the second half of 2007 have continued to have an adverse effect on us and companies we finance. We continue to respond to credit deterioration of TruPS issuers primarily in the mortgage finance and homebuilder sectors held by collateralized securitizations we consolidate, which has adversely affected the cash flow we receive from our securitizations and the fair value of their collateral. CMBS financing has become less available as a source of refinancing for our borrowers, which slowed the pace of refinancing by our borrowers while also creating new lending opportunities for us. In addition, we have seen the delinquency rates in our residential mortgage portfolio and commercial real estate loan portfolio increase. While we believe we have made appropriate adjustments to the valuation of our investments and our provision for losses in our residential mortgage and commercial real estate loan portfolios, we cannot assure you that we will not be adversely effected by further similar developments in our investment portfolio.

Prior to January 1, 2008, we recorded certain of our investments in securities and derivatives at fair value. Upon adoption of SFAS No. 159 on January 1, 2008, we adjusted the carrying amounts of certain investments in securities, certain CDO notes payable, certain derivative instruments and other assets or liabilities to fair value resulting in an increase to shareholders’ equity of $1.1 billion on January 1, 2008. Going forward, we will continue to reflect the fair value of these financial assets and liabilities at fair value in our balance sheet, with all changes in fair value recorded in earnings.

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The following table summarizes the cumulative net fair value adjustments through June 30, 2008 for the specific financial assets and liabilities elected for the fair value option under SFAS No. 159 (dollars in thousands):

	Fair Value Adjustments as of December 31, 2007			SFAS No. 159 Fair Value Adjustments on January 1, 2008			SFAS No. 159 Fair Value Adjustments during Six-Month Period Ended June 30, 2008			Cumulative Fair Value Adjustments as of June 30, 2008
Assets:
Investments in securities (1)	$	(494,765	)	$	(99,991	)	$	(612,605	)	$	(1,207,361	)
Deferred financing costs, net of accumulated amortization		—			(18,047	)		—			(18,047	)
Liabilities:
Trust preferred obligations		—			52,070			51,319			103,389
CDO notes payable		—			1,520,616			946,701			2,467,317
Derivative liabilities		(155,080	)		—			(32,509	)		(187,589	)
Other liabilities		—			6,103			—			6,103
Fair value adjustments before allocation to minority interest		(649,845	)		1,460,751			352,906			1,163,812
Allocation of fair value adjustments to minority interest		123,881			(373,357	)		(90,555	)		(340,031	)
Cumulative effect on shareholders’ equity	$	(525,964	)	$	1,087,394		$	262,351		$	823,781

(1) Prior to January 1, 2008, trading securities were classified as available-for-sale and carried at fair value. Accordingly, the election of the fair value option under SFAS No. 159 for trading securities did not change their carrying value and resulted in a reclassification of $310.5 million from accumulated other comprehensive income (loss) to retained earnings (deficit) on January 1, 2008.

Through June 30, 2008, the cumulative effect of the fair value adjustments recorded on each financial asset and liability selected for the fair value option under SFAS No. 159 was a net increase in shareholders’ equity of $823.8 million. This increase in shareholders’ equity may reverse through earnings as an unrealized loss in the future as we continue to record our financial assets and liabilities at fair value. Given the market conditions referred to above and the volatility in interest rates and the credit performance of our underlying collateral, we cannot assure you that there will not be further significant fluctuations in the fair value of our assets and liabilities subject to SFAS No. 159, which could have a material effect on our financial performance.

Investors should read the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, or the Annual Report, for a detailed discussion of the following items:

• capital markets, liquidity and credit risk,

• interest rate environment,

• prepayment rates on commercial mortgages, mezzanine loans and residential mortgages in our portfolio, and

• other market developments.

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Our Investment Portfolio

Please refer to our Annual Report on Form 10-K for additional information regarding each asset class. The table below summarizes our investment portfolio as of June 30, 2008:

	Amortized Cost(1)		Estimated Fair Value(2)		Percentage of Total Portfolio(3)		Weighted-Average Coupon(4)
	(dollars in thousands)
Investments in Mortgages and Loans
Commercial mortgages and mezzanine loans	$	2,130,887	$	2,127,317	24.2	%	8.3	%
Residential mortgages and mortgage-related receivables(5)		3,813,542		3,298,513	37.6	%	5.6	%
Total investments in mortgages and loans		5,944,429		5,425,830	61.8	%	6.7	%
Investments in Securities
TruPS and subordinated debentures		3,416,597		2,566,231	29.2	%	7.1	%
Unsecured REIT note receivables		370,889		326,867	3.7	%	6.0	%
CMBS receivables		213,921		129,058	1.5	%	5.8	%
Other securities		118,210		60,374	0.7	%	7.6	%
Total investments in securities		4,119,617		3,082,530	35.1	%	6.9	%
Investment in real estate interests		270,578		270,578	3.1	%	N/A
Total Portfolio/Weighted Average	$	10,334,624	$	8,778,938	100.0	%	6.8	%

(1) Amortized cost reflects the cost incurred by us to acquire or originate the asset, net of origination discount.

(2) The fair value of our investments represents management’s estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Our management bases this estimate on the underlying interest rates and credit spreads and, to the extent available, quoted market prices. The amortized cost of our investment in real estate interests approximates fair value.

(3) Percentages are based on estimated fair value.

(4) Weighted average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to amortized cost or estimated fair value.

(5) Our investments in residential mortgages and mortgage-related receivables at June 30, 2008 consisted of investments in adjustable rate residential mortgages. These mortgages bear interest rates that are fixed for three, five, seven and ten year periods, respectively, and reset annually thereafter and are referred to as 3/1, 5/1, 7/1 and 10/1 ARMs, respectively. We financed our investment in these assets through short-term repurchase agreements and long-term securitizations.

A summary of each asset class is as follows:

Commercial real estate loans, including mortgage loans and mezzanine loans.

The tables below describe certain characteristics of our commercial mortgages, mezzanine loans and other loans as of June 30, 2008 (dollars in thousands):

	Carrying Amount		Estimated Fair Value		Range of Loan Yields		Weighted Average Coupon		Range of Maturities	Number of Loans	% of Total Loan Portfolio
Commercial mortgages	$	1,426,195	$	1,416,252	5.2% – 19.0	%	7.7	%	Aug. 2008 – Aug. 2012	120	66.9	%
Mezzanine loans		526,070		529,748	5.1% – 17.0	%	10.5	%	Aug. 2008 – Aug. 2021	159	24.7	%
Other loans		178,622		181,317	4.4% – 9.1	%	6.2	%	Dec. 2008 – Oct. 2016	11	8.4	%
Total	$	2,130,887	$	2,127,317			8.3	%		290	100.0	%

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The charts below describe the property types and the geographic breakdown of our commercial mortgage, mezzanine loans and other loans we own as of June 30, 2008 (based on amortized cost):

(a) Based on Carrying Amount

Residential mortgages and mortgage-related receivables. We acquire residential mortgage loans with the intention of holding them for investment, rather than for sale. These mortgage loans, at origination, had an average FICO score of 738, an average principal balance of approximately $478,000 and an average loan-to-value ratio of approximately 74.9%. As of June 30, 2008, these residential mortgage loans had a weighted-average interest rate of approximately 5.6%. A FICO score is a credit score developed by Fair Isaac & Co., or Fair Isaac, for rating the credit risk of borrowers. FICO scores range from 300-850 and a higher score indicates a lower credit risk. Fair Isaac’s website states that the median FICO score in the United States is 723.

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Set forth below is certain information with respect to the residential mortgage and mortgage-related receivables owned as of June 30, 2008 (dollars in thousands).

	Carrying Amount		Weighted Average Coupon		Average Next Adjustment Date	Average Contractual Maturity	Average FICO Score	Number of Loans	Percentage of Portfolio
3/1 ARM	$	102,639	5.6	%	Aug. 2008	Aug. 2035	731	267	2.7	%
5/1 ARM		3,127,520	5.6	%	July 2010	Sept. 2035	739	6,507	82.0	%
7/1 ARM		525,416	5.7	%	Sept. 2011	July 2035	737	1,162	13.8	%
10/1 ARM		57,967	5.7	%	June 2015	June 2035	749	68	1.5	%
Total	$	3,813,542	5.6	%			738	8,004	100.0	%

The following charts below describe FICO score, at origination, housing type and geographic breakdown of the residential mortgages and mortgage-related receivables we own as of June 30, 2008:

(a) Based on Carrying Amount

Taberna invested in these residential mortgage loan portfolios primarily in 2005 and mid-2006 to maintain its compliance with the REIT asset and income tests. We acquired these portfolios as part of the Taberna merger in December 2006.

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TruPS and subordinated debentures. We have provided REITs and real estate operating companies the ability to raise subordinated debt capital through TruPS and subordinated debentures. TruPS are long-term instruments, with maturities ranging from 10 to 30 years, which are priced based on short-term variable rates, such as the three-month London Inter-Bank Offered Rate, or LIBOR. TruPS are unsecured and contain minimal financial and operating covenants.

In a typical TruPS transaction, a parent REIT or real estate operating company forms a special purpose trust subsidiary to sell TruPS to an investor. The subsidiary loans the proceeds of its sale received from the investor to its parent company in the form of a subordinated debenture. The terms of the subordinated debenture mirror the terms of the TruPS issued by the trust. The special purpose trust uses the payments of interest and principal it receives on the subordinated debenture to pay interest, dividends and redemption amounts to the holders of the TruPS. TruPS are generally not callable by the issuer within five years of issuance. If the parent company of an issuer of TruPS defaults on payments due on the debenture, the trustee under the indenture governing the debenture has the right to accelerate the entire principal amount of the debenture. TruPS are not secured by any collateral, are ranked senior to the issuer’s parent’s equity in right of payment and generally rank junior to an issuer’s existing senior debt securities in right of payment and in liquidation.

The table below describes our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of June 30, 2008 (dollars in thousands):

							Issuer Statistics
Industry Sector	Estimated Fair Value		% of Total		Weighted Average Coupon		Weighted Average Ratio of Debt to Total Capitalization (a)		Weighted Average Interest Coverage Ratio (a)
Commercial Mortgage	$	855,558	33.4	%	7.1	%	73.4	%	1.7x
Office		475,932	18.5	%	6.8	%	71.3	%	2.1x
Specialty Finance		405,089	15.8	%	7.0	%	87.3	%	1.8x
Homebuilders		288,553	11.2	%	8.3	%	71.9	%	1.4x
Retail		199,780	7.8	%	4.7	%	89.7	%	1.8x
Residential Mortgage		169,458	6.6	%	6.4	%	98.4	%	1.1x
Hospitality		100,314	3.9	%	7.5	%	80.0	%	2.5x
Storage		71,547	2.8	%	7.3	%	65.7	%	2.8x
Total	$	2,566,231	100.0	%	7.1	%	78.0	%	1.8x

(a) This is the equity capitalization of our TruPS issuers based on information available to management, as provided by our issuers or through public filings, as of June 30, 2008.

(b) Based on Estimated Fair Value.

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Mortgage-backed securities, including RMBS, CMBS, unsecured REIT notes and other real estate-related debt securities. We have invested, and expect to continue to invest, in RMBS, CMBS, unsecured REIT notes and other real estate-related debt securities.

The table and the chart below describe certain characteristics of our mortgage-backed securities and other real estate-related debt securities as of June 30, 2008 (dollars in thousands):

Investment Description	Estimated Fair Value		Weighted Average Coupon		Weighted Average Years to Maturity	Amortized Cost
Unsecured REIT note receivables	$	326,867	6.0	%	8.4	$	370,889
CMBS receivables		129,058	5.8	%	34.3		213,921
Taberna Europe I & II CDO investments		43,027	12.2	%	29.9		51,794
Other securities		17,347	5.7	%	38.8		66,416
Total	$	516,299	6.3	%	22.2	$	703,020

(a) S&P ratings as of June 30, 2008.

Investment in real estate interests and preferred equity interests. Our real estate investments and preferred equity interests are comprised of equity interests in entities that directly or indirectly own real estate. We consolidate the financial results of any entities which we control. We present our real estate investments and preferred equity interests on a combined basis as consolidated and unconsolidated interests on our balance sheet.

The table below summarizes the amounts included in our consolidated financial statements for real estate investment interests and preferred equity interests (dollars in thousands):

	As of June 30, 2008
Multi-family	$	82,518
Office		180,902
Retail and other		14,289
Subtotal		277,709
Plus: Escrows and reserves		1,017
Less: Accumulated depreciation		(8,148	)
Investments in real estate interests	$	270,578

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Credit Summary

The table below summarizes our non-accrual status investments and loan loss reserves at June 30, 2008 (dollars in thousands):

	Carrying Value of Investments (1)		Number of Non-Accrual Status Investments	Carrying Value of Non-Accrual Status Investments			Percentage of Asset Class(es)		Loan Loss Reserves
Commercial mortgages, mezzanine loans and other loans	$	2,130,887	4	$	42,250		2.0	%	$	38,500	(2)
Investments in real estate interests		270,578	—		—		—			—
Residential mortgages and mortgage-related receivables		3,813,542	350		142,702	(3)	3.7	%		16,973
Investments in securities and security related receivables (4)		3,082,530	13		64,869		2.1	%		N/A	(5)
Total	$	9,297,537	367	$	249,821		2.7	%	$	55,473

(1) Carrying value represents the value at which the respective asset class is recorded on our balance sheet in accordance with GAAP.

(2) Pertains to 11 loans, 4 of which are on non-accrual status, with a $177.2 million aggregate unpaid principal balance.

(3) Includes loans delinquent over 60 days, in foreclosure, bankrupt or real estate owned as of June 30, 2008.

(4) Investments in securities and security related receivables are recorded at fair value in our consolidated balance sheet in accordance with GAAP. The unpaid principal value of these investments as of June 30, 2008 is $4.3 billion. The unpaid principal balance of the non-accrual investments in this category is $373.1 million, or 8.6% of the total unpaid principal balance.

(5) Loan loss reserves are not applicable for investments in securities and security related receivables, including our investments in European, U.S. TruPS or other securities, as these items are carried at fair value in our consolidated financial statements. The estimated fair value adjustment for our U.S. TruPS portfolio is recorded as a component of GAAP net income. The estimated fair value adjustments for our investments in European securitizations and other securities are recorded as a component of accumulated other comprehensive income within shareholders’ equity. A charge to GAAP net income is recorded only if an other than temporary impairment is identified within our European portfolio or other investments. While RAIT believes the estimated fair values of these asset classes are affected by any related credit quality issues, under GAAP, no separate loan loss reserve is established.

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Securitization Summary

Through June 30, 2008, our management team has structured and manages 13 CDOs, including CDOs structured at Taberna prior to our merger with it as follows: Taberna Preferred Funding I, Ltd., or Taberna I, Taberna Preferred Funding II, Ltd., or Taberna II, Taberna Preferred Funding III, Ltd., or Taberna III, Taberna Preferred Funding IV, Ltd., or Taberna IV, Taberna Preferred Funding V, Ltd., or Taberna V, Taberna Preferred Funding VI, Ltd., or Taberna VI, Taberna Preferred Funding VII, Ltd., or Taberna VII, Taberna Preferred Funding VIII, Ltd., or Taberna VIII, Taberna Preferred Funding IX, Ltd., or Taberna IX, Taberna Europe CDO I, P.L.C., or Taberna Europe I, Taberna Europe CDO II, P.L.C., or Taberna Europe II, RAIT CRE CDO I, Ltd., or RAIT I and RAIT CRE CDO II, Ltd., or RAIT II, all of which we manage. Set forth below is certain information about each CDO as of June 30, 2008 (dollars in millions):

				RAIT’s Retained Interests
CDO	Type Of Collateral	Total Collateral Amount		Investment Grade Debt		Non Investment Grade Debt		Equity Retained		Total Investment		Value of Retained Interests on a GAAP Basis (1)		Value of Retained Interests on an Economic Book Value Basis (1)
Taberna I (2)	TruPS, subordinated debt, CMBS and unsecured REIT notes	$	663.0	$	3.4	$	—	$	0.3	$	3.7	$	0.3	$	0.3
Taberna II (2)	TruPS, subordinated debt, CMBS and unsecured REIT notes		983.0		—		13.0		44.5		57.5		—		—
Taberna III (3)	TruPS, subordinated debt, CMBS and unsecured REIT notes		745.0		17.0		23.0		30.3		70.3		195.3		70.3
Taberna IV (3)	TruPS, subordinated debt, CMBS and unsecured REIT notes		650.0		6.8		24.4		26.0		57.2		192.6		57.2
Taberna V (2)	TruPS, subordinated debt, CMBS and unsecured REIT notes		700.0		—		13.0		19.7		32.7		—		—
Taberna VI (3)	TruPS, subordinated debt, senior secured loans, CMBS and unsecured REIT notes		671.3		5.5		3.5		30.0		39.0		204.2		39.0
Taberna VII (3)	TruPS, subordinated debt, first mortgages, CMBS and unsecured REIT notes		633.7		17.5		21.0		30.8		69.3		126.6		69.3
Taberna VIII (4)	TruPS, subordinated debt, first mortgages, CMBS and unsecured REIT notes		735.0		35.0		33.0		60.0		128.0		407.9		128.0
Taberna IX (5)	TruPS, subordinated debt, first mortgages, CMBS and unsecured REIT notes		743.3		89.0		45.0		52.5		186.5		248.6		185.4
Taberna Europe I (6) (7)	Subordinated debt, senior loans, CMBS, other real estate-related assets and financial institution obligations		945.3		—		22.1		17.7		39.8		27.9		27.9
Taberna Europe II (6) (7) (8)	Subordinated debt, senior loans, CMBS, other real estate-related assets and financial institution obligations		1,418.0		—		3.2		27.6		30.8		15.1		15.1
RAIT I (9)	Commercial mortgages and mezzanine loans		984.6		—		35.0		165.0		200.0		184.3		200.0
RAIT II (9)	Commercial mortgages and mezzanine loans		810.6		55.5		30.5		110.2		196.2		168.3		196.2
TOTAL		$	10,682.8	$	229.7	$	266.7	$	614.6	$	1,111.0	$	1,771.1	$	988.7

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(1) These columns represent the basis of our retained interests in these entities under GAAP principles and under our definition of economic book value. The difference between the two columns represents our unrealized gains (losses) recognized in excess of our value of risk that is used to reconcile our Tangible Book Value to Economic Book Value. See “Performance Measures-Economic Book Value” below for a discussion of how we calculate the value of retained interests on an Economic Book Value basis. Economic book value is not intended to represent fair value.

(2) These CDOs are managed and are not consolidated. These CDOs are currently failing several of their respective over-collateralization tests due to collateral defaults and are re-directing approximately $1.5 million of currently available cash flow, in the aggregate on a quarterly basis, associated with our retained interests, to repay principal on senior debt. Additionally, while we are collecting $1.2 million of senior management fees on these CDOs, we are not collecting $1.2 million of our subordinate management fees.

(3) These CDOs are managed and consolidated CDOs. These CDOs are currently failing several of their respective over-collateralization tests due to collateral defaults and are re-directing approximately $3.4 million of currently available cash flow, in the aggregate on a quarterly basis, associated with our retained interests, to repay principal on senior debt. However, we are receiving $0.2 million of cash flow, in the aggregate on a quarterly basis, associated with our retained interests. Additionally, while we are collecting $1.4 million of senior management fees on these CDOs, we are not collecting $1.4 million of our subordinate management fees.

(4) This CDO is managed and consolidated. This CDO cured its failing over-collateralization tests as of June 30, 2008 and will be paying cash flow based upon its respective payment priorities in August 2008. We expect to receive approximately $4.7 million of currently available cash flow, on a quarterly basis, associated with our retained interests and $0.4 million and $0.4 million of senior and subordinated management fees on a quarterly basis.

(5) This CDO is managed and consolidated. This CDO is performing and paying cash flow based upon its respective payment priorities. We receive approximately $4.1 million of cash flow, on a quarterly basis, associated with our retained interests and $0.2 million and $0.4 million of senior and subordinated management fees, respectively, on a quarterly basis. This CDO went effective in January 2008.

(6) These CDOs are managed CDOs and are not consolidated. Each of these CDOs is performing and paying cash flow based upon respective payment priorities within its respective indenture. We are receiving $1.6 million of currently available cash flow, in the aggregate on a quarterly basis, associated with our retained interests. Additionally, we are collecting, in the aggregate on a quarterly basis, $1.2 million of senior management fees on these CDOs and $0.9 million of subordinate management fees.

(7) Amounts presented related to these CDOs are converted to U.S. dollars based on U.S. dollar to Euro exchange rates as of June 30, 2008.

