Centerspace - 10-Q quarterly report FY

      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.

                                                          Yes ( X )           No (   )

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).                       

                                                         Yes ( X )           No (   )

      Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.  Applicant is a North Dakota Real Estate Investment Trust.  As of November 30, 2002, it had 32,119,762 shares of beneficial interest outstanding.

Item 1.  Financial Statements - Second Quarter  - Fiscal 2003 (unaudited)

*  Includes $442,204 for the 3 months ended October 31, 2002, and $324,895 for the 3 months ended October 31, 2001, and $846,583 for the 6 months ended October 31, 2002, and $658,190 for the 6 months ended October 31, 2001, of “straight-line rents.”  Straight-line rents are the amounts to be collected in future years from tenants occupying commercial properties under leases which provide for periodic increases in rents.  It is determined by dividing the total rent payable for the lease term by the total rental period and allocating the  resulting average rent to the period covered by the report.

Note 1  - Organization
      Investors Real Estate Trust ("IRET") elected to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended April 30, 1971.  REITs are subject to a number of organization and operational requirements, including a requirement to distribute 90% of ordinary taxable income to its shareholders and, generally, are not subject to Federal income tax on net income.  IRET is engaged in the acquisition and ownership of residential apartment communities and commercial properties located mainly in the states of North Dakota and Minnesota but also in the states of Colorado, Idaho, Iowa, Georgia, Kansas, Montana, Nebraska, South Dakota, Texas, Michigan and Washington.  As of October 31, 2002, IRET owned 65 apartment communities with 8,347 apartments and 74 commercial buildings totaling 5,128,833 net rentable square feet.  IRET conducts a majority of its business activities through its operating partnership, IRET Properties, a North Dakota Limited Partnership, as well as through a number of other subsidiary entities.

Note 2 – Basis of Presentation and Significant Accounting Policies

Basis of Presentation
      The consolidated financial statements include the accounts of IRET and all its subsidiaries in which it maintains a controlling interest.  The financial statements have been prepared on the basis of accounting principles that are in effect as of the financial statement date.  IRET operates on a fiscal year commencing May 1 and ending April 30.

      The accompanying consolidated financial statements include the accounts of IRET and its 75.6% general partnership interest in the operating partnership.  Such interest has been calculated as the percentage of outstanding common shares divided by the total outstanding common shares and operating partnership units ("UPREIT Units") outstanding.  The remaining 24.4% is reflected as Minority Interest of Unit Holders in Operating Partnership in these consolidated financial statements.  On April 30, 2002, IRET owned a 74.3% general partnership interest in the operating partnership with the remaining 25.7% owned by others.

     The consolidated financial statements also include the ownership by IRET Properties of:  (1) a 60.31% ownership interest in Minnesota Medical Investors LLC, SMB Operating Company LLC, and SMB MM LLC, collectively known as Southdale Medical Center; (2) a 51% ownership interest in Mendota Properties, LLC, a Minnesota limited liability company, the holder of all of the issued and outstanding membership interests in Mendota Office Holding LLC, a Minnesota limited liability company and Mendota Office Three and Four, LLC, a Minnesota limited liability company which are the owners of five multi-tenant commercial real estate properties in Dakota County, Minnesota, and (3) a 51% ownership interest in IRET-BD, LLC, a Minnesota limited liability company.  These companies are consolidated into the IRET's other operations with minority interests reflecting the minority partners’ share of ownership and income and expenses. 

Note 2 –continued

     All material inter-company transactions and balances have been eliminated in the consolidated financial statements.

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.  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 consolidated financial statements 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 10-K405 for the year ended April 30, 2002.

Significant Accounting Policies
      IRET has not made any significant changes in accounting policy and practices since the most recent audited financial statements.

Recent Accounting Pronouncements
      Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, established accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value.  The statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met.  Certain provisions of SFAS 133 were amended by SFAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” an amendment of Statement 133.  The impact of SFAS 133 on IRET is not financially significant.

      In 2001 the FASB issued SFAS No. 141 “Business Combinations” (“SFAS 141”) which requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method, SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”) which provides new guidance in accounting for goodwill and intangible assets and SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) which addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  The adoption of SFAS 141 had no effect of IRET’s financial position or results of operations.  SFAS 142 and SFAS 144 were adopted by IRET May 1, 2002 with no significant financial impact.

Note 3 – Goodwill
      There was no change in the carrying amount of goodwill for the six months ended October 31, 2002.  Goodwill is tested on an annual basis and any impairment adjustments are reflected at that time.  SFAS No. 142 has no significant impact on IRET’s net income or earnings per share when comparing the six months ended October 31, 2002, to October 31, 2001.

