##### 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 June 30, 2008

or



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

For the transition period from  to

Commission file number 1-14760





RAIT FINANCIAL TRUST

(Exact name of
registrant as specified in its charter)







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



|                                              |  |           
|--------------------------------------------- |  | ----------
|2929 Arch Street, 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 63,810,889 common shares of beneficial interest, par value $0.01 per share, of the registrant were outstanding as of August 4, 2008.









---

##### Table of Contents

RAIT FINANCIAL TRUST

TABLE OF CONTENTS



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



---

##### 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 ofJune 30,2008 |           |   | As ofDecember 31,2007 |  
|Assets                                                                                                                                                                                                  |  |                   |           |   |                       |   |            |  
|Investments in mortgages and loans, at amortized cost                                                                                                                                                   |  |                   |           |   |                       |   |            |  
|Commercial mortgages, mezzanine loans and other loans                                                                                                                                                   |  | $                 | 2,119,407 |   |                       | $ | 2,189,939  |  
|Residential mortgages and mortgage-related receivables                                                                                                                                                  |  |                   | 3,813,542 |   |                       |   | 4,065,083  |  
|Allowance for losses                                                                                                                                                                                    |  |                   | (55,473   | ) |                       |   | (26,389    | )
|                                                                                                                                                                                                        |  |                   |           |   |                       |   |            |  
|Total investments in mortgages and loans                                                                                                                                                                |  |                   | 5,877,476 |   |                       |   | 6,228,633  |  
|Investments in securities and security-related receivables ($3,082,530 and $2,776,833, respectively, at fair value)                                                                                     |  |                   | 3,082,530 |   |                       |   | 3,827,800  |  
|Investments in real estate interests                                                                                                                                                                    |  |                   | 270,578   |   |                       |   | 284,252    |  
|Cash and cash equivalents                                                                                                                                                                               |  |                   | 59,183    |   |                       |   | 127,987    |  
|Restricted cash                                                                                                                                                                                         |  |                   | 216,892   |   |                       |   | 298,433    |  
|Accrued interest receivable                                                                                                                                                                             |  |                   | 100,935   |   |                       |   | 110,287    |  
|Other assets                                                                                                                                                                                            |  |                   | 41,736    |   |                       |   | 70,725     |  
|Deferred financing costs, net of accumulated amortization of $4,206 and $3,800, respectively                                                                                                            |  |                   | 33,068    |   |                       |   | 53,340     |  
|Intangible assets, net of accumulated amortization of $77,609 and $64,444, respectively                                                                                                                 |  |                   | 42,958    |   |                       |   | 56,123     |  
|                                                                                                                                                                                                        |  |                   |           |   |                       |   |            |  
|Total assets                                                                                                                                                                                            |  | $                 | 9,725,356 |   |                       | $ | 11,057,580 |  
|                                                                                                                                                                                                        |  |                   |           |   |                       |   |            |  
|Liabilities and Shareholders equity                                                                                                                                                                    |  |                   |           |   |                       |   |            |  
|Indebtedness                                                                                                                                                                                            |  |                   |           |   |                       |   |            |  
|Repurchase agreements                                                                                                                                                                                   |  | $                 | 47,106    |   |                       | $ | 138,788    |  
|Secured credit facilities and other indebtedness                                                                                                                                                        |  |                   | 151,523   |   |                       |   | 146,916    |  
|Mortgage-backed securities issued                                                                                                                                                                       |  |                   | 3,564,475 |   |                       |   | 3,801,959  |  
|Trust preferred obligations ($259,111 at fair value as of June 30, 2008)                                                                                                                                |  |                   | 259,111   |   |                       |   | 450,625    |  
|CDO notes payable ($1,100,972 at fair value as of June 30, 2008)                                                                                                                                        |  |                   | 2,532,222 |   |                       |   | 5,093,833  |  
|Convertible senior notes                                                                                                                                                                                |  |                   | 404,000   |   |                       |   | 425,000    |  
|                                                                                                                                                                                                        |  |                   |           |   |                       |   |            |  
|Total indebtedness                                                                                                                                                                                      |  |                   | 6,958,437 |   |                       |   | 10,057,121 |  
|Accrued interest payable                                                                                                                                                                                |  |                   | 68,900    |   |                       |   | 65,947     |  
|Accounts payable and accrued expenses                                                                                                                                                                   |  |                   | 15,464    |   |                       |   | 19,197     |  
|Derivative liabilities                                                                                                                                                                                  |  |                   | 201,078   |   |                       |   | 201,581    |  
|Deferred taxes, borrowers escrows and other liabilities                                                                                                                                                |  |                   | 100,196   |   |                       |   | 104,821    |  
|Distributions payable                                                                                                                                                                                   |  |                   | 29,350    |   |                       |   | 28,068     |  
|                                                                                                                                                                                                        |  |                   |           |   |                       |   |            |  
|Total liabilities                                                                                                                                                                                       |  |                   | 7,373,425 |   |                       |   | 10,476,735 |  
|Minority interest                                                                                                                                                                                       |  |                   | 474,397   |   |                       |   | 1,602      |  
|                                                                                                                                                                                                        |  |                  
|Shareholders equity                                                                                                                                                                                    |  |                   |           |   |                       |   |            |  
|Preferred shares, $0.01 par value per share, 25,000,000 shares authorized;                                                                                                                              |  |                   |           |   |                       |   |            |  
|7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,760,000 shares issued and
outstanding                                                                 |  |                   | 28        |   |                       |   | 28         |  
|8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,258,300 shares issued and
outstanding                                                                |  |                   | 23        |   |                       |   | 23         |  
|8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 1,600,000 shares issued and
outstanding                                                                |  |                   | 16        |   |                       |   | 16         |  
|Common shares, $0.01 par value per share, 200,000,000 shares authorized, 63,808,255 and 61,018,231 issued and outstanding, including 122,192
and 225,440 unvested restricted share awards, respectively |  |                   | 637       |   |                       |   | 607        |  
|Additional paid in capital                                                                                                                                                                              |  |                   | 1,602,649 |   |                       |   | 1,575,979  |  
|Accumulated other comprehensive income (loss)                                                                                                                                                           |  |                   | (132,455  | ) |                       |   | (440,039   | )
|Retained earnings (deficit)                                                                                                                                                                             |  |                   | 406,636   |   |                       |   | (557,371   | )
|                                                                                                                                                                                                        |  |                   |           |   |                       |   |            |  
|Total shareholders equity                                                                                                                                                                              |  |                   | 1,877,534 |   |                       |   | 579,243    |  
|                                                                                                                                                                                                        |  |                   |           |   |                       |   |            |  
|Total liabilities and shareholders equity                                                                                                                                                              |  | $                 | 9,725,356 |   |                       | $ | 11,057,580 |  
|                                                                                                                                                                                                        |  |                   |           |   |                       |   |            |  