(8) This securitization is currently in its “ramp” period, which means that the securitization is still acquiring collateral. This amount represents the total amount of collateral expected to be owned by the CDO when the ramp period closes. S&P has placed the senior debt securities issued by this CDO on negative watch pending rating agency confirmation in September 2008. If rating agency confirmation is not obtained, the CDO will re-direct all available cash flow to repay principal on senior debt until such time as the CDO is confirmed by the rating agencies.

(9) These CDOs are managed and consolidated commercial real estate, or CRE, CDOs. Each of these CDOs is performing and paying cash flow based upon its respective payment priorities. We receive approximately $18.5 million of cash flow, quarterly, associated with our retained interests.

The equity securities that we own in the CDOs shown in the table are subordinate in right of payment and in liquidation to the collateralized debt securities issued by the CDOs. We may also own common shares, or the non-economic residual interest, in certain of the entities above.

The investors that acquire interests in our CDOs include large, international financial institutions, funds, high net worth individuals and private investors. We do not consolidate Taberna I, Taberna II, Taberna V, Taberna Europe I and Taberna Europe II for financial reporting purposes. We consolidate Taberna III, Taberna IV, Taberna VI, Taberna VII, Taberna VIII, Taberna IX, RAIT I and RAIT II for financial reporting purposes.

Through June 30, 2008, we completed six securitizations of residential mortgage loans, which had aggregate unpaid principal balances of approximately $3.8 billion as of June 30, 2008. The following table summarizes the total collateral amount, our retained interests and loan delinquencies greater than 60 days for each of the six securitizations as of June 30, 2008 (dollars in millions):

	Total Collateral Amount		Our Retained Interests (1)		Loan Delinquencies > 60 days (2)
Bear Stearns ARM Trust 2005-7	$	404.0	$	32.9	2.7	%
Bear Stearns ARM Trust 2005-9		852.7		51.5	1.6	%
Citigroup Mortgage Loan Trust 2005-1		566.6		43.1	1.0	%
CWABS Trust 2005 HYB9		785.1		43.9	9.3	%
Merrill Lynch Mortgage Investors Trust, Series 2005-A9		671.7		45.3	2.6	%
Merrill Lynch Mortgage Backed Securities Trust, Series 2007-2		547.3		23.8	3.4	%
Total	$	3,827.4	$	240.5	3.6	%

(1) We have retained all of the “equity” interests in these securitizations. All of the debt issued by these securitizations that was not retained by us is rated “AAA” by various rating agencies.

(2) Based on Total Collateral Amount as of June 30, 2008. Our total loan loss reserve associated with our residential mortgage portfolio was $17.0 million as of June 30, 2008.

Performance Measures

We use adjusted earnings, total fees generated, assets under management, or AUM, and economic book value as tools to measure our financial and operating performance. The following defines these measures and describes their relevance to our financial and operating performance:

• Adjusted Earnings—We measure our performance using adjusted earnings in addition to net income (loss). Adjusted earnings represents net income (loss) available to common shares, computed in accordance with GAAP, before depreciation, amortization of intangible assets, provision for losses, changes in fair value of financial instruments, net of minority interests, unrealized (gains) losses on hedges, interest cost of hedges, net of minority interests, asset impairments, net of minority interests, capital gains (losses), net gain on deconsolidation of VIEs, share-based compensation, write-off of unamortized deferred financing fees, deferred fee revenue and our deferred tax provisions. These items are recorded in accordance with GAAP and are typically non-cash items that do not impact our operating performance or dividend paying ability.

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Management views adjusted earnings as a useful and appropriate supplement to GAAP net income (loss) because it helps us evaluate our performance without the effects of certain GAAP adjustments that may not have a direct financial impact on our current operating performance and our dividend paying ability. We use adjusted earnings to evaluate the performance of our investment portfolios, our ability to generate fees, our ability to manage our expenses and our dividend paying ability before the impact of non-cash adjustments recorded in accordance with GAAP. We believe this is a useful performance measure for investors to evaluate these aspects of our business as well. The most significant adjustments we exclude in determining adjusted earnings are amortization of intangible assets, provision for losses, changes in fair value of financial instruments, asset impairments, capital gains (losses) and share-based compensation. Management excludes all such items from its calculation of adjusted earnings because these items are not charges or losses which would impact our current operating performance or dividend paying ability. By excluding these significant items, adjusted earnings reduces an investor’s understanding of our operating performance by excluding: (i) management’s expectation of possible losses from our investment portfolio or non-performing assets that may impact future operating performance or dividend paying ability, (ii) the allocation of non-cash costs of generating fee revenue during the periods in which we are receiving such revenue, and (iii) share based compensation required to retain and incentivize our management team.

Adjusted earnings, as a non-GAAP financial measurement, does not purport to be an alternative to net income (loss) determined in accordance with GAAP, or a measure of operating performance or cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. Instead, adjusted earnings should be reviewed in connection with net income (loss) and cash flows from operating, investing and financing activities in our consolidated financial statements to help analyze management’s expectation of potential future losses from our investment portfolio and other non-cash matters that impact our financial results. Adjusted earnings and other supplemental performance measures are defined in various ways throughout the REIT industry. Investors should consider these differences when comparing our adjusted earnings to these other REITs.

During the six-month period ended June 30, 2008, we revised our definition of adjusted earnings to exclude capital gains (losses). Capital gains (losses), while economic gains or losses, do not currently impact operating performance or dividend paying ability. This revision resulted in an increase of $2.2 million to the computation of adjusted earnings for the three-month and six-month periods ended June 30, 2007.

The table below reconciles the differences between reported net income available to common shares and adjusted earnings for the three-month and six-month periods ended June 30, 2008 and 2007 (dollars in thousands):

	For the Three-Month Periods Ended June 30						For the Six-Month Periods Ended June 30
	2008			2007			2008			2007
Net income available to common shares, as reported	$	114,450		$	27,388		$	244,566		$	47,736
Add (deduct):
Provision for losses		25,310			845			35,583			4,563
Depreciation expense		1,385			1,103			2,766			1,871
Amortization of intangible assets		6,094			14,289			13,165			28,578
Gains on extinguishment of debt		(8,662	)		—			(8,662	)		—
Change in fair value of financial instruments, net of allocation to minority interest of $(8,955) and $90,555 for the three-month and six-month periods ended June 30, 2008, respectively		(106,011	)		—			(262,351	)		—
Unrealized (gains) losses on interest rate hedges		66			(429	)		(15	)		(517	)
Interest cost of hedges, net of allocation to minority interest of $3,977 and $6,351 for the three-month and six-month periods ended June 30, 2008, respectively		(11,300	)		—			(17,906	)		—
Capital losses (1)		—			2,239			32,059			2,239
Asset impairments		9,629			—			20,323			—
Share-based compensation		2,453			2,781			4,298			5,737
Write-off of unamortized deferred financing costs		—			2,985			—			2,985
Fee income deferred (recognized)		(116	)		14,986			189			32,995
Deferred tax provision (benefit)		231			(10,577	)		1,223			(18,690	)
Adjusted earnings	$	33,529		$	55,610		$	65,238		$	107,497

(1) During the six-month period ended June 30, 2008, certain of our warehouse arrangements were terminated. We have recorded the estimated loss of our warehouse deposits as a component of the change in fair value of free-standing derivatives in our consolidated statement of operations.

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• Total Fees Generated—Total fees generated represents the total fees generated, without consideration for the deferral of fees, as yield adjustments, in accordance with GAAP. This data is useful to management as a gauge of our cash revenue as it drives earnings at our taxable REIT subsidiaries for distribution to us and ultimately to our shareholders. During the following periods, total fees generated reconciles to our GAAP fees and other income as follows (dollars in thousands):

	For the Three-Month Periods Ended June 30					For the Six-Month Periods Ended June 30
	2008			2007		2008		2007
Fee and other income, as reported	$	4,594		$	1,683	$	12,003	$	9,564
Add (deduct):
Asset management fees eliminated		4,172			5,750		8,561		10,238
Deferred structuring fees		—			5,788		—		11,413
Deferred (recognized) origination fees, net of amortization		(116	)		9,198		189		21,582
Total Fees Generated	$	8,650		$	22,419	$	20,753	$	52,797

• Assets Under Management—AUM represents the total assets that we own or are managing for third parties. While not all AUM generates fee income, it is an important operating measure to gauge our asset growth, volume of originations, size and scale of our operations and our financial performance. AUM includes our total investment portfolio and assets associated with unconsolidated CDOs for which we derive asset management fees. As of June 30, 2008, our total AUM was $14.5 billion, an increase of $0.2 billion, or 1.4%, from $14.3 billion as of December 31, 2007.

• Economic Book Value—We define Economic Book Value as shareholders’ equity, determined in accordance with GAAP, adjusted for the following items: liquidation value of preferred shares, unamortized intangible assets, goodwill, and losses recognized in excess of our investments at risk. Economic book value is a non-GAAP financial measurement, and does not purport to be an alternative to reported shareholders’ equity, determined in accordance with GAAP, as a measure of book value.

Management views economic book value as a useful and appropriate supplement to shareholders’ equity and book value per share. The measure serves as an additional measure of our value because it facilitates evaluation of us without the effects of realized or unrealized gains (losses) on investments in excess of our total investment in that securitization, which is our maximum value at risk. Under GAAP, we record certain of our assets, liabilities and derivatives of our consolidated entities, primarily our consolidated securitizations, at fair value. The net fair value adjustments recognized in our financial statements that reduced our total investment below zero are added back to shareholders’ equity in arriving at economic book value and the net fair value adjustments recognized in our financial statements that are in excess of our total investment are deducted from shareholders’ equity in arriving at economic book value. In performing these computations, we exclude the impact of unrealized fair value adjustments associated with derivatives on economic book value.

Economic book value should be reviewed in connection with shareholders’ equity as set forth in our consolidated balance sheets, to help analyze our value to investors. Economic book value is defined in various ways throughout the REIT industry. Investors should consider these differences when comparing our economic book value to that of other REITs. We do not intend economic book value to represent the fair value of our retained interests in our securitizations or the fair value of our shareholders’ equity available to common shareholders.

The table below reconciles the differences between reported shareholders’ equity, book value, tangible book value and economic book value as of June 30, 2008 and December 31, 2007 (dollars in thousands):

	As of June 30, 2008						As of December 31, 2007
	Amount			Per Share (2)			Amount			Per Share (2)
Shareholders’ equity, as reported	$	1,877,534		$	29.42		$	579,243		$	9.49
Add (deduct):
Liquidation value of preferred shares (1)		(165,458	)		(2.59	)		(165,458	)		(2.71	)
Book Value		1,712,076			26.83			413,785			6.78
Unamortized intangible assets		(42,958	)		(0.67	)		(56,123	)		(0.92	)
Tangible Book Value		1,669,118			26.16			357,662			5.86
Unrealized (gains) losses recognized in excess of value at risk		(782,417	)		(12.26	)		284,002			4.66
Economic Book Value	$	886,701		$	13.90		$	641,664		$	10.52

(1) Based on 2,760,000 Series A preferred shares, 2,258,300 Series B preferred shares, and 1,600,000 Series C preferred shares, all of which have a liquidation preference of $25.00 per share.

(2) Based on 63,808,255 and 61,018,231 common shares outstanding as of June 30, 2008 and December 31, 2007, respectively.

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REIT Taxable Income

To qualify as a REIT, we are required to make annual distributions to our shareholders in an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, to avoid certain U.S. federal excise taxes, we are required to annually make distributions to our shareholders in an amount at least equal to designated percentages of our net taxable income. Because we expect to make distributions based on the foregoing requirements, and not based on our earnings computed in accordance with GAAP, we expect that our distributions may at times be more or less than our reported earnings as computed in accordance with GAAP.

Total taxable income and REIT taxable income are non-GAAP financial measurements, and do not purport to be an alternative to reported net income determined in accordance with GAAP as a measure of operating performance or to cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. Our total taxable income represents the aggregate amount of taxable income generated by us and by our domestic and foreign TRSs. REIT taxable income is calculated under U.S. federal tax laws in a manner that, in certain respects, differs from the calculation of net income pursuant to GAAP. REIT taxable income excludes the undistributed taxable income of our domestic TRSs, which is not included in REIT taxable income until distributed to us. Subject to TRS value limitations, there is no requirement that our domestic TRSs distribute their earnings to us. REIT taxable income, however, generally includes the taxable income of our foreign TRSs because we will generally be required to recognize and report our taxable income on a current basis. Since we are structured as a REIT and the Internal Revenue Code requires that we distribute substantially all of our net taxable income in the form of distributions to our shareholders, we believe that presenting investors with the information management uses to calculate our net taxable income is useful to investors in understanding the amount of the minimum distributions that we must make to our shareholders so as to comply with the rules set forth in the Internal Revenue Code. Because not all companies use identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to other similarly titled measures prepared and reported by other companies.

The table below reconciles the differences between reported net income available to common shares, total taxable income and estimated REIT taxable income for the three-month and six-month periods ended June 30, 2008 and 2007 (dollars in thousands):

	For the Three-Month Periods Ended June 30						For the Six-Month Periods Ended June 30
	2008			2007			2008			2007
Net income available to common shares, as reported	$	114,450		$	27,388		$	244,566		$	47,736
Add (deduct):
Provision for losses, net of charge-offs		19,149			845			29,422			4,563
Domestic TRS book-to-total taxable income differences:
Income tax benefit		(2,293	)		(4,657	)		(2,434	)		(5,080	)
Fees received and deferred in consolidation		148			14,840			307			32,849
Stock compensation and other temporary tax differences		(2,931	)		1,645			867			2,648
Capital losses not offsetting capital gains and other temporary tax differences		—			—			32,059			—
Asset impairments		9,629			—			20,323			—
Change in fair value of financial instruments, net of minority interest of ($8,955) and 90,555 for the three-month and six-month periods ended June 30, 2008, respectively		(106,011	)		—			(262,351	)		—
Amortization of intangible assets		6,094			14,289			13,165			28,578
CDO investments aggregate book-to-taxable income differences(1)		(22,971	)		1,410			(34,503	)		(379	)
Accretion of (premiums) discounts		2,754			1,085			2,271			1,660
Other book to tax differences		(701	)		—			(301	)		(123	)
Total taxable income		17,317			56,845			43,391			112,452
Less: Taxable income attributable to domestic TRS entities		3,979			(13,809	)		2,236			(35,627	)
Plus: Dividends paid by domestic TRS entities		5,500			11,000			12,000			27,250
Estimated REIT taxable income (prior to deduction for dividends paid)	$	26,796		$	54,036		$	57,627		$	104,075

(1) Amounts reflect the aggregate book-to-total taxable income differences and are primarily comprised of (a) unrealized gains on interest rate hedges within CDO entities that Taberna consolidated, (b) amortization of original issue discounts and debt issuance costs and (c) differences in tax year-ends between Taberna and its CDO investments.

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Results of Operations

Three-Month Period Ended June 30, 2008 Compared to the Three-Month Period Ended June 30, 2007

Revenue

Investment interest income. Investment interest income decreased $56.6 million, or 24.2%, to $177.3 million for the three-month period ended June 30, 2008 from $233.9 million for the three-month period ended June 30, 2007. This net decrease was primarily attributable to: decreases in interest income of $33.1 million on approximately $1.5 billion of investments resulting from the deconsolidation of our Taberna II and Taberna V CDOs during the latter half of 2007, $12.6 million from the sale of other securities subsequent to June 30, 2007, and $6.3 million from approximately $514.2 million in repayments on our residential mortgage loans; these decreases were offset by an increase in interest income of $12.5 million from the closing and consolidation of Taberna IX in June 2007. The remaining decrease was primarily related to the reduction in short-term LIBOR from June 30, 2007 through June 30, 2008 of approximately 2.6% and $558.1 million in total principal amount of investments on non-accrual status as of June 30, 2008.

Investment interest expense. Investment interest expense decreased $61.0 million, or 33.7%, to $119.8 million for the three-month period ended June 30, 2008 from $180.8 million for the three-month period ended June 30, 2007. This net decrease was primarily attributable to: decreases in interest expense of $26.0 million on approximately $1.5 billion of indebtedness resulting from the deconsolidation of our Taberna II and Taberna V CDOs during the latter half of 2007, $13.2 million from reductions in our repurchase agreements and other indebtedness used to finance various investments on a short-term basis, $6.7 million from repayments of our residential mortgage-backed securities used to finance our residential mortgage portfolio and $3.0 million related to the write-off of unamortized deferred financing costs resulting from the termination of a line of credit in April 2007; these decreases were offset by increases in interest expense of $6.9 million from the issuance of CDO notes payable from RAIT II in June 2007 and $6.8 million from the closing and consolidation of Taberna IX in June 2007. The remaining decrease was primarily related to the reduction in short-term LIBOR from June 30, 2007 through June 30, 2008 of approximately 2.6% and the presentation of interest cost of hedges in change in fair value of financial instruments during the three-month period ended June 30, 2008 due to the adoption of SFAS No. 159 on January 1, 2008.

Provision for losses. The provision for losses relates to our investments in residential mortgages and mortgage-related receivables acquired from Taberna and our commercial mortgage loan portfolio. The provision for losses increased by $24.5 million for the three-month period ended June 30, 2008 to $25.3 million as compared to $0.8 million for the three-month period ended June 30, 2007. Since December 31, 2007, our delinquencies in our residential mortgage portfolio have increased by $60.6 million, including $48.6 million in real estate-owned, bankruptcy or foreclosure property. Additionally, certain loans in our commercial loan portfolio have continued to deteriorate with our estimate of potential loss increasing. While we believe we have properly reserved for the possibility of losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue or adjust our loan loss reserve as circumstances or conditions change. As of June 30, 2008, $42.3 million of our commercial mortgages and mezzanine loans and $142.7 million of our residential mortgages and mortgage-related receivables were on non-accrual status.

Rental income. Rental income increased $1.3 million, or 47.8%, to $3.9 million for the three-month period ended June 30, 2008 from $2.6 million for the three-month period ended June 30, 2007. This increase was primarily attributable to three new properties, with total assets of approximately $82.5 million, acquired or consolidated since or during the three-month ended June 30, 2007.

Fee and other income. Fee and other income increased $2.9 million to $4.6 million for the three-month period ended June 30, 2008 from $1.7 million for the three-month period ended June 30, 2007. This increase was due to increased origination fees of $2.2 million and increased asset management fees of $0.7 million from our commercial loan and European activities during the three-month period ended June 30, 2008 as compared to the three-month period ended June 30, 2007.

Expenses

Compensation expense. Compensation expense increased $2.6 million, or 45.5%, to $8.4 million for the three-month period ended June 30, 2008 from $5.8 million for the three-month period ended June 30, 2007. This increase was due to increased compensation costs of $2.3 million associated with lower capitalized costs resulting from a reduction of commercial loan and domestic TruPS production, $0.7 million of increased compensation associated with operations in Europe, and $0.3 million increase in salary, bonus and other compensation costs offset by lower stock based compensation amortization of $0.7 million resulting from phantom unit forfeitures from our executives in December 2007.

Real estate operating expense. Real estate operating expense increased $1.2 million, or 44.1%, to $3.9 million for the three-month period ended June 30, 2008 from $2.7 million for the three-month period ended June 30, 2007. This increase was primarily attributable to three new properties, with total assets of approximately $82.5 million, acquired or consolidated since or during the three-month period ended June 30, 2007.

        General and administrative expense. General and administrative expense increased $1.1 million, or 19.4%, to $6.9 million for the three-month period ended June 30, 2008 from $5.8 million for the three-month period ended June 30, 2007. This increase is primarily due to $1.6 million of increased legal expenses related to the class action securities lawsuit offset by $0.5 million of decreased other general and administrative costs, including rent expense and travel and entertainment expense.

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Depreciation expense. Depreciation expense increased $0.3 million to $1.4 million for the three-month period ended June 30, 2008 from $1.1 million for the three-month period ended June 30, 2007. This increase was primarily attributable to three new properties, with total assets of approximately $82.5 million, acquired or consolidated since or during the three-month period ended June 30, 2007 as well as increased depreciation of furniture and fixtures we added since June 30, 2007.

Amortization of intangible assets. Intangible amortization represents the amortization of intangible assets acquired from Taberna on December 11, 2006. Amortization expense decreased $8.2 million, or 57.4%, to $6.1 million for the three-month period ended June 30, 2008 from $14.3 million for the three-month period ended June 30, 2007. This decrease resulted from the full amortization of some of the identified intangibles ($34.8 million had a useful life of one year) and $13.2 million in asset impairments recorded since June 30, 2007.