Note 4 - Earnings Per Share
      Earnings per share  ("EPS") is computed as net income available to common shareholders divided by the weighted average number of common shares outstanding for the period.  The company has no outstanding warrants, convertible stock, or other contractual obligations requiring issuance of additional common shares that would result in a dilution of earnings. 

      The exchange of outstanding operating partnership units for common shares will have no effect on EPS as unitholders and shareholders presently share equally in the net income of the operating partnership. 

      The following table reconciles amounts reported in the consolidated financial statements for the three months and six months ended October 31, 2002, and 2001. 

Note 5 – Investment Certificates Issued
      IRET has sold investment certificates to the public.  The interest rates vary from 5% to 9% per annum, depending on the term of the security.  Interest is paid annually, semiannually, or quarterly on the anniversary date of issuance.  In April of 2002, IRET discontinued the sale of investment certificates and outstanding certificates will be redeemed at maturity as follows:

Note 6 – UPREIT Loan Program
      On January 16, 2002, IRET’s Board authorized an UPREIT unit loan program available to holders of $1,000,000 or more of limited partnership units in IRET’s operating partnership.  IRET will lend up to 50% of the value of the units based on the closing price of IRET shares on the NASDAQ market for a term of two years or less, secured by the borrower's limited partnership units in IRET Properties, at a variable interest rate 1.5% over the interest rate charged IRET by its participating lender.  The interest rate adjusts on the first of each month.  IRET charges a .5% loan fee.

      At this time, no UPREIT loans are outstanding.

Note 7 - Segment Reporting
      The following information summarizes IRET's segment reporting for residential and commercial properties along with reconciliations to the consolidated financial statements:

Three Months Ended October 31, 2002

Three Months Ended October 31, 2001

Note 7 - Segment Reporting - continued
      The following information summarizes IRET's segment reporting for residential and commercial properties along with reconciliations to the consolidated financial statements:

Six Months Ended October 31, 2002

Six Months Ended October 31, 2001

Segment Assets and Accumulated Depreciation

October 31, 2002

April 30, 2002

Note 8 – Pro Forma Condensed Financial Information – Newly Acquired Properties (unaudited)

     IRET acquired the following real estate during the six months ended October 31, 2002:

      The following unaudited pro forma information was prepared as if the above transactions had occurred on May 1, 2002, the beginning of IRET’s current fiscal year.  The pro forma financial information is based upon the rent rolls and expected expenses for each property on the date of its actual acquisition.  This pro forma information is not necessarily indicative of the consolidated results which would have occurred if all of the transactions had been consummated on May 1, 2002, nor do they purport to represent the results of operations for future periods.

      The pro forma consolidated statement of operations (unaudited) for the six months ended October 31, 2002, is presented as if the real estate acquisition had been completed at the beginning of the period May 1, 2002, rather than on the actual acquisition or closing date. 

Note 9 – Market Price Range of Shares

      IRET Shares of Beneficial Interest trade on the NASDAQ National Market under the symbol “IRETS.”  For the three months ended October 31, 2002, a total of 2,390,541 shares were traded in 4,712 separate trades.  The high trade price during the period was $11.00, the low was $9.05, and the closing price on October 31, 2002, was $10.55.  For the three months ended October 31, 2001, a total of 1,102,933 shares were traded in 2,008 separate trades on the NASDAQ small-cap market.  The high trade price during the period was $9.43, the low was $8.80, and the closing price on October 31, 2001, was $9.07.  For the six months ended October 31, 2002, a total of 5,518,054 shares were traded in 11,099 separate trades.  The high trade price during the period was $11.90, the low was $8.55, and the closing price on October 31, 2002, was $10.55.  For the six months ended October 31, 2001, a total of 3,619,055 shares were traded in 6,442 separate trades on the NASDAQ small-cap market.  The high trade price during the period was $10.49, the low was $8.25, and the closing price on October 31, 2001, was $9.07.  On April 9, 2002, IRET moved its listing from the Nasdaq SmallCap Market to the Nasdaq National Market.

Note 10 - Commitments and Contingencies

      Insurance   IRET’s portfolio-wide general liability and property insurance policies expired on April 30, 2002.  IRET renewed its policies at similar coverage levels for the first quarter ending July 31, 2002, but at a price that was $169,367 or 53.8% higher than the prior fiscal year's cost due to the addition of more property to IRET's portfolio as well as the general price increases for insurance coverage implemented by the insurance industry.  A portion of IRET’s insurance costs are passed through to certain commercial tenants pursuant to the terms of the applicable lease agreement.  Of IRET’s total insurance costs of  $1,613,552, $281,737 or 17.46% will be billed back to IRET’s commercial tenants.  For Fiscal 2003, all of IRET's real estate properties are insured against customary casualties and liability claims except for acts of terrorism, which are excluded under IRET’s current insurance policy.  IRET is currently evaluating the financial impact of the recently signed Federal Terrorism Insurance legislation.  Under the new law, insurers must revoke terrorism act exclusions in exchange for an additional premium.  As of the date of this report, IRET has not received notice as to what, if any, the increased premium will be for the reinstatement of terrorism coverage.

