##### Table of Contents





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 September 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, 17thFloor, 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 64,786,782 common shares of beneficial interest, par value $0.01 per share, of the registrant were outstanding as of November 4, 2008.









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##### Table of Contents

RAIT FINANCIAL TRUST

TABLE OF CONTENTS



|                               |  |                                                                                                                                     |  |     
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                                     |  | Page
|PART I - FINANCIAL INFORMATION
|                               |  |                                                                                                                                    
|Item 1.                        |  | Financial Statements (unaudited)                                                                                                    |  |     
|                               |  |                                                                                                                                    
|                               |  | Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007                                                          |  | 1   
|                               |  |                                                                                                                                    
|                               |  | Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2008 and
2007                  |  | 2   
|                               |  |                                                                                                                                    
|                               |  | Consolidated Statements of Comprehensive Income (Loss) for the Three-Month and Nine-Month Periods Ended September 30, 2008
and 2007 |  | 3   
|                               |  |                                                                                                                                    
|                               |  | Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 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                                               |  | 25  
|                               |  |                                                                                                                                    
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                                                                          |  | 54  
|                               |  |                                                                                                                                    
|Item 4.                        |  | Controls and Procedures                                                                                                             |  | 54  
|                              
|PART II - OTHER INFORMATION   
|                               |  |                                                                                                                                    
|Item 1.                        |  | Legal Proceedings                                                                                                                   |  | 55  
|                               |  |                                                                                                                                    
|Item 1A.                       |  | Risk Factors                                                                                                                        |  | 56  
|                               |  |                                                                                                                                    
|Item 6.                        |  | Exhibits                                                                                                                            |  | 56  
|                               |  |                                                                                                                                    
|                               |  | Signatures of Registrant                                                                                                            |  | 57  



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##### Table of Contents

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 ofSeptember 30,2008 |           |   | As ofDecember 31,2007 |  
|Assets                                                                                                                                                                                                 |  |                        |           |   |                       |   |            |  
|Investments in mortgages and loans, at amortized cost                                                                                                                                                  |  |                        |           |   |                       |   |            |  
|Commercial mortgages, mezzanine loans and other loans                                                                                                                                                  |  | $                      | 2,091,366 |   |                       | $ | 2,189,939  |  
|Residential mortgages and mortgage-related receivables                                                                                                                                                 |  |                        | 3,680,672 |   |                       |   | 4,065,083  |  
|Allowance for losses                                                                                                                                                                                   |  |                        | (65,765   | ) |                       |   | (26,389    | )
|                                                                                                                                                                                                       |  |                        |           |   |                       |   |            |  
|Total investments in mortgages and loans                                                                                                                                                               |  |                        | 5,706,273 |   |                       |   | 6,228,633  |  
|Investments in securities and security-related receivables ($2,524,695 and $2,776,833, respectively, at fair value)                                                                                    |  |                        | 2,524,695 |   |                       |   | 3,827,800  |  
|Investments in real estate interests                                                                                                                                                                   |  |                        | 311,214   |   |                       |   | 284,252    |  
|Cash and cash equivalents                                                                                                                                                                              |  |                        | 38,389    |   |                       |   | 127,987    |  
|Restricted cash                                                                                                                                                                                        |  |                        | 196,671   |   |                       |   | 298,433    |  
|Accrued interest receivable                                                                                                                                                                            |  |                        | 102,190   |   |                       |   | 110,287    |  
|Other assets                                                                                                                                                                                           |  |                        | 39,269    |   |                       |   | 70,725     |  
|Deferred financing costs, net of accumulated amortization of $5,017 and $3,800, respectively                                                                                                           |  |                        | 32,676    |   |                       |   | 53,340     |  
|Intangible assets, net of accumulated amortization of $80,492 and $64,444, respectively                                                                                                                |  |                        | 22,037    |   |                       |   | 56,123     |  
|                                                                                                                                                                                                       |  |                        |           |   |                       |   |            |  
|Total assets                                                                                                                                                                                           |  | $                      | 8,973,414 |   |                       | $ | 11,057,580 |  
|                                                                                                                                                                                                       |  |                        |           |   |                       |   |            |  
|Liabilities and Shareholders equity                                                                                                                                                                   |  |                        |           |   |                       |   |            |  
|Indebtedness                                                                                                                                                                                           |  |                        |           |   |                       |   |            |  
|Repurchase agreements                                                                                                                                                                                  |  | $                      |          |   |                       | $ | 138,788    |  
|Secured credit facilities and other indebtedness                                                                                                                                                       |  |                        | 205,966   |   |                       |   | 146,916    |  
|Mortgage-backed securities issued                                                                                                                                                                      |  |                        | 3,438,431 |   |                       |   | 3,801,959  |  
|Trust preferred obligations ($208,916 at fair value as of September 30, 2008)                                                                                                                          |  |                        | 208,916   |   |                       |   | 450,625    |  
|CDO notes payable ($841,546 at fair value as of September 30, 2008)                                                                                                                                    |  |                        | 2,272,796 |   |                       |   | 5,093,833  |  
|Convertible senior notes                                                                                                                                                                               |  |                        | 404,000   |   |                       |   | 425,000    |  
|                                                                                                                                                                                                       |  |                        |           |   |                       |   |            |  
|Total indebtedness                                                                                                                                                                                     |  |                        | 6,530,109 |   |                       |   | 10,057,121 |  
|Accrued interest payable                                                                                                                                                                               |  |                        | 82,517    |   |                       |   | 65,947     |  
|Accounts payable and accrued expenses                                                                                                                                                                  |  |                        | 17,516    |   |                       |   | 19,197     |  
|Derivative liabilities                                                                                                                                                                                 |  |                        | 233,513   |   |                       |   | 201,581    |  
|Deferred taxes, borrowers escrows and other liabilities                                                                                                                                               |  |                        | 66,432    |   |                       |   | 104,821    |  
|Distributions payable                                                                                                                                                                                  |  |                        |          |   |                       |   | 28,068     |  
|                                                                                                                                                                                                       |  |                        |           |   |                       |   |            |  
|Total liabilities                                                                                                                                                                                      |  |                        | 6,930,087 |   |                       |   | 10,476,735 |  
|Minority interest                                                                                                                                                                                      |  |                        | 361,875   |   |                       |   | 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, 64,783,126 and 61,018,231 issued and outstanding, including 99,721
and 225,440 unvested restricted share awards, respectively |  |                        | 648       |   |                       |   | 607        |  
|Additional paid in capital                                                                                                                                                                             |  |                        | 1,610,435 |   |                       |   | 1,575,979  |  
|Accumulated other comprehensive income (loss)                                                                                                                                                          |  |                        | (154,644  | ) |                       |   | (440,039   | )
|Retained earnings (deficit)                                                                                                                                                                            |  |                        | 224,946   |   |                       |   | (557,371   | )
|                                                                                                                                                                                                       |  |                        |           |   |                       |   |            |  
|Total shareholders equity                                                                                                                                                                             |  |                        | 1,681,452 |   |                       |   | 579,243    |  
|                                                                                                                                                                                                       |  |                        |           |   |                       |   |            |  
|Total liabilities and shareholders equity                                                                                                                                                             |  | $                      | 8,973,414 |   |                       | $ | 11,057,580 |  
|                                                                                                                                                                                                       |  |                        |           |   |                       |   |            |  

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



1



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##### Table of Contents

RAIT Financial Trust

Consolidated Statements of Operations

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



|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------- |  | --------------------------------------------- | ---------- | - | -------------------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                        |  | For the Three-MonthPeriods Ended September 30 |            |   | For the Nine-MonthPeriods Ended September 30 |  
|                                                                        |  | 2008                                          |            |   | 2007                                         |   |            | 2008 |  |   | 2007       |  
|Revenue:                                                                |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Investment interest income                                              |  | $                                             | 168,387    |   |                                              | $ | 232,987    |      |  | $ | 530,995    |   |  | $ | 672,053    |  
|Investment interest expense                                             |  |                                               | (116,005   | ) |                                              |   | (186,926   | )    |  |   | (368,853   | ) |  |   | (526,827   | )
|Provision for losses                                                    |  |                                               | (14,992    | ) |                                              |   | (6,099     | )    |  |   | (50,575    | ) |  |   | (10,662    | )
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Net investment income                                                   |  |                                               | 37,390     |   |                                              |   | 39,962     |      |  |   | 111,567    |   |  |   | 134,564    |  
|Rental income                                                           |  |                                               | 4,721      |   |                                              |   | 3,059      |      |  |   | 12,429     |   |  |   | 8,083      |  
|Fee and other income                                                    |  |                                               | 5,128      |   |                                              |   | 11,325     |      |  |   | 17,131     |   |  |   | 20,889     |  
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                                           |  |                                               | 47,239     |   |                                              |   | 54,346     |      |  |   | 141,127    |   |  |   | 163,536    |  
|Expenses:                                                               |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Compensation expense                                                    |  |                                               | 7,085      |   |                                              |   | 10,187     |      |  |   | 23,690     |   |  |   | 24,359     |  
|Real estate operating expense                                           |  |                                               | 4,064      |   |                                              |   | 3,433      |      |  |   | 11,424     |   |  |   | 8,711      |  
|General and administrative expense                                      |  |                                               | 4,733      |   |                                              |   | 7,008      |      |  |   | 16,456     |   |  |   | 19,077     |  
|Depreciation expense                                                    |  |                                               | 1,665      |   |                                              |   | 1,945      |      |  |   | 4,431      |   |  |   | 3,816      |  
|Amortization of intangible assets                                       |  |                                               | 2,883      |   |                                              |   | 17,473     |      |  |   | 16,048     |   |  |   | 46,051     |  
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Total expenses                                                          |  |                                               | 20,430     |   |                                              |   | 40,046     |      |  |   | 72,049     |   |  |   | 102,014    |  
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Income before other income (expense), taxes and discontinued operations |  |                                               | 26,809     |   |                                              |   | 14,300     |      |  |   | 69,078     |   |  |   | 61,522     |  
|Interest and other income (expense)                                     |  |                                               | (87        | ) |                                              |   | 6,004      |      |  |   | 1,085      |   |  |   | 15,360     |  
|Gains (losses) on sale of assets                                        |  |                                               | 912        |   |                                              |   | (7,569     | )    |  |   | 770        |   |  |   | (10,329    | )
|Gains on extinguishment of debt                                         |  |                                               |           |   |                                              |   |           |      |  |   | 8,662      |   |  |   |           |  
|Change in fair value of free-standing derivatives                       |  |                                               |           |   |                                              |   | 1,673      |      |  |   | (37,203    | ) |  |   | 6,715      |  
|Change in fair value of financial instruments                           |  |                                               | (302,245   | ) |                                              |   |           |      |  |   | 50,661     |   |  |   |           |  
|Unrealized gains (losses) on interest rate hedges                       |  |                                               | (290       | ) |                                              |   | (3,122     | )    |  |   | (275       | ) |  |   | (2,605     | )
|Equity in income (loss) of equity method investments                    |  |                                               | (9         | ) |                                              |   | (49        | )    |  |   | 935        |   |  |   | (57        | )
|Asset impairments                                                       |  |                                               | (18,038    | ) |                                              |   | (342,954   | )    |  |   | (38,361    | ) |  |   | (342,954   | )
|(Income) loss allocated to minority interest                            |  |                                               | 114,837    |   |                                              |   | 93,357     |      |  |   | 15,490     |   |  |   | 81,482     |  
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before taxes and discontinued operations                  |  |                                               | (178,111   | ) |                                              |   | (238,360   | )    |  |   | 70,842     |   |  |   | (190,866   | )
|Income tax benefit (provision)                                          |  |                                               | (173       | ) |                                              |   | (1,534     | )    |  |   | 2,261      |   |  |   | 3,546      |  
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations                                |  |                                               | (178,284   | ) |                                              |   | (239,894   | )    |  |   | 73,103     |   |  |   | (187,320   | )
|Income (loss) from discontinued operations                              |  |                                               |           |   |                                              |   | (340       | )    |  |   |           |   |  |   | (132       | )
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                                       |  |                                               | (178,284   | ) |                                              |   | (240,234   | )    |  |   | 73,103     |   |  |   | (187,452   | )
|Income allocated to preferred shares                                    |  |                                               | (3,406     | ) |                                              |   | (3,357     | )    |  |   | (10,227    | ) |  |   | (8,403     | )
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) available to common shares                            |  | $                                             | (181,690   | ) |                                              | $ | (243,591   | )    |  | $ | 62,876     |   |  | $ | (195,855   | )
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|                                                                        |  |                                               |            |  
|Earnings (loss) per shareBasic:                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Continuing operations                                                   |  | $                                             | (2.83      | ) |                                              | $ | (4.01      | )    |  | $ | 1.01       |   |  | $ | (3.23      | )
|Discontinued operations                                                 |  |                                               |           |   |                                              |   | (0.01      | )    |  |   |           |   |  |   |           |  
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Total earnings (loss) per shareBasic                                   |  | $                                             | (2.83      | ) |                                              | $ | (4.02      | )    |  | $ | 1.01       |   |  | $ | (3.23      | )
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Weighted-average shares outstandingBasic                               |  |                                               | 64,176,083 |   |                                              |   | 60,664,698 |      |  |   | 62,460,319 |   |  |   | 60,581,559 |  
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|                                                                        |  |                                               |            |  
|Earnings (loss) per shareDiluted:                                      |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Continuing operations                                                   |  | $                                             | (2.83      | ) |                                              | $ | (4.01      | )    |  | $ | 1.01       |   |  | $ | (3.23      | )
|Discontinued operations                                                 |  |                                               |           |   |                                              |   | (0.01      | )    |  |   |           |   |  |   |           |  
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Total earnings (loss) per shareDiluted                                 |  | $                                             | (2.83      | ) |                                              | $ | (4.02      | )    |  | $ | 1.01       |   |  | $ | (3.23      | )
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Weighted-average shares outstandingDiluted                             |  |                                               | 64,176,083 |   |                                              |   | 60,664,698 |      |  |   | 62,492,475 |   |  |   | 60,581,559 |  
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Distributions declared per common share                                 |  | $                                             |           |   |                                              | $ | 0.46       |      |  | $ | 0.92       |   |  | $ | 2.10       |  
|                                                                        |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  

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



2



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##### Table of Contents

RAIT Financial Trust

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)



|                                                                                                                        |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | -------- | - | -------------------------------------------- | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                                                                                                        |  | For the Three-MonthPeriods Ended September 30 |          |   | For the Nine-MonthPeriods Ended September 30 |  
|                                                                                                                        |  | 2008                                          |          |   | 2007                                         |   |          | 2008 |  |   | 2007    |  
|Net income (loss)                                                                                                       |  | $                                             | (178,284 | ) |                                              | $ | (240,234 | )    |  | $ | 73,103  |   |  | $ | (187,452 | )
|Other comprehensive income (loss)                                                                                       |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  
|Change in fair value of interest rate hedges                                                                            |  |                                               | (6,543   | ) |                                              |   | (142,226 | )    |  |   | (5,958  | ) |  |   | (35,006  | )
|Reclassification adjustments associated with unrealized losses (gains) from interest rate hedges included in net income |  |                                               | 290      |   |                                              |   | 3,122    |      |  |   | 275     |   |  |   | 2,605    |  
|Realized (gains) losses on interest rate hedges reclassified to earnings                                                |  |                                               | 2,399    |   |                                              |   | (2,734   | )    |  |   | 7,314   |   |  |   | (5,816   | )
|Change in fair value of available-for-sale securities                                                                   |  |                                               | (17,658  | ) |                                              |   | (341,608 | )    |  |   | (30,188 | ) |  |   | (442,152 | )
|Realized (gains) losses on available-for-sale securities reclassified to earnings, including asset impairments          |  |                                               |         |   |                                              |   | 285,328  |      |  |   | 4,542   |   |  |   | 288,088  |  
|                                                                                                                        |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  
|Total other comprehensive income (loss) before minority interest allocation                                             |  |                                               | (21,512  | ) |                                              |   | (198,118 | )    |  |   | (24,015 | ) |  |   | (192,281 | )
|Allocation to minority interest                                                                                         |  |                                               | (677     | ) |                                              |   | 7,234    |      |  |   | (1,110  | ) |  |   | 3,491    |  
|                                                                                                                        |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  
|Total other comprehensive income (loss)                                                                                 |  |                                               | (22,189  | ) |                                              |   | (190,884 | )    |  |   | (25,125 | ) |  |   | (188,790 | )
|                                                                                                                        |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  
|Comprehensive income (loss)                                                                                             |  | $                                             | (200,473 | ) |                                              | $ | (431,118 | )    |  | $ | 47,978  |   |  | $ | (376,242 | )
|                                                                                                                        |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  