Other Income (Expenses)

Interest and other income. Interest and other income decreased $4.8 million to $0.1 million for the three-month period ended June 30, 2008 from $4.9 million for the three-month period ended June 30, 2007. This decrease is due to reduced average cash and restricted cash balances during the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 as well as reduced interest rates offered by financial institutions in 2008.

Losses on sale of assets. Losses on sale of assets was $0.1 million for the three-month period ended June 30, 2008 compared to $2.8 million for the three-month period ended June 30, 2007. These losses were associated with the sales of investments in securities during the three-month periods ended June 30, 2008 and 2007.

Gains on extinguishment of debt. Gains on extinguishment of debt during the three-month period ended June 30, 2008 are attributable to the repurchase of $21.0 million in aggregate principal amount of convertible senior notes from the market for a total purchase price of $11.9 million. As a result, we recorded a gain on extinguishment of debt of $8.6 million, net of $0.5 million deferred financing costs that were written off associated with these convertible senior notes.

Change in fair value of free-standing derivatives. The change in fair value of free-standing derivatives represents the earnings (loss) on (of) our first-dollar risk of loss associated with our warehouse facilities. During the six-month period ended June 30, 2008, our warehouse agreements terminated with the respective financial institutions. As such, we do not currently expect that we will recover our warehouse deposits. During the six-month period ended June 30, 2008, we have recorded a loss of $32.1 million on our warehouse deposits. The write-off of these warehouse deposits are our only exposure under these warehouse agreements and we have no further obligations thereunder.

Change in fair value of financial instruments. The change in fair value of financial instruments represents the financial assets, liabilities and derivatives whereby we have elected to record fair value adjustments under SFAS No. 159. Our election to record these assets at fair value was effective on January 1, 2008, the effective date of SFAS No. 159. Our SFAS No. 159 election impacted the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the three months ended June 30, 2008, the fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Three-Month Period Ended June 30, 2008
Change in fair value of trading securities and security-related receivables	$	(171,331	)
Change in fair value of CDO notes payable and trust preferred obligations		156,460
Change in fair value of derivatives		111,927
Change in fair value of financial instruments	$	97,056

Equity in income (loss) of equity method investments. Equity in loss of equity method investments increased $1.0 million to $1.0 million for the three-month period ended June 30, 2008 compared to approximately $0.1 million for the three-month period ended June 30, 2007. The increase relates to the accretion on our investment in a property that was accounted for under the equity method.

Asset impairments. For the three-month period ended June 30, 2008, we recorded asset impairments totaling $9.6 million that were associated with certain investments in available-for-sale securities and other assets for which we did not elect SFAS No. 159. In making this determination, management considered the estimated fair value of the investments to our cost bases, the financial condition of the related entity and our intent and ability to hold the investments for a sufficient period of time to recover our investments. For the identified investments, management believes full recovery is not likely and wrote down the investments to their current recovery value, or estimated fair value. Asset impairments were comprised of $2.7 million of other-than-temporary impairment in our available-for-sale securities and $6.9 million of other-than-temporary impairment in other assets.

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Income (loss) allocated to minority interest. Minority interest represents the earnings of consolidated entities allocated to third parties, including changes in the fair values of financial instruments discussed above. Minority interest decreased $10.8 million to $4.7 million of loss allocated to minority interest for the three-month period ended June 30, 2008 from $6.1 million of income allocated to minority interest for the three-month period ended June 30, 2007. This decrease is primarily attributable to the $9.0 million of loss allocated to minority interest associated with the change in fair value of financial instruments in 2008 when compared to zero in 2007.

Provision for income taxes. We maintain several domestic and foreign TRS entities that are subject to U.S. federal, state and local income taxes and foreign taxes. For the three-month period ended June 30, 2008, the provision for income taxes was a benefit of $2.3 million, a decrease of $2.4 million from $4.7 million for the three-month period ended June 30, 2007. This decrease is primarily attributable to operating losses at several of our domestic TRS entities during the three-month period ended June 30, 2008 as compared to operating income at these same entities during the comparable 2007 period.

Discontinued operations. Discontinued operations of $0.1 million during the three-month period ended June 30, 2007 related to one real estate property that was sold in September 2007. As of June 30, 2008, we do not have any discontinued operations.

Six-Month Period Ended June 30, 2008 Compared to the Six-Month Period Ended June 30, 2007

Revenue

Investment interest income. Investment interest income decreased $76.5 million, or 17.4%, to $362.6 million for the six-month period ended June 30, 2008 from $439.1 million for the six-month period ended June 30, 2007. This net decrease was primarily attributable to: decreases in interest income of $66.0 million on approximately $1.5 billion of investments resulting from the deconsolidation of our Taberna II and Taberna V CDOs during the latter half of 2007, $17.8 million from the sale of other securities subsequent to June 30, 2007 and $13.2 million from approximately $514.2 million in repayments on our residential mortgage loans; these decreases were offset by an increase in interest income of $39.1 million from the closing and consolidation of Taberna VIII in March 2007 and Taberna IX in June 2007. The remaining decrease was primarily related to the reduction in short-term LIBOR from June 30, 2007 through June 30, 2008 of approximately 2.6% and $558.1 million in total principal amount of investments on non-accrual status as of June 30, 2008.

Investment interest expense. Investment interest expense decreased $87.1 million, or 25.6%, to $252.8 million for the six-month period ended June 30, 2008 from $339.9 million for the six-month period ended June 30, 2007. This net decrease was primarily attributable to: decreases in interest expense of $51.3 million on approximately $1.5 billion of indebtedness resulting from the deconsolidation of our Taberna II and Taberna V CDOs during the latter half of 2007, $36.9 million from reductions in our repurchase agreements and other indebtedness used to finance various investments on a short-term basis, $14.1 million from repayments of our residential mortgage-backed securities used to finance our residential mortgage portfolio and $3.0 million related to the write-off of unamortized deferred financing costs resulting from the termination of a line of credit in April 2007; these decreases were offset by increases in interest expense of $16.6 million from the issuance of CDO notes payable from RAIT II in June 2007 and $20.4 million from the closing and consolidation of Taberna VIII on March 2007 and Taberna IX in June 2007. The remaining decrease was primarily related to the reduction in short-term LIBOR from June 30, 2007 through June 30, 2008 of approximately 2.6% and the presentation of interest cost of hedges in change in fair value of financial instruments during the six-month period ended June 30, 2008 due to the adoption of SFAS No. 159 on January 1, 2008.

Provision for losses. The provision for losses relates to our investments in residential mortgages and mortgage-related receivables acquired from Taberna and our commercial mortgage loan portfolio. The provision for losses increased by $31.0 million for the six-month period ended June 30, 2008 to $35.6 million as compared to $4.6 million for the six-month period ended June 30, 2007. Since December 31, 2007, our delinquencies in our residential mortgage portfolio have increased by $60.6 million, including $48.6 million in real estate-owned, bankruptcy or foreclosure property. Additionally, certain loans in our commercial loan portfolio have continued to deteriorate with our estimate of potential loss increasing. While we believe we have properly reserved for the possibility of losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue or adjust our loan loss reserve as circumstances or conditions change. As of June 30, 2008, $42.3 million of our commercial mortgages and mezzanine loans and $142.7 million of our residential mortgages and mortgage-related receivables were on non-accrual status.

Rental income. Rental income increased $2.7 million, or 53.4%, to $7.7 million for the six-month period ended June 30, 2008 from $5.0 million for the six-month period ended June 30, 2007. This increase was primarily attributable to three new properties, with total assets of approximately $82.5 million, acquired or consolidated since or during the three-month period ended June 30, 2007.

Fee and other income. Fee and other income increased $2.4 million, or 25.5%, to $12.0 million for the six-month period ended June 30, 2008 from $9.6 million for the six-month period ended June 30, 2007. This increase was due to origination fees of $4.4 million and increased asset management fees of $3.6 million from our commercial loan and European origination activities during the six-month period ended June 30, 2008 as compared to the six-month period ended June 30, 2007, offset by a structuring fee of $5.6 million that we received in connection with the completion of Taberna Europe I in January 2007.

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Expenses

Compensation expense. Compensation expense increased $2.4 million, or 17.2%, to $16.6 million for the six-month period ended June 30, 2008 from $14.2 million for the six-month period ended June 30, 2007. This increase was due to increased compensation costs of $4.0 million associated with lower capitalized costs due to a reduction of commercial loan and domestic TruPS production, and $1.1 million of increased compensation associated with operations in Europe. These increases were offset by lower stock based compensation amortization of $1.5 million resulting from phantom unit forfeitures by our executives in December 2007, $0.7 million from the vesting of certain restricted share awards subsequent to June 30, 2007 and a $0.4 million reduction in salary, bonus and other compensation costs.

Real estate operating expense. Real estate operating expense increased $2.1 million, or 39.4%, to $7.4 million for the six-month period ended June 30, 2008 from $5.3 million for the six-month period ended June 30, 2007. This increase was primarily attributable to three new properties, with total assets of approximately $82.5 million, acquired or consolidated since or during the three-month period ended June 30, 2007.

General and administrative expense. General and administrative expense decreased $0.4 million, or 2.9%, to $11.7 million for the six-month period ended June 30, 2008 from $12.1 million for the six-month period ended June 30, 2007. This decrease is primarily due a $1.0 million fee paid to Eton Park Capital Management for providing a standby commitment to purchase equity in the Taberna Europe I transaction that we closed in January 2007. No such fees were paid during the six-month period ended June 30, 2008. In addition, there were $1.4 million of increased legal expenses related to the class action securities lawsuit and professional fees and $0.5 million of increased insurance expense offset by $1.3 million of decreased other general and administrative costs, including $0.5 million of travel and entertainment expense, $0.5 million of costs related to deals that will no longer be pursued and $0.3 million of rent expense.

Depreciation expense. Depreciation expense increased $0.9 million to $2.8 million for the six-month period ended June 30, 2008 from $1.9 million for the six-month period ended June 30, 2007. This increase was primarily attributable to three new properties, with total assets of approximately $82.5 million, acquired or consolidated since or during the three-month period ended June 30, 2007 as well as increased depreciation of furniture and fixtures we added since June 30, 2007.

Amortization of intangible assets. Intangible amortization represents the amortization of intangible assets acquired from Taberna on December 11, 2006. Amortization expense decreased $15.4 million, or 53.9%, to $13.2 million for the six-month period ended June 30, 2008 from $28.6 million for the six-month period ended June 30, 2007. This decrease resulted from the full amortization of some of the identified intangibles ($34.8 million had a useful life of one year) and $13.2 million in asset impairments recorded since June 30, 2007.

Other Income (Expenses)

Interest and other income. Interest and other income decreased $8.2 million to $1.2 million for the six-month period ended June 30, 2008 from $9.4 million for the six-month period ended June 30, 2007. This decrease is due to reduced average cash and restricted cash balances during the six months ended June 30, 2008 as compared to the six months ended June 30, 2007 as well as reduced interest rates offered by financial institutions in 2008.

Losses on sale of assets. Losses on sale of assets was $0.1 million for the six-month period ended June 30, 2008 compared to $2.8 million for the six-month period ended June 30, 2007. These losses were associated with the sales of investments in securities during the six-month periods ended June 30, 2008 and 2007.

Gains on extinguishment of debt. Gains on extinguishment of debt during the six-month period ended June 30, 2008 are attributable to the repurchase of $21.0 million in aggregate principal amount of convertible senior notes from the market for a total purchase price of $11.9 million. As a result, we recorded a gain on extinguishment of debt of $8.6 million, net of $0.5 million deferred financing costs that were written off associated with these convertible senior notes.

Change in fair value of free-standing derivatives. The change in fair value of free-standing derivatives represents the earnings (loss) on (of) our first-dollar risk of loss associated with our warehouse facilities. During the six-month period ended June 30, 2008, our warehouse agreements terminated with the respective financial institutions. As such, we do not currently expect that we will recover our warehouse deposits. During the six-month period ended June 30, 2008, we have recorded a loss of $32.1 million on our warehouse deposits. The write-off of these warehouse deposits are our only exposure under these warehouse agreements and we have no further obligations thereunder.

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Change in fair value of financial instruments. The change in fair value of financial instruments represents the financial assets, liabilities and derivatives whereby we have elected to record fair value adjustments under SFAS No. 159. Our election to record these assets at fair value was effective on January 1, 2008, the effective date of SFAS No. 159. Our SFAS No. 159 election impacted the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the six-month period ended June 30, 2008, the fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Six-Month Period Ended June 30, 2008
Change in fair value of trading securities and security-related receivables	$	(612,605	)
Change in fair value of CDO notes payable and trust preferred obligations		998,020
Change in fair value of derivatives		(32,509	)
Change in fair value of financial instruments	$	352,906

Equity in income (loss) of equity method investments. Equity in loss of equity method investments increased $0.9 million to $0.9 million for the six-month period ended June 30, 2008 compared to less than $0.1 million for the six-month period ended June 30, 2007. The increase relates to the accretion on an investment in a property that was accounted for under the equity method.

Asset impairments. For the six-month period ended June 30, 2008, we recorded asset impairments totaling $20.3 million that were associated with certain investments in loans, available-for-sale securities and other assets for which we did not elect SFAS No. 159. In making this determination, management considered the estimated fair value of the investments to our cost bases, the financial condition of the related entity and our intent and ability to hold the investments for a sufficient period of time to recover our investments. For the identified investments, management believes full recovery is not likely and wrote down the investments to their current recovery value, or estimated fair value. Asset impairments were comprised of $8.5 million of other-than-temporary impairment in our investments in loans, $4.9 million of other-than-temporary impairment in available-for-sale securities and $6.9 million of other-than-temporary impairment in other assets.

Income (loss) allocated to minority interest. Minority interest represents the earnings of consolidated entities allocated to third parties, including changes in the fair values of financial instruments discussed above. Income allocated to minority interest increased $87.4 million to $99.3 million for the six-month period ended June 30, 2008 from $11.9 million for the six-month period ended June 30, 2007. This increase is primarily attributable to $90.6 million of income allocated to minority interests due to the change in fair value of financial instruments in 2008 when compared to zero in 2007.

Provision for income taxes. We maintain several domestic and foreign TRS entities that are subject to U.S. federal, state and local income taxes and foreign taxes. For the six-month period ended June 30, 2008, the provision for income taxes was a benefit of $2.4 million, a decrease of $2.7 million from $5.1 million for the six-month period ended June 30, 2007. This decrease is primarily attributable to operating losses at several of our domestic TRS entities during the six-month period ended June 30, 2008 as compared to operating income at these same entities during the comparable 2007 period.

Discontinued operations. Discontinued operations of $0.2 million during the six-month period ended June 30, 2007 related to one real estate property that was sold in September 2007. As of June 30, 2008, we do not have any discontinued operations.

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Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay distributions and other general business needs. The disruption in the credit markets discussed above has reduced our liquidity and capital resources. As discussed above, due to current market conditions, the cash flow to us from a number of the securitizations we sponsored has been reduced and we do not expect to sponsor new securitizations to provide us with long-term financing for the foreseeable future. We are seeking to expand our use of secured lines of credit and other financing strategies that permit us to originate investments generating attractive returns while preserving our capital, such as participations and joint venturing arrangements. We expect to continue to receive substantial cash flow from our investment portfolio, though as discussed above, a number of our securitizations are currently failing several of their respective over-collateralization tests due to collateral defaults and are re-directing cash flow associated with our retained interests to repay principal on senior debt. We believe our available cash and restricted cash balances, funds available under our secured credit facilities, repurchase agreements and other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months. Should our liquidity needs exceed our available sources of liquidity, we believe that our CDO and investment securities could be sold directly to raise additional cash. While we expect to expand our business, we may not be able to obtain additional financing when we desire to do so, or may not be able to obtain desired financing on terms and conditions acceptable to us. If we fail to obtain additional financing, the pace of our growth could be reduced.

Our primary cash requirements are as follows:

• to distribute a minimum of 90% of our net taxable income and to make investments in a manner that enables us to maintain our qualification as a REIT;

• to make investments;

• to repay our indebtedness under our repurchase agreements;

• to pay costs associated with future borrowings, including interest, incurred to finance our investment strategies;

• to pay employee salaries and incentive compensation; and

• to pay U.S. federal, state, and local taxes of our TRSs.

We intend to meet these liquidity requirements through the following:

• the use of our cash and cash equivalent balances of $59.2 million as of June 30, 2008;

• cash generated from operating activities, including net investment income from our investment portfolio, fee income received by Taberna Capital and RAIT Partnership through their collateral management agreements and origination fees received by Taberna Securities. The collateral management fees paid by CDO entities, although eliminated for financial reporting purposes with respect to the consolidated CDOs, represent cash inflows to us, and, after the payment of income taxes, the remaining cash may be used for our operating expenses or distributions; and

• proceeds from future borrowings or offerings of our common and preferred shares.

Cash Flows

As of June 30, 2008 and June 30, 2007, we maintained cash and cash equivalents of approximately $59.2 million and $305.6 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Six-Month Periods Ended June 30
	2008			2007
Cash flow from operating activities	$	82,869		$	101,916
Cash flow from investing activities		325,805			(1,965,744	)
Cash flow from financing activities		(477,478	)		2,070,029
Net change in cash and cash equivalents		(68,804	)		206,201
Cash and cash equivalents at beginning of period		127,987			99,367
Cash and cash equivalents at end of period	$	59,183		$	305,568

Our principal source of cash flows is from our investing activities. Our decreased cash flow from operating activities is primarily due to the reduced fees generated in 2008 as compared to 2007 as well as the increase in loans on non-accrual in 2008 as compared to 2007.

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The cash inflow from our investing activities during 2008 as compared to cash outflow in 2007 reflects reduction in the volume of investments originated or purchased in 2008 as compared to 2007. Our cash inflow from investing activities resulted from $348.5 million principal repayments on loans and investments.

The cash outflow from our financing activities during 2008 as compared to a cash inflow in 2007 is due to a reduction in our capital raised in 2008 as compared to 2007. During the six months ended June 30, 2008, we have aggressively repaid short-term indebtedness of $91.7 million using available cash resources and cash flow generated during the current year.

For the three-month and six-month periods ended June 30, 2008, the cash flows generated by our investment portfolios was as follows (dollars in thousands):

	Assets Under Management		Gross Cash Flow for the Three-Month Period Ended June 30, 2008 (1)		Gross Cash Flow for the Six-Month Period Ended June 30, 2008 (1)
Commercial real estate portfolio (2)	$	2,080,772	$	27,760	$	52,897
Residential mortgage portfolio		3,829,365		4,958		10,062
European portfolio		2,086,178		3,606		7,067
U.S. TruPS portfolio (3)		6,524,318		9,173		21,023
Other investments		1,800		252		601
Total	$	14,522,433	$	45,749	$	91,650

(1) Cash flows for the three-month and six-month periods ended June 30, 2008 may not be indicative of cash flows for subsequent quarterly or annual periods. See “Forward-looking Statements” section above for risks and uncertainties that could cause our gross cash flow for subsequent quarterly or annual periods to differ materially from these amounts.

(2) Our commercial real estate portfolio is comprised of $1.6 billion of assets collateralizing RAIT I and RAIT II, $270.6 million of investments in real estate interests and $248.8 million of commercial mortgages and mezzanine loans included on our consolidated balance sheet.

(3) Our U.S. TruPS portfolio is comprised of assets collateralizing Taberna III, Taberna IV, and Taberna VI through Taberna IX, and our interests in Taberna I, Taberna II and Taberna V, and includes TruPS and subordinated debentures, unsecured REIT note receivables, CMBS receivables, other securities, commercial mortgages and mezzanine loans.

We generated approximately $91.7 million of cash flow for the six-month period ended June 30, 2008 from our portfolios and asset management activities before operating expenses. We incurred approximately $14.7 million in corporate interest expense related to our convertible senior notes outstanding and $6.8 million in preferred share dividends during the six-month period ended June 30, 2008. The remaining net cash flow from operations was used to repay indebtedness, pay operating expenses, including cash compensation expense and general and administrative expenses, and to pay distributions to our shareholders.

Our assets under management have historically been financed on a long-term basis through securitizations and our rights to cash flow from these portfolios are dependent on the terms of the debt and equity securities we hold in these securitizations. Several of our securitizations are currently failing several of their respective over-collateralization tests due to collateral defaults and are re-directing cash flow, associated with our retained interests, to repay principal on senior debt. See “Securitization Summary” above.

At June 30, 2008, we had approximately $47.1 million of indebtedness under repurchase agreements with two major investment banks. We have repaid $91.7 million in repurchase agreement indebtedness during the six months ended June 30, 2008 and expect to significantly reduce the amount of borrowings under repurchase agreements during the remainder of 2008. We have maintained adequate liquidity and met all required margin calls.

