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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

|X| Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2002

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 0-30162
______________________

FRONTLINE CAPITAL GROUP
(exact name of registrant as specified in its charter)



DELAWARE 11-3383642
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)


405 LEXINGTON AVENUE
NEW YORK, NY 10174
(Address of principal executive offices) (Zip Code)


Registrant's telephone number, including area code: (212) 931-8000


______________________


Securities registered pursuant to Section 12 (b) of the Act:



TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 par value NONE


Securities registered pursuant to Section 12 (g) of the Act: None


______________________


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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. | |

Indicate by check mark whether the registrant is an "accelerated filer"
as defined in Exchange Act 12b-2. Yes | | No | |

The aggregate market value of the shares of common stock held by
non-affiliates was approximately $70 thousand based on the closing price on the
OTC Bulletin Board for such shares on March 18, 2003.

The number of the Registrant's shares of common stock outstanding was
37,344,039 as of March 18,2003.


DOCUMENTS INCORPORATED BY REFERENCE

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TABLE OF CONTENTS



ITEM
NO. PAGE
- ---- ----

PART I
1. Business................................................................................ I-3
2. Properties.............................................................................. I-10
3. Legal Proceedings....................................................................... I-11
4. Submission of Matters to a Vote of Security Holders..................................... I-12

PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters................... II-1
6. Selected Financial Data................................................................. II-2
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ II-3
7a. Quantitative and Qualitative Disclosure about Market Risk............................... II-17
8. Financial Statements and Supplementary Data............................................. II-18
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................ II-18

PART III
10. Directors and Executive Officers of the Registrant...................................... III-1
11. Executive Compensation.................................................................. III-2
12. Security Ownership of Certain Beneficial Owners and Management.......................... III-4
13. Certain Relationships and Related Transactions.......................................... III-5
14. Controls and Procedures................................................................. III-7

PART IV
15. Financial Statements and Schedules, Exhibits and Reports on Form 8-K.................... IV-1






I-2


PART I

ITEM 1. BUSINESS

THE COMPANY

FrontLine Capital Group ("FrontLine" or the "Company") was formed on July 15,
1997 and was spun off as a separate public company from Reckson Associates
Realty Corp. ("Reckson Associates") in June 1998. FrontLine is a holding company
with two distinct operating segments: one holds FrontLine's interest in HQ
Global Workplaces, Inc., a company in the officing solutions market and its
predecessor companies ("HQ" or the "HQ Global Segment"), and the other consists
of FrontLine (parent company) ("FrontLine Parent") and its interests in a group
of companies (the "Parent and Other Interests Segment") that provide a range of
services.

FrontLine was established with the purpose of identifying and acquiring
interests in operating companies that engage in businesses that provide services
to other businesses. The groundwork for this business was established in 1997,
with investments commencing in 1998. The first investments were in executive
office suites (now known as the flexible officing solutions industry) and
telecommunications infrastructure.

During 1999, the Company rapidly expanded its operations and ownership position
within the flexible officing solutions industry by orchestrating the merger of
three companies and acquiring interests in the combined company that resulted in
an 84% ownership position of the combined company, then operating under the name
of VANTAS Incorporated ("VANTAS"). In addition, FrontLine increased its
infrastructure enabling the acquisition of ownership interests in an additional
10 companies that each had the goal of leveraging the power of the Internet to
deliver services to other businesses. The ability to deliver this growth was
primarily fueled by access to the public capital markets.

The announcement in January 2000 of the merger of VANTAS with HQ moved FrontLine
to the forefront of the flexible officing solutions industry through the
creation of the world leader in this industry. With a majority common stock
ownership position in the merged entity, the promising growth of the Internet
sector and robust capital markets, FrontLine was well-positioned to capitalize
on the potential of the resulting network of the FrontLine-owned enterprises.

However, the capital markets changed dramatically in mid-2000 and caused a
reassessment of FrontLine's business plan. In October 2000, FrontLine announced
that, as a result of changing market conditions, it was refining its strategic
plan (the "Restructuring") to highlight its holdings in HQ and to maximize the
value of its other holdings. Additionally, in conjunction with the
Restructuring, FrontLine announced that it would focus its resources and capital
on the businesses within its existing portfolio and cease pursuing new
investment activities.

In conjunction with the Restructuring, and in light of market conditions,
FrontLine reevaluated the carrying values of its ownership interests and as a
result of this reevaluation recorded aggregate impairment charges of $57.7
million through December 31, 2002 and 2001, and $25.7 million in the fourth
quarter of the year ended December 31, 2000 to reduce the carrying values of
these investments to their estimated fair values. No further impairment charges
were recorded or considered necessary in 2002.

FRONTLINE BANKRUPTCY

On June 12, 2002, Frontline filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court"). The Company
remains in possession of its assets and properties, and continues to operate its
business and manage its property as a debtor-in-possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the United States Bankruptcy Code.


I-3


The deadline to file proofs of claims and interests expired on September 30,
2002. Frontline is currently in the process of reviewing and assessing the
claims and interests that have been filed, and intends to file objections, as
appropriate.

On November 14, 2002, the Bankruptcy Court issued an order, which, among other
things, extended the exclusive period during which only Frontline may file a
plan of reorganization through and including February 7, 2003. On March 24,
2003, the Bankruptcy Court issued an order which among other things, further
extended the exclusive period during which only Frontline may file a plan of
reorganization through and including June 6, 2003. The Company anticipates
proposing a plan of reorganization in accordance with the federal bankruptcy
laws as administered by the Bankruptcy Court prior to that date. Confirmation of
a Plan of reorganization could materially change the amounts currently recorded
in the financial statements. The financial statements do not give effect to any
adjustment to the carrying value of assets, or amounts and classifications of
liabilities that might be necessary as a consequence of this matter. The Company
has the exclusive right to propose a plan of reorganization through which period
may be extended further by the Bankruptcy Court.

By order dated March 31, 2003, the Bankruptcy Court also authorized Frontline
to, among other things, (a) perform its duties as a debtor-in-possession in
connection with a wholly-owned subsidiary that is a managing member of a limited
liability company, by negotiating and executing definitive documents consistent
with the transactions detailed in the term sheets regarding the proposed
restructuring of Reckson Strategic Venture Partners, LLC and with respect to New
World Realty, LLC annexed to such order (collectively, the "Transactions"), and
(b) to perform such actions and take all steps necessary to implement and
consummate such Transactions.

HQ GLOBAL BANKRUPTCY

On March 13, 2002, HQ and certain of its affiliates (collectively, the
"Debtors") filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the "Delaware Bankruptcy Court") and received a commitment for $30.0
million in debtor-in-possession financing. The Debtors continue to operate their
business and manage their properties as debtors-in-possession during the Chapter
11 proceeding. The Debtors have the exclusive right to propose a plan of
reorganization until May 13, 2003, which period may be extended further by the
Delaware Bankruptcy Court. The Debtors are obligated under their
debtor-in-possession financing facility to file with the Delaware Bankruptcy
Court, no later than April 30, 2003, a plan of reorganization in a form
acceptable to the "Requisite Lenders" under the facility. The Debtors and their
debtor-in-possession lenders have agreed, subject to approval by the Delaware
Bankruptcy Court to an extension of this deadline to June 30, 2003.