      Real Estate Expansions   IRET is committed to provide equity capital of approximately $5,000,000 to the NCSM Partnership (in which IRET holds a majority interest) for the purpose of constructing a 70,000 square foot addition to the Southdale Medical Center in Edina, Minnesota, for an estimated total cost of $13,200,000.  IRET is expecting to finance the balance of the construction cost.  As of October 31, 2002, IRET has advanced $250,000 for the expansion project.

      IRET is also committed to provide equity capital of approximately $5,000,000 to Edgewood Vista Senior Living, Inc. for the purpose of constructing a 68-unit addition consisting of a 15-unit Alzheimer facility, a 53-unit assisted living facility, and an additional formal dining facility to Edgewood Vista Hermantown in Hermantown, Minnesota.  As of October 31, 2002, IRET has advanced $250,000 for the expansion project.

Note 10 - continued

      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 property.  Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate any property containing such substances, may adversely affect the owner’s or operator’s ability to sell or rent the affected property or to borrow using such property as collateral.  Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal of, or remediation of, such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person.  Certain environmental laws impose liability for the release of asbestos-containing materials into the air, and third parties may also seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials, as well as other hazardous or toxic substances.  The operation and subsequent removal of certain underground storage tanks are also regulated by federal and state laws.  In connection with the current or former ownership (direct or indirect), operation, management, development and/or control of real properties, IRET may be considered to be an owner or operator of such properties, or to have arranged for the disposal or treatment of hazardous or toxic substances.  As such, IRET may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and claims for injuries to persons and property.

      It is currently IRET's policy to obtain a Phase I environmental study on each property that IRET seeks to acquire.  If the Phase I indicates any possible environmental problems, IRET's policy is to order a Phase II study, which involves testing the soil and ground water for actual hazardous substances.  No assurance can be given that the Phase I or Phase II environmental studies, or any other environmental studies undertaken with respect to any of IRET's current or future properties, will reveal the full extent of potential environmental liabilities, that any prior owner or operator of a property did not create any material environmental condition unknown to IRET, that a material environmental condition does not otherwise exist as to any one or more of such properties or that environmental matters will not have a material adverse effect on IRET, IRET's ability to make distributions to shareholders and IRET's ability to pay amounts due on debt.  IRET currently does not carry insurance for environmental liabilities.

      Certain environmental laws impose liability on a previous owner of property to the extent that hazardous or toxic substances were present during the prior ownership period.  A transfer of the property does not relieve an owner of such liability.  As a result, in addition to any liability that IRET may have with respect to current properties, IRET may also have liability with respect to properties previously sold by IRET's predecessors or by IRET.  To management's knowledge, as of April 30, 2002, IRET does not own and has not sold any properties that contain known material environmental liabilities.

Note 11 – Subsequent Events

      Dividend Declaration   On November 13, 2002, the Board of Trustees of IRET declared a dividend of $0.157 per share, payable January 17, 2003, to shareholders of record at the close of business on January 2, 2003.

     Boise Building Sale  On November 19, 2002, we entered into a purchase agreement that in part provides for the disposition of the “America’s Best Warehouse” facility we own in Boise, Idaho.  The disposition value will be $3,350,000 assuming this transaction is completed.  It will result in a loss of $315,226 to IRET since we are disposing of the “America’s Best Warehouse” at a value below our purchase cost less deprecation and previous impairments.

     Edgewood Vista -Virginia  On November 13, 2002, the Board of Trustees of IRET approved a $5,000,000 expansion to the Edgewood Vista property located in Virginia, Minnesota.  The expansion will include 43 assisted living apartments, 19 independent living apartments, and an underground parking/storage shed.  Upon completion, the expansion facility will be leased to a third-party operator for a lease term of twenty years, with an initial annual rental payment amount of $550,000, plus all costs for insurance, taxes, maintenance and repairs.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

      The following discussion and analysis should be read in conjunction with the consolidated financial statements included in this report as well as the financial statements audited by Brady Martz & Associates, P.C. of Minot, North Dakota, certified public accountants for the period ended April 30, 2002, which financial statements were attached to the Form 10-K405 on file for Investors Real Estate Trust.