Our two commercial real estate securitized financing arrangements include a revolving credit option that allows us to repay the AAA rated debt tranches totaling $475.0 million as loan repayments occur, and then draw up to the available committed amounts during the first five years of each facility. We have $23.5 million of unused capacity as of June 30, 2008, subject to future funding commitments and borrowing requirements. We also have $90.0 million of capacity under secured credit facilities with three commercial banks at June 30, 2008 of which $53.5 million was outstanding and $36.5 million was available for future commercial loans.

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Capitalization

Debt Financing.

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within CDOs or mortgage securitizations. The following table summarizes our indebtedness as of June 30, 2008 (dollars in thousands):

Description	Unpaid Principal Balance		Carrying Amount		Interest Rate Terms		Current Weighted- Average Interest Rate		Contractual Maturity
Repurchase agreements	$	47,106	$	47,106	3.2% to 3.7	%	3.3	%	Aug. 2008 (1)
Secured credit facilities and other indebtedness		151,523		151,523	4.5% to 8.1	%	6.1	%	Aug. 2008 to 2037
Mortgage-backed securities issued (2)(3)(4)		3,593,375		3,564,475	4.6% to 5.8	%	5.1	%	2035
Trust preferred obligations (5)		362,500		259,111	4.2% to 10.1	%	6.5	%	2035
CDO notes payable – amortized cost(2)(6)		1,431,250		1,431,250	2.8% to 6.5	%	3.2	%	2036 to 2045
CDO notes payable – fair value (2) (5)(7)		3,646,142		1,100,972	2.7% to 10.0	%	3.8	%	2035 to 2038
Convertible senior notes		404,000		404,000	6.9	%	6.9	%	2027
Total indebtedness	$	9,635,896	$	6,958,437			4.7	%

(1) We intend to repay or re-negotiate and extend our repurchase agreements as they mature.

(2) Excludes mortgage-backed securities and CDO notes payable purchased by us which are eliminated in consolidation.

(3) Collateralized by $3,829.4 million principal amount of residential mortgages and mortgage-related receivables. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(4) Rates generally follow the terms of the underlying mortgages, which are fixed for a period of time and variable thereafter.

(5) Relates to liabilities for which we elected to record at fair value under SFAS No. 159. See note 7.

(6) Collateralized by $1,720.1million principal amount of commercial mortgages, mezzanine loans and other loans. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(7) Collateralized by $4,178.4 million principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of June 30, 2008 was $3,085.1 million. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

We are aware that our convertible senior notes, CDO notes payable and other indebtedness are currently trading at substantial discounts to their respective face amounts. In order to reduce future cash interest payments, as well as future principal amounts due at maturity or upon redemption, or to otherwise benefit RAIT, we may, from time to time, purchase such convertible senior notes, CDO notes payable or other indebtedness for cash, in exchange for our equity securities, or for a combination of cash and equity securities, in each case in open market purchases, privately negotiated transactions or otherwise. We will evaluate any such transactions in light of then-existing market conditions, contractual restrictions and other factors, taking into account our current liquidity and prospects for future access to capital. The amounts involved in any such transactions, individually or in the aggregate, may be material.

Repurchase Agreements

As of June 30, 2008, we were party to several repurchase agreements that had $47.1 million in borrowings outstanding. Our repurchase agreements contain standard market terms and generally renew between one and 30 days. As the assets subject to our repurchase agreements prepay or change in value, we are required to ratably reduce our borrowings outstanding under repurchase agreements. During the three-month and six-month periods ended June 30, 2008, we repaid $20.8 million and $91.7 million, respectively, associated with our repurchase agreements.

Secured Credit Facilities and Other Indebtedness

We have secured credit facilities with three financial institutions with total capacity of $90.0 million. As of June 30, 2008, we have borrowed $53.5 million on these credit facilities leaving $36.5 million of availability. As of June 30, 2008, we have $50.2 million of junior subordinated notes issued by us outstanding and $47.8 million of other indebtedness outstanding relating to loans payable on consolidated real estate interests and other loans.

Trust Preferred Obligations

As of January 1, 2008, we adopted the fair value option under SFAS No. 159 and elected to record trust preferred obligations at fair value. At adoption, we decreased the carrying amount of the trust preferred obligations by $52.1 million to reflect these liabilities at fair value in our financial statements. The change in fair value of the trust preferred obligations was a decrease of $12.9 million and $51.3 million for the three-month and six-month periods ended June 30, 2008, respectively, and was included in the accompanying consolidated statements of operations.

CDO Notes Payable – Fair Value

As of January 1, 2008, we adopted the fair value option under SFAS No. 159 and elected to record CDO notes payable that are collateralized by trading securities, security-related receivables and loans at fair value. At adoption, we decreased the carrying amount of these CDO notes payable by $1.5 billion to reflect these liabilities at fair value in our financial statements. The change in fair value of these CDO notes payable was a decrease of $143.6 million and $946.7 million for the three-month and six-month periods ended June 30, 2008, respectively, and was included in the accompanying consolidated statements of operations.

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Convertible Senior Notes

During the three-month and six-month periods ended June 30, 2008, we repurchased, from the market, a total of $21.0 million in aggregate principal amount of convertible senior notes for a total purchase price of $11.9 million. As a result, we recorded gains on extinguishment of debt of $8.6 million, net of $0.5 million deferred financing costs that were written off associated with these convertible senior notes.

Equity Financing.

Preferred Shares

On January 29, 2008, our board of trustees declared a first quarter 2008 cash dividend of $0.484375 per share on our 7.75% Series A Cumulative Redeemable Preferred Shares, $0.5234375 per share on our 8.375% Series B Cumulative Redeemable Preferred Shares and $0.5546875 per share on our 8.875% Series C Cumulative Redeemable Preferred Shares. The dividends were paid on March 31, 2008 to holders of record on March 3, 2008 and totaled $3.4 million.

On April 17, 2008, our board of trustees declared a second quarter 2008 cash dividend of $0.484375 per share on our 7.75% Series A Cumulative Redeemable Preferred Shares, $0.5234375 per share on our 8.375% Series B Cumulative Redeemable Preferred Shares and $0.5546875 per share on our 8.875% Series C Cumulative Redeemable Preferred Shares. The dividends were paid on June 30, 2008 to holders of record on June 2, 2008 and totaled $3.4 million.

On July 29, 2008, our board of trustees declared a third quarter 2008 cash dividend of $0.484375 per share on our 7.75% Series A Cumulative Redeemable Preferred Shares, $0.5234375 per share on our 8.375% Series B Cumulative Redeemable Preferred Shares and $0.5546875 per share on our 8.875% Series C Cumulative Redeemable Preferred Shares. The dividends totaling $3.4 million will be paid on September 30, 2008 to holders of record on September 2, 2008.

Common Shares

On January 8, 2008, the compensation committee of our board of trustees, or the Compensation Committee, awarded 324,200 phantom units, valued at $2.4 million using our closing stock price of $7.55, to various non-executive employees. The awards generally vest over four year periods.

On January 24, 2008, 14,457 of our phantom unit awards were redeemed for our common shares. These phantom units were fully vested at the time of redemption.

On March 5, 2008, the Compensation Committee awarded 26,712 phantom units, valued at $0.2 million using our closing stock price of $6.55, to trustees. These awards vest immediately.

On March 25, 2008, our board of trustees declared a quarterly distribution of $0.46 per common share totaling $28.1 million that was paid on May 15, 2008 to shareholders of record as of April 4, 2008.

On June 30, 2008, our board of trustees declared a quarterly distribution of $0.46 per common share totaling $29.4 million that will be paid on August 12, 2008 to shareholders of record as of July 16, 2008.

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we registered and reserved for issuance 10,000,000 common shares. During the three-month and six-month periods ended June 30, 2008, we issued a total of 2,728,182 common shares pursuant to the DRSPP at a weighted-average price of $8.12 per share and we received $22.2 million of net proceeds.

Off-Balance Sheet Arrangements and Commitments

We have maintained warehouse arrangements with various investment banks. These warehouse arrangements are free-standing derivatives under SFAS No. 133. As such, our investment, or first-dollar risk of loss, is recorded at fair value each period with the change in fair value recorded in earnings.

As of June 30, 2008, we maintain a deposit of $6.1 million as a first loss deposit on one warehouse facility. We do not expect to recover this deposit and have fully accrued for this loss in other liabilities on the accompanying consolidated balance sheet. During the six-month period ended June 30, 2008, two of our warehouse facilities were terminated. Due to these events, $32.1 million was charged to earnings through the change in fair value of free-standing derivatives during the six-month period ended June 30, 2008. The write-off of these warehouse deposits represents our only exposure under our warehouse agreements and we have no further obligations thereunder.

In addition, the option we provided a warehouse provider for us to provide credit default protection on two reference securities was terminated in May 2008 and we have no further obligation thereunder.

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Critical Accounting Estimates and Policies

Our Annual Report on Form 10-K for the year ended December 31, 2007 contains a discussion of our critical accounting policies. On January 1, 2008, we adopted SFAS No. 159 and revised our accounting policies as described below. See Note 2 in our unaudited consolidated financial statements as of June 30, 2008, as set forth herein. Management discusses our critical accounting policies and management’s judgments and estimates with our Audit Committee.

Revenue Recognition for Investment Income. We recognize interest income from investments in debt and other securities, residential mortgages, commercial mortgages and mezzanine loans on a yield to maturity basis. Upon the acquisition of a loan at a discount, we assess the portions of the discount that constitutes accretable yields and non-accretable differences. The accretable yield represents the excess of our expected cash flows from the loan over the amount we paid for the loan. That amount, the accretable yield, is accreted to interest income over the remaining life of the loan. Many of our commercial mortgages and mezzanine loans provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible. Management evaluates loans for non-accrual status each reporting period. Payments received for loans on non-accrual status are applied to principal until the loan is removed from non-accrual status. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. For investments that we did not elect to record at fair value under SFAS No. 159, origination fees and direct loan origination costs are deferred and amortized to net investment income, using the effective interest method, over the contractual life of the underlying loan security or loan, in accordance with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Origination or Acquiring Loans and Initial Direct Costs of Leases”, or SFAS No. 91. For investments that we elected to record at fair value under SFAS No. 159, origination fees and direct loan costs are recorded in income and are not deferred. We recognize interest income from interests in certain securitized financial assets on an estimated effective yield to maturity basis. Management estimates the current yield on the amortized cost of the investment based on estimated cash flows after considering prepayment and credit loss experience.

Investments. We invest in debt securities, residential mortgages and mortgage-related receivables, commercial mortgages, mezzanine loans and other types of real estate-related assets. We account for our investments in securities under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as amended and interpreted, or SFAS No. 115, and designate each investment as a trading security, an available-for-sale security, or a held-to-maturity security based on our intent at the time of acquisition. Under SFAS No. 115, trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings. Available-for-sale securities are recorded at fair value with changes in fair value reported as a component of other comprehensive income (loss). See “Fair Value of Financial Instruments.” Our estimate of fair value is subject to a high degree of variability based upon market conditions and management assumptions. Upon the sale of an available-for-sale security, the realized gain or loss on the sale will be recorded as a component of earnings in the respective period. Held-to-maturity investments are carried at amortized cost at each reporting period.

On January 1, 2008, we adopted Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or SFAS No. 159. See “Recent Accounting Pronouncements.” In applying SFAS No. 159, we classified certain of our available for sale securities as trading securities on January 1, 2008. Trading securities are carried at their estimated fair value, with changes in fair value reported in income.

We account for our investments in subordinated debentures owned by trust VIEs that we consolidate as available-for-sale securities. These VIEs have no ability to sell, pledge, transfer or otherwise encumber the trust or the assets of the trust until such subordinated debenture’s maturity. We account for investments in securities where the transfer meets the criteria as a financing under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, or SFAS No. 140, at amortized cost. Our investments in security-related receivables represent securities that were transferred to issuers of CDOs in which the transferors maintained some level of continuing involvement.

We use our judgment to determine whether an investment in securities has sustained an other-than-temporary decline in value. If management determines that an investment in securities has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and we establish a new cost basis for the investment. Our evaluation of an other-than-temporary decline is dependent on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the estimated fair value of the investment in relation to our cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery of the fair value of the investment.

We account for our investments in residential mortgages and mortgage-related receivables, commercial mortgages, mezzanine loans and other loans at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income on a level yield basis over the terms of the loans. Mortgage-related receivables represent loan receivables secured by residential mortgages, the legal title to which is held by our consolidated securitizations. These residential mortgages were transferred to the consolidated securitizations in transactions accounted for as financings under SFAS No. 140. Mortgage-related receivables maintain all of the economic attributes of the underlying residential mortgages and all benefits or risks of that ownership inure to the trust subsidiary.

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We maintain an allowance for losses on our investments in residential mortgages and mortgage-related receivables, commercial mortgages, mezzanine loans and other loans. Our allowance for losses is based on management’s evaluation of known losses and inherent risks, for example, historical and industry loss experience, economic conditions and trends, estimated fair values, the quality of collateral and other relevant factors. Specific allowances for losses on our commercial and mezzanine loans are established for impaired loans based on a comparison of the recorded carrying value of the loan to either the present value of the loan’s expected cash flow, the loan’s estimated market price or the estimated fair value of the underlying collateral. Our allowance for loss on residential mortgage loans is evaluated collectively for impairment as the mortgage loans are homogenous pools of residential mortgages. The allowance is increased by charges to operations and decreased by charge-offs (net of recoveries).

Transfers of Financial Assets. We account for transfers of financial assets under SFAS No. 140 as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale. Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings, or security-related receivables.

Derivative Instruments. We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.

In accordance with SFAS No. 133, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and records such amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives for which we elected the fair value option under SFAS No. 159, the changes in fair value of the derivative instrument is recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges are recognized in earnings.

Fair Value of Financial Instruments. Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, or SFAS No. 157, which requires additional disclosures about our assets and liabilities that we measure at fair value. As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Beginning in January 2008, assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:

• Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.

• Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables, CDO notes payable and certain financial instruments classified as derivatives where the fair value is based on observable market inputs.

• Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset. Generally, assets carried at fair value and included in this category are TruPS and subordinated debentures where observable market inputs do not exist.

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The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3.

Many financial institutions have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that we and others are willing to pay for an asset. Ask prices represent the lowest price that we and others are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value.

Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with SFAS No. 157, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.

Recent Accounting Pronouncements. In September 2006, the FASB issued SFAS No. 157, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The statement also establishes a framework for measuring fair value by creating a three-level fair value hierarchy that ranks the quality and reliability of information used to determine fair value, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. The adoption of SFAS No. 157 did not have a material impact on our approach to fair valuing our assets, derivative instruments and certain liabilities. See further discussion below on the impact of adopting SFAS No. 159.

In February 2007, the FASB issued SFAS No. 159, which provides entities with an irrevocable option to report most financial assets and liabilities at fair value, with subsequent changes in fair value reported in earnings. The election can be applied on an instrument-by-instrument basis. SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities, and will become effective for us on January 1, 2008. As of January 1, 2008, we adopted SFAS No. 159 and we will begin to record at fair value certain of our investments in securities, CDO notes payable and trust preferred obligations used to finance those investments and any related interest rate derivatives. Subsequent to January 1, 2008, all changes in the fair value of such investments in securities, CDO notes payable, trust preferred obligations and related interest rate derivatives will be recorded in earnings. Upon adoption of SFAS No. 159 on January 1, 2008, we recognized an increase to shareholders’ equity of $1.1 billion.

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The following table presents information about the eligible instruments for which we elected the fair value option and for which adjustments were recorded as of January 1, 2008 (dollars in thousands):

	Carrying Amount as of December 31, 2007			Effect from adoption of SFAS No. 159			Carrying Amount as of January 1, 2008 (After adoption of SFAS No. 159)
Assets:
Trading securities (1)	$	2,721,360		$	—		$	2,721,360
Security-related receivables		1,050,967			(99,991	)		950,976
Deferred financing costs, net of accumulated amortization		18,047			(18,047	)		—
Liabilities:
Trust preferred obligations		(450,625	)		52,070			(398,555	)
CDO notes payable		(3,695,858	)		1,520,616			(2,175,242	)
Deferred taxes and other liabilities		(6,103	)		6,103			—
Fair value adjustments before allocation to minority interest					1,460,751
Allocation of fair value adjustments to minority interest		—			(373,357	)		(373,357	)
Cumulative effect on shareholders’ equity from adoption of SFAS No. 159 (2)				$	1,087,394

(1) Prior to January 1, 2008, trading securities were classified as available-for-sale and carried at fair value. Accordingly, the election of the fair value option under SFAS No. 159 for trading securities did not change their carrying value and resulted in a reclassification of $310.5 million from accumulated other comprehensive income (loss) to retained earnings (deficit) on January 1, 2008.

(2) The $1,087.4 million cumulative effect on shareholders’ equity from the adoption of SFAS No. 159 on January 1, 2008 was comprised of a $310.5 million increase to accumulated other comprehensive income (loss) and a $776.9 million increase to retained earnings (deficit).

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51”, or SFAS No. 160. SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The statement is effective for fiscal years beginning after December 15, 2008. Management is currently evaluating the impact that this statement may have on our consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions”, or FSP No. 140-3. FSP No. 140-3 provides guidance on accounting for a transfer of a financial asset and a repurchase financing. FSP No. 140-3 presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under SFAS No. 140. The statement is effective for fiscal years beginning after November 15, 2008. Management is currently evaluating the impact that this statement may have on our consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133”, or SFAS No. 161. SFAS No. 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The statement is effective for fiscal years beginning after November 15, 2008. Management is currently evaluating the impact that this statement may have on our consolidated financial statements.

In May 2008, the FASB issued Staff Position No. Accounting Principles Board 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”, or APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. APB 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The equity component is presented in shareholders’ equity and the accretion of the resulting discount on the debt is recognized as part of interest expense in the consolidated statement of operations. APB 14-1 requires retrospective application to the terms of instruments as they existed for all periods presented. The statement is effective for fiscal years beginning after December 15, 2008. Management is currently evaluating the impact that this statement may have on our consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, commodity prices and equity prices. In pursuing our business plan, the primary market risks to which we are exposed are interest rate risk and credit risk. Changes in the general level of interest rates prevailing in the financial markets may affect the spread between our yield on invested assets and cost of funds and, in turn, our ability to make distributions or payments to our shareholders. While we have not experienced any significant credit losses, in the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in losses to us which adversely affect our operating results and liquidity.

There have been no material changes in Quantitative and Qualitative disclosures during 2008 from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2007. Reference is made to Item 7A included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our chief executive officer and chief financial officer and with the participation of our disclosure committee, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three-month period ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Putative Consolidated Class Action Securities Lawsuit

RAIT, certain of our executive officers and trustees and the lead underwriters involved in our public offering of common shares in January 2007 were named defendants in one or more of nine putative class action securities lawsuits filed in August and September 2007 in the United States District Court for the Eastern District of Pennsylvania. By Order dated November 17, 2007, the court consolidated these cases under the caption In re RAIT Financial Trust Securities Litigation (No. 2:07-cv-03148), and appointed a lead plaintiff and lead counsel. On January 4, 2008, lead plaintiff filed a consolidated class action complaint, or the complaint, on behalf of a putative class of purchasers of our securities between June 8, 2006 and August 3, 2007. The complaint names as defendants RAIT, eleven current and former officers and trustees of RAIT, ten underwriters who participated in certain of our securities offerings in 2007 and our independent accounting firm. The complaint alleges, among other things, that certain defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by making materially false and misleading statements and material omissions in registration statements and prospectuses about our credit underwriting, our exposure to certain issuers through investments in debt securities, and our loan loss reserves and other financial items. The complaint further alleges that certain defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, by making materially false and misleading statements and material omissions during the putative class period about our credit underwriting, our exposure to certain issuers through investments in debt securities, and our loan loss reserves and other financial items. The complaint seeks unspecified compensatory damages, the right to rescind the purchases of securities in the public offerings, interest, and plaintiffs’ reasonable costs and expenses, including attorneys’ fees and expert fees. On March 10, 2008, defendants moved to dismiss the complaint on a number of grounds. The Court permitted plaintiffs to file a single brief in opposition to all defense motions to dismiss on May 15, 2008. All defendants filed reply briefs in support of their motions to dismiss on June 5, 2008. Thereafter, RAIT and certain of the officer/trustee defendants sought leave to file a supplemental brief, which the Court permitted as of June 24, 2008. Plaintiffs were permitted a response to the supplemental brief, which was deemed filed as of July 1, 2008. At this time, we do not anticipate further briefing on the motions to dismiss. The parties have requested oral argument on the motions to dismiss, but no argument has been scheduled. An adverse resolution of the litigation could have a material adverse effect on our financial condition and results of operations.

