INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

NOTE 2 • continued

     The consolidated financial statements also reflect the ownership by the Operating Partnership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into IRET’s other operations, with minority interests reflecting the minority partners’ share of ownership and income and expenses.

UNAUDITED INTERIM FINANCIAL STATEMENTS

     The interim consolidated financial statements of IRET have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America are omitted. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods have been included.

     The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 8-K dated October 5, 2004, for the fiscal year ended April 30, 2004, filed with the SEC.

RECLASSIFICATIONS

     Certain previously reported amounts have been reclassified to conform to the current financial statement presentation.

NOTE 3 • EARNINGS PER SHARE

     Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. The Company has no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional common shares that would result in a dilution of earnings. While Units can be exchanged for common shares on a one-for-one basis after a minimum holding period of one year, the exchange of Units for common shares has no effect on net income per share, as Unitholders and common shareholders effectively share equally in the net income of the Operating Partnership. The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the consolidated financial statements for the three and six months ended October 31, 2004 and 2003:

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NOTE 5 • SEGMENT REPORTING

     IRET is engaged in acquiring, owning and leasing multi-family residential and commercial real estate. Each property is considered a separate operating segment. Each segment on a stand-alone basis is less than 10% of the revenues, profit or loss, and assets of the combined reported operating segments, and meets the majority of the aggregation criteria under SFAS 131. Previously, IRET’s operating segments were aggregated and classified as multi-family residential and commercial properties, producing two reportable segments. Beginning with the first quarter of IRET’s current fiscal year, IRET is reporting its results in five segments: multi-family residential properties, office, industrial (including miscellaneous commercial properties), retail, and medical (including assisted living facilities) properties.

     IRET expanded its number of reportable segments in response to its growth and to the increased diversity of its properties, in particular the increase in the number of retail and medical properties IRET owns. This growth and increased diversity of property type prompted IRET to reorganize its asset management group, effective July 2004, in order to permit greater management specialization by property type. It also provides a basis for aggregating properties with similar economic characteristics. While IRET will continue to separately evaluate the performance of each of its properties, management will also assess IRET’s performance in each of its five segments.

     The revenues, profit and assets for these reportable segments are summarized as follows as of and for the three and six-month periods ended October 31, 2004 and 2003, along with reconciliations to the consolidated financial statements:

Three Months Ended October 31, 2004

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NOTE 6 • COMMITMENTS AND CONTINGENCIES

      Litigation. IRET is involved in various lawsuits arising in the normal course of business. Management believes that such matters will not have a material effect on the Company’s financial statements.

      Insurance. IRET carries insurance coverage on its properties in amounts and types that the Company believes are customarily obtained by owners of similar properties.

      Purchase Options. The Company has granted options to purchase certain Company properties to various parties. In general, the options grant the parties the right to purchase these properties at the greater of their appraised value or an annual compounded increase of 2% to 2.5% of the initial cost of the property to the Company. As of October 31, 2004, the total property cost of the 17 properties subject to purchase options was approximately $76.1 million, and the gross rental revenue from these properties was approximately $2.0 million for the three months ended October 31, 2004.

     During the quarter ended October 31, 2004, we sold one property under option, an Edgewood Vista assisted living facility located in Minot, North Dakota. See Note 8, Acquisitions and Dispositions, for further information on this sale. In addition, in November 2004, the tenant of four of our Edgewood Vista assisted living facilities exercised the purchase option contained in the leases for these properties. See Note 9, Subsequent Events, for further information on these pending transactions.

      Real Estate Expansions and Development. The Company has certain funding commitments under contracts for property development and expansion projects. As of October 31, 2004, IRET’s funding commitments included the following:

     Grand Forks Apartment Construction. The Company is obligated under a construction contract and an excavating contract for the construction of a multi-family residential property in Grand Forks, ND. The Company is obligated to pay approximately $7.5 million under the construction contract, subject to additions and deductions as provided in the contract, and approximately $340,000 under the excavating contract, for this development project. As of October 31, 2004, approximately $4.5 million and $305,000 have been paid under the construction contract and the excavating contract, respectively.