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



1



---

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

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



2



---

##### Table of Contents

RAIT Financial Trust

Consolidated Statements of Comprehensive Income

(Unaudited and dollars in thousands)



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

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



3



---

##### Table of Contents

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)



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

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



4



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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

NOTE 1: RAIT FINANCIAL TRUST

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

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation

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

b. Principles of Consolidation

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

c. Use of Estimates

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

d. Investments

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



5



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



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

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

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

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

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

e. Transfers of Financial Assets

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

f. Revenue Recognition



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



6



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



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



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



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

g. Off-Balance Sheet Arrangements

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



7



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



h. Derivative Instruments

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

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

i. Fair Value of Financial Instruments

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



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



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

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



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

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



8



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



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

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

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

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

j. Income Taxes

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

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

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



9



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



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

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

k. Recent Accounting Pronouncements

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

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

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



|                                                                            |  |                                      |            |   |                                    |   |           |                                                                    |  |   |            |  
|--------------------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ---------------------------------- | - | --------- | ------------------------------------------------------------------ |  | - | ---------- | -
|                                                                            |  | 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 | )
|Deferred taxes and other liabilities                                        |  |                                      | (6,103     | ) |                                    |   | 6,103     |                                                                    |  |   |           |  
|                                                                            |  |                                      |            |   |                                    |   |           |                                                                    |  |   |            |  
|Fair value adjustments before allocation to minority interest               |  |                                      |            |   |                                    |   | 1,460,751 |                                                                    |  |   |            |  
|Allocation of fair value adjustments to minority interest                   |  |                                      |           |   |                                    |   | (373,357  | )                                                                  |  |   | (373,357   | )
|                                                                            |  |                                      |            |   |                                    |   |           |                                                                    |  |   |            |  
|Cumulative effect on shareholders equity from adoption of SFAS No. 159 (2) |  |                                      |            |   |                                    | $ | 1,087,394 |                                                                    |  |   |            |  
|                                                                            |  |                                      |            |   |                                    |   |           |                                                                    |  |   |            |  



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

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



10



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



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

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

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

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



11



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



NOTE 3: INVESTMENTS IN LOANS

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

Investments in Commercial Mortgages, Mezzanine Loans and Other Loans

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



|                     |  |                        |           |   |                                |   |        |                |  |   |                |   |                       |     |  |                        |   |  |                      
|-------------------- |  | ---------------------- | --------- | - | ------------------------------ | - | ------ | -------------- |  | - | -------------- | - | --------------------- | --- |  | ---------------------- | - |  | ---------------------
|                     |  | UnpaidPrincipalBalance |           |   | Unamortized(Discounts)Premiums |   |        | CarryingAmount |  |   | Number ofLoans |   | WeightedAverageCoupon |     |  | Range ofMaturity Dates
|Commercial mortgages |  | $                      | 1,426,195 |   |                                | $ |       |                |  | $ | 1,426,195      |   |                       | 120 |  | 7.7                    | % |  | Aug. 2008 toAug. 2012
|Mezzanine loans      |  |                        | 529,297   |   |                                |   | (3,227 | )              |  |   | 526,070        |   |                       | 159 |  | 10.5                   | % |  | Aug. 2008 toAug. 2021
|Other loans          |  |                        | 177,761   |   |                                |   | 861    |                |  |   | 178,622        |   |                       | 11  |  | 6.2                    | % |  | Dec. 2008 toOct. 2016
|                     |  |                        |           |   |                                |   |        |                |  |   |                |   |                       |     |  |                        |   |  |                      
|Total                |  |                        | 2,133,253 |   |                                |   | (2,366 | )              |  |   | 2,130,887      |   |                       | 290 |  | 8.3                    | % |  |                      
|                     |  |                        |           |   |                                |   |        |                |  |   |                |   |                       |     |  |                        |   |  |                      
|Unearned fees        |  |                        | (11,480   | ) |                                |   |       |                |  |   | (11,480        | ) |                       |     |  |                        |   |  |                      
|                     |  |                        |           |   |                                |   |        |                |  |   |                |   |                       |     |  |                        |   |  |                      
|Total                |  | $                      | 2,121,773 |   |                                | $ | (2,366 | )              |  | $ | 2,119,407      |   |                       |     |  |                        |   |  |                      
|                     |  |                        |           |   |                                |   |        |                |  |   |                |   |                       |     |  |                        |   |  |                      