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



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##### Table of Contents

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)



|                                                                                      |  |                                              |          |   |      |   |            |  
|------------------------------------------------------------------------------------- |  | -------------------------------------------- | -------- | - | ---- | - | ---------- | -
|                                                                                      |  | For the Nine-MonthPeriods Ended September 30 |         
|                                                                                      |  | 2008                                         |          |   | 2007 |  
|Operating activities:                                                                 |  |                                              |          |   |      |   |            |  
|Net income (loss)                                                                     |  | $                                            | 73,103   |   |      | $ | (187,452   | )
|Adjustments to reconcile net income to cash flow from operating activities:           |  |                                              |          |   |      |   |            |  
|Minority interest                                                                     |  |                                              | (15,490  | ) |      |   | (81,482    | )
|Provision for losses                                                                  |  |                                              | 50,575   |   |      |   | 10,662     |  
|Amortization of share-based compensation                                              |  |                                              | 5,535    |   |      |   | 8,753      |  
|Depreciation and amortization                                                         |  |                                              | 20,479   |   |      |   | 49,867     |  
|Amortization of deferred financing costs and debt discounts                           |  |                                              | 10,700   |   |      |   | 21,639     |  
|Accretion of discounts on investments                                                 |  |                                              | (4,985   | ) |      |   | (6,197     | )
|(Gains) losses on sale of assets                                                      |  |                                              | (770     | ) |      |   | 10,685     |  
|Gains on extinguishment of debt                                                       |  |                                              | (8,662   | ) |      |   |           |  
|Change in fair value of financial instruments                                         |  |                                              | (50,661  | ) |      |   |           |  
|Unrealized (gains) losses on interest rate hedges                                     |  |                                              | 275      |   |      |   | 2,605      |  
|Equity in (income) loss of equity method investments                                  |  |                                              | (935     | ) |      |   | 57         |  
|Asset impairments                                                                     |  |                                              | 38,361   |   |      |   | 342,954    |  
|Unrealized foreign currency gains on investments                                      |  |                                              | (38      | ) |      |   | (4,100     | )
|Changes in assets and liabilities:                                                    |  |                                              |          |   |      |   |            |  
|Accrued interest receivable                                                           |  |                                              | 7,618    |   |      |   | (28,321    | )
|Other assets                                                                          |  |                                              | 16,522   |   |      |   | (46,200    | )
|Accrued interest payable                                                              |  |                                              | 16,570   |   |      |   | 35,049     |  
|Accounts payable and accrued expenses                                                 |  |                                              | 900      |   |      |   | 523        |  
|Deferred taxes, borrowers escrows and other liabilities                              |  |                                              | (56,123  | ) |      |   | 26,281     |  
|                                                                                      |  |                                              |          |   |      |   |            |  
|Cash flows from operating activities                                                  |  |                                              | 102,974  |   |      |   | 155,323    |  
|Investing activities:                                                                 |  |                                              |          |   |      |   |            |  
|Purchase and origination of securities for investment                                 |  |                                              | (62,506  | ) |      |   | (1,890,332 | )
|Proceeds from sale of other securities                                                |  |                                              |         |   |      |   | 914,558    |  
|Purchase and origination of loans for investment                                      |  |                                              | (113,246 | ) |      |   | (1,235,912 | )
|Principal repayments on loans                                                         |  |                                              | 548,372  |   |      |   | 767,610    |  
|Investment in real estate interests                                                   |  |                                              | 3,156    |   |      |   | (158,244   | )
|Proceeds from dispositions of real estate interests                                   |  |                                              | 28,028   |   |      |   | 12,372     |  
|(Increase) decrease in restricted cash                                                |  |                                              | 77,520   |   |      |   | (98,800    | )
|Decrease in warehouse deposits                                                        |  |                                              | 6,058    |   |      |   | 9,416      |  
|                                                                                      |  |                                              |          |   |      |   |            |  
|Cash flows from investing activities                                                  |  |                                              | 487,382  |   |      |   | (1,679,332 | )
|Financing activities:                                                                 |  |                                              |          |   |      |   |            |  
|Proceeds from repurchase agreements, secured credit facilities and other indebtedness |  |                                              | 52,500   |   |      |   | 1,184,398  |  
|Repayments on repurchase agreements, secured credit facilities and other indebtedness |  |                                              | (160,787 | ) |      |   | (2,094,754 | )
|Proceeds from issuance of residential mortgage-backed securities                      |  |                                              |         |   |      |   | 616,542    |  
|Repayments on residential mortgage-backed securities                                  |  |                                              | (371,579 | ) |      |   | (422,556   | )
|Proceeds from issuance of CDO notes payable                                           |  |                                              | 56,671   |   |      |   | 1,867,907  |  
|Repayments on CDO notes payable                                                       |  |                                              | (177,215 | ) |      |   | (78,085    | )
|Proceeds from issuance of convertible senior notes                                    |  |                                              |         |   |      |   | 425,000    |  
|Repayments on convertible senior notes                                                |  |                                              | (11,858  | ) |      |   |           |  
|Acquisition of minority interest in CDOs                                              |  |                                              | (70      | ) |      |   | (19,914    | )
|Distributions to minority interest holders in CDOs                                    |  |                                              | (138     | ) |      |   | (13,083    | )
|Payments for deferred costs                                                           |  |                                              | (512     | ) |      |   | (52,138    | )
|Proceeds from cash flow hedges                                                        |  |                                              |         |   |      |   | 2,280      |  
|Preferred share issuance, net of costs incurred                                       |  |                                              |         |   |      |   | 38,681     |  
|Common share issuance, net of costs incurred                                          |  |                                              | 28,762   |   |      |   | 367,452    |  
|Repurchase of common shares                                                           |  |                                              |         |   |      |   | (74,381    | )
|Distributions paid to preferred shares                                                |  |                                              | (10,227  | ) |      |   | (5,046     | )
|Distributions paid to common shares                                                   |  |                                              | (85,501  | ) |      |   | (141,071   | )
|                                                                                      |  |                                              |          |   |      |   |            |  
|Cash flows from financing activities                                                  |  |                                              | (679,954 | ) |      |   | 1,601,232  |  
|                                                                                      |  |                                              |          |   |      |   |            |  
|Net change in cash and cash equivalents                                               |  |                                              | (89,598  | ) |      |   | 77,223     |  
|Cash and cash equivalents at the beginning of the period                              |  |                                              | 127,987  |   |      |   | 99,367     |  
|                                                                                      |  |                                              |          |   |      |   |            |  
|Cash and cash equivalents at the end of the period                                    |  | $                                            | 38,389   |   |      | $ | 176,590    |  
|                                                                                      |  |                                              |          |   |      |   |            |  
|Supplemental cash flow information:                                                   |  |                                              |          |   |      |   |            |  
|Cash paid for interest                                                                |  | $                                            | 309,278  |   |      | $ | 442,618    |  
|Cash paid for taxes                                                                   |  |                                              | 1,608    |   |      |   | 12,428     |  
|Non-cash decrease in goodwill                                                         |  |                                              |         |   |      |   | 56,753     |  
|Non-cash increase (decrease) in trust preferred obligations                           |  |                                              | (88,125  | ) |      |   | (206,419   | )
|Non-cash increase (decrease) in convertible senior notes from extinguishment of debt  |  |                                              | (9,142   | ) |      |   |           |  
|Distributions payable                                                                 |  |                                              |         |   |      |   | 31,505     |  

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



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##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 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.

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.



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



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 debentures 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 constitute 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



| | 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 nine-month periods ended September 30, 2007, structuring fees of $0 and
$11,413, respectively, were received and eliminated upon consolidation of securitization entities. No structuring fees were received during the nine-month period ended September 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 September 30, 2008 and
2007, we earned $7,139 and $7,946, respectively, of asset management fees, of which we eliminated $4,208 and $6,300, respectively, upon consolidation of CDOs of which we are the primary beneficiary. During the nine-month periods ended
September 30, 2008 and 2007, we earned $21,932 and $20,756, respectively, of asset management fees, of which we eliminated $12,769 and $16,538, 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.

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 are 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.



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



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 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



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



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 operations.

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 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 April 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. Intangible Assets

Intangible assets on our consolidated balance sheets represent identifiable intangible assets acquired in business acquisitions. We
amortize identified intangible assets to expense over their estimated lives using the straight-line method. We evaluate intangible assets for impairment as events and circumstances change, in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS No. 144. Due to current market and economic conditions, management evaluated the carrying value of intangible assets. Based upon that
evaluation, management concluded certain intangible assets were impaired and recorded asset impairment expense of $18,038 for the three-month and nine-month periods ended September 30, 2008. This charge was included in asset impairment expense
in the accompanying consolidated statements of operations.

l. 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



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



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:



|                                                                           |  |                                      |            |   |                                    |   |           |                                                                    |  |   |            |  
|-------------------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ---------------------------------- | - | --------- | ------------------------------------------------------------------ |  | - | ---------- | -
|                                                                           |  | CarryingAmount as ofDecember 31,2007 |            |   | Effect fromadoption ofSFAS No. 159 |   |           | CarryingAmount as
ofJanuary 1, 2008(After adoption ofSFAS 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 | )
|Derivative liabilities                                                     |  |                                      | (155,080   | ) |                                    |   |          |                                                                    |  |   | (155,080   | )
|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).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, or FSP, 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.



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



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 FSP 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.

In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, or FSP FAS 157-3. FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active. FSP FAS 157-3 is effective October 10, 2008, and for prior periods for which financial
statements have not been issued. The adoption of FSP FAS 157-3 did not have a material effect on our consolidated financial statements.

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 September 30, 2008:



|                     |  |                        |           |   |                                |   |        |                |  |   |                |   |                       |     |  |                         |   |  |                       
|-------------------- |  | ---------------------- | --------- | - | ------------------------------ | - | ------ | -------------- |  | - | -------------- | - | --------------------- | --- |  | ----------------------- | - |  | ----------------------
|                     |  | UnpaidPrincipalBalance |           |   | Unamortized(Discounts)Premiums |   |        | CarryingAmount |  |   | Number ofLoans |   | WeightedAverageCoupon |     |  | Range of Maturity Dates
|Commercial mortgages |  | $                      | 1,423,744 |   |                                | $ |       |                |  | $ | 1,423,744      |   |                       | 118 |  | 7.7                     | % |  | Nov. 2008 to Aug. 2012
|Mezzanine loans      |  |                        | 505,614   |   |                                |   | (3,054 | )              |  |   | 502,560        |   |                       | 154 |  | 10.4                    | % |  | Nov. 2008 to Aug. 2021
|Other loans          |  |                        | 174,009   |   |                                |   | 870    |                |  |   | 174,879        |   |                       | 11  |  | 6.1                     | % |  | Dec. 2008 to Oct. 2016
|                     |  |                        |           |   |                                |   |        |                |  |   |                |   |                       |     |  |                         |   |  |                       
|Total                |  |                        | 2,103,367 |   |                                |   | (2,184 | )              |  |   | 2,101,183      |   |                       | 283 |  | 8.2                     | % |  |                       
|                     |  |                        |           |   |                                |   |        |                |  |   |                |   |                       |     |  |                         |   |  |                       
|Unearned fees        |  |                        | (9,817    | ) |                                |   |       |                |  |   | (9,817         | ) |                       |     |  |                         |   |  |                       
|                     |  |                        |           |   |                                |   |        |                |  |   |                |   |                       |     |  |                         |   |  |                       
|Total                |  | $                      | 2,093,550 |   |                                | $ | (2,184 | )              |  | $ | 2,091,366      |   |                       |     |  |                         |   |  |                       
|                     |  |                        |           |   |                                |   |        |                |  |   |                |   |                       |     |  |                         |   |  |                       

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



|                           |  |                 |        
|-------------------------- |  | --------------- | -------
|Delinquency Status         |  | PrincipalAmount
|30 to 59 days              |  | $               | 1,918  
|60 to 89 days              |  |                 | 3,635  
|90 days or more            |  |                 | 78,249 
|In foreclosure or bankrupt |  |                 | 105,938
|                           |  |                 |        
|Total                      |  | $               | 189,740
|                           |  |                 |        

As of September 30, 2008, approximately $146,315 of our commercial mortgages and mezzanine
loans were on non-accrual status and had a weighted-average coupon of 11.6%.



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



Investments in Residential Mortgages and Mortgage-Related Receivables

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



|                     |  |                        |           |                       |   |         |                |  |                                                |           |                       |       |  |                                 |   |  |               
|-------------------- |  | ---------------------- | --------- | --------------------- | - | ------- | -------------- |  | ---------------------------------------------- | --------- | --------------------- | ----- |  | ------------------------------- | - |  | --------------
|                     |  | UnpaidPrincipalBalance |           | Unamortized(Discount) |   |         | CarryingAmount |  | Number of Loansand Mortgage-RelatedReceivables |           | WeightedAverageCoupon |       |  | AverageContractualMaturity Date
|3/1 Adjustable rate  |  | $                      | 93,793    |                       | $ | (695    | )              |  | $                                              | 93,098    |                       | 248   |  | 5.6                             | % |  | August 2035   
|5/1 Adjustable rate  |  |                        | 3,030,222 |                       |   | (10,501 | )              |  |                                                | 3,019,721 |                       | 6,295 |  | 5.6                             | % |  | September 2035
|7/1 Adjustable rate  |  |                        | 513,750   |                       |   | (2,576  | )              |  |                                                | 511,174   |                       | 1,127 |  | 5.7                             | % |  | July 2035     
|10/1 Adjustable rate |  |                        | 57,109    |                       |   | (430    | )              |  |                                                | 56,679    |                       | 67    |  | 5.7                             | % |  | June 2035     
|                     |  |                        |           |                       |   |         |                |  |                                                |           |                       |       |  |                                 |   |  |               
|Total                |  | $                      | 3,694,874 |                       | $ | (14,202 | )              |  | $                                              | 3,680,672 |                       | 7,737 |  | 5.6                             | % |  |               
|                     |  |                        |           |                       |   |         |                |  |                                                |           |                       |       |  |                                 |   |  |               

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 $3,464,774 as of September 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 45.4% of our residential mortgage loans were in the state of California as of September 30, 2008.

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



|                                              |  |                 |        
|--------------------------------------------- |  | --------------- | -------
|Delinquency Status                            |  | PrincipalAmount
|30 to 59 days                                 |  | $               | 52,395 
|60 to 89 days                                 |  |                 | 27,009 
|90 days or more                               |  |                 | 40,110 
|In foreclosure, bankrupt or real estate owned |  |                 | 105,326
|                                              |  |                 |        
|Total                                         |  | $               | 224,840
|                                              |  |                 |        

As of September 30, 2008, residential mortgages and mortgage-related receivables with an
unpaid principal balance of $172,445 and a carrying amount of $169,734 were on non-accrual status and had a weighted-average coupon of 6.0%.

For the nine-month period ended September 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.



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



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



|                                                                           |  |                        |        |                       |   |       
|-------------------------------------------------------------------------- |  | ---------------------- | ------ | --------------------- | - | ------
|                                                                           |  | As ofSeptember 30,2008 |        | As ofDecember 31,2007
|Commercial mortgages, mezzanine loans and other real estate related assets |  | $                      | 46,250 |                       | $ | 14,575
|Residential mortgages and mortgage-related receivables                     |  |                        | 19,515 |                       |   | 11,814
|                                                                           |  |                        |        |                       |   |       
|Total allowance for losses                                                 |  | $                      | 65,765 |                       | $ | 26,389
|                                                                           |  |                        |        |                       |   |       

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



|                             |  |                                                  |        |   |                                                 |   |         |  
|---------------------------- |  | ------------------------------------------------ | ------ | - | ----------------------------------------------- | - | ------- | -
|                             |  | For TheThree-MonthPeriod EndedSeptember 30, 2008 |        |   | For TheNine-MonthPeriod EndedSeptember 30, 2008 |  
|Balance, beginning of period |  | $                                                | 55,473 |   |                                                 | $ | 26,389  |  
|Additions                    |  |                                                  | 14,992 |   |                                                 |   | 50,575  |  
|Charge-offs                  |  |                                                  | (4,700 | ) |                                                 |   | (11,199 | )
|                             |  |                                                  |        |   |                                                 |   |         |  
|Balance, end of period       |  | $                                                | 65,765 |   |                                                 | $ | 65,765  |  
|                             |  |                                                  |        |   |                                                 |   |         |  

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 September 30, 2008:



|                                             |  |               |           |                          |   |            |                     |  |                       |           |  |                                 |   |  |     
|-------------------------------------------- |  | ------------- | --------- | ------------------------ | - | ---------- | ------------------- |  | --------------------- | --------- |  | ------------------------------- | - |  | ----
|Investment Description                       |  | AmortizedCost |           | Net FairValueAdjustments |   |            | EstimatedFair Value |  | WeightedAverageCoupon |           |  | WeightedAverageYears toMaturity
|Trading securities (1)                       |  |               |           |                          |   |            |                     |  |                       |           |  |                                 |   |  |     
|TruPS and subordinated debentures            |  | $             | 3,042,503 |                          | $ | (1,194,948 | )                   |  | $                     | 1,847,555 |  | 7.4                             | % |  | 26.2
|Other securities                             |  |               | 10,000    |                          |   | (8,900     | )                   |  |                       | 1,100     |  | 7.3                             | % |  | 44.1
|                                             |  |               |           |                          |   |            |                     |  |                       |           |  |                                 |   |  |     
|Total trading securities                     |  |               | 3,052,503 |                          |   | (1,203,848 | )                   |  |                       | 1,848,655 |  | 7.4                             | % |  | 26.3
|Available-for-sale securities                |  |               | 64,705    |                          |   | (36,458    | )                   |  |                       | 28,247    |  | 8.8                             | % |  | 33.3
|                                             |  |               |           |                          |  
|Security-related receivables (2)             |  |               |           |                          |   |            |                     |  |                       |           |  |                                 |   |  |     
|TruPS and subordinated debenture receivables |  |               | 373,886   |                          |   | (146,009   | )                   |  |                       | 227,877   |  | 7.8                             | % |  | 21.5
|Unsecured REIT note receivables              |  |               | 370,889   |                          |   | (65,088    | )                   |  |                       | 305,801   |  | 6.0                             | % |  | 8.1 
|CMBS receivables(3)                          |  |               | 213,921   |                          |   | (109,270   | )                   |  |                       | 104,651   |  | 5.8                             | % |  | 34.9
|Other securities                             |  |               | 43,499    |                          |   | (34,035    | )                   |  |                       | 9,464     |  | 4.7                             | % |  | 41.4
|                                             |  |               |           |                          |   |            |                     |  |                       |           |  |                                 |   |  |     
|Total security-related receivables           |  |               | 1,002,195 |                          |   | (354,402   | )                   |  |                       | 647,793   |  | 6.6                             | % |  | 20.3
|                                             |  |               |           |                          |   |            |                     |  |                       |           |  |                                 |   |  |     
|Total investments in securities              |  | $             | 4,119,403 |                          | $ | (1,594,708 | )                   |  | $                     | 2,524,695 |  | 7.2                             | % |  | 24.9
|                                             |  |               |           |                          |   |            |                     |  |                       |           |  |                                 |   |  |     



|(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 $73,945 that are rated BBB+ and BB- by Standard & Poors and securities with a
fair value totaling $30,706 that are rated between AAA and A- by Standard & Poors.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



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 September 30, 2008, approximately $413,625 in
principal amount of TruPS, subordinated debentures, and subordinated debenture receivables were on non-accrual status and had a weighted-average coupon of 7.9% and a fair value of $36,150. As of September 30, 2008, approximately $61,982 in
principal amount available-for-sale securities were on non-accrual status and had a weighted-average coupon of 6.6% and a fair value of $1,131.