Shareholders’ Derivative Action

On August 17, 2007, a putative shareholders’ derivative action was filed in the United States District Court for the Eastern District of Pennsylvania naming RAIT, as nominal defendant, and certain of our executive officers and trustees as defendants. The complaint in this action alleges that certain of our executive officers and trustees breached their duties to RAIT in connection with the matters that are the subject of the securities litigation described above. The board of trustees has established a special litigation committee to investigate the allegations made in the derivative action complaint and in shareholder demands asserting similar allegations, and to determine what action, if any, RAIT should take concerning them. On October 25, 2007, pursuant to a stipulation of the parties, the court ordered the derivative action stayed pending the completion of the special committee’s investigation, subject to quarterly status reports by the special litigation committee beginning March 31, 2008. The special litigation committee filed its most recent status report with the Court on June 30, 2008. An adverse resolution of these matters could have a material adverse effect on our financial condition and results of operations.

Routine Litigation

We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties and disputes arising out of our loan portfolio. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have not been any material changes from the risk factors previously disclosed in Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

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Item 4. Submission of Matters to a Vote of Security Holders

At our Annual Meeting of Shareholders held on May 20, 2008, pursuant to the Notice of Annual Meeting of Shareholders and Proxy Statement dated April 4, 2008, the voting results were as follows:

(a) Each of the following nominees was elected to the Board of Trustees as follows:

TRUSTEE	VOTES FOR	VOTES WITHHELD	VOTES ABSTAIN	BROKER NON-VOTE
Betsy Z. Cohen	53,640,407	1,163,210	0	0
Daniel G. Cohen	53,650,910	1,152,708	0	0
Edward S. Brown	53,653,330	1,150,288	0	0
Frank A. Farnesi	53,671,929	1,131,689	0	0
S. Kristin Kim	53,671,441	1,132,177	0	0
Arthur Makadon	52,468,604	2,335,014	0	0
Daniel Promislo	52,456,742	2,346,876	0	0
John F. Quigley, III	53,665,530	1,138,088	0	0
Murray Stempel, III	52,476,415	2,327,203	0	0

(b) The proposal to approve the selection of Grant Thornton LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008 was approved as follows:

VOTES FOR	VOTES AGAINST	VOTES ABSTAIN	BROKER NON-VOTE
54,139,964	414,904	248,751	0

(c) The proposal to approve an amendment and restatement of RAIT’s 2005 Equity Compensation Plan, including renaming it the RAIT Financial Trust 2008 Incentive Award Plan, was approved as follows:

VOTES FOR	VOTES AGAINST	VOTES ABSTAIN	BROKER NON-VOTE
32,424,810	3,337,810	1,028,711	18,012,289

Item 6. Exhibits

(a) Exhibits

The exhibits filed as part of this quarterly report on Form 10-Q are identified in the exhibit index immediately following the signature page of this Report. Such Exhibit Index is incorporated herein by reference.

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SIGNATURES OF REGISTRANT

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 thereunto duly authorized.

	RAIT FINANCIAL TRUST (Registrant)
Date: August 6, 2008	By:	/s/ Daniel G. Cohen
		Daniel G. Cohen, Chief Executive Officer and Trustee
		(On behalf of the registrant and as its Principal Executive Officer)
Date: August 6, 2008	By:	/s/ Jack E. Salmon
		Jack E. Salmon, Chief Financial Officer and Treasurer
		(On behalf of the registrant and as its Principal Financial Officer)
Date: August 6, 2008	By:	/s/ James J. Sebra
		James J. Sebra, Senior Vice President-Finance and Chief Accounting Officer
		(On behalf of the registrant and as its Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description of Documents
3.1	Amended and Restated Declaration of Trust. (1)
3.1.1	Articles of Amendment to Amended and Restated Declaration of Trust. (2)
3.1.2	Articles of Amendment to Amended and Restated Declaration of Trust. (3)
3.1.3	Certificate of Correction to the Amended and Restated Declaration of Trust. (4)
3.1.4	Articles of Amendment to Amended and Restated Declaration of Trust. (5)
3.1.5	Articles Supplementary relating to the 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Articles Supplementary”). (6)
3.1.6	Certificate of Correction to the Series A Articles Supplementary. (6)
3.1.7	Articles Supplementary relating to the 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest. (7)
3.1.8	Articles Supplementary relating to the 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest. (8)
3.2	By-laws. (9)
4.1	Form of Certificate for Common Shares of Beneficial Interest. (5)
4.2	Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest. (10)
4.3	Form of Certificate for 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest. (7)
4.4	Form of Certificate for 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest. (8)
4.5	Indenture dated as of April 18, 2007 among RAIT Financial Trust, as issuer, or RAIT, RAIT Partnership, L.P. and RAIT Asset Holdings, LLC, as guarantors, and Wells Fargo Bank, N.A., as trustee. (11)
4.6	Registration Rights Agreement dated as of April 18, 2007 between RAIT and Bear, Stearns & Co. Inc. (11)
4.7	Notation of Guarantee by RAIT Partnership, L.P. and RAIT Asset Holdings, LLC, as guarantors. (11)
10.1	Employment Agreement dated as of February 5, 2008 by and between RAIT and Ken R. Frappier. (12)
10.2	RAIT Financial Trust 2008 Incentive Award Plan, as Amended and Restated May 20, 2008 (the “IAP”).(13)
10.3	IAP Form of 2008 Cash Award Program Agreement (13)
15.1	Awareness Letter from Independent Accountants.
31.1	Certification Pursuant to 13a-14 (a) under the Securities Exchange Act of 1934.
31.2	Certification Pursuant to 13a-14 (a) under the Securities Exchange Act of 1934.
32.1	Certification Pursuant to 18 U.S.C. Section 1350.
32.2	Certification Pursuant to 18 U.S.C. Section 1350.
99.1	Material U.S. Federal Income Tax Considerations

(1) Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-35077).

(2) Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-53067).

(3) Incorporated by reference to RAIT’s Registration Statement on Form S-2 (Registration No. 333-55518).

(4) Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended March 31, 2002 (File No. 1-14760).

(5) Incorporated herein by reference to RAIT’s Form 8-K as filed with the SEC on December 15, 2006 (File No. 1-14760).

(6) Incorporated herein by reference to RAIT’s Form 8-K as filed with the SEC on March 18, 2004 (File No. 1-14760).

(7) Incorporated herein by reference to RAIT’s Form 8-K as filed with the SEC on October 1, 2004 (File No. 1-14760).

(8) Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on June 29, 2007 (File No. 1-14760).

(9) Incorporated by reference to RAIT’s Form 10-K for the fiscal year ended December 31, 2007 (File No. 1-14760).

(10) Incorporated herein by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2004 (File No. 1-14760).

(11) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on April 18, 2007 (File No. 1-14760).

(12) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 11, 2008 (File No. 1-14760).

(13) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on May 27, 2008 (File No. 1-14760).

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EX-15.1

Exhibit 15.1

RAIT Financial Trust

Cira Centre

2929 Arch Street, 17th Floor

Philadelphia, Pennsylvania 19104

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 Financial Trust and subsidiaries for the periods ended June 30, 2008 and 2007, as indicated in our report dated August 4, 2008 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 is incorporated by reference in Registration Statements of RAIT Financial Trust on Form S-3 (File No. 333-152351, effective on July 16, 2008; File No. 333-149340, effective on March 13, 2008; File No. 333-144603, effective on July 16, 2007; File No. 333-139948, effective on January 12, 2007; File No. 333-139889, effective on January 10, 2007; File No. 333-103618, effective on March 14, 2003) and Form S-8 (File No. 333-151627, effective on June 13, 2008; 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 also are 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 within the meaning of Sections 7 and 11 of that Act.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

August 4, 2008

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES

EXCHANGE ACT OF 1934, AS AMENDED

I, Daniel G. Cohen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of RAIT Financial Trust;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2008	/s/ Daniel G. Cohen
	Name:	Daniel G. Cohen
	Title:	Chief Executive Officer and Trustee

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES

EXCHANGE ACT OF 1934, AS AMENDED

I, Jack E. Salmon, certify that:

1. I have reviewed this quarterly report on Form 10-Q of RAIT Financial Trust;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2008	/s/ Jack E. Salmon
	Name:	Jack E. Salmon
	Title:	Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RAIT Financial Trust (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel G. Cohen, Chief Executive Officer and Trustee of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Daniel G. Cohen

Daniel G. Cohen

Chief Executive Officer and Trustee

Date: August 6, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RAIT Financial Trust (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jack E. Salmon, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Jack E. Salmon

Jack E. Salmon

Chief Financial Officer and Treasurer

Date: August 6, 2008

EX-99.1

Exhibit 99.1

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of the material U.S. federal income tax considerations relating to RAIT’s and Taberna’s qualification and taxation as REITs and the acquisition, holding, and disposition of RAIT common shares. For purposes of this section, under the heading “Material U.S. Federal Income Tax Considerations,” references to “we,” “us,” and “our” refer to “RAIT” only and not its subsidiaries or other lower-tier entities, except as otherwise indicated and “Taberna” means only Taberna Realty Finance Trust and not its subsidiaries or other lower-tier entities, except as otherwise indicated. Where any description is relevant exclusively to RAIT or Taberna, or applies differently to RAIT or Taberna, the name of the specific entity being described is used for purposes of such description. This summary is based upon the Internal Revenue Code, the Treasury regulations, current administrative interpretations and practices of the IRS (including administrative interpretations and practices expressed in private letter rulings which are binding on the IRS only with respect to the particular taxpayers who requested and received those rulings) and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. No advance ruling has been or will be sought from the IRS regarding any matter discussed in this summary. The summary is also based upon the assumption that the operation of the company, and of its subsidiaries and other lower-tier and affiliated entities, will, in each case, be in accordance with its applicable organizational documents. This summary is for general information only, and does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular shareholder in light of its investment or tax circumstances or to shareholders subject to special tax rules, such as:

• U.S. expatriates;

• persons who mark-to-market our common shares;

• subchapter S corporations;

• U.S. shareholders (as defined below) whose functional currency is not the U.S. dollar;

• financial institutions;

• insurance companies;

• broker-dealers;

• regulated investment companies;

• trusts and estates;

• holders who receive our common shares through the exercise of employee shares options or otherwise as compensation;

• persons holding our common shares as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment;

• persons subject to the alternative minimum tax provisions of the Internal Revenue Code;

• persons holding our common shares through a partnership or similar pass-through entity;

• persons holding a 10% or more (by vote or value) beneficial interest in RAIT;

• and, except to the extent discussed below:

• tax-exempt organizations; and

• non-U.S. shareholders (as defined below).

This summary assumes that shareholders will hold our common shares as capital assets, which generally means as property held for investment.

THE U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF OUR COMMON SHARES DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF HOLDING OUR COMMON SHARES FOR ANY PARTICULAR SHAREHOLDER WILL DEPEND ON THE SHAREHOLDER’S PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR

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PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES, OF ACQUIRING, HOLDING, AND DISPOSING OF OUR COMMON SHARES.

Taxation

We elected to be taxed as a REIT under the Internal Revenue Code commencing with its taxable year ended December 31, 1998. Taberna elected to be taxed as a REIT under the Internal Revenue Code commencing with its taxable year ended December 31, 2005. We believe that both RAIT and Taberna have been organized and operated in a manner that will allow each of them to qualify for taxation as a REIT under the Internal Revenue Code, and RAIT and Taberna intend to continue to be organized and operated in such a manner.

While each of RAIT and Taberna believe that it has been organized and operated so that it will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility of future changes in RAIT’s or Taberna’s circumstances, applicable law, or interpretations thereof, no assurance can be given by RAIT or Taberna that RAIT or Taberna, respectively, will qualify as a REIT for any particular year. RAIT shareholders should be aware that the foregoing is not binding on the IRS, and no assurance can be given that the IRS will not challenge the foregoing.

Each of RAIT’s and Taberna’s qualification and taxation as a REIT depends on its separate ability to meet, on a continuing basis, through actual results of operations, distribution levels and diversity of share ownership, various qualification requirements imposed upon REITs by the Internal Revenue Code. In addition, RAIT’s and Taberna’s ability to qualify as a REIT may depend in part upon the operating results, organizational structure and entity classification for U.S. federal income tax purposes of certain entities in which RAIT and Taberna invest, which could include entities that have made elections to be taxed as REITs. RAIT’s and Taberna’s ability to qualify as a REIT also requires that RAIT and Taberna satisfy certain asset and income tests, some of which depend upon the fair market values of assets directly or indirectly owned by RAIT and Taberna or which serve as security for loans made by RAIT and Taberna. Such values may not be susceptible to a precise determination. Accordingly, no assurance can be given that the actual results of RAIT’s and Taberna’s operations for any taxable year will satisfy the requirements for qualification and taxation as a REIT. In addition, because of RAIT’s ownership of all of the common, but not preferred, equity of Taberna and because it is expected that RAIT will receive substantial dividend income from Taberna, if Taberna fails to qualify as a REIT, it is very likely that RAIT will also fail to qualify as a REIT.

Taxation of REITs in General

As indicated above, qualification and taxation of each of RAIT and Taberna as a REIT depends upon RAIT’s and Taberna’s ability to meet, on a continuing basis, various qualification requirements imposed upon REITs by the Internal Revenue Code. The material qualification requirements are summarized below, under “—Requirements for Qualification—General.” While RAIT and Taberna intend to operate so that each qualifies as a REIT, no assurance can be given that the IRS will not challenge RAIT’s or Taberna’s qualification as a REIT or that either RAIT or Taberna will be able to operate in accordance with the REIT requirements in the future. See “—Failure to Qualify.” In addition, the failure of Taberna to qualify as a REIT would very likely result in RAIT’s failure to qualify as a REIT.

An entity that qualifies as a REIT will generally be entitled to a deduction for dividends paid to its shareholders and, therefore, will not be subject to U.S. federal corporate income tax on net taxable income that is currently distributed to its shareholders. This treatment substantially eliminates the “double taxation” at the corporate and shareholder levels that results generally from investment in a corporation. Rather, income generated by a REIT generally is taxed only at the shareholder level, upon a distribution of dividends by the REIT.

For tax years through 2010, shareholders who are individual U.S. shareholders (as defined below) are generally taxed on corporate dividends at a maximum rate of 15% (the same as long-term capital gains), thereby substantially reducing, though not completely eliminating, the double taxation that has historically applied to corporate dividends. With limited exceptions, however, dividends received by individual U.S. shareholders (as defined below) from us or from other entities that are taxed as REITs will continue to be taxed at rates applicable to ordinary income, which will be as high as 35% through 2010.

Net operating losses, foreign tax credits and other tax attributes of a REIT generally do not pass through to the shareholders of the REIT, subject to special rules for certain items, such as capital gains, recognized by REITs. See “—Taxation of Shareholders.”

If we and Taberna qualify as REITs, we and Taberna will nonetheless be subject to U.S. federal income tax in the following circumstances:

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• Each of Taberna and RAIT will be taxed at regular corporate rates on any undistributed income, including undistributed net capital gains.

• We and Taberna may be subject to the “alternative minimum tax” on its items of tax preference, if any.

• If we or Taberna have net income from prohibited transactions, which are, in general, sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than foreclosure property, such income will be subject to a 100% tax. See “—Prohibited Transactions” and “—Foreclosure Property,” below.

• If we or Taberna elect to treat property that we acquire in connection with a foreclosure of a mortgage loan or from certain leasehold terminations as “foreclosure property.” We or Taberna may thereby avoid (a) the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction) and (b) the inclusion of any income from such property not qualifying for purposes of the REIT gross income tests discussed below, but the income from the sale or operation of the property may be subject to corporate income tax at the highest applicable rate (currently 35%).

• If we or Taberna fail to satisfy the 75% gross income test or the 95% gross income test, as discussed below, but our failure is due to reasonable cause and not due to willful neglect and we or Taberna, as the case may be, nonetheless maintain our or its REIT qualification because other requirements are met, we or Taberna will be subject to a 100% tax on an amount equal to (a) the greater of (1) the amount by which we or Taberna fail the 75% gross income test or (2) the amount by which we or Taberna fail the 95% gross income test, as the case may be, multiplied by (b) a fraction intended to reflect our or Taberna’s profitability.

• If we or Taberna fail to satisfy any of the REIT asset tests, as described below, other than in the case of a de minimis failure of the 5% or 10% asset tests, but such failure is due to reasonable cause and not due to willful neglect and we or Taberna nonetheless maintain our or its REIT qualification because of specified cure provisions, we or Taberna will be required to pay a tax equal to the greater of $50,000 or the highest corporate tax rate (currently 35%) of the net income generated by the non-qualifying assets during the period in which we or Taberna failed to satisfy the asset tests.

• If we or Taberna fail to satisfy any provision of the Internal Revenue Code that would result in our or its failure to qualify as a REIT (other than a gross income or asset test requirement) and the violation is due to reasonable cause and not due to willful neglect, we or Taberna may retain our REIT qualification but we or Taberna will be required to pay a penalty of $50,000 for each such failure.

• If we or Taberna fail to distribute during each calendar year at least the sum of (a) 85% of our or its respective REIT ordinary income for such year, (b) 95% of our or Taberna’s REIT capital gain net income for such year and (c) any undistributed taxable income from prior periods, or the “required distribution,” we or Taberna, as the case may be, will be subject to a 4% excise tax on the excess of the required distribution over the sum of (1) the amounts actually distributed (taking into account excess distributions from prior years), plus (2) retained amounts on which income tax is paid at the corporate level.

• We or Taberna may be required to pay monetary penalties to the IRS in certain circumstances, including if we or Taberna fail to meet record-keeping requirements intended to monitor our and Taberna’s compliance with rules relating to the composition of our and Taberna’s shareholders, as described below in “—Requirements for Qualification—General.”

• A 100% excise tax may be imposed on some items of income and expense that are directly or constructively paid between us and our TRSs and between Taberna and its TRSs (as described below) if and to the extent that the IRS successfully adjusts the reported amounts of these items.

• If we or Taberna acquire appreciated assets from a corporation that is not a REIT in a transaction in which the adjusted tax basis of the assets in our or Taberna’s hands is determined by reference to the adjusted tax basis of the assets in the hands of the non-REIT corporation, we or Taberna, as the case may be, will be subject to tax on such appreciation at the highest corporate income tax rate then applicable if we subsequently recognize gain on a disposition of any such assets during the 10-year period following their acquisition from the non-REIT corporation. The results described in this paragraph assume that the non-REIT corporation will not elect, in lieu of this treatment, to be subject to an immediate tax when the asset is acquired by us or Taberna.

• We will generally be subject to tax on the portion of any excess inclusion income derived from an investment by us or Taberna in residual interests in REMICs to the extent our shares are held in record name by specified tax-exempt organizations not subject to tax on UBTI. Similar rules apply if we or Taberna own an equity interest in a taxable mortgage pool. To the extent that we own a REMIC residual interest or a taxable mortgage pool through a TRS, we will not be subject to this tax. For a discussion of “excess inclusion income,” see “—Effect of Subsidiary Entities — Taxable Mortgage Pools” and “—Excess Inclusion Income .”

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• We may elect to retain and pay income tax on its net long-term capital gain. In that case, a shareholder would include its proportionate share of our undistributed long-term capital gain (to the extent we make a timely designation of such gain to the shareholder) in its income, would be deemed to have paid the tax that we paid on such gain, and would be allowed a credit for its proportionate share of the tax deemed to have been paid, and an adjustment would be made to increase the shareholder’s basis in its common shares.

• We or Taberna may have subsidiaries or own interests in other lower-tier entities that are C corporations, including our or Taberna’s domestic TRSs, the earnings of which will be subject to U.S. federal corporate income tax.

• In addition, we, Taberna and our subsidiaries may be subject to a variety of taxes other than U.S. federal income tax, including payroll taxes and state, local, and foreign income, property and other taxes on assets, income and operations. As further described below, RAIT Advisors, Inc., Taberna Securities, LLC, or Taberna Securities, Taberna Capital Management , LLC, or Taberna Capital, and Taberna Funding LLC, or Taberna Funding, will be subject to U.S. federal corporate income tax on their taxable income. We and Taberna could also be subject to tax in situations and on transactions not presently contemplated.

Requirements for Qualification—General

The Internal Revenue Code defines a REIT as a corporation, trust or association:

(1) that is managed by one or more trustees or directors;

(2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;

(3) that would be taxable as a domestic corporation but for the special Internal Revenue Code provisions applicable to REITs;

(4) that is neither a financial institution nor an insurance company subject to specific provisions of the Internal Revenue Code;

(5) the beneficial ownership of which is held by 100 or more persons;

(6) in which, during the last half of each taxable year, not more than 50% in value of the outstanding shares is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Internal Revenue Code to include specified entities);

(7) which meets other tests described below, including with respect to the nature of its income and assets and the amount of its distributions; and

(8) that makes an election to be a REIT for the current taxable year or has made such an election for a previous taxable year that has not been terminated or revoked.