     Forward Looking Statements    Certain matters included in this discussion are forward looking statements within the meaning of federal securities laws.  Although we believe that the expectations reflected in the following statements are based on reasonable assumptions, we can give no assurance that the expectations expressed will actually be achieved.  Many factors may cause actual results to differ materially from our current expectations, including general economic conditions, local real estate conditions, the general level of interest rates, and the availability of financing, timely completion and lease-up of properties under construction and various other economic risks inherent in the business of owning and operating investment real estate. 

Revenues
      Total IRET revenues for the second quarter of Fiscal 2003 ended October 31, 2002, were $30,432,693 compared to $23,175,041 received in the second quarter of the prior fiscal year ended October 31, 2001.  This is an increase of $7,257,652 or 31%.  Total revenues for the first six months of Fiscal 2003 ended October 31, 2002, were $57,972,334 compared to $44,955,135 for the same period of the prior year, an increase of $13,017,199 or 29% for the first six months of the prior fiscal year ended October 31, 2001.  These increases resulted primarily from the additional investments in real estate made by IRET as well as other factors shown by the following analysis for the first two quarters of Fiscal 2003:

Straight-Line Rents
      Generally Accepted Accounting Principles require us to record as revenue "straight-line rents" on our commercial property leases that contain future rental increases.  This rule requires us to record on monthly income an amount equal to the total rent a tenant has contracted to pay during the term of the lease divided by the number of months of the lease.  This results in recording as revenue an amount that exceeds the actual cash rent collected.  In the later years of such leases, revenue recorded is an amount less than the actual cash being received.         

      As a result of “straight-line rents,” the amount of revenue we have included in our financial statements that is in excess of the amount of cash we have actually collected is:

IRET has a reserve set aside for default for straight-line rents, $10,000 per month, which has a balance of $200,785 at October 31, 2002.

Capital Gain Income
      IRET realized capital gain income of  $52,774 during the second quarter, compared to $16,398 realized during the second quarter of the prior year.  For the six-month periods ended October 31, 2002 and October 31, 2001, capital gain income was $315,342 and $324,332 respectively.

Expenses and Net Income
      The following table shows the changes in revenues, operating expenses, interest, and depreciation for the three months and six months ended October 31, 2002, as compared to the three months and six months ended October 31, 2001:

Expenses and Net Income - - continued

Factors Impacting Net Income

      During the first and second quarters of Fiscal 2003 ended October 31, 2002, there were a number of factors that combined to limit the growth of our total revenue and ultimately negatively impacted our net income per share.  While a number of these negative influences show no signs of lessening in the next twelve months, the most significant negative factor is somewhat within our control.  As a result, assuming we are able to locate suitable investment real estate, we are optimistic that we will invest a majority of our uninvested cash, thus eliminating the dilutive impact on our earning per share.

• Uninvested Cash   The most significant reason for the decline in net income per share during the first and second quarter of Fiscal 2003 ended October 31, 2002, as compared to the corresponding year earlier periods is the large balance of cash and marketable securities.  While this money was invested in short term income producing investments, we ordinarily seek to invest in income producing real estate.  As of October 31, 2002, cash and marketable securities was $17,395,029 compared to $22,833,426 as of April 30, 2002. For the three and six months ended October 31, 2002, cash and marketable securities earned $91,629 or approximately 1.5% and $221,147 or approximately 1.5% respectively.  During the second quarter, we were unable to fully invest the proceeds from the new equity raised during first quarter 2003 into income producing real estate.  This failure to timely invest the stock sale proceeds we raised in May 2002 resulted in a reduction in earnings per share for the three and six month periods ended October 31, 2002.  While we expect to invest a majority of this remaining cash in real estate properties over the next six months, given the current market conditions, we can give no assurance that we will be able to do so.
  
  
• Increased Real Estate Taxes   Taxes imposed on our real estate properties increased by $1,287,458 or 57.6% for the three months ended October 31, 2002, and $2,121,451 or 48.8% for the six months ended October 31, 2002, as compared to the corresponding periods of Fiscal 2002.  Of the increased real estate taxes for the three months ended October 31, 2002, $817,125 or 63.5% is attributable to the addition of new real estate, while $470,333 or 36.5% is due to increased costs for real estate taxes on existing real estate assets.  For the six months ended October 31, 2002, increased real estate taxes of $1,572,000 or 74.1% is attributable to the addition of new real estate, while $549,451 or 25.9% is due to increased costs for real estate taxes on existing real estate assets.  Most of our new property acquisitions during the past year were in Minnesota, a jurisdiction with higher property taxes than North Dakota and the other states in which we own property. Under the terms of most of our commercial leases, the full cost of real estate tax is paid by the tenant as additional rent.  One commercial property, Southdale Medical located in Edina, Minnesota, accounts for $443,742 or 20.9% of the increase in real estate tax costs for the six months ended October 31, 2002.  Due to increased vacancy at Southdale during the first and second quarter of Fiscal 2003 ending October 31, 2002, we were unable to fully recover the real estate tax cost from the tenants.  We expect that the increased vacancy at Southdale will persist for the remaining six months of the fiscal year.  For our noncommercial real estate properties, any increase in our real estate tax costs must be collected from tenants in the form of a general rent increase.  While we have implemented
  

23

---

portfolio wide rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased real estate tax costs.