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 September 30, 2008, investment in securities of $3,221,653 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 September 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 $11,814 was recorded for the nine-month period ended September 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.

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 September 30, 2008:



|                                                 |  |                        |           |                |   |                    |  |              |                                      |  |     |                      |  |                  
|------------------------------------------------ |  | ---------------------- | --------- | -------------- | - | ------------------ |  | ------------ | ------------------------------------ |  | --- | -------------------- |  | -----------------
|Description                                      |  | UnpaidPrincipalBalance |           | CarryingAmount |   | Interest RateTerms |  |              | CurrentWeighted-AverageInterest Rate |  |     | Contractual Maturity
|Secured credit facilities and other indebtedness |  | $                      | 207,182   |                | $ | 205,966            |  | 4.5% to 13.0 | %                                    |  | 6.9 | %                    |  | Nov. 2008 to 2037
|Mortgage-backed securities issued(1)(2)(3)       |  |                        | 3,464,774 |                |   | 3,438,431          |  | 4.6% to 5.8  | %                                    |  | 5.1 | %                    |  | 2035             
|Trust preferred obligations(4)                   |  |                        | 362,500   |                |   | 208,916            |  | 5.5% to 10.1 | %                                    |  | 7.0 | %                    |  | 2035             
|CDO notes payable  amortized cost(1)(5)         |  |                        | 1,431,250 |                |   | 1,431,250          |  | 3.5% to 7.2  | %                                    |  | 3.9 | %                    |  | 2036 to 2045     
|CDO notes payable  fair value(1)(4)(6)          |  |                        | 3,615,691 |                |   | 841,546            |  | 3.1% to 10.0 | %                                    |  | 3.8 | %                    |  | 2035 to 2038     
|Convertible senior notes                         |  |                        | 404,000   |                |   | 404,000            |  | 6.9          | %                                    |  | 6.9 | %                    |  | 2027             
|                                                 |  |                        |           |                |   |                    |  |              |                                      |  |     |                      |  |                  
|Total indebtedness                               |  | $                      | 9,485,397 |                | $ | 6,530,109          |  |              |                                      |  | 4.6 | %                    |  |                  
|                                                 |  |                        |           |                |   |                    |  |              |                                      |  |     |                      |  |                  



|(1) | Excludes mortgage-backed securities and CDO notes payable purchased by us which are eliminated in consolidation.
|--- | ----------------------------------------------------------------------------------------------------------------

|(2) | Collateralized by $3,694,874 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Rates generally follow the terms of the underlying mortgages, which are fixed for a period of time and variable thereafter.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(4) | Relates to liabilities for which we elected to record at fair value under SFAS No. 159. See note 7.
|--- | ---------------------------------------------------------------------------------------------------

|(5) | Collateralized by $1,714,492 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Collateralized by $4,122,412 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these
investments as of September 30, 2008 was $2,583,272. 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



Repurchase Agreements

During the three-month and nine-month periods ended September 30, 2008, we repaid $47,106 and $138,788, respectively, associated with our repurchase agreements.

Secured Credit Facilities and Other Indebtedness

On September 19, 2008, we entered into a series of transactions with a lender enabling us to replace all of our remaining short-term repurchase obligations with two longer-term master repurchase agreements. While these agreements
are titled as repurchase agreements, because they lack many of the standard terms of repurchase agreements and operate in a manner we consider closer to a secured credit facility, we include these agreements in our secured credit facilities in our
financial statements.

The first master repurchase agreement provided for the lender to purchase RMBS from us for an adjusted purchase
price of $24,500. We pay interest monthly beginning September 30, 2008 equal to 13.0% per annum on the then outstanding amount of the purchase price under this agreement which equaled $25,425 at September 19, 2008. We must also pay
mandatory payments monthly for nine months and thereafter quarterly which are applied to the purchase price. We may also be required to pay a performance amount monthly applied to the then outstanding purchase price if losses in the purchased assets
exceed agreed-upon limits. This agreement provides that we will repurchase these RMBS on August 31, 2010, or an earlier date selected by us, for the sum of the then outstanding purchase price, a minimum financing cost of $3,075 (less any
interest previously paid) and the amount of any accrued and unpaid interest. The second master repurchase agreement provided for the lender to purchase commercial real estate CDO securities from us for a purchase price of $3,000. We pay
interest monthly beginning September 30, 2008 equal to 13.0% per annum on the then outstanding amount of the purchase price. We must pay mandatory payments monthly applied to the purchase price. This agreement provides that we will
repurchase these commercial real estate CDO securities on May 29, 2009, or an earlier date selected by us, for the sum of the then outstanding purchase price and the amount of any accrued and unpaid interest.

As partial consideration to the lender for entering into these master repurchase agreements, we issued a Series A Warrant Agreement, or the warrants, to
the lender exercisable to purchase 250,000 common shares of RAIT for an exercise price of $6.00 per common share for an exercise period starting December 19, 2008 and ending September 19, 2011. Holders of the warrants may exercise a
put option requiring us to repurchase the warrants, for cash, at a price based upon the Black-Scholes option pricing model in certain circumstances which may be outside our control, including upon a change in control. As of September 30, 2008, the
warrants have an estimated fair value of $256 and have been recorded in other liabilities in our consolidated balance sheet.

We have
secured credit facilities with three financial institutions with total capacity of $90,000. As of September 30, 2008, we have borrowed $53,493 on these credit facilities leaving $36,507 of availability. As of September 30, 2008, we have
$50,200 of junior subordinated notes issued by us outstanding and $103,489 of other indebtedness outstanding relating to loans payable on consolidated real estate interests and other loans. The maturity of our secured credit facilities and other
indebtedness as of September 30, 2008 is scheduled as follows: $77,915 through December 31, 2009, $59,567 from 2010 through 2014, and $69,700 thereafter.

On October 16, 2008, we issued $38,051 principal amount of TruPS to a third party and received $15,459 of net cash proceeds. Of the total amount of TruPS issued, $18,671 has a fixed interest rate of 8.65% through
March 30, 2015 with a floating rate of LIBOR plus 400 basis points thereafter and a maturity date of March 30, 2035. The remaining $19,380 has a fixed interest rate of 9.64% and a maturity date of October 30, 2015.

On October 21, 2008, we purchased $25,000 principal amount of TruPS that we had issued for a purchase price of $5,250 in a privately negotiated
transaction. These TruPS are included in other indebtedness on our balance sheets as of September 30, 2008. The repurchase generated gains on the extinguishment of debt of $19,750.

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 $50,195 and $101,514 for the three-month and nine-month periods ended September 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 $233,725 and $1,180,426 for the three-month and nine-month periods ended September 30, 2008, respectively, and was included in the accompanying
consolidated statements of operations.



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##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



Convertible Senior Notes

During the nine-month period ended September 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 floating rate indebtedness. 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 September 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 September 30, 2008:



|                              |  |                          |           |            |   |          |  
|----------------------------- |  | ------------------------ | --------- | ---------- | - | -------- | -
|                              |  | As of September 30, 2008 |          
|                              |  | Notional                 |           | Fair Value |  
|Cash flow hedges:             |  |                          |           |            |   |          |  
|Interest rate swaps           |  | $                        | 3,692,342 |            | $ | (233,179 | )
|Interest rate caps            |  |                          | 51,000    |            |   | 571      |  
|Basis swaps                   |  |                          | 50,000    |            |   | (184     | )
|Foreign currency derivatives: |  |                          |           |            |   |          |  
|Currency options              |  |                          | 4,503     |            |   | 14       |  
|                              |  |                          |           |            |   |          |  
|Net fair value                |  | $                        | 3,797,845 |            | $ | (232,778 | )
|                              |  |                          |           |            |   |          |  

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



|                    |  |                                                                      |        |   |                                                                         |   |      |                                                                      |  |                                                                         |       |  |   |        |  
|------------------- |  | -------------------------------------------------------------------- | ------ | - | ----------------------------------------------------------------------- | - | ---- | -------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ----- |  | - | ------ | -
|                    |  | For the Three-MonthPeriod Ended September 30,
2008                   |        |   | For the Three-MonthPeriod Ended September 30, 2007                      |  
|Type of Derivative  |  | Amounts Reclassified toEarnings for EffectiveHedges  Gains (Losses) |        |   | Amounts Reclassifiedto Earnings forHedgeIneffectiveness Gains (Losses) |   |      | Amounts Reclassified toEarnings for
EffectiveHedges  Gains (Losses) |  | Amounts Reclassifiedto Earnings forHedgeIneffectiveness Gains (Losses) |      
|Interest rate swaps |  | $                                                                    | (2,399 | ) |                                                                         | $ | (302 | )                                                                    |  | $                                                                       | 2,734 |  | $ | (3,140 | )
|Interest rate caps  |  |                                                                      |       |   |                                                                         |   |     |                                                                      |  |                                                                         |      |  |   | 52     |  
|Basis swaps         |  |                                                                      |       |   |                                                                         |   |     |                                                                      |  |                                                                         |      |  |   | (20    | )
|Currency options    |  |                                                                      |       |   |                                                                         |   | 12   |                                                                      |  |                                                                         |      |  |   | (14    | )
|                    |  |                                                                      |        |   |                                                                         |   |      |                                                                      |  |                                                                         |       |  |   |        |  
|Total               |  | $                                                                    | (2,399 | ) |                                                                         | $ | (290 | )                                                                    |  | $                                                                       | 2,734 |  | $ | (3,122 | )
|                    |  |                                                                      |        |   |                                                                         |   |      |                                                                      |  |                                                                         |       |  |   |        |  



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



|                    |  |                                                                      |        |   |                                                                         |   |      |                                                                      |  |                                                                         |       |  |   |        |  
|------------------- |  | -------------------------------------------------------------------- | ------ | - | ----------------------------------------------------------------------- | - | ---- | -------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ----- |  | - | ------ | -
|                    |  | For the Nine-MonthPeriod Ended September 30,
2008                    |        |   | For the Nine-MonthPeriod Ended September 30, 2007                       |  
|Type of Derivative  |  | Amounts Reclassified toEarnings for EffectiveHedges  Gains (Losses) |        |   | Amounts Reclassifiedto Earnings forHedgeIneffectiveness Gains (Losses) |   |      | Amounts Reclassified toEarnings for
EffectiveHedges  Gains (Losses) |  | Amounts Reclassifiedto Earnings forHedgeIneffectiveness Gains (Losses) |      
|Interest rate swaps |  | $                                                                    | (7,314 | ) |                                                                         | $ | (292 | )                                                                    |  | $                                                                       | 5,816 |  | $ | (2,555 | )
|Interest rate caps  |  |                                                                      |       |   |                                                                         |   |     |                                                                      |  |                                                                         |      |  |   | (2     | )
|Basis swaps         |  |                                                                      |       |   |                                                                         |   |     |                                                                      |  |                                                                         |      |  |   | (61    | )
|Currency options    |  |                                                                      |       |   |                                                                         |   | 17   |                                                                      |  |                                                                         |      |  |   | 13     |  
|                    |  |                                                                      |        |   |                                                                         |   |      |                                                                      |  |                                                                         |       |  |   |        |  
|Total               |  | $                                                                    | (7,314 | ) |                                                                         | $ | (275 | )                                                                    |  | $                                                                       | 5,816 |  | $ | (2,605 | )
|                    |  |                                                                      |        |   |                                                                         |   |      |                                                                      |  |                                                                         |       |  |   |        |  

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 September 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 $183,968. During the
nine-month period ended September 30, 2008, the change in value of these hedges was a decrease of $78,219 and was recorded as a component of the change in fair value of financial instruments in our consolidated 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.

During the nine-month period ended September 30, 2008, our two 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 nine-month period ended September 30, 2008. The write-off of these warehouse deposits represents our only exposure under our warehouse agreements and we have no further obligations thereunder. We are not party to any
warehouse facilities as of September 30, 2008.

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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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



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.

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



|                                                           |  |                |           |                     |   |          
|---------------------------------------------------------- |  | -------------- | --------- | ------------------- | - | ---------
|Financial Instrument                                       |  | CarryingAmount |           | EstimatedFair Value
|Assets                                                     |  |                |           |                     |   |          
|Investments in mortgages and loans:                        |  |                |           |                     |   |          
|Commercial mortgages, mezzanine loans and other loans      |  | $              | 2,091,366 |                     | $ | 2,098,058
|Residential mortgages and mortgage-related receivables     |  |                | 3,680,672 |                     |   | 2,785,683
|Investments in securities and security-related receivables |  |                | 2,524,695 |                     |   | 2,524,695
|Investments in real estate interests                       |  |                | 311,214   |                     |   | 311,214  
|Cash and cash equivalents                                  |  |                | 38,389    |                     |   | 38,389   
|Restricted cash                                            |  |                | 196,671   |                     |   | 196,671  
|Derivative assets                                          |  |                | 735       |                     |   | 735      
|                                                           |  |               
|Liabilities                                                |  |                |           |                     |   |          
|Indebtedness:                                              |  |                |           |                     |   |          
|Secured credit facilities and other indebtedness           |  |                | 205,966   |                     |   | 205,966  
|Mortgage-backed securities issued                          |  |                | 3,438,431 |                     |   | 2,708,387
|Trust preferred obligations                                |  |                | 208,916   |                     |   | 208,916  
|CDO notes payable                                          |  |                | 2,272,796 |                     |   | 1,834,235
|Convertible senior notes                                   |  |                | 404,000   |                     |   | 199,987  
|Derivative liabilities                                     |  |                | 233,513   |                     |   | 233,513  
|Other liabilities                                          |  |                | 256       |                     |   | 256      

Fair Value Measurements

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



|                                             |  |                                                             |   |                                             |   |                                         |  |                                |           |  |   |          
|-------------------------------------------- |  | ----------------------------------------------------------- | - | ------------------------------------------- | - | --------------------------------------- |  | ------------------------------ | --------- |  | - | ---------
|Assets:                                      |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservable Inputs(Level 3) |  | Balance as ofSeptember 30,2008
|Trading securities                           |  |                                                             |   |                                             |   |                                         |  |                                |           |  |   |          
|TruPS and subordinated debentures            |  | $                                                           |  |                                             | $ |                                        |  | $                              | 1,847,555 |  | $ | 1,847,555
|Other securities                             |  |                                                             |  |                                             |   | 1,100                                   |  |                                |          |  |   | 1,100    
|Available-for-sale securities                |  |                                                             |  |                                             |   | 28,247                                  |  |                                |          |  |   | 28,247   
|Security-related receivables                 |  |                                                             |   |                                             |   |                                         |  |                                |           |  |   |          
|TruPS and subordinated debenture receivables |  |                                                             |  |                                             |   |                                        |  |                                | 227,877   |  |   | 227,877  
|Unsecured REIT note receivables              |  |                                                             |  |                                             |   | 305,801                                 |  |                                |          |  |   | 305,801  
|CMBS receivables                             |  |                                                             |  |                                             |   | 104,651                                 |  |                                |          |  |   | 104,651  
|Other securities                             |  |                                                             |  |                                             |   | 9,464                                   |  |                                |          |  |   | 9,464    
|                                             |  |                                                             |   |                                             |   |                                         |  |                                |           |  |   |          
|Total assets                                 |  | $                                                           |  |                                             | $ | 449,263                                 |  | $                              | 2,075,432 |  | $ | 2,524,695
|                                             |  |                                                             |   |                                             |   |                                         |  |                                |           |  |   |          