The Debtors anticipate proposing a plan of reorganization in accordance with the
federal bankruptcy laws as administered by the Court. Confirmation of a plan of
reorganization could materially change the amounts currently recorded in the
financial statements. The financial statements do not give effect to any
adjustment to the carrying value of assets, or amounts and classifications of
liabilities that might be necessary as a consequence of this matter.

DELISTING BY NASDAQ

In March 2002, the Company's stock was delisted by Nasdaq as a direct result of
the HQ bankruptcy filing. The Company's common stock currently trades on the OTC
Bulletin Board under the symbol FLCGQOB.


I-4


HQ

HQ is a provider of flexible officing solutions. As of December 31, 2002, HQ
owned, operated, or franchised 304 business centers, which are included in
continuing operations and are primarily located in the United States. There were
19 business centers operating at December 31, 2002 that were held for sale and
included in discontinued operations or in the process of being closed. A
wholly-owned subsidiary of HQ is also the franchiser of 15 domestic and 31
international business centers for unrelated franchisees. Excluding franchised
and managed centers, as of March 24, 2003, HQ owned and operated 242 business
centers.

HQ provides a complete outsourced office solution through furnished and equipped
individual offices and multi-office suites available on short notice with
flexible contracts. HQ also provides business support and information services
including: telecommunications; broadband Internet access; mail room and
reception services; high speed copying, faxing and printing services;
secretarial, desktop publishing and IT support services and various size
conference facilities, with multi-media presentation and video teleconferencing
capabilities. HQ also provides similar services for those businesses and
individuals that do not require offices on a full-time basis.

On June 1, 2000, VANTAS Incorporated ("VANTAS"), a majority-owned subsidiary of
the Company, merged with HQ Global Workplaces, Inc. ("Old HQ"), an affiliate of
CarrAmerica Realty Corporation ("CarrAmerica"), in a two-step merger (the "HQ
Merger"). As a result of the HQ Merger, the combined company became a
wholly-owned subsidiary of a newly-formed parent corporation, HQ Global Holdings
Inc. ("HQ Global"), under the name HQ Global Workplaces, Inc. See Note 3 to the
financial statements included elsewhere in this Form 10-K. For the year ended
December 31, 2000, the results of operations included in the financial
statements in this Form 10-K are comprised of twelve months of VANTAS and the
seven months of Old HQ following the HQ Merger with HQ Global.

BUSINESS STRATEGY

Workplace Solutions
- -------------------

HQ offers its clients two office solution plans based on their particular needs
and preferences. These two plans are Full Office Program and Business Access
Program. Details of these services are described below:

The Full Office Program

This program provides clients with fully furnished and equipped individual
offices and suites and a full array of business support services without
substantial investment of time and money, enabling companies to allocate
resources more effectively. In addition to a fully furnished office and access
to such business support services, clients receive the following additional
amenities and benefits:

Infrastructure:

o Desirable business addresses in o Mail processing, courier, shipping
prime locations and receiving services

o High quality full service business o 24 hour per day/7 day per week access
environments

o Client services area with essential o Complimentary beverage service
office equipment including coffee and tea

o Meeting rooms with audio-visual o Office supplies
equipment

o Access to approximately 300 centers
worldwide through operated and
franchised locations


I-5


People:

o Professional receptionist to greet o Dedicated administrative staff
guests proficient in business software

o Telephone answering and call o Meeting planning and catering
screening

o Responsive on site management and o IT support teams
support teams


Technology:

o High speed Internet connectivity o E-Mail

o Telecommunications services o Webhosting

o Video conferencing o Telephone and web conferencing

o Additional technology includes:
technical support, LAN and other
configurations

The Business Access Program

This program provides value to clients that need a local presence in a
particular market or access to HQ's worldwide network and utilization of the
many services offered by HQ, but do not need a full-time office. As a result, HQ
offers a part-time plan called the Business Access Program. HQ's clients receive
a prestigious address, building directory lobby listing, personalized telephone
answering, message and voice mail services, facsimile capabilities, incoming
mail handling and use of conference rooms and/or offices as needed.

The Business Access Program provides flexibility for HQ's clients. For example,
as a client grows, it can transfer into a Full Office Program. Similarly, should
a Full Office client need to downsize, it can adjust its overhead and
participate as a Business Access client in a seamless manner.

Additional Services

HQ offers a variety of additional services to its clients on an as-needed basis
and charges for these services according to a price schedule. Such services,
which may be a key determinant in a client's decision to choose a business
center, include word processing and secretarial services, desktop
publishing/graphics design, clerical services (i.e., photocopying, filing,
labeling, concierge services), and technical support services
(hardware/software).

Clients
- -------

As of December 31, 2002, HQ had approximately 22,000 clients, including both
Full Office and Business Access clients, utilizing 19,000 workstations.
Approximately 60% of HQ's Full Office clients are large regional or national
companies, often purchasing HQ's services at multiple locations. National and
regional firms generally prefer doing business with a larger, well-established
business center operator, such as HQ, in order to ensure longevity and
consistency of service, as well as the ability to contract for multiple
locations in multiple markets with a single provider. In return, the largest
business center operators typically obtain more favorable lease terms than
single site operators who are unable to provide this level of service. No single
client accounts for more than 1% of HQ's revenues.

Suppliers
- ---------

HQ's primary suppliers are its landlords from whom it leases office space. These
landlords include primarily large real estate companies from which HQ leases
space at multiple locations. HQ's landlords include Boston Properties, Inc.,
CarrAmerica, Duke-Weeks Realty Corporation, Equity Office Properties Trust
("EOP"), Reckson Associates and Shorenstein Properties. No single landlord
accounts for more than 11% of the aggregate annual rental payments made by HQ.



I-6


The initial terms of the agreements pursuant to which HQ leases office space
from landlords average approximately 10 years and, in most cases, carry lease
renewal options at 95% to 100% of fair market value. In any given year, a
portion of the leases held in HQ's portfolio of leases will be eligible for
renewal. This lease expiration diversity enables HQ to manage lease rates on a
portfolio basis. In the years ending December 31, 2003, 2004 and 2005, 0.4%,
7.6% and 23.5% respectively of the continuing operations leases are scheduled to
expire, respectively.

Office Service Agreements
- -------------------------

HQ provides furnished office space to clients with flexible terms. A number of a
business center's clients terminate their agreements during the course of a year
and, therefore, maintaining high occupancy requires ongoing sales efforts. One
risk HQ faces is the risk of non-renewals resulting in lower occupancy and
reduced service revenues. Despite the short-term nature of the office service
agreements, many clients elect to renew their office service agreements and
remain clients for periods of time averaging approximately four times longer
than the original term of their service agreement. HQ estimates that the
historical average length of stay of its Full Office clients is approximately
two to three years. At December 31, 2002, HQ occupancy as measured by occupied
offices, for continuing operations business centers owned and operated by HQ was
69%. Although HQ's occupancy rates vary from one period to another and are not
the only determinant in its ability to generate revenues and profits, HQ's
continued ability to generate business center operating income is dependent upon
sufficiently high occupancy rates.

Franchise Centers
- -----------------

HQ provides its clients with an additional 46 office center locations, which are
operated under franchise agreements by third party owners. These franchised
centers, of which 15 are located in 7 states and Puerto Rico, and 31 are located
in 10 international locations, provide HQ's clients with additional solutions to
their global office needs. HQ receives a franchise royalty from these third
party owners for the use of the HQ name, with royalty percentages ranging from
1.0% to 2.5% of the franchise center's gross revenue. Franchise fees aggregated
$0.8 million for the year ended December 31, 2002, and are included in business
services revenues.