The Internal Revenue Code provides that conditions (1) through (4) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a shorter taxable year. Conditions (5) and (6) do not need to be satisfied for the first taxable year for which an election to become a REIT has been made. Our and Taberna’s declarations of trust provides restrictions regarding the ownership and transfer of shares, which are intended to assist in satisfying the share ownership requirements described in conditions (5) and (6) above. For purposes of condition (6), an “individual” generally includes a supplemental unemployment compensation benefit plan, a private foundation or a portion of a trust permanently set aside or used exclusively for charitable purposes, but does not include a qualified pension plan or profit sharing trust.

To monitor compliance with the share ownership requirements, we and Taberna are generally required to maintain records regarding the actual ownership of our and its shares. To do so, we and it must demand written statements each year from the record holders of significant percentages of our and Taberna’s shares, in which the record holders are to disclose the actual owners of the shares ( i.e. , the persons required to include in gross income the dividends paid by us). A list of those persons failing or refusing to comply with this demand must be maintained as part of our and Taberna’s records. Failure by us or Taberna to comply with these record-keeping requirements could subject us or Taberna to monetary penalties. If we and Taberna satisfy these requirements and have no reason to know that condition (6) is not satisfied, we and Taberna will be deemed to have satisfied such condition. A shareholder that fails or refuses to comply with the demand is required by the Treasury regulations to submit a statement with its tax return disclosing the actual ownership of the shares and other information.

In addition, a corporation generally may not elect to become a REIT unless its taxable year is the calendar year. We and Taberna satisfy this requirement.

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Effect of Subsidiary Entities

Ownership of Partnership Interests. In the case of a REIT that is a partner in a partnership, the Treasury regulations provide that the REIT is deemed to own its proportionate share of the partnership’s assets and to earn its proportionate share of the partnership’s gross income based on its pro rata share of its capital interest in the partnership for purposes of the asset and gross income tests applicable to REITs, as described below. However, solely for purposes of the 10% value test, described below, the determination of a REIT’s interest in partnership assets will be based on the REIT’s proportionate interest in any securities issued by the partnership, excluding for these purposes, certain excluded securities as described in the Internal Revenue Code. In addition, the assets and gross income of the partnership generally are deemed to retain the same character in the hands of the REIT. Thus, our and Taberna’s proportionate shares of the assets and items of income of partnerships in which we or it own an equity interest are treated as assets and items of income for purposes of applying the REIT requirements described below. Consequently, to the extent that we or Taberna directly or indirectly hold a preferred or other equity interest in a partnership, the partnership’s assets and operations may affect our or Taberna’s ability to qualify as a REIT, even though we or Taberna may have no control or only limited influence over the partnership.

Disregarded Subsidiaries. If a REIT owns a corporate subsidiary that is a “qualified REIT subsidiary,” that subsidiary is disregarded for U.S. federal income tax purposes, and all assets, liabilities and items of income, deduction and credit of the subsidiary are treated as assets, liabilities and items of income, deduction and credit of the REIT, including for purposes of the gross income and asset tests applicable to REITs, as summarized below. A qualified REIT subsidiary is any corporation, other than a TRS (as described below), that is wholly owned by a REIT, by other disregarded subsidiaries or by a combination of the two. Single member limited liability companies that are wholly owned by a REIT are also generally disregarded as separate entities for U.S. federal income tax purposes, including for purposes of the REIT gross income and asset tests. Disregarded subsidiaries, along with partnerships in which a REIT holds an equity interest, are sometimes referred to herein as “pass-through subsidiaries.” We expect that we and Taberna will each hold assets and conduct operations, in part, through qualified REIT subsidiaries and disregarded subsidiaries. Accordingly, all assets, liabilities, and items of income, deduction and credit of each such subsidiary will be treated as assets, liabilities, and items of income, deduction, and credit of ours or Taberna’s, as the case may be.

In the event that a disregarded subsidiary ceases to be wholly owned by us or Taberna—for example, if any equity interest in the subsidiary is acquired by a person other than us or Taberna or another disregarded subsidiary of us or Taberna—the subsidiary’s separate existence would no longer be disregarded for U.S. federal income tax purposes. Instead, it would have multiple owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect our or Taberna’s ability to satisfy the various asset and gross income tests applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the value or voting power of the outstanding securities of another corporation. See “—Asset Tests” and “—Gross Income Tests.”

Taxable REIT Subsidiaries. A REIT may jointly elect with a non-REIT subsidiary corporation, whether or not wholly owned, to treat the subsidiary corporation as a TRS. The separate existence of a TRS or other taxable corporation, unlike a disregarded subsidiary as discussed above, is not ignored for U.S. federal income tax purposes. Accordingly, such an entity would generally be subject to corporate income tax on its earnings, which may reduce the cash flow generated by us and our subsidiaries (including Taberna) in the aggregate and its ability to make distributions to its shareholders.

We have made a TRS election with respect to RAIT Advisors, Inc., and Taberna has made a TRS election with respect to Taberna Capital, Taberna Securities, Taberna Funding, Taberna Equity Funding, Ltd., or Taberna Equity, Taberna Bermuda, Taberna Ireland, Taberna Preferred Funding II, Ltd., or Taberna II, Taberna Preferred Funding III, Ltd., or Taberna III, Taberna Preferred Funding IV, Ltd., or Taberna IV, Taberna Preferred Funding V, Ltd., or Taberna V, Taberna Preferred Funding VI, Ltd., or Taberna VI, Taberna Preferred Funding VII, Ltd., or Taberna VII, Taberna Preferred Funding VIII, Ltd., or Taberna VIII, Taberna Preferred Funding IX, Ltd., or Taberna IX, Taberna Europe CDO I PLC, or Taberna Europe, Taberna Europe CDO II PLC, or Taberna Europe II and RAIT Securities UK. It is expected that we and Taberna will make additional TRS elections, including with respect to future non-U.S. entities that issue equity interests to us or Taberna pursuant to CDO securitizations. The Internal Revenue Code and the Treasury regulations provide a specific exemption from U.S. federal income tax to non-U.S. corporations that restrict their activities in the United States to trading in shares and securities (or any activity closely related thereto) for their own account whether such trading (or such other activity) is conducted by the corporation or its employees through a resident broker, commission agent, custodian or other agent. Certain U.S. shareholders (as defined below) of such a non-U.S. corporation are required to include in their income currently their proportionate share of the earnings of such a corporation, whether or not such earnings are distributed. Taberna Equity, Taberna II, Taberna III, Taberna IV, Taberna V, Taberna VI, Taberna VII, Taberna VIII and Taberna IX, and certain additional CDO entities in which we or Taberna may invest and with which we or Taberna will jointly make a TRS election will be organized as Cayman Islands companies and will either rely on such exemption or otherwise operate in a manner so

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that they will not be subject to U.S. federal income tax on their net income. Taberna Bermuda and Taberna Ireland each also has operated and intends to operate in a manner so that it will not be subject to U.S. federal income tax on its net income. Therefore, despite such contemplated status of such CDO entities, RAIT Securities UK, Taberna Bermuda, Taberna Ireland, Taberna Europe and Taberna Europe II as TRSs, we expect that such entities should generally not be subject to U.S. federal corporate income tax on their earnings. However, Taberna will be required to include in its income, in certain cases, even without the receipt of actual distributions, on a current basis, the earnings of such CDO entities. This could affect Taberna’s, and thus our ability to comply with the REIT gross income tests and distribution requirement. See “—Gross Income Tests” and “—Annual Distribution Requirements.”

A REIT is not considered the owner of the assets of a TRS or other subsidiary corporation or (until dividends are paid by the TRS to the REIT) the recipient of any income that a domestic TRS earns. Rather, the shares issued by the subsidiary are an asset in the hands of the REIT, and the REIT generally recognizes as income the dividends, if any, that it receives from a domestic TRS. However, we or Taberna, as the case may be, will generally be required to include in income on a current basis the earnings of a CDO entity that is a non-U.S. TRS as described in the preceding paragraph. This treatment can affect the gross income and asset test calculations that apply to us or Taberna, as described below. Because a REIT does not include the assets and, in the case of a domestic TRS, income of such subsidiary corporations in determining the REIT’s compliance with the REIT requirements, such entities may be used by a REIT to undertake indirectly activities that the REIT rules might otherwise preclude it from doing directly or through pass-through subsidiaries or render commercially unfeasible (for example, activities that give rise to certain categories of income such as non-qualifying hedging or prohibited transaction income). If dividends are paid to us or Taberna by one or more of our or its TRSs, other than a non-U.S. TRS as described in the preceding paragraph, then a portion of the dividends that we distribute to U.S. individual shareholders generally will be eligible for taxation at preferential qualified dividend income tax rates rather than at ordinary income rates. See “—Taxation of Shareholders—Taxation of Taxable U.S. Shareholders” and “—Taxation of Shareholders—Distributions.”

Certain restrictions imposed on TRSs are intended to ensure that such entities will be subject to appropriate levels of U.S. federal income taxation. First, a TRS may not deduct interest payments made in any year to an affiliated REIT to the extent that such payments exceed, generally, 50% of the TRS’s adjusted taxable income for that year (although the TRS may carry forward to, and deduct in, a succeeding year the disallowed interest amount if the 50% test is satisfied in that year). In addition, if amounts are paid to a REIT or deducted by a TRS due to transactions between a REIT, its tenants and/or a TRS, that exceed the amount that would be paid to or deducted by a party in an arm’s-length transaction, the REIT generally will be subject to an excise tax equal to 100% of such excess. Rents we or Taberna receive that include amounts for services furnished by one of our or Taberna’s TRSs to any of its tenants will not be subject to the excise tax if such amounts qualify for the safe harbor provisions contained in the Internal Revenue Code. Safe harbor provisions are provided where (1) amounts are excluded from the definition of impermissible tenant service income as a result of satisfying the 1% de minimis exception; (2) a TRS renders a significant amount of similar services to unrelated parties and the charges for such services are substantially comparable; (3) rents paid to its REIT shareholder from tenants that are not receiving services from the TRS are substantially comparable to the rents paid by the REIT’s tenants leasing comparable space that are receiving such services from the TRS and the charge for the services is separately stated; or (4) the TRS’s gross income from the service is not less than 150% of the TRS’s direct cost of furnishing the service.

Taberna has elected with each of Taberna Capital, Taberna Securities, Taberna Funding, Taberna Equity, Taberna Bermuda, Taberna Ireland, Taberna III, Taberna IV, Taberna V, Taberna VI, Taberna VII, Taberna VIII, Taberna IX, Taberna Europe, Taberna Europe II and RAIT Securities UK, for those subsidiaries to be treated as TRSs for U.S. federal income tax purposes. In addition, Taberna II, which is a subsidiary of Taberna Equity, is therefore also a TRS of Taberna. RAIT has elected with RAIT Advisors, Inc. to treat RAIT Advisors, Inc. as a TRS for U.S. federal tax purposes. We and Taberna may form additional TRSs in the future. To the extent that any such TRSs pay any taxes, they will have less CAD to Taberna or us. If dividends are paid by a taxable domestic TRS, such as Taberna Capital, Taberna Securities or Taberna Funding, to Taberna, then the dividends we designate and pay to our shareholders who are individuals, up to the amount of dividends we receive from such entities, generally will be eligible to be taxed at the reduced 15% maximum U.S. federal rate applicable to qualified dividend income. See “—Taxation of Shareholders—Taxation of Taxable U.S. Shareholders.” Currently, we anticipate that each of Taberna Capital, Taberna Securities and Taberna Funding will retain its after tax income, if any, subject to compliance with the 20% (25% for 2009 and subsequent tax years) asset test applicable to Taberna’s aggregate ownership of TRSs. See “—Asset Tests.”

The shares that Taberna holds in Taberna Capital have a tax basis below the basis such shares would have had if Taberna purchased such shares at their agreed value in connection with the completion of its initial private placement of common shares and related transactions, which we refer to as Taberna’s formation transactions. If Taberna were to sell these shares, the gain that it would recognize would be in excess of the amount of gain that would have been recognized had it purchased such shares in a taxable transaction. Accordingly, such a sale could result in the generation of a significant amount

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of income that would not qualify for the REIT 75% gross income test and an increased distribution requirement and, accordingly, could adversely affect Taberna’s ability to qualify as a REIT. See the discussion under “—Gross Income Tests” and “—Annual Distribution Requirements.” In addition, such a sale would result in a larger portion of RAIT’s dividend being subject to tax as a capital gain dividend as opposed to a return of capital.

Taxable Mortgage Pools. An entity, or a portion of an entity, may be classified as a taxable mortgage pool under the Internal Revenue Code if:

• substantially all of its assets consist of debt obligations or interests in debt obligations;

• more than 50% of those debt obligations are real estate mortgage loans or interests in real estate mortgage loans as of specified testing dates;

• the entity has issued debt obligations that have two or more maturities; and

• the payments required to be made by the entity on its debt obligations “bear a relationship” to the payments to be received by the entity on the debt obligations that it holds as assets.

Under the Treasury regulations, if less than 80% of the assets of an entity (or a portion of an entity) consist of debt obligations, these debt obligations are considered not to comprise “substantially all” of its assets, and therefore the entity would not be treated as a taxable mortgage pool.

Taberna’s securitizations of mortgage loans are likely classified as taxable mortgage pool securitizations. As we and Taberna continue to make significant investments in mortgage loans, CMBS or RMBS securities, we both will likely continue to engage in securitization structures, similar to these securitizations whereby we or Taberna convey one or more pools of real estate mortgage loans to a trust, which issues several classes of mortgage-backed bonds having different maturities, and the cash flow on the real estate mortgage loans will be the sole source of payment of principal and interest on the several classes of mortgage-backed bonds. As with Taberna’s securitizations through December 31, 2006, neither we nor Taberna would likely not make a REMIC election with respect to such securitization transactions, and, as a result, each such similar transaction would also be a taxable mortgage pool securitization.

A taxable mortgage pool generally is treated as a corporation for U.S. federal income tax purposes. However, special rules apply to a REIT, a portion of a REIT, or a qualified REIT subsidiary that is a taxable mortgage pool. If a REIT owns directly, or indirectly through one or more qualified REIT subsidiaries or other entities that are disregarded as a separate entity for U.S. federal income tax purposes, 100% of the equity interest in the taxable mortgage pool, the taxable mortgage pool will be a qualified REIT subsidiary and, therefore, ignored as an entity separate from the parent REIT for U.S. federal income tax purposes and would not generally affect the qualification of the REIT. Rather, the consequences of the taxable mortgage pool classification would generally, except as described below, be limited to the REIT’s shareholders. See “—Excess Inclusion Income.”

If we or Taberna own less than 100% of the ownership interests in a subsidiary that is a taxable mortgage pool or fail to qualify as a REIT, the foregoing rules would not apply. Rather, the subsidiary would be treated as a corporation for U.S. federal income tax purposes, and would potentially be subject to corporate income tax. In addition, this characterization would alter our or Taberna’s REIT income and asset test calculations and could adversely affect our or Taberna’s compliance with those requirements. We do not expect that we or Taberna will form any subsidiary in which we or Taberna own some, but less than all, of the ownership interests that would become a taxable mortgage pool, and we intend to monitor the structure of any taxable mortgage pools in which we or Taberna have an interest to ensure that they will not adversely affect our or Taberna’s REIT qualification.

Gross Income Tests

In order to maintain each of our and Taberna’s qualification as REITs, each entity must satisfy two gross income tests annually. First, at least 75% of our and Taberna’s gross income for each taxable year, excluding gross income from “prohibited transactions,” must be derived from investments relating to real property or mortgages on real property, including “rents from real property,” dividends received from other REITs (including, in RAIT’s case, dividends from Taberna, provided Taberna qualifies as a REIT), interest income derived from mortgage loans secured by real property (including certain types of mortgage-backed securities), and gains from the sale of real estate assets, as well as income from certain kinds of temporary investments. Second, at least 95% of each of our and Taberna’s gross income in each taxable year, excluding gross income from prohibited transactions, must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as other dividends, interest, and gain from the sale or disposition of shares or securities, which need not have any relation to real property.

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For purposes of the 75% and 95% gross income tests, a REIT is deemed to have earned a proportionate share of the income earned by any partnership, or any limited liability company treated as a partnership for U.S. federal income tax purposes, in which it owns an interest, which share is determined by reference to its capital interest in such entity, and is deemed to have earned the income earned by any qualified REIT subsidiary.

Interest Income. Interest income constitutes qualifying mortgage interest for purposes of the 75% gross income test to the extent that the obligation is secured by a mortgage on real property. If a REIT receives interest income with respect to a mortgage loan that is secured by both real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that such REIT acquired or originated the mortgage loan, the interest income will be apportioned between the real property and the other property, and its income from the loan will qualify for purposes of the 75% gross income test only to the extent that the interest is allocable to the real property. Even if a loan is not secured by real property or is under-secured, the income that it generates may nonetheless qualify for purposes of the 95% gross income test.

To the extent that the terms of a loan provide for contingent interest that is based on the cash proceeds realized upon the sale of the property securing the loan (a “shared appreciation provision”), income attributable to the participation feature will be treated as gain from sale of the underlying property, which generally will be qualifying income for purposes of both the 75% and 95% gross income tests, provided that the property is not inventory or dealer property in the hands of the borrower or the lender.

To the extent that a REIT derives interest income from a loan where all or a portion of the amount of interest payable is contingent, such income generally will qualify for purposes of the gross income tests only if it is based upon the gross receipts or sales and not the net income or profits of any person. This limitation does not apply, however, to a mortgage loan where the borrower derives substantially all of its income from the property from the leasing of substantially all of its interest in the property to tenants, to the extent that the rental income derived by the borrower would qualify as rents from real property had it been earned directly by the lender.

Any amount includible in a REITs gross income with respect to a regular or residual interest in a REMIC generally is treated as interest on an obligation secured by a mortgage on real property. If, however, less than 95% of the assets of a REMIC consists of real estate assets (determined as if such REIT held such assets), such REIT will be treated as receiving directly its proportionate share of the income of the REMIC.

Among the assets that we hold are mezzanine loans secured by equity interests in a pass-through entity that directly or indirectly owns real property, rather than a direct mortgage on the real property. IRS Revenue Procedure 2003-65 provides a safe harbor pursuant to which a mezzanine loan, if it meets each of the requirements contained in the Revenue Procedure, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from it will be treated as qualifying real estate income for purposes of the 75% gross income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. Moreover, the mezzanine loans that we hold and that we may acquire in the future do not and may not meet all of the requirements for reliance on this safe harbor. Hence, there can be no assurance that the IRS will not challenge the qualification of our mezzanine loans as real estate assets or the interest generated by these loans as qualifying income under the 75% gross income test. To the extent we have made or make corporate mezzanine loans, such loans will not qualify as real estate assets and interest income with respect to such loans will not be qualifying income for the 75% gross income test.

We believe that the interest, original issue discount, and market discount income that we and Taberna receive from mortgage-related securities generally will be qualifying income for purposes of both gross income tests. However, to the extent that we or Taberna own non-REMIC collateralized mortgage obligations or other debt instruments secured by mortgage loans (rather than by real property) or secured by non-real estate assets, or debt securities that are not secured by mortgages on real property or interests in real property, the interest income received with respect to such securities generally will be qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. In addition, the loan amount of a mortgage loan that we or Taberna own may exceed the value of the real property securing the loan. In that case, a portion of the income from the loan will be qualifying income for purposes of the 95% gross income test, but not the 75% gross income test.