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



|                            |  |                                                             |   |                                             |   |                                         |  |                                |         |  |   |          
|--------------------------- |  | ----------------------------------------------------------- | - | ------------------------------------------- | - | --------------------------------------- |  | ------------------------------ | ------- |  | - | ---------
|Liabilities:                |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservable Inputs(Level 3) |  | Balance as ofSeptember 30,2008
|Trust preferred obligations |  | $                                                           |  |                                             | $ |                                        |  | $                              | 208,916 |  | $ | 208,916  
|CDO notes payable(1)        |  |                                                             |  |                                             |   | 841,546                                 |  |                                |        |  |   | 841,546  
|Derivative liabilities      |  |                                                             |  |                                             |   | 233,513                                 |  |                                |        |  |   | 233,513  
|Other liabilities           |  |                                                             |  |                                             |   | 256                                     |  |                                |        |  |   | 256      
|                            |  |                                                             |   |                                             |   |                                         |  |                                |         |  |   |          
|Total liabilities           |  | $                                                           |  |                                             | $ | 1,075,315                               |  | $                              | 208,916 |  | $ | 1,284,231
|                            |  |                                                             |   |                                             |   |                                         |  |                                |         |  |   |          



|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 nine-month period ended September 30, 2008:



|                                                |  |                                                     |           |   |                                                                          |   |          |                    |  |   |            |  
|----------------------------------------------- |  | --------------------------------------------------- | --------- | - | ------------------------------------------------------------------------ | - | -------- | ------------------ |  | - | ---------- | -
|Assets                                          |  | Trading Securities TruPS andSubordinatedDebentures |           |   | Security-RelatedReceivables  TruPSand SubordinatedDebenture Receivables |   |          | TotalLevel 3Assets | 
|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   |  |                                                     | (876,818  | ) |                                                                          |   | (128,410 | )                  |  |   | (1,005,228 | )
|Purchases and sales, net                        |  |                                                     | 9,218     |   |                                                                          |   | (51,757  | )                  |  |   | (42,539    | )
|                                                |  |                                                     |           |   |                                                                          |   |          |                    |  |   |            |  
|Balance, as of September 30, 2008               |  | $                                                   | 1,847,555 |   |                                                                          | $ | 227,877  |                    |  | $ | 2,075,432  |  
|                                                |  |                                                     |           |   |                                                                          |   |          |                    |  |   |            |  



|                                                |  |                            |          |   |                         |   |          |  
|----------------------------------------------- |  | -------------------------- | -------- | - | ----------------------- | - | -------- | -
|Liabilities                                     |  | Trust PreferredObligations |          |   | TotalLevel 3Liabilities |  
|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   |  |                            | (101,514 | ) |                         |   | (101,514 | )
|Purchases and sales, net                        |  |                            | (88,125  | ) |                         |   | (88,125  | )
|                                                |  |                            |          |   |                         |   |          |  
|Balance, as of September 30, 2008               |  | $                          | 208,916  |   |                         | $ | 208,916  |  
|                                                |  |                            |          |   |                         |   |          |  

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 consolidated statements of operations as follows:



|                                                                                             |  |                                                 |          |   |                                                |   |            |  
|-------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | -------- | - | ---------------------------------------------- | - | ---------- | -
|Description                                                                                  |  | For theThree-MonthPeriod EndedSeptember 30,2008 |          |   | For theNine-MonthPeriod EndedSeptember 30,2008 |  
|Change in fair value of trading securities and security-related receivables                  |  | $                                               | (539,780 | ) |                                                | $ | (1,152,385 | )
|Change in fair value of CDO notes payable, trust preferred obligations and other liabilities |  |                                                 | 283,954  |   |                                                |   | 1,281,974  |  
|Change in fair value of derivatives                                                          |  |                                                 | (46,419  | ) |                                                |   | (78,928    | )
|                                                                                             |  |                                                 |          |   |                                                |   |            |  
|Change in fair value of financial instruments                                                |  | $                                               | (302,245 | ) |                                                | $ | 50,661     |  
|                                                                                             |  |                                                 |          |   |                                                |   |            |  

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



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##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



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 September 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 were paid on
September 30, 2008 to holders of record on September 2, 2008.

On October 22, 2008, our board of trustees declared a fourth
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 December 31, 2008 to holders of record on December 1, 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 $2,448 using our closing stock price of $7.55, to various non-executive employees. The awards generally vest over four year periods.

On January 14, 2008, we paid a quarterly distribution of $0.46 per common share totaling $28,068 to shareholders of record as of December 17, 2007.

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 vested 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 was paid on August 12, 2008 to shareholders of record as of July 16, 2008.

On October 10, 2008, our board of trustees declared a distribution of $0.35 per common share totaling $22,675 that will be paid on December 5,
2008 to shareholders of record as of October 31, 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 period ended September 30, 2008, we issued a total of
938,376 common shares pursuant to the DRSPP at a weighted-average price of $6.68 per share and we received $6,250 of net proceeds. During the nine-month period ended September 30, 2008, we issued a total of 3,666,558 common shares
pursuant to the DRSPP at a weighted-average price of $7.75 per share and we received $28,400 of net proceeds.



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##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



NOTE 9: EARNINGS PER SHARE

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



|                                                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------- |  | --------------------------------------------- | ---------- | - | -------------------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                    |  | For the Three-MonthPeriods Ended September 30 |            |   | For the Nine-monthPeriods Ended September 30 |  
|                                                                    |  | 2008                                          |            |   | 2007                                         |   |            | 2008 |  |   | 2007       |  
|Income (loss) from continuing operations                            |  | $                                             | (178,284   | ) |                                              | $ | (239,894   | )    |  | $ | 73,103     |   |  | $ | (187,320   | )
|Income allocated to preferred shares                                |  |                                               | (3,406     | ) |                                              |   | (3,357     | )    |  |   | (10,227    | ) |  |   | (8,403     | )
|                                                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations available to common shares |  |                                               | (181,690   | ) |                                              |   | (243,251   | )    |  |   | 62,876     |   |  |   | (195,723   | )
|Income (loss) from discontinued operations                          |  |                                               |           |   |                                              |   | (340       | )    |  |   |           |   |  |   | (132       | )
|                                                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) available to common shares                        |  | $                                             | (181,690   | ) |                                              | $ | (243,591   | )    |  | $ | 62,876     |   |  | $ | (195,855   | )
|                                                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Weighted-average shares outstandingBasic                           |  |                                               | 64,176,083 |   |                                              |   | 60,664,698 |      |  |   | 62,460,319 |   |  |   | 60,581,559 |  
|Dilutive securities under the treasury stock method(1)              |  |                                               |           |   |                                              |   |           |      |  |   | 32,156     |   |  |   |           |  
|                                                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Weighted-average shares outstandingDiluted                         |  |                                               | 64,176,083 |   |                                              |   | 60,664,698 |      |  |   | 62,492,475 |   |  |   | 60,581,559 |  
|                                                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Earnings (loss) per shareBasic:                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Continuing operations                                               |  | $                                             | (2.83      | ) |                                              | $ | (4.01      | )    |  | $ | 1.01       |   |  | $ | (3.23      | )
|Discontinued operations                                             |  |                                               |           |   |                                              |   | (0.01      | )    |  |   |           |   |  |   |           |  
|                                                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Total earnings (loss) per shareBasic                               |  | $                                             | (2.83      | ) |                                              | $ | (4.02      | )    |  | $ | 1.01       |   |  | $ | (3.23      | )
|                                                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Earnings (loss) per shareDiluted:                                  |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Continuing operations                                               |  | $                                             | (2.83      | ) |                                              | $ | (4.01      | )    |  | $ | 1.01       |   |  | $ | (3.23      | )
|Discontinued operations                                             |  |                                               |           |   |                                              |   | (0.01      | )    |  |   |           |   |  |   |           |  
|                                                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  
|Total earnings (loss) per shareDiluted                             |  | $                                             | (2.83      | ) |                                              | $ | (4.02      | )    |  | $ | 1.01       |   |  | $ | (3.23      | )
|                                                                    |  |                                               |            |   |                                              |   |            |      |  |   |            |   |  |   |            |  



|(1) | There were no dilutive securities under the treasury stock method during the three-month period ended September 30, 2008 and the three-month and nine-month periods ended
September 30, 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the three-month and nine-month periods ended September 30, 2008, securities convertible
into 53,387,504 and 46,299,154 common shares, respectively, were excluded from the earnings per share computations because their effect would have been anti-dilutive. For the three-month and nine-month periods ended September 30, 2007,
securities convertible into 22,044,509 and 5,209,769 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 September 30, 2008 and 2007, we incurred total shared service expenses of



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



$0 and $277, respectively. During the nine-month periods ended September 30, 2008 and 2007, we incurred total shared service expenses of $519 and $872,
respectively. Shared service expenses have been included in general and administrative expense in the accompanying consolidated 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 September 30, 2008 and 2007
relating to these leases was $13 and $12, respectively. Rent expense during the nine-month periods ended September 30, 2008 and 2007 relating to these leases was $38 and $53, respectively. Rent expense has been included in general and
administrative expense in the accompanying consolidated statements of operations. Future minimum lease payments due over the remaining term of the lease are $370.

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 September 30, 2008, the intangible asset has been fully amortized.

d). Common SharesAs of September 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 nine-month periods ended September 30, 2008, we incurred collateral management fees of $127 and $368, respectively, payable
to EuroDekania, which have been included in fee and other income in the accompanying consolidated statements of operations.

f). Trust Preferred Securities In October 2008, we re-purchased $25,000 principal amount of our TruPS that we issued from a third party using the broker-dealer services of Cohen & Company, for which Cohen & Company
received $70 in principal transaction income.

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 September 30, 2008, we had $2,140 of cash and cash equivalents and $13,443 of restricted cash on deposit at Bancorp. We earn interest on our cash and cash
equivalents at an interest rate of approximately 3.0% per annum. During the three-month periods ended September 30, 2008 and 2007, we received $33 and $200, respectively, of interest income from Bancorp. During the nine-month periods ended
September 30, 2008 and 2007, we received $100 and $681, 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 ensures 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 $200 for the three-month and nine-month periods ended September 30, 2008 and $103 and $341 for the three-month and nine-month periods ended September 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.



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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2008

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



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 nine-month periods ended September 30, 2008 and 2007.
Management fees of $24 and $36 were paid to Brandywine during the three-month periods ended September 30, 2008 and 2007, respectively, relating to those interests. Management fees of $96 and $109 were paid to Brandywine during the nine-month
periods ended September 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-MonthPeriod EndedSeptember 30, 2007 |      |   | For the Nine-MonthPeriod EndedSeptember 30, 2007 |  
|Rental income                                    |  | $                                                 | 488  |   |                                                  | $ | 1,481 |  
|Expenses:                                        |  |                                                   |      |   |                                                  |   |       |  
|Real estate operating expenses                   |  |                                                   | 421  |   |                                                  |   | 1,104 |  
|Depreciation                                     |  |                                                   | 51   |   |                                                  |   | 153   |  
|                                                 |  |                                                   |      |   |                                                  |   |       |  
|Total expenses                                   |  |                                                   | 472  |   |                                                  |   | 1,257 |  
|                                                 |  |                                                   |      |   |                                                  |   |       |  
|Income (loss) from discontinued operations       |  |                                                   | 16   |   |                                                  |   | 224   |  
|Gain (loss) from discontinued operations         |  |                                                   | (356 | ) |                                                  |   | (356  | )
|                                                 |  |                                                   |      |   |                                                  |   |       |  
|Total income (loss) from discontinued operations |  | $                                                 | (340 | ) |                                                  | $ | (132  | )
|                                                 |  |                                                   |      |   |                                                  |   |       |  

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.



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##### Table of Contents

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 subsidiaries as of September 30, 2008 and the related consolidated statements of operations, other comprehensive income (loss) and cash flows for
the three-month and nine-month periods ended September 30, 2008 and 2007. These interim financial statements are the responsibility of the Companys management.

We conducted our review in accordance with the 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
|November 6, 2008          



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##### Table of Contents

|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 distributions and capital appreciation, while seeking to manage the risks associated with our investment strategy.

We continue to face challenging and volatile market conditions that began in the second half of 2007, including significant disruptions in the credit
markets, abrupt and significant devaluations of assets directly or indirectly linked to the real estate finance markets, and the attendant removal of liquidity, both long and short term, from the capital markets. In addition, more recently
recessionary economic conditions have developed and the stock market has become even more volatile. We also cannot predict with any certainty the potential impact on our financial performance of contemplated or future government interventions
in financial markets. We seek to position RAIT to be able to take advantage of opportunities once market conditions improve and to maximize shareholder value over time. To do this, we will continue to focus on:



| |  |  | generating adjusted earnings for our investors,
| | - |  | -----------------------------------------------



| |  |  | originating new, risk-adjusted, good performing assets, and earning fees,
| | - |  | -------------------------------------------------------------------------



| |  |  | enhancing cash flows from our investment portfolios, and
| | - |  | --------------------------------------------------------



| |  |  | repositioning non-performing assets.
| | - |  | ------------------------------------

We believe these are the appropriate steps to position RAIT in the near term for long-term growth.

During the three-month and
nine-month periods ended September 30, 2008, we generated adjusted earnings per diluted share of $0.46 and $1.52, respectively, total earnings (loss) per diluted share of $(2.83) and $1.01, respectively, and gross cash flow of $44.3
million and $136.0 million, respectively. Our GAAP net loss in the three months ended September 30, 2008 was primarily caused by the non-cash fair value adjustments to our TruPS portfolio, which did not impact our cash flow. As discussed
below, the difference between fair value adjustments to our assets and liabilities was a primary contributor to our GAAP net income in the nine months ended September 30, 2008. Despite the market conditions described above, our investment
portfolio continues to generate adjusted earnings and cash flow.

The market conditions described above are affecting the performance and
prospects of each of the four primary categories in our investment portfolio: commercial real estate loans, residential mortgages, TruPS and investments underlying our unconsolidated European securitizations.

Our commercial real estate loans are our primary investment portfolio generating 52.2% and 55.9% of our gross cash flow during the three-month and
nine-month periods ended September 30, 2008, respectively. During the three-month and nine-month



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##### Table of Contents

periods ended September 30, 2008, we originated $47.0 million and $185.8 million, respectively, of new commercial real estate loans. Worsening
economic conditions have subjected borrowers under our commercial real estate loans to financial stress, which has increased the number of loans on non-accrual and caused us to increase our loan loss reserves. We continue to actively monitor and
manage these loans. Where it is likely to maximize our return, we consider restructuring loans, including restructuring that results in our consolidation of the underlying property. As we continue to pursue ways of improving our overall
recovery and repayment on these loans, we may experience temporary reductions in net investment income and cash flow. 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. The U.S. government sponsored entities Fannie Mae and Freddie Mac continue to provide financing for the acquisition and refinancing of multi-family properties, which may
positively impact our loans collateralized by multi-family properties. Liquidity for other commercial property types remains limited since banks are hesitant to lend and the securitization market for commercial real estate assets remains
frozen. In this environment we also continue to review investment opportunities within our own capital structure.

Our portfolio of
residential mortgages generated 10.8% and 10.9% of our gross cash flow during the three-month and nine-month periods ended September 30, 2008, respectively. We have seen the delinquency rates in our residential mortgage portfolio increase,
which resulted in increases in our loan loss reserves and the number and amount of loans on non-accrual status.

Our portfolio of TruPS
generated 27.0% and 24.2% of our gross cash flow during the three-month and nine-month periods ended September 30, 2008, respectively. We continue to respond to credit deterioration of TruPS issuers primarily in the mortgage finance and
homebuilder sectors held by collateralized securitizations we consolidate. This credit deterioration continues to adversely affect the cash flow we receive from our securitizations and the fair value of their collateral. We continue to
seek remedies and other means of restructuring our TruPS so as to improve the overall recovery in future periods. For example, during the third quarter of 2008, we exchanged collateral in Taberna VIII that resulted in recovery of approximately
$2.5 million of deferred subordinated management fees and cash flow from our residual interests in Taberna VIII, which had been deferred during the second quarter. We are unable to determine whether the number and range of issuers seeking
alternative repayment terms will enable us to sustain the cash flows at the present levels within each of the securitizations collateralized by TruPS.

Our portfolio of investments underlying our unconsolidated European securitizations generated 9.6% and 8.3% of our gross cash flow during the three-month and nine-month periods ended September 30, 2008,
respectively. During the third quarter of 2008, we experienced our first credit issues in our Taberna Europe II portfolio . In November 2008, one of two rating agencies did not confirm the ratings of the notes issued by Taberna Europe II. As a
result, we expect our cash flows from this portfolio to be reduced by approximately $0.8 million per quarter for the foreseeable future. In order to complete our second European securitization, we used our remaining restricted cash in the
securitization to pay down senior debt in lieu of originating additional investments.

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 affected by further similar developments in our investment
portfolio.

While our pace of investment origination has slowed from historical levels due to these conditions, we continue to see
opportunities for new investments generating favorable returns, primarily in our commercial real estate loan portfolio. We originated $177.5 million and $566.2 million of gross asset production in our investment portfolios during the three-month and
nine-month periods ended September 30, 2008, respectively, financed primarily through repayments of our loans, the sale of loan participations, secured credit facilities, and revolving credit facilities under our commercial real estate
securitizations and restricted cash available under our unconsolidated European securitizations that generated fee income for us. The credit crisis has slowed transaction volumes and new fee generating opportunities which are predicated on the pace
and amount of loan repayments we receive.

We continue to focus on managing our liquidity by using financing strategies that preserve our
capital. We also completed the execution of our strategy of reducing our exposure to possible margin calls under repurchase agreements by repaying the remaining repurchase agreement indebtedness during the three-month period ended September 30,
2008. As of September 30, 2008, we had no outstanding repurchase agreement debt. In addition, we also maintain our liquidity by managing our investment portfolio which continues to generate substantial cash flows as described
below.



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##### Table of Contents

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 and 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.