Managed and Joint Venture Centers
- ---------------------------------

As of December 31, 2002, HQ has no managed centers in the United States. The
management agreement for the one managed center operated by HQ expired on
December 31, 2002. Additionally, HQ has entered into a joint venture agreement
with EOP and currently manages one center pursuant to this agreement. Management
fees generally include a base fee plus an incentive fee and certain profit
participations.

Marketing Alliance
- ------------------

HQ has a marketing alliance with Servcorp, a business center operator with
centers primarily located in Asia, Australia and New Zealand, whereby HQ
receives and provides client referrals from and to Servcorp.

The Industry
- ------------

During 2002, the U.S. economy was stagnant, which had a negative impact on the
users of flexible officing solutions, causing continued pressure on pricing and
occupancy in the industry. The industry is highly fragmented with over 10% of
total business centers owned by the two largest participants, including HQ.


I-7


Several trends are driving the acceptance and usage of business centers,
including:

o the widespread use of business center facilities by national and regional
corporations to support mobile employees;

o small businesses nationwide requiring more flexible office space and
related services;

o home-based businesses and free agents utilizing part-time office facilities
for meetings and support services;

o the continuing trend of corporate downsizing which often results in the
need for temporary office space for former employees seeking new jobs
and/or starting new businesses;

o the growing use and acceptance of enhanced telecommunication and computer
technologies which can help businesses create "virtual offices" without
fixed space requirements; and

o the increased awareness by commercial real estate owners that business
centers can provide amenities to existing tenants (such as conference
facilities and offices for visiting executives) and act as an incubator for
future tenants.

Furthermore, the emergence of certain communications technologies has played an
important role in the evolution of the industry. Improved telecommunication
services and Internet applications have become more frequently utilized and
integrated into business center service offerings. As the industry continues to
evolve, office equipment and communications technology will become an
increasingly competitive factor. Business center operators are likely to face
pressure to invest in technology in order to offer services such as E-mail and
LANs as well as video conferencing.

Competition
- -----------

The industry is highly fragmented with approximately 10% of total business
centers owned by HQ and the two largest participants, including HQ. In many
markets, HQ's largest competitor may be a locally-owned operator with several
centers. HQ's largest global competitor is Regus plc. Regus has a large
international presence and a smaller presence in the United States. HQ may
compete with these and other entities in both the search for attractive business
center locations and in attracting and retaining clients in its business centers
as well as skilled managers.

Team Members
- ------------

As of December 31, 2002, HQ employed approximately 1,400 team members
(employees) including 235 corporate team members. None of these team members is
covered by a collective bargaining agreement and HQ believes its relationship
with team members is good. HQ is continually implementing and improving its
operating systems, expanding opportunities and providing training programs for
its team members.

Management compensation consists of base salaries and incentive compensation
based upon HQ's performance and individual team member performance. In addition,
certain team members participate in a stock option plan designed to motivate
long-term contribution to HQ's success.

GEOGRAPHIC INFORMATION
- ----------------------

Information by geographic area is provided in Item 2, below. As of December 31,
2002, HQ's continuing operations are primarily located in North America, except
for certain franchise centers.



I-8


DISCONTINUED OPERATIONS

In December 2001, HQ's Board of Directors approved a plan to dispose of HQ's
business in Europe. As a result of this transaction, the HQ consolidated balance
sheets for the years ended December 31, 2002 and 2001 and the statements of
operations and cash flows for the years ended December 31, 2002, 2001 and 2000
present the European businesses as a discontinued operation.

On June 24, 2002, HQ sold certain assets of the discontinued operations in the
United Kingdom for cash proceeds of $15.5 million. Of this amount, $11.5 million
was repatriated to the United States. This transaction resulted in a gain of
$5.4 million, representing the excess of the proceeds over the previously
estimated net realizable value of the assets. There were no income taxes related
to this transaction.

PARENT AND OTHER INTERESTS SEGMENT

The Parent and Other Interests Segment consists of FrontLine and its interests
in a group of companies, which provide a range of services.

As discussed above, in conjunction with the Restructuring and in light of market
conditions experienced beginning in mid-2000, FrontLine reevaluated the carrying
value of its ownership interests and, as a result of this re-evaluation,
recorded aggregate impairment charges of $57.7 million through the year ended
December 31, 2002 and 2001 and $25.7 million in the fourth quarter of the year
ended December 31, 2000 to reduce the carrying values of these investments to
their estimated fair values. No further impairment charges were recorded or
considered necessary in 2002.

FrontLine also has an interest in Reckson Strategic Venture Partners, LLC, which
invests in operating companies with experienced management teams in real estate
and real estate related market sectors which are in the early stages of their
growth cycle or offer unique circumstances for attractive investments, as well
as platforms for future growth.

At December 31, 2002, FrontLine had 2 officers and no employees.

See Note 4 to the accompanying Consolidated Financial Statements for financial
information and further discussion and financial data related to our Parent and
Other Interests Segment.




I-9



ITEM 2. PROPERTIES

FrontLine's principal office is located at 405 Lexington Avenue, New York, New
York, 10174. Management believes that such space is sufficient to meet
FrontLine's present needs and does not presently anticipate securing additional
space.

HQ Business Centers at December 31, 2002
- ----------------------------------------

The following table sets forth the number of HQ business centers and the related
number of workstations that HQ operated as of December 31, 2002. HQ centers are
located in buildings where HQ leases office space from landlords. See
"Suppliers" in Item 1 to this Form 10-K.



LOCATION CENTERS WORKSTATIONS
-------- ------- ------------

United States:
Alabama............................................. 2 171
Arizona............................................. 5 587
California.......................................... 45 5,000
Colorado............................................ 7 958
Washington D.C...................................... 23 2,468
Florida............................................. 12 1,167
Georgia............................................. 16 1,658
Illinois............................................ 23 2,467
Indiana............................................. 2 178
Kansas.............................................. 2 219
Massachusetts....................................... 13 1,291
Michigan............................................ 5 595
Minnesota........................................... 5 560
Missouri............................................ 3 276
Nevada.............................................. 3 250
New Jersey.......................................... 14 1,169
New York............................................ 29 3,678
North Carolina...................................... 3 381
Ohio................................................ 8 764
Oklahoma............................................ 1 77
Oregon.............................................. 3 311
Pennsylvania........................................ 3 284
Tennessee........................................... 1 95
Texas............................................... 15 1,939
Utah................................................ 1 93
Washington.......................................... 6 657
Wisconsin........................................... 1 60
------ ------
U.S. - Operated Centers 251 27,353

International:
Mexico.............................................. 7 364
------ ------
International Centers................................. 7 364

Franchise Centers..................................... 46 5,014
------ ------
Total Centers......................................... 304 32,731
====== ======



HQ operates 99 of these centers and approximately 11,000 workstations in the top
five markets of New York City, Los Angeles, Chicago, Washington D.C. and San
Francisco. Additionally, HQ has 46 franchised centers of which 15 are located in
10 states and 31 are located in 10 international locations. HQ also manages one
business center under a joint venture agreement. Overall, as of December 31,
2002, HQ provided its clients officing solutions in 304 centers, with 32,731
workstations in 12 countries.

HQ's corporate headquarters is located at 15305 North Dallas Parkway, Dallas,
Texas.