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



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

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

Investments in Residential Mortgages and Mortgage-Related Receivables

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



|                     |  |                        |           |                       |   |         |                |  |                                               |           |                       |       |  |                                |   |  |               
|-------------------- |  | ---------------------- | --------- | --------------------- | - | ------- | -------------- |  | --------------------------------------------- | --------- | --------------------- | ----- |  | ------------------------------ | - |  | --------------
|                     |  | UnpaidPrincipalBalance |           | Unamortized(Discount) |   |         | CarryingAmount |  | Number of LoansandMortgage-RelatedReceivables |           | WeightedAverageCoupon |       |  | AverageContractualMaturityDate
|3/1 Adjustable rate  |  | $                      | 103,434   |                       | $ | (795    | )              |  | $                                             | 102,639   |                       | 267   |  | 5.6                            | % |  | August 2035   
|5/1 Adjustable rate  |  |                        | 3,139,173 |                       |   | (11,653 | )              |  |                                               | 3,127,520 |                       | 6,507 |  | 5.6                            | % |  | September 2035
|7/1 Adjustable rate  |  |                        | 528,327   |                       |   | (2,911  | )              |  |                                               | 525,416   |                       | 1,162 |  | 5.7                            | % |  | July 2035     
|10/1 Adjustable rate |  |                        | 58,431    |                       |   | (464    | )              |  |                                               | 57,967    |                       | 68    |  | 5.7                            | % |  | June 2035     
|                     |  |                        |           |                       |   |         |                |  |                                               |           |                       |       |  |                                |   |  |               
|Total                |  | $                      | 3,829,365 |                       | $ | (15,823 | )              |  | $                                             | 3,813,542 |                       | 8,004 |  | 5.6                            | % |  |               
|                     |  |                        |           |                       |   |         |                |  |                                               |           |                       |       |  |                                |   |  |               



12



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



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

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



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

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

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

Allowance For Losses

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

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



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

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



|                             |  |                                             |        |   |                                           |   |        |  
|---------------------------- |  | ------------------------------------------- | ------ | - | ----------------------------------------- | - | ------ | -
|                             |  | For TheThree-MonthPeriod EndedJune 30, 2008 |        |   | For TheSix-MonthPeriod EndedJune 30, 2008 |  
|Balance, beginning of period |  | $                                           | 35,675 |   |                                           | $ | 26,389 |  
|Additions                    |  |                                             | 25,310 |   |                                           |   | 35,583 |  
|Charge-offs                  |  |                                             | (5,512 | ) |                                           |   | (6,499 | )
|                             |  |                                             |        |   |                                           |   |        |  
|Balance, end of period       |  | $                                           | 55,473 |   |                                           | $ | 55,473 |  
|                             |  |                                             |        |   |                                           |   |        |  



13



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



NOTE 4: INVESTMENTS IN SECURITIES

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



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



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

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

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

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

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

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

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



14



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



NOTE 5: INDEBTEDNESS

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



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



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

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

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

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

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

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

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

Repurchase Agreements

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

Secured Credit Facilities and Other Indebtedness

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

Trust Preferred Obligations

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

CDO Notes Payable  Fair
Value

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



15



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



Convertible Senior Notes

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

NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS

Cash Flow Hedges

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

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

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



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

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



|                    |  |                                                                      |        |   |                                                                         |   |     |                                                                   |  |                                                                        |       |  |   |     |  
|------------------- |  | -------------------------------------------------------------------- | ------ | - | ----------------------------------------------------------------------- | - | --- | ----------------------------------------------------------------- |  | ---------------------------------------------------------------------- | ----- |  | - | --- | -
|                    |  | For the Three-MonthPeriod Ended June 30,
2008                        |        |   | For the Three-MonthPeriod Ended June
30, 2007                           |  
|Type of Derivative  |  | Amounts Reclassified toEarnings for EffectiveHedges  Gains (Losses) |        |   | Amounts Reclassifiedto Earnings forHedgeIneffectiveness Gains (Losses) |   |     | AmountsReclassified toEarnings forEffectiveHedges Gains (Losses) |  | AmountsReclassified toEarnings forHedgeIneffectiveness Gains (Losses) |      
|Interest rate swaps |  | $                                                                    | (2,405 | ) |                                                                         | $ | (62 | )                                                                 |  | $                                                                      | 1,875 |  | $ | 483 |  
|Interest rate caps  |  |                                                                      |       |   |                                                                         |   |    |                                                                   |  |                                                                        |      |  |   | (7  | )
|Basis swaps         |  |                                                                      |       |   |                                                                         |   |    |                                                                   |  |                                                                        |      |  |   | (24 | )
|Currency options    |  |                                                                      |       |   |                                                                         |   | (4  | )                                                                 |  |                                                                        |      |  |   | (23 | )
|                    |  |                                                                      |        |   |                                                                         |   |     |                                                                   |  |                                                                        |       |  |   |     |  
|Total               |  | $                                                                    | (2,405 | ) |                                                                         | $ | (66 | )                                                                 |  | $                                                                      | 1,875 |  | $ | 429 |  
|                    |  |                                                                      |        |   |                                                                         |   |     |                                                                   |  |                                                                        |       |  |   |     |  