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



|                                                              |  |                                             |          |   |                                                     |   |           |                                                                                   |  |   |                                                          |   |  |   |            |  
|------------------------------------------------------------- |  | ------------------------------------------- | -------- | - | --------------------------------------------------- | - | --------- | --------------------------------------------------------------------------------- |  | - | -------------------------------------------------------- | - |  | - | ---------- | -
|                                                              |  | Fair ValueAdjustments as ofDecember 31,2007 |          |   | SFAS No. 159Fair ValueAdjustments onJanuary 1, 2008 |   |           | SFAS No. 159 FairValue Adjustmentsduring Nine-MonthPeriod
EndedSeptember 30, 2008 |  |   | Cumulative Fair ValueAdjustments as ofSeptember 30, 2008 |  
|Assets:                                                       |  |                                             |          |   |                                                     |   |           |                                                                                   |  |   |                                                          |   |  |   |            |  
|Investments in securities(1)                                  |  | $                                           | (494,765 | ) |                                                     | $ | (99,991   | )                                                                                 |  | $ | (1,152,385                                               | ) |  | $ | (1,747,141 | )
|Deferred financing costs, net of accumulated amortization     |  |                                             |         |   |                                                     |   | (18,047   | )                                                                                 |  |   |                                                         |   |  |   | (18,047    | )
|Liabilities:                                                  |  |                                             |          |   |                                                     |   |           |                                                                                   |  |   |                                                          |   |  |   |            |  
|Trust preferred obligations                                   |  |                                             |         |   |                                                     |   | 52,070    |                                                                                   |  |   | 101,514                                                  |   |  |   | 153,584    |  
|CDO notes payable                                             |  |                                             |         |   |                                                     |   | 1,520,616 |                                                                                   |  |   | 1,180,426                                                |   |  |   | 2,701,042  |  
|Derivative liabilities                                        |  |                                             | (155,080 | ) |                                                     |   |          |                                                                                   |  |   | (78,928                                                  | ) |  |   | (234,008   | )
|Other liabilities                                             |  |                                             |         |   |                                                     |   | 6,103     |                                                                                   |  |   | 34                                                       |   |  |   | 6,137      |  
|                                                              |  |                                             |          |   |                                                     |   |           |                                                                                   |  |   |                                                          |   |  |   |            |  
|Fair value adjustments before allocation to minority interest |  |                                             | (649,845 | ) |                                                     |   | 1,460,751 |                                                                                   |  |   | 50,661                                                   |   |  |   | 861,567    |  
|Allocation of fair value adjustments to minority interest     |  |                                             | 123,881  |   |                                                     |   | (373,357  | )                                                                                 |  |   | 27,748                                                   |   |  |   | (221,728   | )
|                                                              |  |                                             |          |   |                                                     |   |           |                                                                                   |  |   |                                                          |   |  |   |            |  
|Cumulative effect on shareholders equity                     |  | $                                           | (525,964 | ) |                                                     | $ | 1,087,394 |                                                                                   |  | $ | 78,409                                                   |   |  | $ | 639,839    |  
|                                                              |  |                                             |          |   |                                                     |   |           |                                                                                   |  |   |                                                          |   |  |   |            |  



|(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 September 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 $639.8 million. This increase in shareholders equity may reverse through earnings as an unrealized loss in the future. For
example, in the event our CDO notes payable were to recover some or all of their par amount at a speed that exceeds any recovery of par amount by our investments in securities, the difference in the respective par amount recoveries could adversely
affect earnings. 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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##### Table of Contents

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 September 30, 2008 (dollars in thousands):



|                                                          |  |                   |            |                         |   |                                 |  |       |                            |  |     |  
|--------------------------------------------------------- |  | ----------------- | ---------- | ----------------------- | - | ------------------------------- |  | ----- | -------------------------- |  | --- | -
|                                                          |  | AmortizedCost (1) |            | EstimatedFair Value (2) |   | Percentageof TotalPortfolio (3) |  |       | Weighted-AverageCoupon (4) | 
|Investments in mortgages and loans                        |  |                   |            |                         |   |                                 |  |       |                            |  |     |  
|Commercial mortgages, mezzanine loans and other loans     |  | $                 | 2,101,183  |                         | $ | 2,098,058                       |  | 27.2  | %                          |  | 8.2 | %
|Residential mortgages and mortgage-related receivables(5) |  |                   | 3,680,672  |                         |   | 2,785,683                       |  | 36.1  | %                          |  | 5.6 | %
|                                                          |  |                   |            |                         |   |                                 |  |       |                            |  |     |  
|Total investments in mortgages and loans                  |  |                   | 5,781,855  |                         |   | 4,883,741                       |  | 63.3  | %                          |  | 6.7 | %
|Investments in securities                                 |  |                   |            |                         |   |                                 |  |       |                            |  |     |  
|TruPS and subordinated debentures                         |  |                   | 3,416,389  |                         |   | 2,075,432                       |  | 26.8  | %                          |  | 7.4 | %
|Unsecured REIT note receivables                           |  |                   | 370,889    |                         |   | 305,801                         |  | 4.0   | %                          |  | 6.0 | %
|CMBS receivables                                          |  |                   | 213,921    |                         |   | 104,651                         |  | 1.4   | %                          |  | 5.8 | %
|Other securities                                          |  |                   | 118,204    |                         |   | 38,811                          |  | 0.5   | %                          |  | 7.1 | %
|                                                          |  |                   |            |                         |   |                                 |  |       |                            |  |     |  
|Total investments in securities                           |  |                   | 4,119,403  |                         |   | 2,524,695                       |  | 32.7  | %                          |  | 7.2 | %
|Investment in real estate interests                       |  |                   | 311,214    |                         |   | 311,214                         |  | 4.0   | %                          |  | N/A |  
|                                                          |  |                   |            |                         |   |                                 |  |       |                            |  |     |  
|Total Portfolio/Weighted Average                          |  | $                 | 10,212,472 |                         | $ | 7,719,650                       |  | 100.0 | %                          |  | 6.9 | %
|                                                          |  |                   |            |                         |   |                                 |  |       |                            |  |     |  



|(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 September 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 mortgages, mezzanine loans and other loans.

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



|                     |  |                |           |                     |   |                     |  |                       |  |      |                     |  |                       |  |                        |  |       |  
|-------------------- |  | -------------- | --------- | ------------------- | - | ------------------- |  | --------------------- |  | ---- | ------------------- |  | --------------------- |  | ---------------------- |  | ----- | -
|                     |  | CarryingAmount |           | EstimatedFair Value |   | Range ofLoan Yields |  | WeightedAverageCoupon |  |      | Range of Maturities |  | Numberof Loans        |  | % ofTotalLoanPortfolio | 
|Commercial mortgages |  | $              | 1,423,744 |                     | $ | 1,409,564           |  | 5.2%  19.0%          |  | 7.7  | %                   |  | Nov. 2008  Aug. 2012 |  | 118                    |  | 67.8  | %
|Mezzanine loans      |  |                | 502,560   |                     |   | 510,113             |  | 5.1%  17.0%          |  | 10.4 | %                   |  | Nov. 2008  Aug. 2021 |  | 154                    |  | 23.9  | %
|Other loans          |  |                | 174,879   |                     |   | 178,381             |  | 4.3%  9.1%           |  | 6.1  | %                   |  | Dec. 2008  Oct. 2016 |  | 11                     |  | 8.3   | %
|                     |  |                |           |                     |   |                     |  |                       |  |      |                     |  |                       |  |                        |  |       |  
|Total                |  | $              | 2,101,183 |                     | $ | 2,098,058           |  |                       |  | 8.2  | %                   |  |                       |  | 283                    |  | 100.0 | %
|                     |  |                |           |                     |   |                     |  |                       |  |      |                     |  |                       |  |                        |  |       |  



28



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##### Table of Contents

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

LOGO

LOGO

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 unpaid principal balance of approximately $478,000 and an average loan-to-value ratio of
approximately 74.9%. As of September 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.



29



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##### Table of Contents

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



|         |  |                |           |                       |     |   |                           |            |                            |            |                  |     |               |       |                       |       |  
|-------- |  | -------------- | --------- | --------------------- | --- | - | ------------------------- | ---------- | -------------------------- | ---------- | ---------------- | --- | ------------- | ----- | --------------------- | ----- | -
|         |  | CarryingAmount |           | WeightedAverageCoupon |     |   | AverageNextAdjustmentDate |            | AverageContractualMaturity |            | AverageFICOScore |     | NumberofLoans |       | PercentageofPortfolio |      
|3/1 ARM  |  | $              | 93,098    |                       | 5.6 | % |                           | Nov. 2008  |                            | Aug. 2035  |                  | 729 |               | 248   |                       | 2.5   | %
|5/1 ARM  |  |                | 3,019,721 |                       | 5.6 | % |                           | Sept. 2010 |                            | Sept. 2035 |                  | 738 |               | 6,295 |                       | 82.1  | %
|7/1 ARM  |  |                | 511,174   |                       | 5.7 | % |                           | July 2012  |                            | July 2035  |                  | 737 |               | 1,127 |                       | 13.9  | %
|10/1 ARM |  |                | 56,679    |                       | 5.7 | % |                           | June 2015  |                            | June 2035  |                  | 749 |               | 67    |                       | 1.5   | %
|         |  |                |           |                       |     |   |                           |            |                            |            |                  |     |               |       |                       |       |  
|Total    |  | $              | 3,680,672 |                       | 5.6 | % |                           |            |                            |            |                  | 738 |               | 7,737 |                       | 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 September 30, 2008:



|     |  |     
|---- |  | ----
|LOGO |  | LOGO

LOGO



|(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.



30



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##### Table of Contents

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 September 30, 2008 (dollars in thousands):



|                     |  |                     |           |           |       |   |                        |     |   |                                                          |      |   |                                            |     
|-------------------- |  | ------------------- | --------- | --------- | ----- | - | ---------------------- | --- | - | -------------------------------------------------------- | ---- | - | ------------------------------------------ | ----
|                     |  |                     |           |           |       |   |                        |     |   | Issuer Statistics                                       
|Industry Sector      |  | EstimatedFair Value |           | % ofTotal |       |   | WeightedAverage Coupon |     |   | Weighted AverageRatio of Debt to TotalCapitalization (a) |      |   | Weighted AverageInterest CoverageRatio (a)
|Commercial Mortgage  |  | $                   | 662,446   |           | 31.9  | % |                        | 7.3 | % |                                                          | 74.6 | % |                                            | 1.4x
|Office               |  |                     | 433,114   |           | 20.9  | % |                        | 7.2 | % |                                                          | 70.4 | % |                                            | 2.4x
|Specialty Finance    |  |                     | 303,621   |           | 14.6  | % |                        | 7.3 | % |                                                          | 86.1 | % |                                            | 1.7x
|Homebuilders         |  |                     | 227,357   |           | 11.0  | % |                        | 8.4 | % |                                                          | 71.2 | % |                                            | 1.6x
|Retail               |  |                     | 146,072   |           | 7.0   | % |                        | 5.8 | % |                                                          | 89.4 | % |                                            | 1.7x
|Residential Mortgage |  |                     | 132,573   |           | 6.4   | % |                        | 6.9 | % |                                                          | 95.8 | % |                                            | 1.3x
|Hospitality          |  |                     | 102,062   |           | 4.9   | % |                        | 7.7 | % |                                                          | 79.7 | % |                                            | 2.0x
|Storage              |  |                     | 68,187    |           | 3.3   | % |                        | 7.5 | % |                                                          | 63.1 | % |                                            | 2.8x
|                     |  |                     |           |           |       |   |                        |     |   |                                                          |      |   |                                            |     
|Total                |  | $                   | 2,075,432 |           | 100.0 | % |                        | 7.4 | % |                                                          | 77.3 | % |                                            | 1.8x
|                     |  |                     |           |           |       |   |                        |     |   |                                                          |      |   |                                            |     

LOGO



|(a) | Based on estimated fair value.
|--- | ------------------------------

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



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##### Table of Contents

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
September 30, 2008 (dollars in thousands):



|                                      |  |                     |         |                       |      |   |                                 |      |               |   |        
|------------------------------------- |  | ------------------- | ------- | --------------------- | ---- | - | ------------------------------- | ---- | ------------- | - | -------
|Investment Description                |  | EstimatedFair Value |         | WeightedAverageCoupon |      |   | WeightedAverageYears toMaturity |      | AmortizedCost
|Unsecured REIT note receivables       |  | $                   | 305,801 |                       | 6.0  | % |                                 | 8.1  |               | $ | 370,889
|CMBS receivables                      |  |                     | 104,651 |                       | 5.8  | % |                                 | 34.1 |               |   | 213,921
|Taberna Europe I & II CDO investments |  |                     | 26,518  |                       | 12.2 | % |                                 | 29.6 |               |   | 51,794 
|Other securities                      |  |                     | 12,293  |                       | 6.0  | % |                                 | 38.6 |               |   | 66,409 
|                                      |  |                     |         |                       |      |   |                                 |      |               |   |        
|Total                                 |  | $                   | 449,263 |                       | 6.4  | % |                                 | 22.2 |               | $ | 703,013
|                                      |  |                     |         |                       |      |   |                                 |      |               |   |        

LOGO



|(a) | S&P ratings as of September 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 ofSeptember 30,2008 |        
|Multi-family                         |  | $                      | 111,126 |  
|Office                               |  |                        | 192,827 |  
|Retail and other                     |  |                        | 14,289  |  
|                                     |  |                        |         |  
|Subtotal                             |  |                        | 318,242 |  
|Plus: Escrows and reserves           |  |                        | 1,688   |  
|Less: Accumulated depreciation       |  |                        | (8,716  | )
|                                     |  |                        |         |  
|Investments in real estate interests |  | $                      | 311,214 |  
|                                     |  |                        |         |  



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##### Table of Contents

Credit Summary

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



|                                                                                            |  |                                 |           |                                       |     |                                              |   |         |                             |  |     |                   |  |   |        |    
|------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------------- | --- | -------------------------------------------- | - | ------- | --------------------------- |  | --- | ----------------- |  | - | ------ | ---
|                                                                                            |  | CarryingValue ofInvestments (1) |           | Numberof Non-AccrualStatusInvestments |     | CarryingValue ofNon-AccrualStatusInvestments |   |         | Percentageof AssetClass(es) |  |     | Loan LossReserves | 
|Commercial mortgages, mezzanine loans, other loans and investments in real estate interests |  | $                               | 2,412,397 |                                       | 11  |                                              | $ | 146,315 |                             |  | 6.1 | %                 |  | $ | 46,250 | (2)
|Residential mortgages and mortgage-related receivables                                      |  |                                 | 3,680,672 |                                       | 435 |                                              |   | 169,734 | (3)                         |  | 4.6 | %                 |  |   | 19,515 |    
|Investments in securities and security-related receivables (4)                              |  |                                 | 2,524,695 |                                       | 14  |                                              |   | 37,281  |                             |  | 1.5 | %                 |  |   | N/A    | (5)
|                                                                                            |  |                                 |           |                                       |     |                                              |   |         |                             |  |     |                   |  |   |        |    
|Total                                                                                       |  | $                               | 8,617,764 |                                       | 460 |                                              | $ | 353,330 |                             |  | 4.1 | %                 |  | $ | 65,765 |    
|                                                                                            |  |                                 |           |                                       |     |                                              |   |         |                             |  |     |                   |  |   |        |    



|(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 13 loans with a $182.0 million aggregate unpaid principal balance.
|--- | ------------------------------------------------------------------------------

|(3) | Includes loans delinquent over 60 days, in foreclosure, bankrupt or real estate owned as of September 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 September 30, 2008 is $4.3 billion. The unpaid principal balance of the non-accrual investments in this category is $475.6 million, or 11.1% 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 we believe 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33