I-10


ITEM 3. LEGAL PROCEEDINGS

On February 4, 1999, a lawsuit captioned OmniOffices, Inc. et al. v. Joseph
Kaidanow, et al., (Civil Action No. 99-0260) was filed in the United States
District Court for the District of Columbia. This litigation (the "D.C.
Action"), is with two stockholders of Old HQ (f/k/a OmniOffices, Inc.) and
involves the conversion of approximately $111 million of debt previously loaned
to Old HQ by CarrAmerica, into HQ's non-voting common stock. CarrAmerica and Old
HQ initiated the action by filing a complaint seeking a declaratory judgment
that the conversion price was fair, following threats by Messrs. Kaidanow and
Arcoro ("Defendants") to challenge the conversion price. Defendants filed
counterclaims against CarrAmerica, Old HQ and the then current directors of Old
HQ, seeking a judgment declaring the conversion void or voidable, or in the
alternative, compensatory and punitive damages. The stockholders' counterclaim
makes no allegations against HQ. By January 2000, discovery was complete, the
case was fully briefed, and the parties were awaiting a court ruling on HQ and
CarrAmerica's ("Plaintiffs") motion for summary judgment and Defendants' motion
to modify the scheduling order and motion to seal. The case was reassigned
twice, and the two motions were then dismissed without prejudice on September
19, 2000 and September 26, 2000. On November 13, 2000, Plaintiffs filed a motion
to reinstate their summary judgment motion. Defendants filed a cross-motion for
leave to file a cross-motion for summary judgment. The Court permitted the
refiling and took the motion and cross-motion for summary judgment under
advisement. On September 12, 2001, without holding oral argument, the Court
denied Plaintiffs' motion for summary judgment, but granted the Defendants'
cross-motion for summary judgment. Plaintiffs and the directors of old HQ filed
a Notice of Appeal in October, 2001. On February 15, 2002, the D.C. Circuit
announced that oral argument was scheduled for January 16, 2003. On March 17,
2002, the D.C. Circuit referred the appeal to its Appellate Mediation Program.
On April 24, 2002, HQ filed a notice of bankruptcy stay in respect of its March
13, 2002 Chapter 11 proceeding. HQ informed the D.C. Circuit that the appeal was
stayed as to HQ pursuant to the automatic stay provisions of the U.S. Bankruptcy
Code. The D.C. Circuit reversed the District Court in an opinion dated March 7,
2003.

In re HQ Global Workplaces, Inc. Shareholder Litigation, No. 17996-NC. The
original lawsuit (the "Fiduciary Action"), was brought in Delaware State
Chancery Court on April 17, 2000 by Kaidanow and Arcoro ("Plaintiffs") but was
removed to the Federal District Court for the District of Delaware and then
remanded on Plaintiffs' motion back to Delaware Chancery Court. The action
alleges a breach of fiduciary duty by CarrAmerica Realty Corporation and Old
HQ's directors in approving the HQ Merger transaction. The complaint alleges
among other things that allocation of the purchase price between the UK and U.S.
companies failed to meet the standard of entire fairness, and that CarrAmerica
breached its obligations under the Tag-Along Rights Agreement between Plaintiffs
and CarrAmerica. The lawsuit also alleges an aiding and abetting claim against
the Company as well as a tortuous interference claim against HQ and the Company.
The Plaintiffs in the Fiduciary Action have also brought an appraisal action in
the Chancery Court requesting appraisal of 100,000 of their shares sold in the
HQ Merger. Modest discovery has occurred in the Appraisal Action. The Appraisal
Action and the Fiduciary Action have now been consolidated into one action. On
March 8, 2002, Plaintiffs filed a motion for leave to amend their complaint to
add, inter alia, a breach of warrant agreements claim against HQ and other
claims against FrontLine. On March 15, 2002, HQ filed a notice of bankruptcy
stay, stemming from its March 13, 2002 voluntary petition for Chapter 11
bankruptcy protection in the United States Bankruptcy Court for the District of
Delaware. HQ informed the Court that the consolidated action should be stayed as
to HQ pursuant to the automatic stay provisions of the Bankruptcy Code. At a
status conference held on March 25, 2002, the Vice Chancellor ordered the
parties to work out a scheduling order for the briefing of the motion regarding
the stay of the proceedings. At a hearing on this motion on September 9, 2002,
the Vice Chancellor stayed the proceedings until November 13, 2002. The former
director co-defendants in the consolidated action separately filed an adversary
proceeding in the Delaware Bankruptcy Court seeking to stay the consolidated
action as to the former directors. After a hearing on June 25, 2002, the
Delaware Bankruptcy Court denied the requested relief.



I-11


On September 9, 2002, HQ Global Workplaces, Inc. filed an adversary proceeding
in the Delaware Bankruptcy Court seeking to subordinate, pursuant to Section
510(b) of the Bankruptcy Code, the claims of Messrs. Kaidanow and Arcoro on the
basis that the claims arose from the purchase or sale of an equity security.

On or about October 3, 2001, Burgess Services, LLC ("Burgess Services"),
Dominion Venture Group, LLC ("Dominion Venture Group") and certain affiliated
parties commenced an action in Oklahoma State Court against Reckson Strategic
Venture Partners, LLC ("RSVP"), Reckson Associates Realty Corp. ("Reckson"), and
RAP-Dominion LLC ("RAP-Dominion"), a joint venture through which RSVP and
Reckson invested in a venture with certain of the plaintiffs. On April 10, 2002,
the litigation was settled without liability on the part of the Company or the
defendant. In connection with the settlement, the joint venture will be
terminated. As a result of this settlement, the Company determined that no
further impairment was necessary on its carrying value in its investment in
Reckson Strategic.

In April 2000, the Company entered into an office lease which expires in
December 2010. In January 2001, the Company assigned the lease to HQ. The lease
assignment did not relieve the Company of any of its obligations under the terms
of this lease. At December 31, 2002, HQ was past due on $0.9 million of rent.
The landlord has drawn the full letter on credit of $2.8 million. Of the $57.6
million HQ restructuring charge recorded in 2001, a $4.8 million accrual
applicable to this lease was recorded as an estimate for the cost of terminating
this lease. If the ultimate cost of terminating this lease exceeds the
outstanding letter of credit, then additional cash may need to be paid by either
HQ or the Company. Since HQ is currently in bankruptcy, the landlord is likely
to seek to recover any further damages from FrontLine. As of December 31, 2002,
the remaining lease commitment was $23.4 million.

The Company also has potential liability under its indemnification of
CarrAmerica for liabilities of Carr America under its guarantees relating to
four HQ leases. In conjunction with the HQ Merger pursuant to the terms of a
stockholders agreement, FrontLine agreed to indemnify CarrAmerica for its
guarantees of certain HQ leases. As of December 31, 2002, the remaining lease
commitments in excess of the existing letter of credit was $27.4 million.

The Equal Employment Opportunity Commission has filed a suit (N.D. 111., Cause
No. 02 C 6623, on September 1, 2002), on behalf of a former employee alleging
discrimination under the Americans with Disability Act and Title 1 of the Civil
Rights Act of 1991. HQ is currently evaluating the information and has not yet
filed a response.

In addition to the cases set forth above, the Company and its investee entities
are party to claims and administrative proceedings arising in the ordinary
course of business or which are otherwise subject to indemnification, some of
which are expected to be covered by liability insurance (subject to policy
deductibles and limitations of liability) and all of which, including the cases
discussed above, collectively are not expected to have a material adverse effect
on the Company's financial position or results of operations.