• Increased Maintenance Expense   The maintenance expense category increased by $1,177,744 or 58.8% for the three months ended October 31, 2002, and $1,977,295 or 52.3% for the six months ended October 31, 2002, as compared to the corresponding periods of Fiscal 2002.  Of the increased maintenance costs for the three months ended October 31, 2002, $806,500 or 68.4% is attributable to the addition of new real estate, while $371,244 or 31.6% is due to increased costs for maintenance on existing real estate assets.  For the six months ended October 31, 2002, increased maintenance costs of $1,484,755 or 75.1% is attributable to the addition of new real estate, while $492,540 or 24.9% is due to increased costs for maintenance on existing real estate assets.  Under the terms of most of our commercial leases, the full cost of maintenance is paid by the tenant as additional rent.  One commercial property, Southdale Medical located in Edina, Minnesota, accounts for $343,821 or 17.4% of the increase in maintenance costs for the six months ended October 31, 2002.  Due to increased vacancy at Southdale during the first and second quarter of Fiscal 2003 ending October 31, 2002, we were unable to fully recover the maintenance cost from the tenants.  We expect that the increased vacancy at Southdale will persist for the remaining six months of the fiscal year.  For our noncommercial real estate properties, any increase in our maintenance costs must be collected from tenants in the form of a general rent increase.  While we have implemented portfolio wide rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased maintenance costs.
  
  
• Increased Utility Expense   The utility expense category increased by $905,481 or 76.3% for the three months ended October 31, 2002, and $1,187,665 or 49.9% for the six months ended October 31, 2002, as compared to the corresponding periods of Fiscal 2002.  Of the increased utility costs for the three months ended October 31, 2002, $488,328 or 53.9% is attributable to the addition of new real estate, while $417,153 or 46.1% is due to increased costs for utilities on existing real estate assets.  For the six months ended October 31, 2002, increased utility costs of $850,184 or 71.6% is attributable to the addition of new real estate, while utility costs on our existing portfolio increased $337,481 or 28.4%.  Under the terms of most of our commercial leases, the full cost of utilities is paid by the tenant as additional rent.  One commercial property, Southdale Medical located in Edina, Minnesota, accounts for $353,664 or 29.8% of the increase in utility costs for the six months ended October 31, 2002.  Due to increased vacancy at Southdale during the first and second quarter of Fiscal 2003 ending October 31, 2002, we were unable to fully recover the utility cost from the tenants.  We expect that the increased vacancy at Southdale will persist for the remaining six months of the fiscal year.  For our other noncommercial real estate properties, any increase in our utility costs must be collected from tenants in the form of a general rent increase.  While we have implemented portfolio wide rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased utility costs. Since our real estate portfolio is primarily located in Minnesota and North Dakota, the severity of winters will have a large impact on our utility costs.
  

• Increased Administrative and Operating Expense   Administrative and operating expenses increased by $212,842 or 41.5% for the three months ended October 31, 2002, and $419,226 or 40.9% for the six months ended October 31, 2002, as compared to the corresponding periods of Fiscal 2002.  Of this increase in administrative and operating expense for the six months ended October 31, 2002, $139,000 or 33.2% was due to professional fees and costs associated with our most recent stock offering in the first quarter of this fiscal year.  In prior years, the work associated with offerings of company stock to the public was largely done by our employees in-house.  Over the past 6 months we have hired 3 new employees.  These new employees as well as increases in the wages and benefits paid to existing employees account for $150,810 or 35.9% of the increase in administrative and operating costs for the six months ended October 31, 2002, and $70,799 or 33.3% of the increase for three month period ending October 31, 2002.
  
  
• Increased Insurance Premiums   Insurance expense increased by $235,718 or 75.1% for the three months ended October 31, 2002, and $405,086 or 64.5% for the six months ended October 31, 2002, compared to an increase in revenues of  $7,256,237 or 31.7% for the three months ended October 31, 2001, and $12,864,800 or 28.9% for the six months ended October 31, 2001.  Of the increased insurance costs for the three months ended October 31, 2002,  $80,273 or 34.1% is attributable to the addition of new real estate, while $155,445 or 65.9% is due to increased premium costs for coverage on existing real estate assets. For the six months ended October 31, 2002, increased insurance costs of $140,780 or 34.8% is attributable to the addition of new real estate, while $264,306 or 65.2% is due to increased premium costs for coverage on existing real estate assets. Under the terms of most of our commercial leases, the full cost of insurance is paid by the tenant as additional rent. For our other real estate properties, any increase in our insurance costs must be collected from tenants in the form of a general rent increase.  While we have implemented portfolio wide rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased insurance costs. We expect our insurance expense to continue at its current level for the remaining six months of this fiscal year as well as for the next fiscal year.
  