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##### Table of Contents

Securitization Summary

Through September 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 Preferred Funding II, Ltd., or RAIT II, all of which we manage. These CDOs contain interest coverage and overcollateralization triggers that must be met in order for us to receive our
subordinated management fees and debt or residual equity returns. If these interest coverage or overcollateralization triggers are not met, cash flows will be re-directed from lower-rated debt and equity tranches (including our retained interests)
to repay principal on senior tranches of CDO notes. We may have the ability to cure defaults, which could resume normal residual payments to us, by purchasing non-performing assets out of our CDOs or other actions. Set forth below is certain
information about each CDO as of September 30, 2008 (dollars in millions):



|                         |  |                                                                                                               |  |                       |          |                           |   |                        |  |                |       |                 |   |                                            |  |                                                          |         |  |   |         |  |   |      
|------------------------ |  | ------------------------------------------------------------------------------------------------------------- |  | --------------------- | -------- | ------------------------- | - | ---------------------- |  | -------------- | ----- | --------------- | - | ------------------------------------------ |  | -------------------------------------------------------- | ------- |  | - | ------- |  | - | -----
|                         |  |                                                                                                               |  |                       |          | RAITs Retained Interests |   |                       
|CDO                      |  | Type of Collateral                                                                                            |  | TotalCollateralAmount |          | InvestmentGradeDebt       |   | NonInvestmentGradeDebt |  | EquityRetained |       | TotalInvestment |   | Value ofRetainedInterestson aGAAPBasis (1) |  | Value ofRetainedInterestson anEconomicBookValueBasis (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    |  |   | 127.8   |  |   | 70.3 
|Taberna IV(3)            |  | TruPS, subordinated debt, CMBS and unsecured REIT notes                                                       |  |                       | 650.0    |                           |   | 6.8                    |  |                | 24.4  |                 |   | 26.0                                       |  |                                                          | 57.2    |  |   | 131.5   |  |   | 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    |  |   | 143.0   |  |   | 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    |  |   | 150.2   |  |   | 69.3 
|Taberna VIII(4)          |  | TruPS, subordinated debt, first mortgages, CMBS and unsecured REIT notes                                      |  |                       | 726.2    |                           |   | 40.0                   |  |                | 33.0  |                 |   | 60.0                                       |  |                                                          | 133.0   |  |   | 327.2   |  |   | 133.0
|Taberna IX(4)            |  | TruPS, subordinated debt, first mortgages, CMBS and unsecured REIT notes                                      |  |                       | 740.1    |                           |   | 89.0                   |  |                | 45.0  |                 |   | 52.5                                       |  |                                                          | 186.5   |  |   | 324.5   |  |   | 186.5
|Taberna Europe I (5)(6)  |  | Subordinated debt, senior loans, CMBS, other real estate-related assets and financial institution obligations |  |                       | 845.5    |                           |   |                       |  |                | 19.7  |                 |   | 15.9                                       |  |                                                          | 35.6    |  |   | 19.7    |  |   | 19.7 
|Taberna Europe II (6)(7) |  | Subordinated debt, senior loans, CMBS, other real estate-related assets and financial institution obligations |  |                       | 1,100.0  |                           |   |                       |  |                | 2.8   |                 |   | 17.6                                       |  |                                                          | 20.4    |  |   | 6.8     |  |   | 6.8  
|RAIT I(8)                |  | Commercial mortgages and mezzanine loans                                                                      |  |                       | 985.2    |                           |   |                       |  |                | 35.0  |                 |   | 165.0                                      |  |                                                          | 200.0   |  |   | 181.2   |  |   | 200.0
|RAIT II(8)               |  | Commercial mortgages and mezzanine loans                                                                      |  |                       | 810.6    |                           |   | 55.5                   |  |                | 30.5  |                 |   | 110.2                                      |  |                                                          | 196.2   |  |   | 166.1   |  |   | 196.2
|                         |  |                                                                                                               |  |                       |          |                           |   |                        |  |                |       |                 |   |                                            |  |                                                          |         |  |   |         |  |   |      
|TOTAL                    |  |                                                                                                               |  | $                     | 10,253.6 |                           | $ | 234.7                  |  | $              | 263.9 |                 | $ | 602.8                                      |  | $                                                        | 1,101.4 |  | $ | 1,578.3 |  | $ | 978.3
|                         |  |                                                                                                               |  |                       |          |                           |   |                        |  |                |       |                 |   |                                            |  |                                                          |         |  |   |         |  |   |      



|(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 $1.7 million of currently available cash flow, on a quarterly basis, associated with our retained interests, to repay principal on senior debt. Additionally, while we are collecting $1.1 million of senior management fees
on quarterly basis on these CDOs, we are not collecting $1.1 million of our subordinate management fees on a quarterly basis.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 $4.0 million of currently available cash flow, 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, on a quarterly basis,
associated with our retained interests. Additionally, while we are collecting $1.2 million of senior management fees on a quarterly basis on these CDOs, we are not collecting $1.2 million of our subordinate management fees on a quarterly basis.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(4) | These CDOs are managed and consolidated. These CDOs are performing and paying cash flow based upon their respective payment priorities. We receive approximately $9.8 million of cash
flow, on a quarterly basis, associated with our retained interests and $0.6 million and $0.7 million of senior and subordinated management fees, respectively, on a quarterly basis Although these CDOs are currently in compliance with their respective
interest coverage and overcollateralization triggers, any future defaults would likely result in a failure of these triggers and a corresponding reduction in cash flows to us.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | This CDO is managed and not consolidated. This CDO is performing and paying cash flow based upon its payment priorities within its indenture. We receive $1.1 million of cash flow,
on a quarterly basis, associated with our retained interests. Additionally, we are collecting, on a quarterly basis, $0.5 million of senior management fees and $0.3 million of subordinate management fees. Although this CDO is currently in compliance
with its respective interest coverage and overcollateralization triggers, any future defaults would likely result in a failure of these triggers and a corresponding reduction in cash flows to us.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Amounts presented related to these CDOs are converted to U.S. dollars based on U.S. dollar to Euro exchange rates as of September 30, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(7) | This CDO is managed and not consolidated. This CDO is currently failing several of its over-collateralization tests due to collateral defaults and is re-directing approximately $0.4
million of currently available cash flow, on a quarterly basis, associated with our retained interests, to repay principal on senior debt. Additionally, while we are collecting $0.6 million of senior management fees on this CDO, we are not
collecting $0.4 million of our subordinate management fees on a quarterly basis. In November 2008, one of two rating agencies determined not to confirm its ratings of the notes issued by this CDO. Rating agency non-confirmation and existing
collateral defaults will cause cash-flow, excluding senior management fee payments, to be re-directed from lower-rated debt and equity (including our retained interests) to the senior notes for the foreseeable future.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | 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 $18.2 million of cash flow, on a quarterly basis, associated with our retained interests. Although these CDOs are currently in compliance with their respective interest coverage and overcollateralization triggers, any future
defaults would likely result in a failure of these triggers and a corresponding reduction in cash flows to us.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 September 30, 2008, we completed six securitizations of
residential mortgage loans, which had aggregate unpaid principal balances of approximately $3.7 billion as of September 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 September 30, 2008 (dollars in millions):

|                                                              |  |                        |         |                           |   |                                 |  |      |  
|------------------------------------------------------------- |  | ---------------------- | ------- | ------------------------- | - | ------------------------------- |  | ---- | -
|                                                              |  | Total CollateralAmount |         | Our RetainedInterests (1) |   | Loan Delinquencies> 60 days (2) | 
|Bear Stearns ARM Trust 2005-7                                 |  | $                      | 390.5   |                           | $ | 32.5                            |  | 3.0  | %
|Bear Stearns ARM Trust 2005-9                                 |  |                        | 826.9   |                           |   | 50.7                            |  | 2.0  | %
|Citigroup Mortgage Loan Trust 2005-1                          |  |                        | 550.6   |                           |   | 42.7                            |  | 1.7  | %
|CWABS Trust 2005 HYB9                                         |  |                        | 751.0   |                           |   | 41.1                            |  | 11.1 | %
|Merrill Lynch Mortgage Investors Trust, Series 2005-A9        |  |                        | 645.3   |                           |   | 44.3                            |  | 3.6  | %
|Merrill Lynch Mortgage Backed Securities Trust, Series 2007-2 |  |                        | 529.2   |                           |   | 23.8                            |  | 5.0  | %
|                                                              |  |                        |         |                           |   |                                 |  |      |  
|Total                                                         |  | $                      | 3,693.5 |                           | $ | 235.1                           |  | 4.6  | %
|                                                              |  |                        |         |                           |   |                                 |  |      |  



|(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 September 30, 2008. Our total loan loss reserve associated with our residential mortgage portfolio was $19.5 million as of September 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 GAAP net
income (loss). Adjusted earnings represents net income (loss) available to common shares, computed in accordance with GAAP, before provision for losses, depreciation expense, amortization of intangible assets, (gains) losses on sale of assets,
(gains) losses on extinguishment of debt, change in fair value of financial instruments, net of allocation to minority interest, unrealized (gains) losses on interest rate hedges, interest cost of hedges, net of allocation to minority interest,
capital (gains) losses, asset impairments, net of allocation to minority interest, net (gains) losses on deconsolidation of VIEs, share-based compensation, write-off of unamortized deferred financing costs, fee income deferred (recognized) and our
deferred tax provision (benefit). 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.

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 provision for losses, amortization of intangible assets, change in fair value of
financial instruments, capital (gains) losses, asset impairments 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



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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 nine-month period ended September 30, 2008, we revised our definition of adjusted earnings to exclude capital (gains) losses and gains
(losses) on sale of assets. Capital (gains) losses and gains (losses) on sale of assets, while economic gains or losses, do not currently impact operating performance or dividend paying ability. This revision resulted in an increase of $7.6 million
and $10.3 million to the computation of adjusted earnings for the three-month and nine-month periods ended September 30, 2007, respectively.

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



|                                                                                                                                                                                                    |  |                                              |          |   |                                             |   |          |      |  |   |         |   |  |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | -------- | - | ------------------------------------------- | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                                                                                                                                                                                    |  | For the Three-MonthPeriods EndedSeptember 30 |          |   | For the Nine-MonthPeriods EndedSeptember 30 |  
|                                                                                                                                                                                                    |  | 2008                                         |          |   | 2007                                        |   |          | 2008 |  |   | 2007    |  
|Net income (loss) available to common shares, as reported                                                                                                                                           |  | $                                            | (181,690 | ) |                                             | $ | (243,591 | )    |  | $ | 62,876  |   |  | $ | (195,855 | )
|Add (deduct):                                                                                                                                                                                       |  |                                              |          |   |                                             |   |          |      |  |   |         |   |  |   |          |  
|Provision for losses                                                                                                                                                                                |  |                                              | 14,992   |   |                                             |   | 6,099    |      |  |   | 50,575  |   |  |   | 10,662   |  
|Depreciation expense                                                                                                                                                                                |  |                                              | 1,665    |   |                                             |   | 1,945    |      |  |   | 4,431   |   |  |   | 3,816    |  
|Amortization of intangible assets                                                                                                                                                                   |  |                                              | 2,883    |   |                                             |   | 17,473   |      |  |   | 16,048  |   |  |   | 46,051   |  
|(Gains) losses on sale of assets                                                                                                                                                                    |  |                                              | (770     | ) |                                             |   | 7,569    |      |  |   | (770    | ) |  |   | 10,329   |  
|(Gains) losses on extinguishment of debt                                                                                                                                                            |  |                                              |         |   |                                             |   |         |      |  |   | (8,662  | ) |  |   |         |  
|Change in fair value of financial instruments, net of allocation to minority interest of $(118,303) and $(27,748) for the three-month and
nine-month periods ended September 30, 2008, respectively |  |                                              | 183,942  |   |                                             |   |         |      |  |   | (78,409 | ) |  |   |         |  
|Unrealized (gains) losses on interest rate hedges                                                                                                                                                   |  |                                              | 290      |   |                                             |   | 3,122    |      |  |   | 275     |   |  |   | 2,605    |  
|Interest cost of hedges, net of allocation to minority interest of $3,850 and $10,201 for the three-month and nine-month periods ended
September 30, 2008, respectively                             |  |                                              | (11,238  | ) |                                             |   |         |      |  |   | (29,144 | ) |  |   |         |  
|Capital losses(1)                                                                                                                                                                                   |  |                                              |         |   |                                             |   |         |      |  |   | 32,059  |   |  |   |         |  
|Asset impairments, net of allocation to minority interest of $95,986 for the three-month and nine-month periods ended September 30, 2007                                                            |  |                                              | 18,038   |   |                                             |   | 246,968  |      |  |   | 38,361  |   |  |   | 246,968  |  
|Share-based compensation                                                                                                                                                                            |  |                                              | 1,237    |   |                                             |   | 3,016    |      |  |   | 5,535   |   |  |   | 8,753    |  
|Write-off of unamortized deferred financing costs                                                                                                                                                   |  |                                              |         |   |                                             |   |         |      |  |   |        |   |  |   | 2,985    |  
|Fee income deferred (recognized)                                                                                                                                                                    |  |                                              | 257      |   |                                             |   | (5,263   | )    |  |   | 446     |   |  |   | 27,732   |  
|Deferred tax provision (benefit)                                                                                                                                                                    |  |                                              | 17       |   |                                             |   | 3,245    |      |  |   | 1,240   |   |  |   | (15,445  | )
|                                                                                                                                                                                                    |  |                                              |          |   |                                             |   |          |      |  |   |         |   |  |   |          |  
|Adjusted earnings                                                                                                                                                                                   |  | $                                            | 29,623   |   |                                             | $ | 40,583   |      |  | $ | 94,861  |   |  | $ | 148,601  |  
|                                                                                                                                                                                                    |  |                                              |          |   |                                             |   |          |      |  |   |         |   |  |   |          |  



|(1) | During the nine-month period ended September 30, 2008, all 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. Total fees generated, as a non-GAAP financial measurement, does not purport to be an alternative to fee and other income 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, total fees generated 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.

The table below reconciles the differences between
GAAP fee and other income and total fees generated for the three-month and nine-month periods ended September 30, 2008 and 2007 (dollars in thousands):



|                                                            |  |                                              |       |      |                                             |        |      |  |      |        |  |   |       
|----------------------------------------------------------- |  | -------------------------------------------- | ----- | ---- | ------------------------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------
|                                                            |  | For the Three-MonthPeriods EndedSeptember 30 |       |      | For the Nine-MonthPeriods EndedSeptember 30
|                                                            |  | 2008                                         |       | 2007 |                                             |        | 2008 |  | 2007
|Fee and other income, as reported                           |  | $                                            | 5,128 |      | $                                           | 11,325 |      |  | $    | 17,131 |  | $ | 20,889
|Add (deduct):                                               |  |                                              |       |      |                                             |        |      |  |      |        |  |   |       
|Asset management fees eliminated                            |  |                                              | 4,208 |      |                                             | 6,300  |      |  |      | 12,769 |  |   | 16,538
|Deferred structuring fees                                   |  |                                              |      |      |                                             |       |      |  |      |       |  |   | 11,413
|Deferred (recognized) origination fees, net of amortization |  |                                              | 257   |      |                                             | (5,263 | )    |  |      | 446    |  |   | 16,319
|                                                            |  |                                              |       |      |                                             |        |      |  |      |        |  |   |       
|Total fees generated                                        |  | $                                            | 9,593 |      | $                                           | 12,362 |      |  | $    | 30,346 |  | $ | 65,159
|                                                            |  |                                              |       |      |                                             |        |      |  |      |        |  |   |       

Assets Under ManagementAssets under management, or 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. Our total AUM was $14.3 billion as of September 30, 2008.

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 (gains) losses recognized in excess of our investments at risk.

Management views economic book value as a useful and appropriate supplement to shareholders equity, book value and tangible 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 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. 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.



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



|                                                                |  |                          |           |   |                         |   |       |        |  |   |              |   |  |   |       |  
|--------------------------------------------------------------- |  | ------------------------ | --------- | - | ----------------------- | - | ----- | ------ |  | - | ------------ | - |  | - | ----- | -
|                                                                |  | As of September 30, 2008 |           |   | As of December 31, 2007 |  
|                                                                |  | Amount                   |           |   | PerShare (2)            |   |       | Amount |  |   | PerShare (2) |  
|Shareholders equity, as reported                               |  | $                        | 1,681,452 |   |                         | $ | 25.95 |        |  | $ | 579,243      |   |  | $ | 9.49  |  
|Add (deduct):                                                   |  |                          |           |   |                         |   |       |        |  |   |              |   |  |   |       |  
|Liquidation value of preferred shares(1)                        |  |                          | (165,458  | ) |                         |   | (2.55 | )      |  |   | (165,458     | ) |  |   | (2.71 | )
|                                                                |  |                          |           |   |                         |   |       |        |  |   |              |   |  |   |       |  
|Book value                                                      |  |                          | 1,515,994 |   |                         |   | 23.40 |        |  |   | 413,785      |   |  |   | 6.78  |  
|Unamortized intangible assets                                   |  |                          | (22,037   | ) |                         |   | (0.34 | )      |  |   | (56,123      | ) |  |   | (0.92 | )
|                                                                |  |                          |           |   |                         |   |       |        |  |   |              |   |  |   |       |  
|Tangible book value                                             |  |                          | 1,493,957 |   |                         |   | 23.06 |        |  |   | 357,662      |   |  |   | 5.86  |  
|Unrealized (gains) losses recognized in excess of value at risk |  |                          | (600,032  | ) |                         |   | (9.26 | )      |  |   | 284,002      |   |  |   | 4.66  |  
|                                                                |  |                          |           |   |                         |   |       |        |  |   |              |   |  |   |       |  
|Economic book value                                             |  | $                        | 893,925   |   |                         | $ | 13.80 |        |  | $ | 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 64,783,126 and 61,018,231 common shares outstanding as of September 30, 2008 and December 31, 2007, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------

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.



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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 nine-month periods ended September 30, 2008 and 2007 (dollars in thousands):



|                                                                                                                                                                                      |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | -------- | - | -------------------------------------------- | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                                                                                                                                                                      |  | For the Three-MonthPeriods Ended September 30 |          |   | For the Nine-MonthPeriods Ended September 30 |  
|                                                                                                                                                                                      |  | 2008                                          |          |   | 2007                                         |   |          | 2008 |  |   | 2007    |  
|Net income (loss) available to common shares, as reported                                                                                                                             |  | $                                             | (181,690 | ) |                                              | $ | (243,591 | )    |  | $ | 62,876  |   |  | $ | (195,855 | )
|Add (deduct):                                                                                                                                                                         |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  
|Provision for losses, net of charge-offs                                                                                                                                              |  |                                               | 10,291   |   |                                              |   | 6,099    |      |  |   | 39,713  |   |  |   | 10,662   |  
|Domestic TRS book-to-total taxable income differences:                                                                                                                                |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  
|Income tax provision (benefit)                                                                                                                                                        |  |                                               | 173      |   |                                              |   | 1,534    |      |  |   | (2,261  | ) |  |   | (3,546   | )
|Fees received and deferred in consolidation                                                                                                                                           |  |                                               |         |   |                                              |   | (5,472   | )    |  |   | 307     |   |  |   | 27,377   |  
|Stock compensation and other temporary tax differences                                                                                                                                |  |                                               | 953      |   |                                              |   | (14,243  | )    |  |   | 1,820   |   |  |   | (11,595  | )
|Capital losses not offsetting capital gains and other temporary tax differences                                                                                                       |  |                                               |         |   |                                              |   | 5,028    |      |  |   | 32,059  |   |  |   | 5,028    |  
|Asset impairments, net of minority interest of $95,986 for the three-month and nine-month periods ended September 30,
2007                                                            |  |                                               | 18,038   |   |                                              |   | 246,968  |      |  |   | 38,361  |   |  |   | 246,968  |  
|Change in fair value of financial instruments, net of minority interest of $(118,303) and $(27,748) for the three-month and nine-month periods
ended September 30, 2008, respectively |  |                                               | 183,942  |   |                                              |   |         |      |  |   | (78,409 | ) |  |   |         |  
|Amortization of intangible assets                                                                                                                                                     |  |                                               | 2,883    |   |                                              |   | 17,473   |      |  |   | 16,048  |   |  |   | 46,051   |  
|CDO investments aggregate book-to-taxable income differences(1)                                                                                                                       |  |                                               | (17,509  | ) |                                              |   | 3,020    |      |  |   | (52,012 | ) |  |   | 2,641    |  
|Accretion of (premiums) discounts                                                                                                                                                     |  |                                               | 972      |   |                                              |   | 472      |      |  |   | 3,243   |   |  |   | 2,132    |  
|Other book to tax differences                                                                                                                                                         |  |                                               | 307      |   |                                              |   | (42      | )    |  |   | 6       |   |  |   | (165     | )
|                                                                                                                                                                                      |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  
|Total taxable income                                                                                                                                                                  |  |                                               | 18,360   |   |                                              |   | 17,246   |      |  |   | 61,751  |   |  |   | 129,698  |  
|Plus (less): Taxable income (loss) attributable to domestic TRS entities                                                                                                              |  |                                               | (3,143   | ) |                                              |   | 9,673    |      |  |   | (907    | ) |  |   | (25,954  | )
|Plus: Dividends paid by domestic TRS entities                                                                                                                                         |  |                                               |         |   |                                              |   |         |      |  |   | 12,000  |   |  |   | 27,250   |  
|                                                                                                                                                                                      |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  
|Estimated REIT taxable income (prior to deduction for dividends paid)                                                                                                                 |  | $                                             | 15,217   |   |                                              | $ | 26,919   |      |  | $ | 72,844  |   |  | $ | 130,994  |  
|                                                                                                                                                                                      |  |                                               |          |   |                                              |   |          |      |  |   |         |   |  |   |          |  



|(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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The aggregate amount we distributed to our common shareholders pursuant to our dividends paid on January 14, 2008, May 15, 2008 and
August 12, 2008 was $85.5 million and we expect to distribute approximately $22.7 million to our common shareholders on December 5, 2008 pursuant to our dividend declared on October 10, 2008.