Management does not anticipate that these litigations will negatively impact
future operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders during the fourth quarter of
the year ended December 31, 2002.



I-12


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock traded over the counter ("OTC") under the symbol
"RSII" through August 1999 when it began trading on the NASDAQ National Market
("NASDAQ"). In April 2000, the Company's symbol was changed to "FLCG." As a
direct result of the HQ bankruptcy filing in March 2002, the symbol was changed
by NASDAQ to FLCGQ. In March 2002, the Company's common stock was delisted by
NASDAQ and currently trades on the OTC Bulletin Board. The following table sets
forth the quarterly high and low closing bid prices per share of the Company's
common stock reported for each respective quarter. These OTC and NASDAQ market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions. Since
inception, the Company has not paid any dividends to its shareholders. Under the
terms of the Company's credit facilities, as long as there are outstanding
advances under such facilities, the Company is prohibited from paying dividends
on any share of its common stock. In addition, the payment of dividends on the
Company's common stock is prohibited unless full distributions have been paid on
both of the Company's Series A and Series B Preferred Stock. The Company is in
arrears with regard to the payment of dividends on its Series A and Series B
Preferred Stock.

FLCG STOCK PRICE
- ----------------



2001 HIGH LOW
- ---- ---- ---

March 31.............................................. $10.50 $10.06
June 30............................................... $ 1.97 $ 1.01
September 30.......................................... $ 0.13 $ 0.08
December 31........................................... $ 0.13 $ 0.10
2002
- ----
March 31.............................................. $0.100 $0.001
June 30............................................... $0.018 $0.004
September 30.......................................... $0.010 $0.002
December 31........................................... $0.005 $0.000



The number of registered shareholders of the Company's common stock as of March
18, 2002 was 6,805.

UNREGISTERED SALES OF SECURITIES

As distributions on its Series A 8.875% Convertible Cumulative Preferred Stock
(the "Series A Preferred Stock") which were payable in February 2001, May 2001
and August 2001, FrontLine issued 43,227, 63,895 and 484,973 shares of its
common stock, respectively, to the institutional investor that holds the Series
A Preferred Stock in transactions exempt from registration under Section 4(2).
The Company did not declare or pay the quarterly dividend due on these shares on
November 6, 2001 or February 6, 2002.

On December 13, 2000, FrontLine obtained a $25.0 million preferred equity
facility, initially issuing 15,000 shares of Series B Convertible Cumulative
Preferred Stock (the "Series B Preferred Stock") for net proceeds of $13.9
million. On February 1, 2001, FrontLine drew the remaining $10.0 million of the
facility, issuing 10,000 shares of Series B Preferred Stock for net proceeds of
$10.0 million. These transactions were exempt from registration under Section
4(2).

As noted above, the Company is in arrears with regard to the payment of
dividends on its Series A and Series B Preferred Stock. For information
concerning the failure to pay such dividends, please see Item 7 below.



II-1



ITEM 6. SELECTED FINANCIAL DATA




Year Ended December 31,
------------------------------------------------------------------
2002 2001 2000(2) 1999(3) 1998
---- ---- ------ ------- ----
OPERATIONS SUMMARY: (IN THOUSANDS EXCEPT SHARE AMOUNTS)

HQ operating revenues.................... $ 328,025 $ 470,707 $ 455,490 $ 214,445 $ --
HQ operating income...................... 2,073 24,354 87,847 27,527 --
Corporate general and administrative..... (2,241) (3,915) (16,478) (9,509) (2,613)
Equity in net loss and impairment of
unconsolidated companies............... (1,407) (36,448) (125,928) (10,266) (3,630)
Net loss applicable to common
shareholders........................... $(144,138) $(630,408) $ (234,897) $ (39,847) $ (8,147)

PER SHARE DATA(1):
Basic and diluted net loss................ $ (3.86) $ (17.03) $ (6.73) $ (1.56) $ (0.56)

BALANCE SHEET DATA (PERIOD END):
Cash and cash equivalents................ $ 10,311 $ 18,139 $ 19,665 $ 32,740 $ 2,026
Working capital (deficit)................ (778,255) (630,151) (36,833) 17,090 132
Ownership interests in and advances to
unconsolidated companies(4) ........... 12,322 13,396 39,845 97,833 45,838
Intangible assets........................ 14,567 16,820 581,680 239,412 --
Total assets............................. 191,050 280,768 1,119,452 541,983 58,843
Long-term debt........................... -- -- 440,449 274,380 40,981
Total shareholders' (deficiency)
equity(5).............................. $(648,828) $(504,690) $ 120,843 $ 114,109 $ 15,968



(1) Based on 37,344,039, 37,009,891, 34,880,709, 25,600,985 and 14,522,513
weighted average shares of common stock outstanding for the years ended
December 31, 2002 2001, 2000, 1999 and 1998, respectively.

(2) Reflects the operating results of HQ Global Workplaces, Inc. ("Old
HQ") for the period subsequent to June 1, 2000, the date of the merger
of Old HQ with VANTAS Incorporated ("VANTAS"). See Note 3 to the
accompanying consolidated financial statements for further discussion.

(3) Reflects the Company's acquisition and consolidation of a majority
ownership interest in VANTAS as of January 1, 1999.

(4) Includes the carrying value of investments in Reckson Strategic
Venture Partners, LLC of $12,322,000, $13,396,000, $28,969,000,
$36,626,000 and $15,561,000 as of December 31, 2002, 2001, 2000, 1999
and 1998 respectively.

(5) No dividends on the common stock were paid in any of the periods
presented. During the years ended December 31, 2002, 2001 and 2000,
the Company recognized $2,195,000, $5,582,000 and $2,119,000,
respectively of dividends on and accretion of preferred stock.

NOTE: Certain prior period amounts have been reclassified to conform to
the current year presentation.


II-2



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the accompanying
financial statements of FrontLine Capital Group (the "Company" or "FrontLine")
and related notes thereto.

The Company considers certain statements set forth in this Annual Report Form
10-K herein to be forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, with respect to the Company's expectations for future
periods. Certain forward-looking statements involve certain risks and
uncertainties. Although the Company believes that the expectations reflected in
such forward-looking statements are based on reasonable assumptions, the actual
results may differ materially from those set forth in the forward-looking
statements and the Company can give no assurance that such expectations will be
achieved. Certain factors that might cause the results of the Company to differ
materially from those indicated by such forward-looking statements include,
among other factors, an inability to extend and/or amend the terms of the
Company's outstanding indebtedness and HQ Global Holdings Inc. ("HQ" or the "HQ
Global Segment") indebtedness on terms that are favorable to the Company and its
common stockholders, results of the bankruptcy of Frontline and HQ, negative
changes in the officing solutions industry or the Internet-related businesses in
which the unconsolidated companies in which we invest operate, a continued
downturn in general economic conditions, increases in interest rates, a lack of
capital availability, ability to satisfy financial covenants, competition,
reduced demand or decreases in rental rates for executive office suites and
other real estate-related risks such as the timely completion of projects under
development, our inability to complete future strategic transactions, costs
incurred in connection with strategic transactions and our dependence upon our
key personnel and the key personnel of HQ and other risks detailed in
FrontLine's reports and other filings made with the Securities and Exchange
Commission. Consequently, such forward-looking statements should be regarded
solely as reflections of the Company's current operating and development plans
and estimates. These plans and estimates are subject to revision from time to
time as additional information becomes available, and actual results may differ
from those indicated in the referenced statements.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements of the Company include accounts of the
Company and its majority-owned subsidiary. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions in certain
circumstances that affect amounts reported in the Company's consolidated
financial statements and related notes. In preparing these financial statements,
management has utilized information available including its past history,
industry standards and the current economic environment among other factors in
forming its estimates and judgments of certain amounts included in the
consolidated financial statements, giving due consideration to materiality. It
is possible that the ultimate outcome as anticipated by management in
formulating its estimates inherent in these financial statements may not
materialize. However, application of the critical accounting policies below
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. In addition, other companies may utilize different estimates, which
may impact comparability of the Company's results of operations to those of
companies in similar businesses.