16



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



|                    |  |                                                                      |        |                                             |                                                                         |   |                                                                   |  |                                                                        |       |  |   |     |  
|------------------- |  | -------------------------------------------------------------------- | ------ | ------------------------------------------- | ----------------------------------------------------------------------- | - | ----------------------------------------------------------------- |  | ---------------------------------------------------------------------- | ----- |  | - | --- | -
|                    |  | For the Six-MonthPeriod Ended June 30,
2008                          |        | For the Six-MonthPeriod Ended June
30, 2007 |                                                                        
|Type of Derivative  |  | Amounts Reclassified toEarnings for
EffectiveHedges  Gains (Losses) |        |                                             | Amounts Reclassifiedto Earnings forHedgeIneffectiveness Gains (Losses) |   | AmountsReclassified toEarnings forEffectiveHedges Gains (Losses) |  | AmountsReclassified toEarnings forHedgeIneffectiveness Gains (Losses) |      
|Interest rate swaps |  | $                                                                    | (4,915 | )                                           |                                                                         | $ | 10                                                                |  | $                                                                      | 3,082 |  | $ | 585 |  
|Interest rate caps  |  |                                                                      |       |                                             |                                                                         |   |                                                                  |  |                                                                        |      |  |   | (54 | )
|Basis swaps         |  |                                                                      |       |                                             |                                                                         |   |                                                                  |  |                                                                        |      |  |   | (41 | )
|Currency options    |  |                                                                      |       |                                             |                                                                         |   | 5                                                                 |  |                                                                        |      |  |   | 27  |  
|                    |  |                                                                      |        |                                             |                                                                         |   |                                                                   |  |                                                                        |       |  |   |     |  
|Total               |  | $                                                                    | (4,915 | )                                           |                                                                         | $ | 15                                                                |  | $                                                                      | 3,082 |  | $ | 517 |  
|                    |  |                                                                      |        |                                             |                                                                         |   |                                                                   |  |                                                                        |       |  |   |     |  

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

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

Free-Standing Derivatives

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

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

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

NOTE 7: FAIR VALUE OF
FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

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



17



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



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



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

Fair Value Measurements

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



|                                             |  |                                                             |   |                                             |   |                                         |  |                            |           |  |   |          
|-------------------------------------------- |  | ----------------------------------------------------------- | - | ------------------------------------------- | - | --------------------------------------- |  | -------------------------- | --------- |  | - | ---------
|Assets:                                      |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservable Inputs(Level 3) |  | Balance as ofJune 30, 2008
|Trading securities                           |  |                                                             |   |                                             |   |                                         |  |                            |           |  |   |          
|TruPS and subordinated debentures            |  | $                                                           |  |                                             | $ |                                        |  | $                          | 2,294,509 |  | $ | 2,294,509
|Other securities                             |  |                                                             |  |                                             |   | 1,500                                   |  |                            |          |  |   | 1,500    
|Available-for-sale securities                |  |                                                             |  |                                             |   | 45,899                                  |  |                            |          |  |   | 45,899   
|Security-related receivables                 |  |                                                             |   |                                             |   |                                         |  |                            |           |  |   |          
|TruPS and subordinated debenture receivables |  |                                                             |  |                                             |   |                                        |  |                            | 271,722   |  |   | 271,722  
|Unsecured REIT note receivables              |  |                                                             |  |                                             |   | 326,867                                 |  |                            |          |  |   | 326,867  
|CMBS receivables                             |  |                                                             |  |                                             |   | 129,058                                 |  |                            |          |  |   | 129,058  
|Other securities                             |  |                                                             |  |                                             |   | 12,975                                  |  |                            |          |  |   | 12,975   
|                                             |  |                                                             |   |                                             |   |                                         |  |                            |           |  |   |          
|Total assets                                 |  | $                                                           |  |                                             | $ | 516,299                                 |  | $                          | 2,566,231 |  | $ | 3,082,530
|                                             |  |                                                             |   |                                             |   |                                         |  |                            |           |  |   |          



|                            |  |                                                             |   |                                             |   |                                         |  |                            |         |  |   |          
|--------------------------- |  | ----------------------------------------------------------- | - | ------------------------------------------- | - | --------------------------------------- |  | -------------------------- | ------- |  | - | ---------
|Liabilities:                |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservable Inputs(Level 3) |  | Balance as ofJune 30, 2008
|Trust preferred obligations |  | $                                                           |  |                                             | $ |                                        |  | $                          | 259,111 |  | $ | 259,111  
|CDO notes payable (1)       |  |                                                             |  |                                             |   | 1,100,972                               |  |                            |        |  |   | 1,100,972
|Derivative liabilities      |  |                                                             |  |                                             |   | 201,078                                 |  |                            |        |  |   | 201,078  
|                            |  |                                                             |   |                                             |   |                                         |  |                            |         |  |   |          
|Total liabilities           |  | $                                                           |  |                                             | $ | 1,302,050                               |  | $                          | 259,111 |  | $ | 1,561,161
|                            |  |                                                             |   |                                             |   |                                         |  |                            |         |  |   |          