Results of Operations

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

Revenue

Investment interest income.Investment interest income decreased $64.6 million, or 27.7%, to $168.4 million for the three-month period ended
September 30, 2008 from $233.0 million for the three-month period ended September 30, 2007. This net decrease was primarily attributable to: decreases in interest income of $30.8 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, $3.0 million from the sale of other securities subsequent to September 30, 2007 and $6.1 million from approximately $486.7 million in
repayments on our residential mortgage loans subsequent to September 30, 2007. The remaining decrease was primarily related to the reduction in short-term LIBOR of approximately 2.5% during the three-month period ended September 30, 2008
compared to the three-month period ended September 30, 2007 and $794.4 million in total principal amount of investments on non-accrual status as of September 30, 2008.

Investment interest expense.Investment interest expense decreased $70.9 million, or 37.9%, to $116.0 million for the three- month period ended
September 30, 2008 from $186.9 million for the three-month period ended September 30, 2007. This net decrease was primarily attributable to: decreases in interest expense of $25.5 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, $4.5 million from reductions in our repurchase agreements and other indebtedness used to finance various investments on a short-term basis, and
$7.5 million from repayments of our residential mortgage-backed securities used to finance our residential mortgage portfolio. The remaining decrease was primarily related to the reduction in short-term LIBOR of approximately 2.5% during the
three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007 and the presentation of interest cost of hedges in change in the fair value of financial instruments during the three-month period
ended September 30, 2008 due to the adoption of SFAS No. 159 on January 1, 2008.



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Provision for losses. The provision for losses relates to our investments in residential mortgages
and mortgage-related receivables and our commercial mortgage loan portfolio. The provision for losses increased by $8.9 million for the three-month period ended September 30, 2008 to $15.0 million as compared to $6.1 million for the three-month
period ended September 30, 2007. Since December 31, 2007, our delinquencies in our residential mortgage portfolio have increased by $104.9 million, including $67.5 million in real estate-owned, bankruptcy or foreclosure property, and by
$109.0 million in our commercial loan portfolio. 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 September 30, 2008, $146.3 million of our commercial mortgages and mezzanine loans and $169.7 million of our residential mortgages and mortgage-related receivables were on non-accrual status.

Rental income. Rental income increased $1.6 million, or 54.3%, to $4.7 million for the three-month period ended September 30,
2008 from $3.1 million for the three-month period ended September 30, 2007. This increase was primarily attributable to three new properties, with total assets of approximately $60.9 million, acquired or consolidated since or during the
three-month ended September 30, 2007.

Fee and other income.Fee and other income decreased $6.2 million to $5.1 million for
the three-month period ended September 30, 2008 from $11.3 million for the three-month period ended September 30, 2007. This decrease was due to decreased origination fees of $7.6 million from our European activities during the three-month
period ended September 30, 2008 as compared to the three-month period ended September 30, 2007 offset by increased asset management fees of $1.4 million resulting from the deconsolidation of our Taberna II and Taberna V CDOs during the
latter half of 2007.

Expenses

Compensation expense. Compensation expense decreased $3.1 million, or 30.5%, to $7.1 million for the three-month period ended September 30, 2008 from $10.2 million for the three-month period ended
September 30, 2007. This decrease was due to lower stock based compensation amortization of (i) $1.0 million resulting from phantom unit forfeitures from our executives in December 2007 and (ii) $0.6 million from the vesting of
certain restricted share awards subsequent to September 30, 2007 and $1.8 million of reduced salary, bonus and other compensation costs offset by a $0.3 million increase associated with lower capitalized costs due to a reduction of commercial
loan and domestic TruPS production.

Real estate operating expense.Real estate operating expense increased $0.7 million, or 18.4%,
to $4.1 million for the three-month period ended September 30, 2008 from $3.4 million for the three-month period ended September 30, 2007. This increase was primarily attributable to three new properties, with total assets of approximately
$60.9 million, acquired or consolidated since or during the three-month period ended September 30, 2007.

General and
administrative expense. General and administrative expense decreased $2.3 million, or 32.5%, to $4.7 million for the three-month period ended September 30, 2008 from $7.0 million for the three-month period ended September 30, 2007.
This decrease is primarily attributable to $0.4 million of less travel and entertainment expenses, $0.5 million of decreased expenses for professional services, $0.4 million of decreased costs associated with deals that will no longer be pursued,
$0.3 million of decreased investment monitoring costs and other decreased general and administrative costs.

Depreciation expense.
Depreciation expense decreased $0.2 million to $1.7 million for the three-month period ended September 30, 2008 from $1.9 million for the three-month period ended September 30, 2007. This decrease was primarily attributable to a real
estate property that was sold during the three-month period ended September 30, 2007.

Amortization of intangible assets.
Amortization expense decreased $14.6 million, or 83.5%, to $2.9 million for the three-month period ended September 30, 2008 from $17.5 million for the three-month period ended September 30, 2007. This decrease resulted from the full
amortization or impairment of some of the identified intangibles ($34.8 million had a useful life of one year) recorded subsequent to or during the three-month period ended September 30, 2007.

Other Income (Expenses)

Interest and other income. Interest and other income decreased $6.1 million to a loss of $0.1 million for the three-month period ended September 30, 2008 from $6.0 million for the three-month period ended September 30,
2007. This decrease is due to reduced average cash and restricted cash balances during the three months ended September 30, 2008 as compared to the three months ended September 30, 2007 as well as reduced interest rates offered by
financial institutions in 2008. In addition, certain foreign exchange rates decreased during the three-month period ended September 30, 2008 which resulted in foreign currency losses on cash held by our foreign TRSs.



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Gains (losses) on sale of assets.Gains on sale of assets were $0.9 million for the three-month
period ended September 30, 2008 compared to losses on sale of assets of $7.6 million for the three-month period ended September 30, 2007. These gains and losses were associated with the sales of investments in securities and other assets
during the three-month periods ended September 30, 2008 and 2007.

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 nine-month period ended September 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 nine-month period ended September 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 September 30, 2008, the fair value adjustments we recorded were as follows (dollars in thousands):



|                                                                                             |  |                                                  |          |  
|-------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | -------- | -
|Description                                                                                  |  | For theThree-MonthPeriod EndedSeptember 30, 2008 |         
|Change in fair value of trading securities and security-related receivables                  |  | $                                                | (539,780 | )
|Change in fair value of CDO notes payable, trust preferred obligations and other liabilities |  |                                                  | 283,954  |  
|Change in fair value of derivatives                                                          |  |                                                  | (46,419  | )
|                                                                                             |  |                                                  |          |  
|Change in fair value of financial instruments                                                |  | $                                                | (302,245 | )
|                                                                                             |  |                                                  |          |  

Asset impairments. For the three-month period ended September 30, 2008, we recorded
asset impairments totaling $18.1 million that were associated with certain intangible assets. We evaluate intangible assets for impairment as events and circumstances change, in accordance with SFAS No. 144. Due to current market and economic
conditions, management evaluated the carrying value of its intangible assets and based upon that evaluation, management concluded certain intangible assets were impaired and recorded other-than-temporary impairment of $18.1 million for the
three-month period ended September 30, 2008. Asset impairments totaling $343.0 million for the three-month period ended September 30, 2007 were recorded prior to the adoption of SFAS No. 159 and were comprised of other-than-temporary
impairment of $335.4 million in our investments in securities and $7.6 million of other-than-temporary impairment in our intangible 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. Minority
interest increased $21.4 million to $114.8 million of loss allocated to minority interest for the three-month period ended September 30, 2008 from $93.4 million of loss allocated to minority interest for the three-month period ended
September 30, 2007. This increase is primarily attributable to $118.3 million of loss allocated to minority interest associated with the change in fair value of financial instruments in 2008 due to our adoption of SFAS No 159 on January 1,
2008. During the three-month period ended September 30, 2007, $96.0 million of loss allocated to minority interest was associated with asset impairments prior to the adoption of SFAS No. 159.

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. Our provision for income taxes decreased $1.3 million to $0.2 million for the three-month period ended September 30, 2008 from $1.5 million for the three-month period ended September 30, 2007. This decrease is primarily
attributable to operating losses at several of our domestic TRS entities during the three-month period ended September 30, 2008 as compared to operating income at these same entities during the comparable 2007 period.

Discontinued operations. Discontinued operations of $0.3 million during the three-month period ended September 30, 2007 related to one real
estate property that was sold in September 2007. As of September 30, 2008, we do not have any discontinued operations.



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Nine-Month Period Ended September 30, 2008 Compared to the Nine-Month Period Ended September 30, 2007

Revenue

Investment interest income.Investment interest income decreased $141.1 million, or 21.0%, to $531.0 million for the nine-month period ended September 30, 2008 from $672.1 million for the nine-month period ended
September 30, 2007. This net decrease was primarily attributable to: decreases in interest income of $96.8 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, $20.8 million from the sale of other securities subsequent to September 30, 2007 and $19.3 million from approximately $486.7 million in repayments on our residential mortgage loans; these decreases were offset by an
increase in interest income of $38.8 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 of approximately 2.4% during
the nine-month period ended September 30, 2008 compared to the nine-month period ended September 30, 2007 and $794.4 million in total principal amount of investments on non-accrual status as of September 30, 2008.

Investment interest expense.Investment interest expense decreased $157.9 million, or 30.0%, to $368.9 million for the nine-month period ended
September 30, 2008 from $526.8 million for the nine-month period ended September 30, 2007. This net decrease was primarily attributable to: decreases in interest expense of $76.8 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, $41.4 million from reductions in our repurchase agreements and other indebtedness used to finance various investments on a short-term basis,
$21.6 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 $14.4 million from the issuance of CDO notes payable from RAIT II in June 2007 and $11.5 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 of approximately 2.4% during the nine-month period ended September 30, 2008 compared to the nine-month period ended
September 30, 2007 and the presentation of interest cost of hedges in change in the fair value of financial instruments during the nine-month period ended September 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
and our commercial mortgage loan portfolio. The provision for losses increased by $39.9 million for the nine-month period ended September 30, 2008 to $50.6 million as compared to $10.7 million for the nine-month period ended September 30,
2007. Since December 31, 2007, our delinquencies in our residential mortgage portfolio have increased by $104.9 million, including $67.5 million in real estate-owned, bankruptcy or foreclosure property, and by $109.0 million in our commercial
loan portfolio. 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 September 30, 2008, $146.3 million of our commercial mortgages and mezzanine loans and $169.7 million of our residential mortgages and mortgage-related receivables were on non-accrual status.

Rental income. Rental income increased $4.3 million, or 53.8%, to $12.4 million for the nine-month period ended September 30, 2008 from $8.1
million for the nine-month period ended September 30, 2007. This increase was primarily attributable to three new properties, with total assets of approximately $60.9 million, acquired or consolidated since or during the nine-month period ended
September 30, 2007.

Fee and other income.Fee and other income decreased $3.8 million, or 18.0%, to $17.1 million for the
nine-month period ended September 30, 2008 from $20.9 million for the nine-month period ended September 30, 2007. This decrease was due to a structuring fee of $5.6 million that we received in connection with the completion of Taberna
Europe I in January 2007. No structuring fees were earned during the nine-month period ended September 30, 2008. In addition, we received $3.2 million of lower origination fees from our European origination activities offset by $5.0 million of
increased asset management fees resulting primarily from the deconsolidation of our Taberna II and Taberna V CDOs during the latter half of 2007 and the completion of Taberna Europe II in September 2007.

Expenses

Compensation
expense. Compensation expense decreased $0.7 million, or 2.7%, to $23.7 million for the nine-month period ended September 30, 2008 from $24.4 million for the nine-month period ended September 30, 2007. This decrease was due to lower
stock based compensation amortization of (i) $2.5 million resulting from phantom unit forfeitures from our executives in December 2007 and (ii) $1.4 million from the vesting of certain restricted share awards subsequent to
September 30, 2007 and $1.1 million of reduced salary, bonus and other compensation costs offset by a $4.3 million increase associated with lower capitalized costs due to a reduction of commercial loan and domestic TruPS production.



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Real estate operating expense.Real estate operating expense increased $2.7 million to $11.4
million for the nine-month period ended September 30, 2008 from $8.7 million for the nine-month period ended September 30, 2007. This increase was primarily attributable to three new properties, with total assets of approximately $60.9
million, acquired or consolidated since or during the nine-month period ended September 30, 2007.

General and administrative
expense. General and administrative expense decreased $2.6 million, or 13.7%, to $16.5 million for the nine-month period ended September 30, 2008 from $19.1 million for the nine-month period ended September 30, 2007. This decrease is
primarily due to 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 nine-month
period ended September 30, 2008. In addition, there were $0.9 million of less travel and entertainment expenses, $0.9 million of lower costs for deals that will no longer be pursued, $0.4 million of less investment monitoring costs and other
decreased general and administrative costs offset by $1.6 million of increased legal expenses related to the class action securities lawsuit.

Depreciation expense. Depreciation expense increased $0.6 million to $4.4 million for the nine-month period ended September 30, 2008 from $3.8 million for the nine-month period ended September 30, 2007. This increase was
primarily attributable to three new properties, with total assets of approximately $60.9 million, acquired or consolidated since or during the nine-month period ended September 30, 2007 offset by the sale of one real estate property during the
nine-month period ended September 30, 2007.

Amortization of intangible assets. Amortization expense decreased $30.1 million,
or 65.2%, to $16.0 million for the nine-month period ended September 30, 2008 from $46.1 million for the nine-month period ended September 30, 2007. This decrease resulted from the full amortization or impairment of some of the identified
intangibles ($34.8 million had a useful life of one year) recorded subsequent to or during the nine-month period ended September 30, 2007.

Other Income (Expenses)

Interest and other income. Interest and other income decreased $14.3 million to $1.1
million for the nine-month period ended September 30, 2008 from $15.4 million for the nine-month period ended September 30, 2007. This decrease is due to reduced average cash and restricted cash balances during the nine months ended
September 30, 2008 as compared to the nine months ended September 30, 2007 as well as reduced interest rates offered by financial institutions in 2008.

Gains (losses) on sale of assets.Gains on sale of assets were $0.8 million for the nine-month period ended September 30, 2008 compared to losses on sale of assets of $10.3 million for the nine-month
period ended September 30, 2007. These gains and losses were associated with the sales of investments in securities and other assets during the nine-month periods ended September 30, 2008 and 2007.

Gains on extinguishment of debt. Gains on extinguishment of debt during the nine-month period ended September 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 nine-month period ended September 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 nine-month period ended September 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 nine-month period ended September 30, 2008, the fair value
adjustments we recorded were as follows (dollars in thousands):



|                                                                                             |  |                                                |            |  
|-------------------------------------------------------------------------------------------- |  | ---------------------------------------------- | ---------- | -
|Description                                                                                  |  | For theNine-monthPeriod EndedSeptember 30,2008 |           
|Change in fair value of trading securities and security-related receivables                  |  | $                                              | (1,152,385 | )
|Change in fair value of CDO notes payable, trust preferred obligations and other liabilities |  |                                                | 1,281,974  |  
|Change in fair value of derivatives                                                          |  |                                                | (78,928    | )
|                                                                                             |  |                                                |            |  
|Change in fair value of financial instruments                                                |  | $                                              | 50,661     |  
|                                                                                             |  |                                                |            |  



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Equity in income (loss) of equity method investments. Equity in income (loss) of equity method
investments increased $1.0 million to income of $0.9 million for the nine-month period ended September 30, 2008 compared to loss of $0.1 million for the nine-month period ended September 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 nine-month period ended
September 30, 2008, we recorded asset impairments totaling $38.4 million that were associated with certain intangible assets and 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. We evaluate intangible
assets for impairment as events and circumstances change, in accordance with SFAS No. 144. Due to current market and economic conditions, management evaluated the carrying value of intangible assets. Based upon that evaluation, management
concluded certain intangible assets were impaired and recorded impairment expense of $18.1 million during the nine-month period ended September 30, 2008. Asset impairments totaling $343.0 million for the nine-month period ended
September 30, 2007 were recorded prior to the adoption of SFAS No. 159 and were comprised of other-than-temporary impairment of $335.4 million in our investments in securities and $7.6 million of impairment expense in our intangible
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. Minority interest decreased $66.0 million to $15.5 million of loss allocated to minority interest for the nine-month period ended September 30,
2008 from $81.5 million of loss allocated to minority interest for the nine-month period ended September 30, 2007. This decrease is primarily attributable to $27.7 million of loss allocated to minority interest associated with the change in
fair value of financial instruments in 2008 due to our adoption of SFAS No 159 on January 1, 2008. During the nine-month period ended September 30, 2007, $96.0 million of loss allocated to minority interest was associated with asset
impairments prior to the adoption of SFAS No. 159.