Dividend Income. We and Taberna may receive distributions from TRSs or other corporations that are not REITs or qualified REIT subsidiaries. These distributions will generally be classified as dividend income to the extent of the earnings and profits of the distributing corporation. Such distributions will generally constitute qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. Any dividends received by us or Taberna from a REIT (including dividends RAIT receives from Taberna, provided Taberna qualifies as a REIT) will be qualifying income for purposes of both the 95% and 75% gross income tests. We and Taberna likely will be required to include in its income, even without the receipt of actual distributions, earnings from its foreign TRSs which are CDOs. Taberna treats and we intend to treat certain

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of these income inclusions as qualifying income for purposes of the 95% gross income test but not the 75% gross income test. The provisions that set forth what income is qualifying income for purposes of the 95% gross income test provide that gross income derived from dividends, interest and certain other enumerated classes of passive income qualify for purposes of the 95% gross income test. Income inclusions from equity investments in foreign TRSs which are CDOs are technically neither dividends nor any of the other enumerated categories of income specified in the 95% gross income test for U.S. federal income tax purposes, and there is no other clear precedent with respect to the qualification of such income. However, based on advice of counsel, Taberna treats and we intend to treat such income inclusions, to the extent distributed by a foreign TRS which are CDOs in the year accrued, as qualifying income for purposes of the 95% gross income test. Nevertheless, because this income does not meet the literal requirements of the REIT provisions, it is possible that the IRS could successfully take the position that such income is not qualifying income. In the event that such income was determined not to qualify for the 95% gross income test, we and Taberna would be subject to a penalty tax with respect to such income to the extent it and other nonqualifying income exceeds 5% of gross income and/or we or Taberna could fail to qualify as a REIT. In addition, if such income was determined not to qualify for the 95% gross income test, we or Taberna would need to invest in sufficient qualifying assets, or sell some interests in foreign TRSs which are CDOs to ensure that the income recognized from foreign TRSs which are CDOs or such other corporations does not exceed 5% of gross income, or cease to qualify as a REIT. See “—Failure to Satisfy the Gross Income Tests.”

Hedging Transactions. We and Taberna may enter into hedging transactions with respect to one or more of our assets or liabilities. Hedging transactions could take a variety of forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. Except to the extent provided by the Treasury regulations, any income from a hedging transaction we enter into in the normal course of its business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, which is clearly identified as specified in the Treasury regulations before the close of the day on which it was acquired, originated, or entered into, including gain from the sale or disposition of such a transaction, will not constitute gross income for purposes of the 95% gross income test (and will generally constitute non-qualifying income for purposes of the 75% gross income test if the hedging transaction was entered into on or before July 30, 2008, but will not constitute non-qualifying income for purposes of the 75% gross income test if the hedging transaction was entered into after July 30, 2008). To the extent that we or Taberna enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. We and Taberna intend to structure any hedging transactions in a manner that does not jeopardize our or Taberna’s qualification as a REIT.

Rents from Real Property. To the extent that a REIT owns real property or interests therein, rents it receives will qualify as “rents from real property” in satisfying the gross income tests described above only if several conditions are met, including the following. If rent attributable to personal property leased in connection with real property is greater than 15% of the total rent received under any particular lease, then all of the rent attributable to such personal property will not qualify as rents from real property. The determination of whether an item of personal property constitutes real or personal property under the REIT provisions of the Internal Revenue Code is subject to both legal and factual considerations and is therefore subject to different interpretations.

In addition, in order for rents received by a REIT to qualify as “rents from real property,” the rent must not be based in whole or in part on the income or profits of any person. However, an amount will not be excluded from rents from real property solely by being based on a fixed percentage or percentages of sales or if it is based on the net income of a tenant which derives substantially all of its income with respect to such property from subleasing of substantially all of such property, to the extent that the rents paid by the subtenants would qualify as rents from real property, if earned directly by the REIT. Moreover, for rents received to qualify as “rents from real property,” a REIT generally must not operate or manage the property or furnish or render certain services to the tenants of such property, other than through an “independent contractor” who is adequately compensated and from which we derive no income, or through a TRS, as discussed below. A REIT is permitted, however, to perform services that are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. In addition, a REIT may directly or indirectly provide non-customary services to tenants of its properties without disqualifying all of the rent from the property if the payment for such services does not exceed 1% of the total gross income from the property. In such a case, only the amounts for non-customary services are not treated as rents from real property and the provision of the services does not disqualify the related rent. Moreover, a REIT is permitted to provide services to tenants through a TRS without disqualifying the rental income received from tenants for purposes of the REIT gross income tests.

Rental income will qualify as rents from real property only to the extent that we a REIT does not directly or constructively own, (1) in the case of any tenant which is a corporation, shares possessing 10% or more of the total combined voting power of all classes of shares entitled to vote, or 10% or more of the total value of shares of all classes of shares of such tenant, or (2) in the case of any tenant which is not a corporation, an interest of 10% or more in the assets or net profits

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of such tenant. However, rental payments from a TRS will qualify as rents from real property even if a REIT owns more than 10% of the combined voting power of the TRS if at least 90% of the property is leased to unrelated tenants and the rent paid by the TRS is substantially comparable to the rent paid by the unrelated tenants for comparable space.

Failure to Satisfy the Gross Income Tests. We intend to monitor our and Taberna’s sources of income, including any non-qualifying income received by us or Taberna, so as to ensure our and Taberna’s compliance with the gross income tests. If we or Taberna fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we or Taberna, as the case may be, may still qualify as a REIT for the year if entitled to relief under applicable provisions of the Internal Revenue Code. These relief provisions will generally be available if the failure to meet these tests was due to reasonable cause and not due to willful neglect and, following the identification of such failure, we or Taberna set forth a description of each item of our or Taberna’s gross income that satisfies the gross income tests in a schedule for the taxable year filed in accordance with the Treasury regulations. It is not possible to state whether we or Taberna would be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions are inapplicable to a particular set of circumstances, we or Taberna will not qualify as a REIT. As discussed above under “—Taxation of REITs in General,” even where these relief provisions apply, a tax would be imposed upon the profit attributable to the amount by which we or Taberna fail to satisfy the particular gross income test multiplied by a fraction intended to reflect our or its profitability. If the IRS were to determine that Taberna failed the 95% gross income test because income inclusions with respect to its equity investments in foreign TRSs which are CDOs that were distributed by the foreign TRSs during the year such income was accrued are not qualifying income, it is possible that the IRS would not consider Taberna’s position taken with respect to such income, and accordingly its failure to satisfy the 95% gross income test, to be considered to be due to reasonable cause and not due to willful neglect. If the IRS were to successfully assert this position, Taberna, and therefore very likely RAIT, would fail to qualify as a REIT. See “Failure to Qualify.”

Asset Tests

A REIT, at the close of each calendar quarter, must also satisfy four tests relating to the nature of its assets. First, at least 75% of the value of the REIT’s total assets must be represented by some combination of “real estate assets,” cash, cash items, U.S. government securities and, under some circumstances, shares or debt instruments purchased with new capital. For this purpose, real estate assets include interests in real property, such as land, buildings, leasehold interests in real property, shares of other corporations that qualify as REITs (including Taberna shares owned by RAIT, provided Taberna qualifies as a REIT) and certain kinds of mortgage-backed securities and mortgage loans. Assets that do not qualify for purposes of the 75% test are subject to the additional asset tests described below.

Second, the value of any one issuer’s securities owned by the REIT may not exceed 5% of the value of the REIT’s gross assets. Third, the REIT may not own more than 10% of any one issuer’s outstanding securities, as measured by either voting power or value. Fourth, the aggregate value of all securities of TRSs held by a REIT may not exceed 20% (25% for 2009 and subsequent tax years) of the value of such REIT’s gross assets.

The 5% and 10% asset tests do not apply to securities of TRSs and qualified REIT subsidiaries. The 10% value test does not apply to certain “straight debt” and other excluded securities, as described in the Internal Revenue Code, including but not limited to any loan to an individual or an estate, any obligation to pay rents from real property and any security issued by a REIT. In addition, (a) a REIT’s interest as a partner in a partnership is not considered a security for purposes of applying the 10% value test; (b) any debt instrument issued by a partnership (other than straight debt or other excluded security) will not be considered a security issued by the partnership if at least 75% of the partnership’s gross income is derived from sources that would qualify for the 75% REIT gross income test; and (c) any debt instrument issued by a partnership (other than straight debt or other excluded security) will not be considered a security issued by the partnership to the extent of the REIT’s interest as a partner in the partnership.

For purposes of the 10% value test, “straight debt” means a written unconditional promise to pay on demand on a specified date a sum certain in money if (i) the debt is not convertible, directly or indirectly, into shares, (ii) the interest rate and interest payment dates are not contingent on profits, the borrower’s discretion, or similar factors other than certain contingencies relating to the timing and amount of principal and interest payments, as described in the Internal Revenue Code and (iii) in the case of an issuer which is a corporation or a partnership, securities that otherwise would be considered straight debt will not be so considered if the REIT, and any of its “controlled TRSs” as defined in the Internal Revenue Code, hold any securities of the corporate or partnership issuer which: (a) are not straight debt or other excluded securities (prior to the application of this rule), and (b) have an aggregate value greater than 1% of the issuer’s outstanding securities (including, for the purposes of a partnership issuer, the REIT’s interest as a partner in the partnership).

After initially meeting the asset tests at the close of any quarter, a REIT will not lose its qualification as such for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If a REIT fails to satisfy the asset tests because it acquires securities during a quarter, it can cure this failure by disposing of sufficient non-qualifying

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assets within 30 days after the close of that quarter. If a REIT fails the 5% asset test, or the 10% vote or value asset tests at the end of any quarter and such failure is not cured within 30 days thereafter, the REIT may dispose of sufficient assets (generally within six months after the last day of the quarter in which such REIT’s identification of the failure to satisfy these asset tests occurred) to cure such a violation that does not exceed the lesser of 1% of its assets at the end of the relevant quarter or $10,000,000. If a REIT fails any of the other asset tests or its failure of the 5% and 10% asset tests is in excess of the de minimis amount described above, as long as such failure was due to reasonable cause and not willful neglect, the REIT is permitted to avoid disqualification as a REIT, after the 30 day cure period, by taking steps including the disposition of sufficient assets to meet the asset test (generally within six months after the last day of the quarter in which the identification of the failure to satisfy the REIT asset test occurred) and paying a tax equal to the greater of $50,000 or the highest corporate income tax rate (currently 35%) of the net income generated by the non-qualifying assets during the period in which the REIT fails to satisfy the asset test.

We expect that the assets and mortgage-related securities that we and Taberna own generally will be qualifying assets for purposes of the 75% asset test. However, to the extent that we or Taberna own non-REMIC collateralized mortgage obligations or other debt instruments secured by mortgage loans (rather than by real property) or secured by non-real estate assets, or debt securities issued by corporations that are not secured by mortgages on real property, those securities may not be qualifying assets for purposes of the 75% asset test. In addition, to the extent we or Taberna own the equity of a TruPS securitization and do not make a TRS election with respect to such entity, we or Taberna, as the case may be, will be deemed to own such TruPS, which will not be a qualifying real estate asset for purposes of the 75% asset test described above. We believe that our and Taberna’s holdings of securities and other assets will be structured in a manner that will comply with the foregoing REIT asset requirements and intend to monitor compliance on an ongoing basis. Moreover, values of some assets may not be susceptible to a precise determination and are subject to change in the future. Furthermore, the proper classification of an instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset tests. As an example, if we or Taberna were to make an investment in preferred securities or other equity securities of a REIT issuer that were determined by the IRS to represent debt securities of such issuer, such securities would also not qualify as real estate assets. Accordingly, there can be no assurance that the IRS will not contend that interests in subsidiaries or in the securities of other issuers (including REIT issuers) cause a violation of the REIT asset tests.

We have acquired and Taberna and we may acquire mezzanine loans, which are loans secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan, if it meets each of the requirements contained in the Revenue Procedure, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying real estate income for purposes of the REIT 75% income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. RAIT has acquired and we and Taberna may acquire mezzanine loans that may not meet all of the requirements for reliance on this safe harbor. In the event we or Taberna own a mezzanine loan that does not meet the safe harbor, the IRS could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests, and if such a challenge were sustained, we or Taberna could fail to qualify as a REIT.

We and Taberna have entered into and intend to enter into sale and repurchase agreements under which we and Taberna nominally sell certain of their mortgage assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets. We and Taberna believe that they have been and will be treated for U.S. federal income tax purposes as the owner of the mortgage assets that are the subject of any such agreement notwithstanding that they may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we or Taberna did not own the mortgage assets during the term of the sale and repurchase agreement, in which case our or Taberna’s ability to qualify as a REIT would be adversely affected.

Annual Distribution Requirements

In order to qualify as REITs, we and Taberna are required to make distributions, other than capital gain dividends, to our respective shareholders (principally us, in the case of Taberna) in an amount at least equal to:

(a) the sum of:

• 90% of our “REIT taxable income” (computed without regard to its deduction for dividends paid and our net capital gains); and

• 90% of the net income (after tax), if any, from foreclosure property (as described below); minus

(b) the sum of specified items of non-cash income that exceeds a percentage of its income.

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These distributions must be paid in the taxable year to which they relate or in the following taxable year if such distributions are declared in October, November or December of the taxable year, are payable to shareholders of record on a specified date in any such month and are actually paid before the end of January of the following year. Such distributions are treated as both paid by us and received by each shareholder on December 31 of the year in which they are declared. In addition, at its election, a distribution for a taxable year may be declared before a REIT timely files its tax return for the year and be paid with or before the first regular dividend payment after such declaration, provided that such payment is made during the 12-month period following the close of such taxable year. These distributions are taxable to the REIT’s shareholders in the year in which paid, even though the distributions relate to its prior taxable year for purposes of the 90% distribution requirement.

In order for distributions to be counted towards our distribution requirement and to provide us with a tax deduction, they must not be “preferential dividends.” A dividend is not a preferential dividend if it is pro rata among all outstanding shares within a particular class and is in accordance with the preferences among different classes of shares as set forth in our organizational documents.

To the extent that we or Taberna distribute at least 90%, but less than 100%, of our or its “REIT taxable income,” as adjusted, we or it, as the case may be, will be subject to tax at ordinary corporate tax rates on the retained portion. In addition, we or Taberna may elect to retain, rather than distribute, our or its net long-term capital gains and pay tax on such gains. In this case, we or Taberna, as the case may be, could elect to have our or its shareholders include their proportionate share of such undistributed long-term capital gains in income and receive a corresponding credit for their proportionate share of the tax paid by us or Taberna. Our or Taberna’s shareholders would then increase the adjusted basis of their shares in us or Taberna by the difference between the designated amounts included in their long-term capital gains and the tax deemed paid with respect to their proportionate shares.

If we or Taberna fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our or its REIT capital gain net income for such year and (c) any undistributed taxable income from prior periods, we or Taberna, as the case may be, will be subject to a 4% excise tax on the excess of such required distribution over the sum of (x) the amounts actually distributed (taking into account excess distributions from prior periods) and (y) the amounts of income retained on which we or Taberna, as the case may be, have paid corporate income tax. We intend to make and to have Taberna make timely distributions so that neither we nor Taberna are not subject to the 4% excise tax.

It is possible that we or Taberna, from time to time, may not have sufficient cash to meet the distribution requirements due to timing differences between (a) the actual receipt of cash, including receipt of distributions from our or Taberna’s subsidiaries and (b) the inclusion of items in income by us or Taberna for U.S. federal income tax purposes including the inclusion of items of income from CDO entities in which we or Taberna, as the case may be, hold an equity interest. See “—Effect of Subsidiary Entities—Taxable REIT Subsidiaries.” In the event that such timing differences occur, in order to meet the distribution requirements, it might be necessary to arrange for short-term, or possibly long-term, borrowings or to pay dividends in the form of taxable in-kind distributions of property.

A REIT is also treated as having paid a dividend if it and its shareholders elect to treat certain amounts as distributed, although no actual distribution is made. The election may be filed at any time not later than the date (including extensions) of the REIT’s income tax return for the taxable year for which the dividend paid deduction is claimed. Taberna used this “consent dividend” election to comply with its distribution requirement for 2007 and may do so in 2008 and subsequent years. It, and we, as the holder of all of the common shares of Taberna intend to file such an election with Taberna’s tax return. As a result, we had dividend income from Taberna for 2007 in an amount equal to such consent dividend. We believe we have distributed to our shareholders sufficient dividends for 2007 so that we were in compliance with our distribution requirements even after including the consent dividend from Taberna in our income.

We or Taberna may be able to rectify a failure to meet the distribution requirements for a year by paying “deficiency dividends” to shareholders in a later year, which may be included in our or Taberna’s deduction for dividends paid for the earlier year. In this case, we or Taberna, as the case may be, may be able to avoid losing our or its qualification as a REIT or being taxed on amounts distributed as deficiency dividends. However, we or Taberna, as the case may be, will be required to pay interest and a penalty based on the amount of any deduction taken for deficiency dividends.

Excess Inclusion Income

If we or Taberna own a residual interest in a REMIC, we or Taberna may realize excess inclusion income. If we or Taberna are deemed to have issued debt obligations having two or more maturities, the payments on which correspond to payments on mortgage loans owned by us or Taberna, such arrangement will be treated as a taxable mortgage pool for U.S.

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federal income tax purposes. See “ — Effect of Subsidiary Entities—Taxable Mortgage Pools.” If all or a portion of us or Taberna is treated as a taxable mortgage pool, our or Taberna’s qualification as a REIT generally should not be impaired. However, to the extent that all or a portion of us or Taberna is treated as a taxable mortgage pool, or we or Taberna make investments or enter into financing and securitization transactions, such as Taberna’s five mortgage loan securitizations through December 31, 2005, that give rise to Taberna being considered to own an interest in one or more taxable mortgage pools, a portion of our or Taberna’s REIT taxable income may be characterized as excess inclusion income and allocated to our or Taberna’s shareholders (principally RAIT), generally in a manner set forth under the applicable Treasury regulations. We expect that such financing and securitization transactions will result in a significant portion of Taberna’s income being considered excess inclusion income. The U.S. Treasury Department has issued guidance on the tax treatment of shareholders of a REIT that owns an interest in a taxable mortgage pool. Excess inclusion income is an amount, with respect to any calendar quarter, equal to the excess, if any, of (i) income allocable to the holder of a residual interest in a REMIC during such calendar quarter over (ii) the sum of amounts allocated to each day in the calendar quarter equal to its ratable portion of the product of (a) the adjusted issue price of the interest at the beginning of the quarter multiplied by (b) 120% of the long term federal rate (determined on the basis of compounding at the close of each calendar quarter and properly adjusted for the length of such quarter). Taberna’s excess inclusion income would be largely allocated to us, and our excess inclusion income would be allocated among our shareholders that hold our stock in record name in proportion to dividends paid to such shareholders. A shareholder’s share of any excess inclusion income:

• could not be offset by net operating losses of a shareholder;

• in the case of a shareholder that is a REIT, RIC, common trust fund or other pass-through entity, would be considered excess inclusion income of such entity to the extent allocated to their owners that are disqualified organizations;

• would be subject to tax as UBTI to a tax-exempt holder;

• would be subject to the application of the U.S. federal income tax withholding (without reduction pursuant to any otherwise applicable income tax treaty) with respect to amounts allocable to non-U.S. shareholders (as defined below); and

• would be taxable (at the highest corporate tax rates) to us, rather than our shareholders, to the extent allocable to our shares held in record name by disqualified organizations (generally, tax-exempt entities not subject to unrelated business income tax, including governmental organizations). Nominees or other broker/dealers who hold our shares on behalf of disqualified organizations are subject to this tax on the portion of our excess inclusion income allocable to the common stock held on behalf of disqualified organizations.

Tax-exempt investors, foreign investors and taxpayers with net operating losses should carefully consider the tax consequences described above and should consult their tax advisors with respect to excess inclusion income.

Prohibited Transactions

Net income derived from a prohibited transaction is subject to a 100% tax. The term “prohibited transaction” generally includes a sale or other disposition of property (other than foreclosure property) that is held as inventory or primarily for sale to customers in the ordinary course of a trade or business by a REIT, by a pass-through entity in which the REIT holds an equity interest or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to the REIT. We intend to conduct our operations so that no asset owned by us, Taberna or our pass-through subsidiaries will be held as inventory or for sale to customers in the ordinary course of business. However, whether property is held “for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances. No assurance can be given that any particular property in which we or Taberna hold a direct or indirect interest will not be treated as property held for sale to customers or that certain safe-harbor provisions of the Internal Revenue Code that prevent such treatment will apply. The 100% tax will not apply to gains from the sale of property by a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular U.S. federal corporate income tax rates.

Foreclosure Property

Foreclosure property is real property and any personal property incident to such real property (1) that is acquired by a REIT as a result of the REIT having bid on the property at foreclosure or having otherwise reduced the property to ownership or possession by agreement or process of law after there was a default (or default was imminent) on a lease of the property or a mortgage loan held by the REIT and secured by the property, (2) for which the related loan or lease was acquired by the REIT at a time when default was not imminent or anticipated and (3) for which such REIT makes a proper election to treat the property as foreclosure property. REITs generally are subject to tax at the maximum corporate rate (currently 35%) on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income that would otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale of

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property for which a foreclosure property election has been made will not be subject to the 100% tax on gains from prohibited transactions described above, even if the property would otherwise constitute inventory or property held for sale to customers in the ordinary course of business in the hands of the selling REIT. We do not anticipate that we or Taberna will receive any income from foreclosure property that is not qualifying income for purposes of the 75% gross income test, but, if we or Taberna do receive any such income, we intend to elect, or to have Taberna elect, to treat the related property as foreclosure property.