PROPERTY AND EQUIPMENT

Office equipment, furniture and fixtures are depreciated using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years. The cost of HQ's enterprise resource system is being amortized over
seven years. Leasehold improvements are amortized over the lesser of the term of
the related lease or the estimated useful lives of the assets.



II-3


IMPAIRMENTS OF OWNERSHIP INTERESTS AND ADVANCES TO UNCONSOLIDATED COMPANIES

The Company continually evaluates the carrying value of its ownership interests
in and advances to each of its investments in unconsolidated companies for
possible impairment based on achievement of business plan objectives and
milestones, the value of each ownership interest in the unconsolidated company
relative to carrying value, the financial condition and prospects of the company
and other relevant factors. The fair value of the Company's ownership interests
in and advances to privately held companies is generally determined based on the
value at which independent third parties have invested or have committed to
invest in the companies. The Company recorded a $25.7 million charge during the
year ended December 31, 2000 to recognize impairment charges to reduce the
carrying value of its investments in certain unconsolidated companies. In
recognition of continuing difficult capital market conditions and operating
performance of these ownership interests, the Company recorded an additional
$32.9 million during the year ended December 31, 2001. Of the $32.9 million
recorded, $20.0 million related to Reckson Strategic Venture Partners, LLC
("Reckson Strategic")(see Note 4 for further discussion). During the twelve
months ended December 31, 2002, the Company determined that no additional
impairment was necessary. These charges are included in "Equity in net loss and
impairment of unconsolidated companies" in the accompanying consolidated
statements of operations.

IMPAIRMENTS OF LONG-LIVED ASSETS

Impairment charges are recorded as a permanent reduction in the carrying amount
of the related asset. Effective January 1, 2002, the Company adopted Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, ("FAS 142"). As a result, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized, but
are subject to annual impairment tests. Other intangible assets continue to be
amortized over their useful lives.

As a result of impairment charges recorded in the third and fourth quarters of
2001, discussed below, the Company does not have any goodwill or
indefinite-lived intangible assets recorded at December 31, 2002 or 2001.
Accordingly, adoption of FAS 142 did not have an impact on the Company's
financial condition or results of operations.

Effective January 1, 2002, the Company also adopted FAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ("FAS 144"). The FASB's new
rules on asset impairment supersede FAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121").
FAS 144 retains the requirements of FAS 121 to (a) recognize an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows, and (b) measure an impairment loss as the difference
between the carrying amount and fair value of the asset, but removes goodwill
from its scope. FAS 144 will primarily impact the accounting for intangible
assets subject to amortization, property and equipment, and certain other
long-lived assets. The adoption of FAS 144 did not have a significant impact on
the Company's financial condition or results of operations.

Prior to January 1, 2002, the Company reviewed long-lived assets, including
intangible assets, for impairment whenever events or changes in circumstances
indicated that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated fair value of the asset or business
center. In preparing these estimates, HQ must make a number of assumptions
concerning occupancy rates, rates which will be charged to clients for
workstations and services, and rates of growth of rent expense and other
operating expenses. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the estimated fair value of the assets.

Based on the trend of operating losses as well as HQ's inability to remain in
compliance with its debt arrangements, HQ determined that the carrying value of
its intangible assets was impaired at September 30, 2001. Therefore, in the
third quarter of 2001, the Company recognized an impairment charge of
approximately $294.1 million, representing the amount by which the carrying
amount of the intangible assets exceeded their estimated fair value. As a result



II-4


of continuing operating losses, the Company further revised its projected cash
flows during the fourth quarter of 2001, resulting in an additional impairment
charge of $241.4 million. Assets to be disposed of are reported at the lower of
the carrying amount or estimated fair value less costs to sell. Accordingly, the
Company recorded impairment charges of $0.8 million and $25.7 million related to
restructurings in 2002 and 2001, respectively.

Management believes that assumptions made in estimating fair values were
reasonable, but actual fair values may differ from these estimates.

RISK AND UNCERTAINTIES

The future results of operations and financial condition of HQ will be impacted
by the following factors, among others: the competition in the office solutions
business with respect to, among other things, price, service, and location;
dependence on leases and changes in lease costs; the availability of capital for
expansion; the ability to obtain and retain qualified employees; the level of
difficulty experienced in the integration of acquired businesses; the
competition for future acquisitions; and the ability of HQ to secure adequate
capital.

OVERVIEW AND BACKGROUND

FrontLine is a holding company, with two distinct operating segments: one holds
FrontLine's interest in HQ Global Holdings, Inc., a company in the officing
solutions market, and its predecessor companies ("HQ" or the "HQ Global
Segment"), the other consists of FrontLine (parent company) ("FrontLine Parent")
and its interests in a group of companies (the "Parent and Other Interests
Segment") that provided a range of services.

In October 2000, FrontLine announced that, as a result of changing capital
market conditions, it was refining its strategic plan (the "Restructuring"- see
Note 14 to the accompanying consolidated financial statements for further
discussion) to highlight its holdings in HQ and to maximize the value of its
other holdings. Additionally, in conjunction with the Restructuring, FrontLine
announced that it would focus its resources and capital on the businesses within
its existing portfolio and cease pursuing new investment activities.

In conjunction with the Restructuring, FrontLine re-evaluated the carrying
values of its investments and recorded aggregate impairment charges of $57.7
million through the year ended December 31, 2002 and 2001 and $25.7 million in
the fourth quarter of the year ended December 31, 2000, in order to reduce the
carrying value of these investments to fair value.

The presentation and content of the Company's financial statements is largely a
function of the presentation and content of the financial statements of HQ and
its predecessor companies and the other investee entities.

EFFECT OF VARIOUS ACCOUNTING METHODS ON RESULTS OF OPERATIONS

The interests that FrontLine owns in its investee entities and Reckson Strategic
Venture Partners, LLC (the "Reckson Strategic") have historically been accounted
for under one of three methods: consolidation, equity method and cost method.
The applicable accounting method is generally determined based on the Company's
voting interest and rights in each investee.

Consolidation. Where the Company directly or indirectly owns more than 50% of
the outstanding voting securities of an entity or controls the board of
directors, the consolidation method of accounting is applied. Under this method,
an entity's results of operations are reflected within the Company's
Consolidated Statements of Operations. The entities whose results are
consolidated by the Company are comprised of VANTAS Incorporated ("VANTAS") and
effective with the June 1, 2000 merger (the "Merger") of VANTAS with HQ Global
Workplaces, Inc. ("Old HQ"). The entity representative of Old HQ and its


II-5


predecessors, such as VANTAS, is referred to herein as HQ. (See Note 3 to the
accompanying consolidated financial statements for further discussion).
Participation of other shareholders in the earnings or losses of the
consolidated entities is reflected in the caption "Minority interest" in the
Consolidated Statements of Operations. Minority interest adjusts the
consolidated net results of operations to reflect only the Company's share of
the earnings or losses of the consolidated entities.