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 nine-month period ended September 30, 2008, the provision for income taxes was a benefit of $2.3 million, a decrease of $1.2 million from a
benefit of $3.5 million for the nine-month period ended September 30, 2007. These tax benefits are primarily attributable to operating losses at several of our domestic TRS entities during the nine-month periods ended September 30, 2008
and 2007.

Discontinued operations. Discontinued operations of $0.1 million during the nine-month period ended September 30,
2007 related to one real estate property that was sold in September 2007. As of September 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 and has generally increased the cost of any new sources of liquidity over historical levels. 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. Due to credit issues in investments underlying
Taberna Europe II, the remaining restricted cash in that securitization was redirected to pay down the senior debt issued by that securitization. We are seeking to expand our use of secured lines of credit, our ability to obtain cash in
transactions restructuring securities issued by our sponsored securitizations 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 secured credit facilities and other indebtedness;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | 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 primarily through the following:



| |  |  | the use of our cash and cash equivalent balances of $38.4 million as of September 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 September 30, 2008 and September 30, 2007, we maintained cash and
cash equivalents of approximately $38.4 million and $176.6 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):



|                                                 |  |                                              |          |   |      |   |            |  
|------------------------------------------------ |  | -------------------------------------------- | -------- | - | ---- | - | ---------- | -
|                                                 |  | For the Nine-Month PeriodsEnded September 30 |         
|                                                 |  | 2008                                         |          |   | 2007 |  
|Cash flow from operating activities              |  | $                                            | 102,974  |   |      | $ | 155,323    |  
|Cash flow from investing activities              |  |                                              | 487,382  |   |      |   | (1,679,332 | )
|Cash flow from financing activities              |  |                                              | (679,954 | ) |      |   | 1,601,232  |  
|                                                 |  |                                              |          |   |      |   |            |  
|Net change in cash and cash equivalents          |  |                                              | (89,598  | ) |      |   | 77,223     |  
|Cash and cash equivalents at beginning of period |  |                                              | 127,987  |   |      |   | 99,367     |  
|                                                 |  |                                              |          |   |      |   |            |  
|Cash and cash equivalents at end of period       |  | $                                            | 38,389   |   |      | $ | 176,590    |  
|                                                 |  |                                              |          |   |      |   |            |  



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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.

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 $548.4 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 nine months ended September 30,
2008, we have aggressively repaid $160.8 million of short-term indebtedness using available cash resources and cash flow generated during the current year.

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



|                                    |  |                        |            |                                                                    |   |                                                                   |  |   |        
|----------------------------------- |  | ---------------------- | ---------- | ------------------------------------------------------------------ | - | ----------------------------------------------------------------- |  | - | -------
|                                    |  | Assets UnderManagement |            | Gross CashFlow for theThree-MonthPeriod EndedSeptember 30,2008 (1) |   | Gross CashFlow for theNine-MonthPeriod EndedSeptember 30,2008 (1)
|Commercial real estate portfolio(2) |  | $                      | 2,104,833  |                                                                    | $ | 23,137                                                            |  | $ | 76,034 
|Residential mortgage portfolio      |  |                        | 3,694,875  |                                                                    |   | 4,778                                                             |  |   | 14,840 
|European portfolio                  |  |                        | 1,945,487  |                                                                    |   | 4,264                                                             |  |   | 11,331 
|U.S. TruPS portfolio(3)             |  |                        | 6,512,275  |                                                                    |   | 11,952                                                            |  |   | 32,975 
|Other investments                   |  |                        | 720        |                                                                    |   | 210                                                               |  |   | 811    
|                                    |  |                        |            |                                                                    |   |                                                                   |  |   |        
|Total                               |  | $                      | 14,258,190 |                                                                    | $ | 44,341                                                            |  | $ | 135,991
|                                    |  |                        |            |                                                                    |   |                                                                   |  |   |        



|(1) | Cash flows for the three-month and nine-month periods ended September 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, $311.2 million of investments in real estate interests and $240.3
million of commercial mortgages and mezzanine loans included on our consolidated balance sheet as of September 30, 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 $136.0 million of cash flow for the nine-month period ended September 30, 2008 from our portfolios and asset management
activities before operating expenses. We incurred approximately $21.6 million in corporate interest expense related to our convertible senior notes outstanding and $10.2 million in preferred share dividends during the nine-month period ended
September 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 December 31, 2007, we had approximately $138.8 million of indebtedness under repurchase agreements with major investment banks and we have repaid all such repurchase agreement indebtedness during the nine
months ended September 30, 2008 while maintaining adequate liquidity.

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 $55.6 million of unused capacity in our two CRE securitizations to invest in commercial loans as of September 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 September 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 September 30, 2008 (dollars in thousands):



|                                                 |  |                        |           |                |   |                    |  |              |                                      |  |     |                     |  |                  
|------------------------------------------------ |  | ---------------------- | --------- | -------------- | - | ------------------ |  | ------------ | ------------------------------------ |  | --- | ------------------- |  | -----------------
|Description                                      |  | UnpaidPrincipalBalance |           | CarryingAmount |   | Interest RateTerms |  |              | CurrentWeighted-AverageInterest Rate |  |     | ContractualMaturity
|Secured credit facilities and other indebtedness |  | $                      | 207,182   |                | $ | 205,966            |  | 4.5% to 13.0 | %                                    |  | 6.9 | %                   |  | Nov. 2008 to 2037
|Mortgage-backed securities issued(1)(2)(3)       |  |                        | 3,464,774 |                |   | 3,438,431          |  | 4.6% to 5.8  | %                                    |  | 5.1 | %                   |  | 2035             
|Trust preferred obligations(4)                   |  |                        | 362,500   |                |   | 208,916            |  | 5.5% to 10.1 | %                                    |  | 7.0 | %                   |  | 2035             
|CDO notes payable  amortized cost(1)(5)         |  |                        | 1,431,250 |                |   | 1,431,250          |  | 3.5% to 7.2  | %                                    |  | 3.9 | %                   |  | 2036 to 2045     
|CDO notes payable  fair value(1)(4)(6)          |  |                        | 3,615,691 |                |   | 841,546            |  | 3.1% to 10.0 | %                                    |  | 3.8 | %                   |  | 2035 to 2038     
|Convertible senior notes                         |  |                        | 404,000   |                |   | 404,000            |  | 6.9          | %                                    |  | 6.9 | %                   |  | 2027             
|                                                 |  |                        |           |                |   |                    |  |              |                                      |  |     |                     |  |                  
|Total indebtedness                               |  | $                      | 9,485,397 |                | $ | 6,530,109          |  |              |                                      |  | 4.6 | %                   |  |                  
|                                                 |  |                        |           |                |   |                    |  |              |                                      |  |     |                     |  |                  



|(1) | Excludes mortgage-backed securities and CDO notes payable purchased by us which are eliminated in consolidation.
|--- | ----------------------------------------------------------------------------------------------------------------

|(2) | Collateralized by $3.7 billion 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Rates generally follow the terms of the underlying mortgages, which are fixed for a period of time and variable thereafter.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(4) | Relates to liabilities for which we elected to record at fair value under SFAS No. 159. See note 7.
|--- | ---------------------------------------------------------------------------------------------------

|(5) | Collateralized by $1.7 billion 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Collateralized by $4.1 billion principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these
investments as of September 30, 2008 was $2.6 billion. 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

During the three-month and nine-month periods ended September 30, 2008, we repaid $47.1 million and $138.8 million, respectively, associated with our
repurchase agreements.

Secured Credit Facilities and Other Indebtedness

On September 19, 2008, we entered into a series of transactions with a lender enabling us to replace all of our remaining short-term repurchase
obligations with two longer-term master repurchase agreements. While these agreements are titled as repurchase agreements, because they lack many of the standard terms of repurchase agreements and operate in a manner we consider closer to a
secured credit facility, we include these agreements in our secured credit facilities in our financial statements.

The first master repurchase agreement provided for the lender to purchase RMBS from us for an adjusted purchase price of $24.5 million. We pay interest monthly beginning
September 30, 2008 equal to 13.0% per annum on the then outstanding amount of the purchase price under this agreement which equaled $25.4 million at September 19, 2008. We must also pay mandatory payments monthly for nine months and
thereafter quarterly which are applied to the purchase price. We may also be required to pay a performance amount monthly applied to the then outstanding purchase price if losses in the purchased assets exceed agreed-upon limits. This agreement
provides that we will repurchase these RMBS on August 31, 2010, or an earlier date selected by us, for the sum of the then outstanding purchase price, a minimum financing cost of $3.1 million (less any interest previously paid) and the amount
of any accrued and unpaid interest. The second master repurchase agreement provided for the lender to purchase commercial real estate CDO securities from us for a purchase price of $3.0 million. We pay interest monthly beginning
September 30, 2008 equal to 13.0% per annum on the then outstanding amount of the purchase price. We must pay mandatory payments monthly applied to the purchase price. This agreement provides that we will repurchase these commercial real
estate CDO securities on May 29, 2009, or an earlier date selected by us, for the sum of the then outstanding purchase price and the amount of any accrued and unpaid interest.



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As partial consideration to the lender for entering into these master repurchase agreements, we issued a
Series A Warrant Agreement, or the warrants, to the lender exercisable to purchase 250,000 common shares of RAIT for an exercise price of $6.00 per common share for an exercise period starting December 19, 2008 and ending September 19,
2011. Holders of the warrants may exercise a put option requiring us to repurchase the warrants, for cash, at a price based upon the Black-Scholes option pricing model in certain circumstances which may be outside our control, including upon a
change in control. As of September 30, 2008, the warrants have an estimated fair value of $0.3 million and have been recorded in other liabilities in our consolidated balance sheet.

We have secured credit facilities with three financial institutions with total capacity of $90.0 million. As of September 30, 2008, we have borrowed
$53.5 million on these credit facilities leaving $36.5 million of availability. As of September 30, 2008, we have $50.2 million of junior subordinated notes issued by us outstanding and $103.5 million of other indebtedness outstanding relating
to loans payable on consolidated real estate interests and other loans. As of September 30, 2008, the maturity of our secured credit facilities and other indebtedness is scheduled as follows: $77.9 million through December 31, 2009, $59.6
million from 2010 through 2014, and $69.7 million thereafter.

On October 16, 2008, we issued $38.1 million principal amount of TruPS
to a third party and received $15.5 million of net cash proceeds. Of the total amount at TruPS issued, $18.7 million has a fixed interest rate of 8.65% through October 30, 2015 with a floating rate of LIBOR plus 400 basis points thereafter
and a maturity date of March 30, 2035. The remaining $19.4 million has a fixed interest rate of 9.64% and a maturity date of October 30, 2015.

On October 21, 2008, we purchased $25.0 million principal amount of TruPS that we had issued for a purchase price of $5.3 million in a privately negotiated transaction. These TruPS are included in other
indebtedness on our balance sheets as of September 30, 2008. The repurchase generated gains on the extinguishment of debt of $19.7 million.

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 $50.2 million and $101.5 million for the three-month and nine-month periods ended September 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 $233.7
million and $1,180.4 million for the three-month and nine-month periods ended September 30, 2008, respectively, and was included in the accompanying consolidated statements of operations.

Convertible Senior Notes

During the
nine-month period ended September 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.



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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 were paid on September 30, 2008 to holders of record on September 2, 2008 and totaled $3.4 million.

On
October 22, 2008, our board of trustees declared a fourth 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 December 31, 2008 to holders of record on December 1, 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 14, 2008, we paid a quarterly distribution of $0.46 per common share totaling $28.1 million to shareholders of
record as of December 17, 2007.

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 was paid on
August 12, 2008 to shareholders of record as of July 16, 2008.

On October 10, 2008, our board of trustees declared a
distribution of $0.35 per common share totaling $22.7 million that will be paid on December 5, 2008 to shareholders of record as of October 31, 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 of 10,000,000 common
shares. During the three-month period ended September 30, 2008, we issued a total of 938,376 common shares pursuant to the DRSPP at a weighted-average price of $6.68 per share and we received $6.2 million of net proceeds. During the
nine-month period ended September 30, 2008, we issued a total of 3,666,558 common shares pursuant to the DRSPP at a weighted-average price of $7.75 per share and we received $28.4 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.

During the nine-month period ended September 30, 2008, our two 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 nine-month period ended September 30, 2008. The write-off of these warehouse
deposits represents our only exposure under our warehouse agreements and we have no further obligations thereunder. We are not party to any warehouse facilities as of September 30, 2008.

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.

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 September 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



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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 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 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 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 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.

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



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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 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 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.



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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.

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):



|                                                                           |  |                                      |            |   |                                    |   |           |                                                                    |  |   |            |  
|-------------------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ---------------------------------- | - | --------- | ------------------------------------------------------------------ |  | - | ---------- | -
|                                                                           |  | CarryingAmount as ofDecember 31,2007 |            |   | Effect fromadoption ofSFAS No. 159 |   |           | CarryingAmount as ofJanuary 1, 2008(After adoption ofSFAS 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 | )
|Derivative liabilities                                                     |  |                                      | (155,080   | ) |                                    |   |          |                                                                    |  |   | (155,080   | )
|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).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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In December 2007, the FASB issued SFAS No. 160, which 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 FSP No. 140-3, which 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
SFAS No. 161, which 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 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.

In October 2008, the FASB issued FSP FAS 157-3, which clarifies the application of SFAS No. 157 in a market that is not active. FSP FAS 157-3 is effective October 10, 2008, and for prior periods for which
financial statements have not been issued. The adoption of FSP FAS 157-3 did not have a material effect 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. 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 September 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. On August 22, 2008, the special litigation committee advised the court that it had completed its investigation, had found no merit to the allegations of wrongdoing asserted
against RAITs officers and trustees and concluded that prosecution of the claims asserted in the shareholders derivative action would not serve RAITs best interests. The special litigation committee
accordingly moved on behalf of RAIT to dismiss that action. That motion remains pending. 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.



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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.

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: November 7, 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: November 7, 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: November 7, 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



|              |  |                                                                                                                                                                                                                     
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | 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)                                                                                                                                                                 
|              | 
|10.4          |  | Letter Agreement dated as of August 7, 2008 by and between RAIT Financial Trust and Plamen M. Mitrikov. (14)                                                                                                        
|              | 
|10.5          |  | Master Repurchase Agreement dated as of September 19, 2008 between Wilmington Trust Company, as agent for Cedric LLC, as buyer, and Taberna Loan Holdings I, LLC, as seller (the TLHI
Agreement). (15)            
|              | 
|10.6          |  | The TLHI Agreement, as amended and restated as of October 27, 2008. (16)                                                                                                                                            
|              | 
|10.7          |  | Master Repurchase Agreement dated as of September 19, 2008 between Wilmington Trust Company, as agent for Cedric LLC, as buyer, and RAIT CRE Holdings, LLC, as seller (the RAIT CRE
Agreement). (15)              
|              | 
|10.8          |  | Parent Guarantee dated as of September 19, 2008 made by RAIT Financial Trust and Taberna Realty Finance Trust in favor of Wilmington Trust Company, as agent for Cedric LLC relating to the TLHI
Agreement. (15)    
|              | 
|10.9          |  | Parent Guarantee dated as of September 19, 2008 made by RAIT Financial Trust and Taberna Realty Finance Trust in favor of Wilmington Trust Company, as agent for Cedric LLC relating to the RAIT
CRE Agreement. (15)
|              | 
|10.10         |  | Warrant Issuance Agreement dated as of September 19, 2008 between RAIT Financial Trust and Cedric LLC. (15)                                                                                                         
|              | 
|10.11         |  | Series A Warrant Agreement dated as of September 19, 2008 made by RAIT Financial Trust and acknowledged by Cedric LLC. (15)                                                                                         
|              | 
|15.1          |  | Awareness Letter from Independent Accountants.                                                                                                                                                                      



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|              |  |                                                                                
|------------- |  | -------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Documents                                                       
|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 (17)                           



|(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).
|---- | ------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference to RAITs Form 8-K as filed with the SEC on August 13, 2008 (File No. 1-14760).
|---- | ---------------------------------------------------------------------------------------------------------

|(15) | Incorporated by reference to RAITs Form 8-K as filed with the SEC on September 25, 2008 (File No. 1-14760).
|---- | ------------------------------------------------------------------------------------------------------------

|(16) | Incorporated by reference to RAITs Form 8-K as filed with the SEC on October 31, 2008 (File No. 1-14760).
|---- | ----------------------------------------------------------------------------------------------------------

|(17) | Incorporated by reference to RAITs Form 10-Q for the quarterly period ended June 30, 2008 (File No. 1-14760).
|---- | --------------------------------------------------------------------------------------------------------------



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