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



18



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



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



|                                                |  |                                                     |           |   |                                                                          |   |         |                    |  |   |           |  
|----------------------------------------------- |  | --------------------------------------------------- | --------- | - | ------------------------------------------------------------------------ | - | ------- | ------------------ |  | - | --------- | -
|Assets                                          |  | Trading Securities TruPS 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   |  |                                                     | (429,864  | ) |                                                                          |   | (84,773 | )                  |  |   | (514,637  | )
|Purchases and sales, net                        |  |                                                     | 9,218     |   |                                                                          |   | (51,549 | )                  |  |   | (42,331   | )
|                                                |  |                                                     |           |   |                                                                          |   |         |                    |  |   |           |  
|Balance, as of June 30, 2008                    |  | $                                                   | 2,294,509 |   |                                                                          | $ | 271,722 |                    |  | $ | 2,566,231 |  
|                                                |  |                                                     |           |   |                                                                          |   |         |                    |  |   |           |  



|                                                |  |                            |         |   |                         |   |         |  
|----------------------------------------------- |  | -------------------------- | ------- | - | ----------------------- | - | ------- | -
|Liabilities                                     |  | Trust 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   |  |                            | (51,319 | ) |                         |   | (51,319 | )
|Purchases and sales, net                        |  |                            | (88,125 | ) |                         |   | (88,125 | )
|                                                |  |                            |         |   |                         |   |         |  
|Balance, as of June 30, 2008                    |  | $                          | 259,111 |   |                         | $ | 259,111 |  
|                                                |  |                            |         |   |                         |   |         |  

Change in Fair Value of Financial Instruments

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



|                                                                            |  |                                             |          |   |                                           |   |          |  
|--------------------------------------------------------------------------- |  | ------------------------------------------- | -------- | - | ----------------------------------------- | - | -------- | -
|Description                                                                 |  | For theThree-MonthPeriod EndedJune 30, 2008 |          |   | For theSix-MonthPeriod EndedJune 30,
2008 |  
|Change in fair value of trading securities and security-related receivables |  | $                                           | (171,331 | ) |                                           | $ | (612,605 | )
|Change in fair value of CDO notes payable and trust preferred obligations   |  |                                             | 156,460  |   |                                           |   | 998,020  |  
|Change in fair value of derivatives                                         |  |                                             | 111,927  |   |                                           |   | (32,509  | )
|                                                                            |  |                                             |          |   |                                           |   |          |  
|Change in fair value of financial instruments                               |  | $                                           | 97,056   |   |                                           | $ | 352,906  |  
|                                                                            |  |                                             |          |   |                                           |   |          |  

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

NOTE 8: SHAREHOLDERS EQUITY

Preferred Shares

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

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

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



19



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



Common Shares

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

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

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

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

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

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

NOTE 9: EARNINGS PER SHARE

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



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



20



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



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

NOTE 10: RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

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

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

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



21



---

##### Table of Contents

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2008

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



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

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

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

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

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

NOTE 11: DISCONTINUED OPERATIONS

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



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

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



22



---

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

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2007, and the related consolidated statements of operations, other comprehensive income (loss), shareholders equity and cash flows for the year then ended (not presented herein), and in our report dated
February 28, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2007 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

August 4, 2008



23



---

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

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

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

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

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

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



24



---

##### Table of Contents

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



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



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

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

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



| |  |  | capital markets, liquidity and credit risk,
| | - |  | -------------------------------------------



| |  |  | interest rate environment,
| | - |  | --------------------------



| |  |  | prepayment rates on commercial mortgages, mezzanine loans and residential mortgages in our portfolio, and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | other market developments.
| | - |  | --------------------------



25



---

##### 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 June 30, 2008:



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



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

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

|(3) | Percentages are based on estimated fair value.
|--- | ----------------------------------------------

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

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

A summary of each
asset class is as follows:

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

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



|                     |  |                |           |                     |   |                     |  |             |                       |  |      |                     |  |                      |  |                        |  |       |  
|-------------------- |  | -------------- | --------- | ------------------- | - | ------------------- |  | ----------- | --------------------- |  | ---- | ------------------- |  | -------------------- |  | ---------------------- |  | ----- | -
|                     |  | CarryingAmount |           | EstimatedFair Value |   | Range ofLoan Yields |  |             | WeightedAverageCoupon |  |      | Range of Maturities |  | Numberof Loans       |  | % ofTotalLoanPortfolio | 
|Commercial mortgages |  | $              | 1,426,195 |                     | $ | 1,416,252           |  | 5.2%  19.0 | %                     |  | 7.7  | %                   |  | Aug. 2008 Aug. 2012 |  | 120                    |  | 66.9  | %
|Mezzanine loans      |  |                | 526,070   |                     |   | 529,748             |  | 5.1%  17.0 | %                     |  | 10.5 | %                   |  | Aug. 2008 Aug. 2021 |  | 159                    |  | 24.7  | %
|Other loans          |  |                | 178,622   |                     |   | 181,317             |  | 4.4%  9.1  | %                     |  | 6.2  | %                   |  | Dec. 2008 Oct. 2016 |  | 11                     |  | 8.4   | %
|                     |  |                |           |                     |   |                     |  |             |                       |  |      |                     |  |                      |  |                        |  |       |  
|Total                |  | $              | 2,130,887 |                     | $ | 2,127,317           |  |             |                       |  | 8.3  | %                   |  |                      |  | 290                    |  | 100.0 | %
|                     |  |                |           |                     |   |                     |  |             |                       |  |      |                     |  |                      |  |                        |  |       |  



26



---

##### 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 June 30, 2008 (based on amortized cost):

LOGO



|(a) | Based on Carrying Amount
|--- | ------------------------

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



27



---

##### Table of Contents

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



|         |  |                |           |                       |     |   |                           |            |                            |            |                  |     |               |       |                       |       |  
|-------- |  | -------------- | --------- | --------------------- | --- | - | ------------------------- | ---------- | -------------------------- | ---------- | ---------------- | --- | ------------- | ----- | --------------------- | ----- | -
|         |  | CarryingAmount |           | WeightedAverageCoupon |     |   | AverageNextAdjustmentDate |            | AverageContractualMaturity |            | AverageFICOScore |     | NumberofLoans |       | PercentageofPortfolio |      
|3/1 ARM  |  | $              | 102,639   |                       | 5.6 | % |                           | Aug. 2008  |                            | Aug. 2035  |                  | 731 |               | 267   |                       | 2.7   | %
|5/1 ARM  |  |                | 3,127,520 |                       | 5.6 | % |                           | July 2010  |                            | Sept. 2035 |                  | 739 |               | 6,507 |                       | 82.0  | %
|7/1 ARM  |  |                | 525,416   |                       | 5.7 | % |                           | Sept. 2011 |                            | July 2035  |                  | 737 |               | 1,162 |                       | 13.8  | %
|10/1 ARM |  |                | 57,967    |                       | 5.7 | % |                           | June 2015  |                            | June 2035  |                  | 749 |               | 68    |                       | 1.5   | %
|         |  |                |           |                       |     |   |                           |            |                            |            |                  |     |               |       |                       |       |  
|Total    |  | $              | 3,813,542 |                       | 5.6 | % |                           |            |                            |            |                  | 738 |               | 8,004 |                       | 100.0 | %
|         |  |                |           |                       |     |   |                           |            |                            |            |                  |     |               |       |                       |       |  

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

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.



28



---

##### 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 June 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  |  | $                   | 855,558   |           | 33.4  | % |                        | 7.1 | % |                                                          | 73.4 | % |                                            | 1.7x
|Office               |  |                     | 475,932   |           | 18.5  | % |                        | 6.8 | % |                                                          | 71.3 | % |                                            | 2.1x
|Specialty Finance    |  |                     | 405,089   |           | 15.8  | % |                        | 7.0 | % |                                                          | 87.3 | % |                                            | 1.8x
|Homebuilders         |  |                     | 288,553   |           | 11.2  | % |                        | 8.3 | % |                                                          | 71.9 | % |                                            | 1.4x
|Retail               |  |                     | 199,780   |           | 7.8   | % |                        | 4.7 | % |                                                          | 89.7 | % |                                            | 1.8x
|Residential Mortgage |  |                     | 169,458   |           | 6.6   | % |                        | 6.4 | % |                                                          | 98.4 | % |                                            | 1.1x
|Hospitality          |  |                     | 100,314   |           | 3.9   | % |                        | 7.5 | % |                                                          | 80.0 | % |                                            | 2.5x
|Storage              |  |                     | 71,547    |           | 2.8   | % |                        | 7.3 | % |                                                          | 65.7 | % |                                            | 2.8x
|                     |  |                     |           |           |       |   |                        |     |   |                                                          |      |   |                                            |     
|Total                |  | $                   | 2,566,231 |           | 100.0 | % |                        | 7.1 | % |                                                          | 78.0 | % |                                            | 1.8x
|                     |  |                     |           |           |       |   |                        |     |   |                                                          |      |   |                                            |     