  
• Increased Vacancy   During the second quarter of Fiscal 2003, vacancy levels continued to increase throughout our entire portfolio. Our same store apartment vacancy increased to 6.4% from 3.9% for the three months ended October 31, 2002.  For the six months ended October 31, 2002, our same store apartment vacancy increased to 6.9% from 4.6%.  Likewise, vacancy levels at our same store commercial properties increased from 1.2% to 4.6% for the three months ended October 31, 2001.  For six months ended October 31, 2001, same store commercial vacancy increased from 0.9% to 4.9%.  A majority of the markets that we operate in continue to experience overall poor economic conditions. The poor economic climate has translated directly into increased vacancy at most of our properties.
  

Our commercial vacancy is primarily due to our inability to either renew existing leases or to re-lease space being vacated by tenants at the expiration of their lease. For the first half of Fiscal 2003 we did not lose any commercial tenants due to bankruptcy or insolvency of the tenant. While not necessarily indicative of future business cycles, in past economic downturns, a recovery in occupancy levels generally trails the pick up in economic activity by twelve months or more. As a result, we do not expect our occupancy levels to improve during the remaining six months of Fiscal 2003.

• Slower Increase of Interest Expense   Our mortgage debt increased $35,880,800 or 7.8% for the three months ending October 31, 2002, and $38,932,292 or 8.5% for the six months ending October 31, 2002.  Due to the fact that interest rates on new mortgages incurred during those periods were at lower rates than mortgages in prior periods, our interest expense increased by only $1,715,949 or 24.1% for the three months ended October 31, 2002, and $3,162,736 or 22.4% for the six months ended October 31, 2002, as compared to the corresponding periods of Fiscal 2002.  Of the increased interest expense for the three months ended October 31, 2002, $1,781,017 or 103.8% is attributable to the addition of new real estate, while interest expenses on existing real estate assets actually declined by $65,068 or 3.8%.  For the six months ended October 31, 2002, increased interest expense of $3,246,229 or 102.6% is attributable to the addition of new real estate, while interest expenses on existing real estate assets actually declined by $83,493 or 2.6%.

• Increased Minority Partnership Interests   In addition to the factors discussed above that have negatively impacted our earnings per share despite an overall increase in gross revenue, the increase in the number of limited partnership units in our operating partnership has also contributed to the fact that even though our revenue increased by $7,256,237 or 31.7% for the quarter ending October 31, 2002, our net income only increased $122,307 or 4.2%. During the three months and six months ending October 31, 2002, outstanding limited partnership units in our operating partnership increased by 425,295 and 671,931 respectively. Under the terms of our operating partnership, each limited partner is entitled to an equal allocation of net income or net loss. Limited partnership units are issued by us in exchange for the contribution of an interest in real estate.  If capital gain income and the limited partnership ownership interest reflected as minority interests on the financial statements are excluded, the increase in net income is more closely related to the increase in revenue:

Results from Stabilized Properties
      IRET defines fully stabilized properties, as those both owned at the beginning of the prior fiscal year and having completed the rent-up phase (90% occupancy).  "Same-store" results for the three months and six months ended October 31, 2002 and 2001 for residential and commercial were:

 Comparison of Residential and Commercial Properties
      The following is a comparison of the net operating income from the two types of real estate investments owned by IRET - residential and commercial - for the three months and six months ended October 31, 2002 and 2001:

 Net Real Estate Operating Income

       The growth in the two operating segments resulted primarily from the acquisition of real estate properties during the prior and current fiscal years.

Occupancy Rates and Credit Risk
      Occupancy rates are calculated as a percentage of the actual rent paid to IRET versus the scheduled rent charged by IRET for the period of time presented.  The following tables compare occupancy rates for stabilized properties for the three months and six months ended October 31, 2002 and 2001:

       The following table shows our tenants in commercial property that account for three percent or more of the total scheduled rent on November 1, 2002, from all commercial properties owned by IRET:

 We currently own a 75,815 square foot commercial office facility located in Rapid City, South Dakota. The facility is fully leased to Conseco Finance Service Corp.  The lease term runs through June 30, 2015. The tenant pays $771,214 per year in rent as well as all taxes, insurance and repairs.  There is a possibility that Conseco may not continue as a going concern.  Should Conseco default on its obligation to us, we estimate the financial impact to be $1,185,700 per year.  Such an event would decrease our future earnings by $1,185,700 or approximately 3.8 cents per share assuming all other operational activities remain unchanged.