To understand the Company's results of operations and financial position without
the effect of the consolidation of HQ, Note 4 to the accompanying consolidated
financial statements presents the balance sheets, statements of operations and
cash flows of the Company without the consolidation of FrontLine's ownership
interest in HQ.

Equity Method. Investees whose results are not consolidated, but over whom the
Company exercises significant influence, have been accounted for under the
equity method of accounting. Investments which were accounted for under the
equity method of accounting included: EmployeeMatters, Inc. ("EmployeeMatters"-
sold in December 2000), OnSite Access, Inc., RealtyIQ Corp. ("RealtyIQ" - sold
in April 2001), UpShot.com and Reckson Strategic.

Cost Method. Investees not accounted for under either the consolidation or the
equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
these companies is not included in the Consolidated Statements of Operations.
Impairment charges recognized on cost method investments are included in "Equity
in net loss and impairment of unconsolidated companies" in the accompanying
Consolidated Statements of Operations.

RESULTS OF OPERATIONS

The reportable segments in FrontLine's financial statements are the HQ Segment
and the Parent and Other Interests Segment. The following discussion should be
read in conjunction with the accompanying consolidated financial statements and
notes thereto.

HQ

OVERVIEW OF 2002 DEVELOPMENTS

For the fiscal year ended December 31, 2002, HQ's business centers continued the
economic decline that has been reflected in the overall US economy. As
previously noted, On March 13, 2002 HQ and certain of its affiliates filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code. The resulting business center closings and corporate headcount reduction
are indicative of the company's efforts to stabilize the operations and emerge
from bankruptcy as soon as possible.

In the second quarter of 2002, HQ sold certain assets of the discontinued
operations in the United Kingdom for cash proceeds of $15.5 million. Of this
amount, $11.5 million was repatriated to the United States. This transaction
resulted in a gain of $5.4 million, representing the excess of the proceeds over
the previously estimated net realizable value of the assets. The gain of $5.4
million was recorded in the second quarter of 2002 and is included in income
from discontinued operations for the twelve months ended December 31, 2002.

As part of the restructuring plan, management has actively pursued renegotiation
of HQ's lease agreements with its landlords throughout 2002. Many agreements
will not become effective until the lease is assumed by HQ, with approval by the
Delaware Bankruptcy Court. Consequently HQ's rent expense reflects the current
expense and does not reflect these anticipated savings. This process will
continue into 2003 as HQ develops the plan of reorganization.



II-6


RESULTS OF CONTINUING OPERATIONS

YEARS ENDED DECEMBER 31, 2002 AND 2001

Revenues. Total business center revenues for the year ended December 31, 2002
were $328.0 million, representing a decrease of $142.7 million, or 30.3%, from
the year ended December 31, 2001. This decline in revenue reflects a fewer
number of business centers which have been closed as part of the company's
reorganization process. Pricing pressure has stabilized; however demand
continued to fall throughout 2002.

Business centers with twelve months of activity for both periods under
comparison ("Same Centers") had revenues for the twelve-month period ended
December 31, 2002 and 2001 of $304.8 million and $375.1 million, respectively,
representing a decrease in 2002 of $70.4 million, or 18.8%, compared with 2001.
The decrease in revenues in 2002 is attributable to a general decline in
business performance. Reflective of the challenging macro-economic environment
experienced throughout 2001 and into 2002, business centers experienced reduced
demand and downward pricing pressure.

Business centers that were closed during the period of comparison ("Closed
Centers") had revenues for the twelve-month period ended December 31, 2002 and
2001 of $17.6 million and $91.9 million, respectively. In 2002, HQ closed 45
centers in the United States.

Business centers opened subsequent to in 2001 ("Development Centers") had
revenues for the twelve-month period ended December 31, 2002 and 2001 of $5.6
million and $3.7 million respectively. This increase is reflective of 12 months
of operations in 2002 vs. less than 12 months of operations in 2001.

Expenses. Total business center expenses for the year ended December 31, 2002
were $289.1 million, representing a decrease of $96.4 million, or 25.0%, from
the year ended December 31, 2001. This decrease reflects the reduced number of
centers in operation in 2002 vs. 2001.

Same Center expenses for the years ended December 31, 2002 and 2001 were $261.7
million and $289.8 million, respectively, representing a decrease in 2002 of
$28.1 million, or 9.7%, compared with 2001. The decrease is attributable to
reduced center general and administrative costs, a reduction in bad debt
expense, as well as lower technology and business service expenses associated
with the decline in related revenue.

Development Center expenses for the years ended December 31, 2002 and 2001 were
$5.5 million and $4.4 million, respectively, representing an increase of $1.1
million, compared with 2001 attributable to twelve-month results in 2002.

Closing Center expenses for the years ended December 31, 2002 and 2001 were
$21.9 million and $91.3 million, respectively with the decrease in expense
attributable to the termination of operations in those centers.

Business Center Operating Income ("BCOI"). For the year ended December 31, 2002,
BCOI was $38.9 million as compared with $85.1 million for 2001. The BCOI as a
percentage of total revenues ("BCOI Margin") was 11.9% for the year ended
December 31, 2002 as compared to 18.1% for 2001. The decrease in BCOI Margin can
be attributed to a combination of reduced demand reflective of the challenging
macro-economic environment experienced throughout 2002.

Same Center BCOI for the years ended December 31, 2002 and 2001 was $43.0
million and $85.3 million respectively, representing a decrease of $42.3 million
or 49.5%, from 2001. The BCOI Margin from Same Centers for the year ended
December 31, 2002 was 13.1% as compared with 18.1% in the corresponding period
in 2001.



II-7


Development Center BCOI for the years ended December 31, 2002 and 2001 was $0.2
million and negative $0.7 million respectively representing an increase in 2002
of $0.9 million from the corresponding period in 2001. The increase is
attributable to the maturity of Development Centers operating in the year ended
December 31, 2002 compared to the year ended December 31, 2001.

Closing Center BCOI for the years ended December 31, 2002 and 2001 was negative
$4.3 million and $0.6 million respectively.

Corporate General And Administrative Expenses. For the years ended December 31,
2002 and 2001, corporate general and administrative expenses were $36.8 million
and $60.8 million, respectively. Corporate overhead as a percentage of revenue
was 11.2% in 2002 vs. 12.9% in 2001.

Restructuring Charges. For the years ended December 31, 2002 and 2001,
restructuring charges were $29.4 million and $57.6 million respectively. For
fiscal 2002, restructuring charges related to a reduction in the number of
business centers, the reduction in the associated workforce and professional
fees incurred in conjunction with HQ's restructuring efforts. The charges
consisted of $1.1 million of severance and retention charges for
terminated/retained employees and $28.3 million in estimated costs associated
with the closing of business centers.

Reorganization Charges. For the years ended December 31, 2002 and 2001,
reorganization charges were $33.2 million and zero respectively. The 2002
charges consisted of $8.5 million of professional services costs associated with
the Chapter 11 proceeding and a $24.7 million non-cash charge associated with
the write-off of deferred financing costs associated with the Mezzanine Loan.