LOGO



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

|(b) | Based on Estimated Fair Value.
|--- | ------------------------------



29



---

##### 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
June 30, 2008 (dollars in thousands):



|                                      |  |                     |         |                       |      |   |                                 |      |               |   |        
|------------------------------------- |  | ------------------- | ------- | --------------------- | ---- | - | ------------------------------- | ---- | ------------- | - | -------
|Investment Description                |  | EstimatedFair Value |         | WeightedAverageCoupon |      |   | WeightedAverageYears toMaturity |      | AmortizedCost
|Unsecured REIT note receivables       |  | $                   | 326,867 |                       | 6.0  | % |                                 | 8.4  |               | $ | 370,889
|CMBS receivables                      |  |                     | 129,058 |                       | 5.8  | % |                                 | 34.3 |               |   | 213,921
|Taberna Europe I & II CDO investments |  |                     | 43,027  |                       | 12.2 | % |                                 | 29.9 |               |   | 51,794 
|Other securities                      |  |                     | 17,347  |                       | 5.7  | % |                                 | 38.8 |               |   | 66,416 
|                                      |  |                     |         |                       |      |   |                                 |      |               |   |        
|Total                                 |  | $                   | 516,299 |                       | 6.3  | % |                                 | 22.2 |               | $ | 703,020
|                                      |  |                     |         |                       |      |   |                                 |      |               |   |        

LOGO



|(a) | S&P ratings as of June 30, 2008.
|--- | --------------------------------

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

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



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



30



---

##### Table of Contents

Credit Summary

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



|                                                               |  |                                |           |                                       |     |                                              |   |         |                             |  |     |                   |  |   |        |    
|-------------------------------------------------------------- |  | ------------------------------ | --------- | ------------------------------------- | --- | -------------------------------------------- | - | ------- | --------------------------- |  | --- | ----------------- |  | - | ------ | ---
|                                                               |  | CarryingValue ofInvestments(1) |           | Numberof Non-AccrualStatusInvestments |     | CarryingValue ofNon-AccrualStatusInvestments |   |         | Percentageof AssetClass(es) |  |     | Loan LossReserves | 
|Commercial mortgages, mezzanine loans and other loans          |  | $                              | 2,130,887 |                                       | 4   |                                              | $ | 42,250  |                             |  | 2.0 | %                 |  | $ | 38,500 | (2)
|Investments in real estate interests                           |  |                                | 270,578   |                                       |    |                                              |   |        |                             |  |    |                   |  |   |       |    
|Residential mortgages and mortgage-related receivables         |  |                                | 3,813,542 |                                       | 350 |                                              |   | 142,702 | (3)                         |  | 3.7 | %                 |  |   | 16,973 |    
|Investments in securities and security related receivables (4) |  |                                | 3,082,530 |                                       | 13  |                                              |   | 64,869  |                             |  | 2.1 | %                 |  |   | N/A    | (5)
|                                                               |  |                                |           |                                       |     |                                              |   |         |                             |  |     |                   |  |   |        |    
|Total                                                          |  | $                              | 9,297,537 |                                       | 367 |                                              | $ | 249,821 |                             |  | 2.7 | %                 |  | $ | 55,473 |    
|                                                               |  |                                |           |                                       |     |                                              |   |         |                             |  |     |                   |  |   |        |    



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

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

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

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

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



31



---

##### Table of Contents

Securitization Summary

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



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



32



---

##### Table of Contents



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

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

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

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

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

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

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

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

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

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

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

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



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



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

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

Performance Measures

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



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



33



---

##### Table of Contents

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

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

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

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



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



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



34



---

##### Table of Contents

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



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



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



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

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

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

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



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



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

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



35



---

##### Table of Contents

REIT Taxable Income

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

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

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



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



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



36



---

##### Table of Contents

Results of Operations

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

Revenue

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

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

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

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

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

Expenses

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

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

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



37



---

##### Table of Contents

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

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

Other Income (Expenses)

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

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

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

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

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



|                                                                            |  |                                             |          |  
|--------------------------------------------------------------------------- |  | ------------------------------------------- | -------- | -
|Description                                                                 |  | For theThree-MonthPeriod EndedJune 30, 2008 |         
|Change in fair value of trading securities and security-related receivables |  | $                                           | (171,331 | )
|Change in fair value of CDO notes payable and trust preferred obligations   |  |                                             | 156,460  |  
|Change in fair value of derivatives                                         |  |                                             | 111,927  |  
|                                                                            |  |                                             |          |  
|Change in fair value of financial instruments                               |  | $                                           | 97,056   |  
|                                                                            |  |                                             |          |  

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

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



38



---

##### Table of Contents

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

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

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

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

Revenue

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

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

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

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

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



39



---

##### Table of Contents

Expenses

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

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

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

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

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

Other Income (Expenses)

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

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

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

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



40



---

##### Table of Contents

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



|                                                                            |  |                                           |          |  
|--------------------------------------------------------------------------- |  | ----------------------------------------- | -------- | -
|Description                                                                 |  | For theSix-MonthPeriod EndedJune 30,
2008 |         
|Change in fair value of trading securities and security-related receivables |  | $                                         | (612,605 | )
|Change in fair value of CDO notes payable and trust preferred obligations   |  |                                           | 998,020  |  
|Change in fair value of derivatives                                         |  |                                           | (32,509  | )
|                                                                            |  |                                           |          |  
|Change in fair value of financial instruments                               |  | $                                         | 352,906  |  
|                                                                            |  |                                           |          |  

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

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

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

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

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



41



---

##### Table of Contents

Liquidity and Capital Resources

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

Our primary cash requirements are as follows:



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



| |  |  | to make investments;
| | - |  | --------------------



| |  |  | to repay our indebtedness under our repurchase agreements;
| | - |  | ----------------------------------------------------------