 Property Acquisitions and Dispositions
      During the six months ended October 31, 2002, IRET acquired 8 commercial properties and 2 apartment complexes: 

      These two apartment complexes were acquired by the issuance of 227,826 partnership units in exchange for $2,412,681 of equity and $1,512,372 cash and debt assumption.

 Dispositions
     The 37-unit Eastwood, 27-unit Oak Manor, and 17-unit Jenner apartment complexes in Dickinson, North Dakota, were sold during the first quarter of Fiscal 2003 at a gain of $262,568. In the second quarter ended October 31, 2002, the 15,217 square foot Cottage Grove Strip Center in Cottage Grove, Minnesota, was sold at a gain of $52,774.

 Funds From Operations
      IRET considers Funds from Operations (“FFO”) a useful measure of performance for an equity REIT.  FFO is defined as net income available to shareholders determined in accordance with accounting principles generally accepted in the United States of America ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, and after adjustment for unconsolidated partnerships and joint ventures.  IRET uses the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO as amended by NAREIT to be effective January 1, 2000. 

       FFO presented herein is not necessarily comparable to FFO presented by other real estate companies because not all real estate companies use the same definition. 

       FFO should not be considered as an alternative to net income as determined in accordance with accounting principles generally accepted in the United States of America as a measure of IRET’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of IRET’s needs or its ability to service indebtedness or make distributions. 

      Funds from Operations for IRET for the three months ended October 31, 2002, increased to $8,826,234 compared to $7,349,622 for the three months ended October 31, 2001, an increase of 20.1%.

       Funds from Operations for IRET for the six months ended October 31, 2002, increased to $16,899,096, compared to $14,191,926 for the six months ended October 31, 2001, an increase of 19.1%.

  (1)         Depreciation on office equipment and other assets used by IRET are excluded.  Amortization of financing and other expenses are excluded, except for amortization of leasing commissions which are included.
 (2)         Limited partnership units of the operating partnership are exchangeable for shares of beneficial interest of IRET only on a one-for-one basis.
(3)          Distributions are paid equally on shares and units.  It is our intent to distribute approximately 70% of FFO to our shareholders and unitholders.

 *         Includes $442,204 and $324,895 for 3 months ended October 31, 2002 and October 31, 2001, and $846,583 and $658,190 for the 6 months ended October 31, 2002 and October 31, 2001, of “straight-line rents.”

32

---

Distributions
      The following distributions were paid during the six months ended October 31st of Fiscal years 2003 and 2002:

          The Board of Trustees of IRET has declared a distribution of $.157 per share, payable January 17, 2003 to shareholders of record at the close of business on January 2, 2003.

Liquidity and Capital Resources
      The important changes in IRET’s balance sheet during the first six months of Fiscal 2003 ended October 31, 2002, were:

• Real Estate Owned
  Real estate owned increased to $825,032,048 from the April 30, 2002, figure of $740,319,436.  The increase resulted from the acquisition of additional investment properties net of dispositions as described below:   

• Mortgage Loans Receivable
  Mortgage loans receivable decreased to $3,788,087 from $3,952,762 from April 30, 2002.  This decrease resulted from scheduled payments received.

• Cash
  Cash on hand on October 31, 2002, was $14,742,760 compared to $12,333,426 on April 30, 2002.  This increase resulted from the net of proceeds from sale of shares less purchase of property acquisitions and marketable securities.
  
  
• Marketable Securities
  During the first six months ended October 31, 2002, IRET decreased its investment in marketable securities classified as available-for-sale to $2,652,269 from $10,500,000 on April 30, 2002, using proceeds to purchase real estate.
  
  
• Mortgages Payable
  Mortgages payable on October 31, 2002, totaled $498,501,196, compared to $459,568,905 at April 30, 2002.  This increase resulted from refinancing of maturing mortgages and the placement of new mortgages.  The average weighted interest rate payable on the outstanding indebtedness on October 31, 2002, was 7.41%. 
  
  
• Investment Certificates
  Investment Certificates outstanding on October 31, 2002, totaled $14,409,069, compared to $25,186,582 on April 30, 2002.  This decrease resulted from payments made on maturing investment certificates.
  
  
• Operating Partnership Units
  Outstanding Limited Partnership units in the Operating Partnership increased to 10,308,178 partnership units on October 31, 2002, as compared to the 9,636,247 units outstanding on April 30, 2002.  The increase resulted from the issuance of additional partnership units to acquire the Three Paramont Plaza, East Park Apartments, Sycamore Village Apartments and Abbott Northwestern Specialty Care Center. 
  