Failure to Qualify

In the event that we or Taberna violate a provision of the Internal Revenue Code that would result in our or its failure to qualify as a REIT, specified relief provisions will be available to us or Taberna to avoid such disqualification if (1) the violation is due to reasonable cause and not due to willful neglect, (2) we or Taberna pay a penalty of $50,000 for each failure to satisfy the provision and (3) the violation does not include a violation under the gross income or asset tests described above (for which other specified relief provisions are available). This cure provision reduces the instances that could lead to our or Taberna’s disqualification as a REIT for violations due to reasonable cause and not due to willful neglect. If we or Taberna fail to qualify for taxation as a REIT in any taxable year and none of the relief provisions of the Internal Revenue Code apply, we or Taberna will be subject to tax, including any applicable alternative minimum tax, on our or Taberna’s taxable income at regular corporate rates. Distributions to our shareholders in any year in which we are not a REIT will not be deductible by us or Taberna, nor will they be required to be made. In this situation, to the extent of current and accumulated earnings and profits, and, subject to limitations of the Internal Revenue Code, distributions to our or Taberna’s shareholders will generally be taxable in the case of our shareholders who are individual U.S. shareholders (as defined below), at a maximum rate of 15%, and dividends in the hands of our corporate U.S. shareholders may be eligible for the dividends received deduction. In addition, our or Taberna’s taxable mortgage pool securitizations will be treated as separate taxable corporations for U.S. federal income tax purposes. Unless we are entitled to relief under the specific statutory provisions, we or Taberna will also be disqualified from re-electing to be taxed as a REIT for the four taxable years following a year during which qualification was lost. It is not possible to state whether, in all circumstances, we or Taberna will be entitled to statutory relief.

Taxation of Shareholders

Taxation of Taxable U.S. Shareholders. This section summarizes the taxation of U.S. shareholders that are not tax-exempt organizations. For these purposes, a U.S. shareholder is a beneficial owner of either our common shares that for U.S. federal income tax purposes is:

• a citizen or resident of the United States;

• a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or of a political subdivision thereof (including the District of Columbia);

• an estate whose income is subject to U.S. federal income taxation regardless of its source; or

• any trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our common shares, the U.S. federal income tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding our common shares should consult its tax advisor regarding the U.S. federal income tax consequences to the partner of the acquisition, ownership and disposition of our common shares by the partnership.

Distributions. Provided that we qualify as a REIT, distributions made to our taxable U.S. shareholders out of our current and accumulated earnings and profits, and not designated as capital gain dividends, will generally be taken into account by them as ordinary dividend income and will not be eligible for the dividends received deduction generally available to corporate U.S. shareholders. In determining the extent to which a distribution with respect to our common shares constitutes a dividend for U.S. federal income tax purposes, our earnings and profits will be allocated first to distributions with respect to our preferred shares of beneficial interest and then to its common shares. Dividends received from REITs generally are not eligible to be taxed at the preferential qualified dividend income rates applicable to individual U.S. shareholders who receive dividends from regular corporations.

In addition, distributions from us that are designated as capital gain dividends will be taxed to U.S. shareholders as long-term capital gains, to the extent that they do not exceed the actual net capital gain of us for the taxable year, without

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regard to the period for which the U.S. shareholder has held its shares. To the extent that we elect under the applicable provisions of the Internal Revenue Code to retain its net capital gains, U.S. shareholders will be treated as having received, for U.S. federal income tax purposes, our undistributed capital gains as well as a corresponding credit for taxes paid by us on such retained capital gains. U.S. shareholders will increase their adjusted tax basis in our common shares by the difference between their allocable share of such retained capital gain and their share of the tax paid by us. Corporate U.S. shareholders may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally taxable at maximum U.S. federal income tax rates of 15% (through 2010) in the case of U.S. shareholders who are individuals, and 35% for corporations. Capital gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% maximum U.S. federal income tax rate for individual U.S. shareholders, to the extent of previously claimed depreciation deductions.

Distributions in excess of our current and accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the adjusted tax basis of the U.S. shareholder’s shares in respect of which the distributions were made, but rather will reduce the adjusted tax basis of these shares. To the extent that such distributions exceed the adjusted tax basis of an individual U.S. shareholder’s shares, they will be included in income as long-term capital gain, or short-term capital gain if the shares have been held for one year or less. In addition, any dividend declared by us in October, November or December of any year and payable to a U.S. shareholder of record on a specified date in any such month will be treated as both paid by us and received by the U.S. shareholder on December 31 of such year, provided that the dividend is actually paid by us before the end of January of the following calendar year.

With respect to individual U.S. shareholders, we may elect to designate a portion of its distributions paid to such U.S. shareholders as “qualified dividend income.” A portion of a distribution that is properly designated as qualified dividend income is taxable to non-corporate U.S. shareholders as capital gain, provided that the U.S. shareholder has held the common shares with respect to which the distribution is made for more than 60 days during the 121-day period beginning on the date that is 60 days before the date on which such common shares became ex-dividend with respect to the relevant distribution. The maximum amount of our distributions eligible to be designated as qualified dividend income for a taxable year is equal to the sum of:

(a) the qualified dividend income received by us during such taxable year from non-REIT corporations that are subject to U.S. federal income tax;

(b) the excess of any “undistributed” REIT taxable income recognized during the immediately preceding year over the U.S. federal income tax paid by us with respect to such undistributed REIT taxable income; and

(c) the excess of any income recognized during the immediately preceding year attributable to the sale of a built-in-gain asset that was acquired in a carry-over basis transaction from a non-REIT C corporation over the U.S. federal income tax paid by us with respect to such built-in gain.

In addition, to the extent Taberna pays dividends to us comprised of the above items, our dividends should generally be treated as qualified dividend income.

Generally, dividends that we receive will be treated as qualified dividend income for purposes of (a) above if the dividends are received from a domestic corporation (other than a REIT or a RIC), which are subject to U.S. federal income tax, or a “qualifying foreign corporation” and specified holding period requirements and other requirements are met. We expect that any foreign corporate CDO entity in which we or Taberna invest would not be a “qualifying foreign corporation,” and accordingly our distribution of any income with respect to such entities will not constitute “qualified dividend income.”

To the extent that we or Taberna have available net operating losses and capital losses carried forward from prior tax years, such losses may reduce the amount of distributions that must be made in order to comply with the REIT distribution requirements. See “—Taxation of REITs in General” and “—Annual Distribution Requirements . “ Such losses, however, are not passed through to our shareholders (and, in the case of Taberna, are not passed through to us) and do not offset income of our shareholders from other sources, nor do they affect the character of any distributions that are actually made by us, which are generally subject to tax in the hands of our shareholders to the extent that we have current or accumulated earnings and profits.

Dispositions of Our Common Shares. In general, a U.S. shareholder will realize gain or loss upon the sale, redemption or other taxable disposition of our common shares in an amount equal to the difference between the sum of the fair market value of any property and the amount of cash received in such disposition and the U.S. shareholder’s adjusted tax basis in the common shares at the time of the disposition. In general, a U.S. shareholder’s adjusted tax basis will equal the U.S. shareholder’s acquisition cost, increased by the excess of net capital gains deemed distributed to the U.S. shareholder (discussed above) less tax deemed paid on it and reduced by returns of capital. In general, capital gains recognized by individual U.S. shareholders upon the sale or disposition of our common shares will be subject to a maximum U.S. federal

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income tax rate of 15% for taxable years through 2010, if our common shares are held for more than 12 months, and will be taxed at ordinary income rates (of up to 35% through 2010) if our common shares are held for 12 months or less. Gains recognized by U.S. shareholders that are corporations are subject to U.S. federal income tax at a maximum rate of 35%, whether or not classified as long-term capital gains. The IRS has the authority to prescribe, but has not yet prescribed, regulations that would apply a U.S. federal income tax rate of 25% (which is generally higher than the long-term capital gain tax rates for non-corporate holders) to a portion of capital gain realized by an individual holder on the sale of REIT shares that would correspond to the REIT’s “unrecaptured Section 1250 gain.” Capital losses recognized by a U.S. shareholder upon the disposition of our common shares held for more than one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain income of the U.S. shareholder but not ordinary income (except in the case of individuals, who may offset up to $3,000 of ordinary income each year). In addition, any loss upon a sale or exchange of our common shares by a U.S. shareholder who has held the shares for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions received from us that were required to be treated by the U.S. shareholder as long-term capital gain.

Passive Activity Losses and Investment Interest Limitations. Distributions made by us and gain arising from the sale or exchange by a U.S. shareholder of our common shares will not be treated as passive activity income. As a result, U.S. shareholders will not be able to apply any “passive losses” against income or gain relating to its ownership of our common shares. Distributions made by us, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation. A U.S. shareholder that elects to treat capital gain dividends, capital gains from the disposition of shares or qualified dividend income as investment income for purposes of the investment interest limitation will be taxed at ordinary income rates on such amounts.

Taxation of Tax-Exempt U.S. Shareholders. U.S. tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from U.S. federal income taxation. However, they are subject to taxation on their UBTI. While many investments in real estate may generate UBTI, the IRS has ruled that dividend distributions from a REIT to a tax-exempt entity do not constitute UBTI. Based on that ruling, and provided that (1) a tax-exempt U.S. shareholder has not held our common shares as “debt financed property” within the meaning of the Internal Revenue Code ( i.e., where the acquisition or holding of the property is financed through a borrowing by the tax-exempt shareholder), (2) the common shares of us are not otherwise used in an unrelated trade or business, and (3) we and Taberna do not hold an asset that generates “excess inclusion income” (See “—Effect of Subsidiary Entities—Taxable Mortgage Pools” and “—Excess Inclusion Income”), distributions from us and income from the sale of our common shares should generally not be treated as UBTI to a tax-exempt U.S. shareholder. We and Taberna expect to engage in transactions that result in a portion of our dividend income being considered “excess inclusion income,” and accordingly, it is likely that a significant portion of our dividends received by a tax-exempt shareholder will be treated as UBTI.

Tax-exempt U.S. shareholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code, respectively, are subject to different UBTI rules, which generally will require them to characterize distributions from us as UBTI.

In certain circumstances, a pension trust (1) that is described in Section 401(a) of the Internal Revenue Code, (2) is tax exempt under Section 501(a) of the Internal Revenue Code, and (3) that owns more than 10% of our shares could be required to treat a percentage of the dividends from us as UBTI if we are a “pension-held REIT.” We will not be a pension-held REIT unless (1) either (A) one pension trust owns more than 25% of the value of our shares, or (B) a group of pension trusts, each individually holding more than 10% of the value of our shares, collectively owns more than 50% of such shares; and (2) we would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Internal Revenue Code provides that shares owned by such trusts shall be treated, for purposes of the requirement that not more than 50% of the value of the outstanding shares of a REIT is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Internal Revenue Code to include certain entities) by the beneficiaries of such trusts. Certain restrictions on ownership and transfer of our shares should generally prevent a tax-exempt entity from owning more than 10% of the value of our shares, or us from becoming a pension-held REIT.

Tax-exempt U.S. shareholders are urged to consult their tax advisors regarding the U.S. federal, state, local and foreign tax consequences of owning our shares.

Taxation of Non-U.S. Shareholders. The following is a summary of certain U.S. federal income tax consequences of the acquisition, ownership and disposition of our common shares applicable to non-U.S. shareholders of our common shares. For purposes of this summary, a non-U.S. shareholder is a beneficial owner of our common shares that is not a U.S. shareholder. The discussion is based on current law and is for general information only. It addresses only selective and not all aspects of U.S. federal income taxation.

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Ordinary Dividends. The portion of dividends received by non-U.S. shareholders payable out of our earnings and profits that are not attributable to gains from sales or exchanges of U.S. real property interests, or USRPIs, and which are not effectively connected with a U.S. trade or business of the non-U.S. shareholder will generally be subject to U.S. federal withholding tax at the rate of 30%, unless reduced or eliminated by an applicable income tax treaty. Under some treaties, however, lower rates generally applicable to dividends do not apply to dividends from REITs. In addition, any portion of the dividends paid to non-U.S. shareholders that are treated as excess inclusion income will not be eligible for exemption from the 30% withholding tax or a reduced treaty rate. As previously noted, we and Taberna expect to engage in transactions that result in a portion of our dividends being considered “excess inclusion income,” and accordingly, it is likely that a significant portion of our dividends received by a non-U.S. shareholder will not be eligible for exemption from the 30% withholding tax or a reduced treaty rate.

In general, non-U.S. shareholders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our common shares. In cases where the dividend income from a non-U.S. shareholder’s investment in RAIT common shares is, or is treated as, effectively connected with the non-U.S. shareholder’s conduct of a U.S. trade or business, the non-U.S. shareholder generally will be subject to U.S. federal income tax at graduated rates, in the same manner as U.S. shareholders are taxed with respect to such dividends, and may also be subject to a 30% branch profits tax, after the application of the U.S. federal income tax, in the case of a non-U.S. shareholder-that is a corporation.

Non-Dividend Distributions. Unless (A) our common shares constitute a USRPI or (B) either (1) if the non-U.S. shareholder’s investment in our common shares is effectively connected with a U.S. trade or business conducted by such non-U.S. shareholder (in which case the non-U.S. shareholder will be subject to the same treatment as U.S. shareholders with respect to such gain) or (2) if the non-U.S. shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States (in which case the non-U.S. shareholder will be subject to a 30% tax on the individual’s net capital gain for the year), distributions by us which are not dividends out of our earnings and profits will not be subject to U.S. federal income tax. If it cannot be determined at the time at which a distribution is made whether or not the distribution will exceed current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to dividends. However, the non-U.S. shareholder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the distribution was, in fact, in excess of our current and accumulated earnings and profits. If our common shares constitute a USRPI, as described below, distributions by us in excess of the sum of our earnings and profits plus the non-U.S. shareholder’s adjusted tax basis in our common shares will be taxed under the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, at the rate of tax, including any applicable capital gains rates, that would apply to a U.S. shareholder of the same type ( e.g. , an individual or a corporation), and the collection of the tax will be enforced by a withholding at a rate of 10% of the amount by which the distribution exceeds the shareholder’s share of our earnings and profits.

Capital Gain Dividends. Under FIRPTA, a distribution made by us to a non-U.S. shareholder, to the extent attributable to gains from dispositions of USRPIs held by us directly or through pass-through subsidiaries, or USRPI capital gains, will be considered effectively connected with a U.S. trade or business of the non-U.S. shareholder and will be subject to U.S. federal income tax at the rates applicable to U.S. shareholders, without regard to whether the distribution is designated as a capital gain dividend. In addition, we will be required to withhold tax equal to 35% of the amount of capital gain dividends to the extent the dividends constitute USRPI capital gains. Moreover, if a non-U.S. shareholder disposes of our common shares during the 30-day period preceding a dividend payment by us, and such non-U.S. shareholder (or a person related to such non-U.S. shareholder) acquires or enters into a contract or option to acquire our common shares within 61 days of the first day of the 30-day period described above, and any portion of such dividend payment would, but for the disposition, be treated as a USRPI capital gain to such non-U.S. shareholder, then such non-U.S. shareholder shall be treated as having USRPI capital gain in an amount that, but for the disposition, would have been treated as USRPI capital gain. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax when received by a non-U.S. holder that is a corporation. However, the 35% withholding tax will not apply to any capital gain dividend with respect to any class of our shares which is regularly traded on an established securities market located in the United States if the non-U.S. shareholder did not own more than 5% of such class of shares at any time during the taxable year. Instead any capital gain dividend will be treated as a distribution subject to the rules discussed above under “—Taxation of Non-U.S. Shareholders” and “—Ordinary Dividends.” Also, the branch profits tax will not apply to such a distribution. A distribution is not a USRPI capital gain if we held the underlying asset solely as a creditor, although the holding of a shared appreciation mortgage loan would not be solely as a creditor. Capital gain dividends received by a non-U.S. shareholder from a REIT that are not USRPI capital gains generally are not subject to U.S. federal income or withholding tax, unless either (1) if the non-U.S. shareholder’s investment in our common shares is effectively connected with a U.S. trade or business conducted by such non-U.S. shareholder (in which case the non-U.S. shareholder will be subject to the same treatment as U.S. shareholders with respect to such gain) or (2) if the non-U.S. shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States (in which case the non-U.S. shareholder will be subject to a 30% tax on the individual’s net capital gain for the year).

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Dispositions of Our Common Shares. Unless our common shares constitute a USRPI, a sale of the shares by a non-U.S. shareholder generally will not be subject to U.S. federal income taxation under FIRPTA. The shares will not be treated as a USRPI if less than 50% of our assets throughout a prescribed testing period consist of interests in real property located within the United States, excluding, for this purpose, interests in real property solely in a capacity as a creditor. We do not expect that more than 50% of our assets (including our proportionate share of Taberna’s assets) will consist of interests in real property located in the United States.

In addition, our common shares will not constitute a USRPI if we are a “domestically controlled REIT.” A domestically controlled REIT is a REIT in which, at all times during a specified testing period, less than 50% in value of its outstanding shares is held directly or indirectly by non-U.S. shareholders. We believe that we are, and expect us to continue to be, a domestically controlled REIT and, therefore, the sale of our common shares should not be subject to taxation under FIRPTA. However, because our shares are widely held and publicly traded, we cannot assure investors that we are or will remain a domestically controlled REIT. Even if we do not qualify as a domestically controlled REIT, a non-U.S. shareholder’s sale of our common shares nonetheless will generally not be subject to tax under FIRPTA as a sale of a USRPI, provided that (a) our common shares owned are of a class that is “regularly traded,” as defined by the applicable Treasury regulations, on an established securities market, and (b) the selling non-U.S. shareholder owned, actually or constructively, 5% or less of our outstanding shares of that class at all times during a specified testing period.

If gain on the sale of our common shares were subject to taxation under FIRPTA, the non-U.S. shareholder would be subject to the same treatment as a U.S. shareholder with respect to such gain, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals, and the purchaser of the shares could be required to withhold 10% of the purchase price and remit such amount to the IRS.

Gain from the sale of our common shares that would not otherwise be subject to FIRPTA will nonetheless be taxable in the United States to a non-U.S. shareholder in two cases: (a) if the non-U.S. shareholder’s investment in our common shares is effectively connected with a U.S. trade or business conducted by such non-U.S. shareholder, the non-U.S. shareholder will be subject to the same treatment as a U.S. shareholder with respect to such gain, or (b) if the non-U.S. shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain.

Backup Withholding and Information Reporting

We will report to our U.S. shareholders and the IRS the amount of dividends paid during each calendar year and the amount of any tax withheld. Under the backup withholding rules, a U.S. shareholder may be subject to backup withholding with respect to dividends paid unless the holder is a corporation or comes within other exempt categories and, when required, demonstrates this fact or provides a taxpayer identification number or social security number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A U.S. shareholder that does not provide his or her correct taxpayer identification number or social security number may also be subject to penalties imposed by the IRS. In addition, we may be required to withhold a portion of capital gain distribution to any U.S. shareholder who fails to certify its non-foreign status.

We must report annually to the IRS and to each non-U.S. shareholder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. shareholder resides under the provisions of an applicable income tax treaty. A non-U.S. shareholder may be subject to backup withholding unless applicable certification requirements are met.

Payment of the proceeds of a sale of our common shares within the United States is subject to both backup withholding and information reporting unless the beneficial owner certifies under penalties of perjury that it is a non-U.S. shareholder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a U.S. person) or the holder otherwise establishes an exemption. Payment of the proceeds of a sale of our common shares conducted through certain United States related financial intermediaries is subject to information reporting (but not backup withholding) unless the financial intermediary has documentary evidence in its records that the beneficial owner is a non-U.S. shareholder and specified conditions are met or an exemption is otherwise established.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be claimed as a refund or a credit against such holder’s U.S. federal income tax liability, provided the required information is furnished to the IRS.

State, Local and Foreign Taxes

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We and our subsidiaries (including Taberna and its subsidiaries) and our shareholders may be subject to state, local or foreign taxation in various jurisdictions, including those in which we or they transact business, own property or reside. We and Taberna may own interests in properties located in a number of jurisdictions, and may be required to file tax returns in certain of those jurisdictions. The state, local or foreign tax treatment of Taberna, us and our shareholders may not conform to the U.S. federal income tax treatment discussed above. Any foreign taxes incurred by us or Taberna would not pass through to our shareholders as a credit against their U.S. federal income tax liability. Prospective shareholders should consult their tax advisors regarding the application and effect of state, local and foreign income and other tax laws on an investment in our common shares.

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