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



| |  |  | to pay employee salaries and incentive compensation; and
| | - |  | --------------------------------------------------------



| |  |  | to pay U.S. federal, state, and local taxes of our TRSs.
| | - |  | --------------------------------------------------------

We intend to meet these liquidity requirements through the following:



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



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



| |  |  | proceeds from future borrowings or offerings of our common and preferred shares.
| | - |  | --------------------------------------------------------------------------------

Cash Flows

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



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

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



42



---

##### Table of Contents

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

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

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



|                                     |  |                        |            |                                                                |   |                                                              |  |   |       
|------------------------------------ |  | ---------------------- | ---------- | -------------------------------------------------------------- | - | ------------------------------------------------------------ |  | - | ------
|                                     |  | Assets UnderManagement |            | Gross CashFlow for theThree-MonthPeriod EndedJune 30, 2008 (1) |   | Gross CashFlow for theSix-MonthPeriod EndedJune 30, 2008 (1)
|Commercial real estate portfolio (2) |  | $                      | 2,080,772  |                                                                | $ | 27,760                                                       |  | $ | 52,897
|Residential mortgage portfolio       |  |                        | 3,829,365  |                                                                |   | 4,958                                                        |  |   | 10,062
|European portfolio                   |  |                        | 2,086,178  |                                                                |   | 3,606                                                        |  |   | 7,067 
|U.S. TruPS portfolio (3)             |  |                        | 6,524,318  |                                                                |   | 9,173                                                        |  |   | 21,023
|Other investments                    |  |                        | 1,800      |                                                                |   | 252                                                          |  |   | 601   
|                                     |  |                        |            |                                                                |   |                                                              |  |   |       
|Total                                |  | $                      | 14,522,433 |                                                                | $ | 45,749                                                       |  | $ | 91,650
|                                     |  |                        |            |                                                                |   |                                                              |  |   |       



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

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

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

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

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

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

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



43



---

##### Table of Contents

Capitalization

Debt Financing.

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



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



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

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

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

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

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

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

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

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

Repurchase Agreements

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

Secured Credit Facilities and Other Indebtedness

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

Trust Preferred Obligations

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

CDO Notes Payable  Fair Value

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



44



---

##### Table of Contents

Convertible Senior Notes

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

Equity Financing.

Preferred Shares

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

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

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

Common Shares

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

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

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

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

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

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

Off-Balance Sheet Arrangements and Commitments

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

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

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



45



---

##### Table of Contents

Critical Accounting Estimates and Policies

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

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

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

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

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

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

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



46



---

##### Table of Contents

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

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

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

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

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



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



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

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



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



47



---

##### Table of Contents

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

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

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

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

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

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



48



---

##### Table of Contents

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 | )
|Deferred taxes and other liabilities                                        |  |                                      | (6,103     | ) |                                    |   | 6,103     |                                                                    |  |   |           |  
|                                                                            |  |                                      |            |   |                                    |   |           |                                                                    |  |   |            |  
|Fair value adjustments before allocation to minority interest               |  |                                      |            |   |                                    |   | 1,460,751 |                                                                    |  |   |            |  
|Allocation of fair value adjustments to minority interest                   |  |                                      |           |   |                                    |   | (373,357  | )                                                                  |  |   | (373,357   | )
|                                                                            |  |                                      |            |   |                                    |   |           |                                                                    |  |   |            |  
|Cumulative effect on shareholders equity from adoption of SFAS No. 159 (2) |  |                                      |            |   |                                    | $ | 1,087,394 |                                                                    |  |   |            |  
|                                                                            |  |                                      |            |   |                                    |   |           |                                                                    |  |   |            |  



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

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

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

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

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

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



49



---

##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

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

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



|Item 4. | Controls and Procedures
|------- | -----------------------

Disclosure Controls and
Procedures

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

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

Changes in Internal Control Over Financial Reporting

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



50



---

##### Table of Contents

Part II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

Putative Consolidated Class Action
Securities Lawsuit

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

Shareholders Derivative Action

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

Routine Litigation

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



|Item 1A. | Risk Factors
|-------- | ------------

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



51



---

##### Table of Contents

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

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



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



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



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



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



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



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



|Item 6. | Exhibits
|------- | --------



|(a) | Exhibits
|--- | --------

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



52



---

##### Table of Contents

SIGNATURES OF REGISTRANT

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



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



53



---

##### Table of Contents

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)                                                                                                                                                   
|              | 
|15.1          |  | Awareness Letter from Independent Accountants.                                                                                                                                                       
|              | 
|31.1          |  | Certification Pursuant to 13a-14 (a) under the Securities Exchange Act of 1934.                                                                                                                      
|              | 
|31.2          |  | Certification Pursuant to 13a-14 (a) under the Securities Exchange Act of 1934.                                                                                                                      
|              | 
|32.1          |  | Certification Pursuant to 18 U.S.C. Section 1350.                                                                                                                                                    
|              | 
|32.2          |  | Certification Pursuant to 18 U.S.C. Section 1350.                                                                                                                                                    
|              | 
|99.1          |  | Material U.S. Federal Income Tax Considerations                                                                                                                                                      



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

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

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

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

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

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

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

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

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

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

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

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

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



54