  
• Shares of Beneficial Interest
  Shares of beneficial interest outstanding on October 31, 2002, totaled 32,023,980, as compared to 27,847,079 shares outstanding on April 30, 2002.  This increase in shares outstanding is due to the sale of 3.6 million shares of stock on April 25, 2002, to the general public at $9.50 per share resulting in gross proceeds of $31,663,100, as well as shares issued pursuant to the distribution reinvestment plan on July 1, 2002, of 229,521 shares and on October 1, 2002, of 224,816 shares to existing shareholders resulting in net proceeds of $4,595,130.

• Pending Acquisitions and Dispositions
  As of the date of this report, IRET has entered into contracts to acquire and dispose the following real estate investments:
  

      IRET had cash on hand of $14,742,760 and marketable securities of $2,652,269 on October 31, 2002.  As of October 31, 2002, IRET’s unsecured credit lines with First International Bank & Trust, Bremer Bank, and First Western Bank & Trust, all of Minot, North Dakota, totaled $19,000,000.  None of the credit lines were in use on October 31, 2002.

       IRET believes that its existing cash and borrowing capacities are adequate to fund all of its acquisition and development obligations and all of its other short and long-term liquidity requirements.  IRET believes that its net cash provided by operations will continue to be adequate to meet both operating requirements and the payment of dividends in accordance with Internal Revenue Code provisions pertaining to real estate investment trusts in both the short and long term.  Budgeted expenditures for ongoing maintenance, capital improvements and renovations to its real estate portfolio are expected to be funded from the cash flow generated from the operation of these properties. 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     Our exposure to market risk is limited to fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations. Even though our philosophy is to maintain a fairly low exposure to interest rate fluctuation risk, we are still vulnerable to significant fluctuations in interest rates on variable rate debt, on any future repricing or refinancing of fixed rate debt and on future debt.

     We primarily use long-term (more than nine years) and medium-term (five to seven years) debt as a source of capital. We do not currently use derivative securities, interest-rate swaps or any other type of hedging activity to manage our costs of capital. As of October 31, 2002, we had the following amount of future principal payments on mortgages secured by our real estate.

 (1)   The weighted average interest rate as of October 31, 2002, was 7.41%. Any fluctuations on the variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $30,260,568 of variable rate indebtedness would increase our annual interest expense by $302,606.

 Item 4.  Control and Procedures  

     The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Report on Form 10-Q, that the Company’s controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed by it under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure.

       There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 

Item 1.  Legal Proceedings

      In the course of our operations, we become involved in litigation.  At this time, we know of no pending or threatened proceedings that would have a material impact upon us.

Item 2.  Changes in Securities and Use of Proceeds

      None

Item 3.  Defaults upon Senior Securities

      None

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

      At the Annual Meeting of Shareholders held on September 24, 2002, the following proposals were adopted by the margins indicated:

1.         To elect a Board of Trustees to hold office until the next annual meeting of shareholders and until their successors are elected and qualified.

2.         To approve appointment of Brady Martz & Associates, P.C. as independent auditor for IRET for the fiscal year ended April 30, 2003:

           For:      21,954,666.391                        Against:           205,021.646

Item 5.  Other Information

      None

Item 6.  Exhibits and Reports on Form 8-K
                                             
      IRET filed an 8-K on October 15, 2002, as amended by an 8-K/A filed on December 16, 2002, SEC File #000-14851. 

      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.

INVESTORS REAL ESTATE TRUST
(Registrant)

By: /s/ Thomas A. Wentz, Sr.________________
     Thomas A. Wentz, Sr., President & Chief
     Executive Officer

By:  /s/ Diane K. Bryantt___________________
       Diane K. Bryantt, Senior Vice President &
       Chief Financial Officer

Date:  December 16, 2002

I, Thomas A. Wentz, Sr., certify that:

 1.         I have reviewed this quarterly report on Form 10-Q of Investors Real Estate Trust;

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

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

 4.         The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

   a)         designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,  particularly during the period in which this quarterly report is being prepared;

   b)         evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

   c)         presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 5.         The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

    a)        all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

    b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

39

---

 6.         The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:    December 16, 2002

By:       /s/ Thomas A. Wentz, Sr.______________ 
            Thomas A. Wentz, Sr., President & CEO

I, Diane K. Bryantt certify that:

 1.         I have reviewed this quarterly report on Form 10-Q of Investors Real Estate Trust;

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

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

 4.         The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

    a)        designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

    b)        evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

    c)        presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 5.         The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

    a)        all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

    b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

41

---

 6.         The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material  weaknesses.

Date:    December 16, 2002

By:       /s/ Diane K. Bryantt_____________________
            Diane K. Bryantt, Senor Vice President & CFO