     Lithia Springs, Georgia Expansion Project. The Company is obligated to pay up to $575,000 to construct expansion premises at its Lithia Springs, Georgia assisted living facility. As of October 31, 2004, the Company had paid approximately $96,000 of this obligation.

     Kalispell Retail Center, Kalispell, MT. The Company has entered into a ten-year lease agreement with Conlin’s Furniture, Inc. The Company is obligated to pay approximately $620,000 for tenant improvements and leasing commissions under the lease agreement. As of October 31, 2004, the Company has paid approximately $169,000 of this obligation.

     Crosstown Circle Office Building, Eden Prairie, MN. The Company’s Crosstown Circle Office Building in Eden Prairie, Minnesota was acquired in October 2004 from Best Buy Company, which is leasing all but 7,500 square feet of the 185,000 square foot building under a master lease expiring September 30, 2010. Under the terms of the financing obtained by the

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NOTE 6 • continued

Company for this building, the Company is obligated to fund a leasing reserve account in the event that a specified occupancy level is not met at the time the Best Buy master lease expires. The amount to be deposited in the leasing reserve account would be calculated by multiplying a specified amount per square foot by the difference between the specified occupancy level and the building’s actual occupied square feet. The maximum amount the Company would be required to deposit in such leasing reserve account is $4,625,000. Funds in the leasing reserve account would be released as leases for vacant space in the building are executed.

      Environmental Matters. Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around or under the property. While IRET currently has no knowledge of any violation of environmental laws, ordinances or regulations at any of its properties, there can be no assurance that areas of contamination will not be identified at any of the Company’s properties, or that changes in environmental laws, regulations or cleanup requirements would not result in significant costs to the Company.

      Pending Acquisitions and Dispositions. As of October 31, 2004, the Company was a party to purchase agreements to acquire a residential townhome complex and a commercial property, for purchase prices totaling approximately $5.9 million. Also as of October 31, 2004, the Company was a party to contracts to sell one multi-family residential property, one parcel of vacant land, and one retail property, for sale prices totaling approximately $6.0 million and an estimated gain on sale of approximately $2.3 million. The Company expects to complete these pending acquisitions and dispositions over the next several months; however, the purchase or sale of each of these properties is subject to the Company’s or the buyer’s completion of due diligence and the satisfaction of other customary closing conditions, and there can be no assurance that any or all of these pending transactions will be consummated.

NOTE 7 • DISCONTINUED OPERATIONS

     SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” requires the Company to report in discontinued operations the results of operations of a property that has either been disposed of or is classified as held for sale. It also requires that any gains or losses from the sale of a property be reported in discontinued operations. There were no properties classified as held for sale as of October 31, 2004 or 2003. The following information shows the effect on net income, net of minority interest, and the gains or losses from the sale of properties classified as discontinued operations for the three and six months ended October 31, 2004 and 2003:

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NOTE 8 • ACQUISITIONS AND DISPOSITIONS

     During the three months ended October 31, 2004, IRET acquired one office property, and sold one multi-family residential property, one medical property (an assisted living facility), and one office property, as follows:

Acquisitions and Dispositions During Three Months Ended October 31, 2004:

Acquisitions

     This office property was acquired from Best Buy Company for a purchase price of $22,000,000. Of this amount, the Company paid $16,250,000 in cash and cash equivalents, with the remaining $5,750,000 of the purchase price consisting of the value of the Company’s Flying Cloud Office Building in Eden Prairie, MN, which was acquired by Best Buy Company as part of the transaction. Best Buy Company is leasing all but 7,500 square feet of the 177,500 square foot Crosstown Circle building under a master lease expiring September 30, 2010.

Dispositions

     During the six months ended October 31, 2004, IRET has acquired and disposed of the following properties:

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NOTE 8 • continued

Acquisitions and Dispositions During Six Months Ended October 31, 2004:

Acquisitions