Asset Impairments. For the years ended December 31, 2002 and 2001, impairment of
intangible assets was $0.8 million and $561.2 million, respectively. Based on
the trend of operating losses as well as HQ's inability to remain in compliance
with its debt arrangements, HQ determined that the value of its intangible
assets were impaired in 2001 and additional impairment charges related to long
lived assets were recorded in 2002 as a result of HQ's bankruptcy filing.

Depreciation And Amortization. For the years ended December 31, 2002 and 2001,
depreciation and amortization expenses were $40.1 million and $70.1 million,
respectively. The decrease in depreciation and amortization is attributable to
the reduced carrying value of intangible and fixed assets due to impairment
charges recorded in the second half of fiscal 2001.

Interest Expense. For the years ended December 31, 2002 and 2001, net interest
expense was $27.2 million and $44.4 million, respectively. The decrease in
interest expense is due to suspension of the interest accrual related to
interest on the Mezzanine Loan after March 13, 2002, the date of HQ's bankruptcy
filing, and lower interest rates.

Provision For Income Taxes. For the years ended December 31, 2002 and 2001, the
provision for income taxes, which is comprised entirely of certain minimum state
taxes, was zero and $0.8 million, respectively.

Minority Interest. Minority interest was zero and a loss of $306.0 million in
the years ended December 31, 2002 and 2001, respectively.

YEARS ENDED DECEMBER 31, 2001 AND 2000

Revenues. Total business center revenues for the year ended December 31, 2001
were $470.7 million, representing an increase of $15.2 million, or 3.3%, from
the year ended December 31, 2000. The increase is primarily attributable to the
inclusion of a full year of revenue from business centers acquired in the HQ
Merger on June 1, 2000, offset by a general decline in business performance.
Reflective of the challenging macro-economic environment experienced throughout
2001, business centers experienced reduced demand and downward pricing pressure.



II-8


Business centers with twelve months of activity for both periods under
comparison ("Same Center") had revenues for the year ended December 31, 2001 and
2000 of $201.0 million and $241.3 million, respectively, representing a decrease
in 2001 of $40.3 million, or 16.7%, compared with 2000.

Business centers that were acquired during the periods under comparison
("Acquired Center") had revenues for the years ended December 31, 2001 and 2000
of $216.3 million and $156.9 million, respectively, representing an increase of
$59.4 million, or 37.9%, compared with 2000. The increase is attributable to the
inclusion of a full year of revenue from business centers acquired in the HQ
Merger on June 1, 2000.

Business centers with less than twelve months of activity during one of the
periods under comparison ("Development Center") had revenues for the years ended
December 31, 2001 and 2000 of $21.2 million and $11.1 million, respectively,
representing an increase of $10.1 million compared with 2000. At December 31,
2001 and 2000, there were 15 and 12 Development Centers, respectively, excluding
acquired centers open for less than 12 months.

Business centers that were closed, or were in the process of closing, during the
period under comparison ("Closing Center") had revenues for the years ended
December 31, 2001 and 2000 of $32.2 million and $46.2 million, respectively.

Expenses. Total business center expenses for the year ended December 31, 2001
were $385.5 million, representing an increase of $68.3 million, or 21.5%, from
the year ended December 31, 2000. The increase is primarily attributable to the
inclusion of a full year of expenses from business centers acquired in the HQ
Merger on June 1, 2000.

Same Center expenses for the years ended December 31, 2001 and 2000 were $159.6
million and $167.6 million, respectively, representing a decrease in 2001 of
$8.0 million, or 4.8%, compared with 2000. The decrease is attributable to
reduced center general and administrative costs, as well as lower technology and
business service expenses associated with the decline in related revenue, offset
by certain lease increases and higher bad debt expense.

Acquired Center expenses for the years ended December 31, 2001 and 2000 were
$169.9 million and $101.4 million, respectively. The increase is primarily
attributable to the inclusion of a full year of expenses for business centers
acquired in the HQ Merger.

Development Center expenses for the years ended December 31, 2001 and 2000 were
$18.7 million and $9.9 million, respectively, representing an increase of $8.8
million, compared with 2000.

Closing Center expenses for the years ended December 31, 2001 and 2000 were
$37.3 million and $38.3 million, respectively.

Business Center Operating Income ("BCOI"). For the year ended December 31, 2001,
BCOI was $85.2 million as compared with $138.3 million for 2000. The BCOI as a
percentage of total revenues ("BCOI Margin") was 18.1% for the year ended
December 31, 2001 as compared to 30.4% for 2000. The decrease in BCOI Margin can
be attributed to a combination of reduced demand and downward pricing pressure,
reflective of the challenging macro-economic environment experienced throughout
2001.

Same Center BCOI was $41.4 million and $73.7 million for the years ended
December 31, 2001 and 2000, respectively, representing a decrease in 2001 of
$32.3 million or 43.8%, from 2000. The BCOI Margin from Same Centers for the
year ended December 31, 2001 was 20.6% as compared with 30.5% in the
corresponding period in 2000.

Acquired Center BCOI was $46.4 million and $55.5 million for the years ended
December 31, 2001 and 2000, respectively, representing a decrease of $9.1
million, or 16.4%, from 2000. The BCOI Margin for Acquired Centers for the year
ended December 31, 2001 was 21.5% as compared with 35.4% in the corresponding
period in 2000.



II-9


Development Center BCOI was $2.5 million and $1.2 million for the years ended
December 31, 2001 and 2000, respectively, representing an increase in 2001 of
$1.3 million from the corresponding period in 2000. The increase is attributable
to the number and maturity of Development Centers operating in the year ended
December 31, 2001 compared to the year ended December 31, 2000.

Closing Center BCOI was negative $5.1 million and positive $7.9 million for the
years ended December 31, 2001 and 2000, respectively.

Corporate General And Administrative Expenses. For the years ended December 31,
2001 and 2000, corporate general and administrative expenses were $60.8 million
and $50.4 million, respectively. In the year ended December 31, 2001, expenses
include $2.8 million of professional expenses associated with an abandoned
merger and $0.5 million associated with amending loan covenants. By the fourth
quarter of 2001, corporate general and administrative expenses had been
decreased to 8.4% of revenue, compared with 12.9% for the full year of 2001 and
11.1% in 2000.

Merger And Integration Charges. For the years ended December 31, 2001 and 2000,
merger and integration charges were zero and $24.7 million, respectively. For
fiscal 2000, merger and integration charges related to the HQ Merger completed
June 1, 2000 and consisted of $11.4 million of payments to cancel options to
purchase common stock held by officers and employees, $9.4 million of charges
related to severance, retention incentives and other benefits, and $3.9 million
of professional fees and other expenses.

Restructuring Charges. For the years ended December 31, 2001 and 2000,
restructuring charges were $57.6 million and zero, respectively. For fiscal
2001, restructuring charges related to a reduction in the number of business
centers, the reduction in the associated workforce and professional fees
incurred in conjunction with HQ's restructuring efforts. The charges consisted
of $4.9 million of severance payments for terminated employees, $47.0 million in
estimated costs associated with the closing of business centers and $5.7 million
in professional fees.

Asset Impairments. For the years ended December 31, 2001 and 2000, impairment of
intangible assets was $561.2 million and zero, respectively. Based on the trend
of operating losses as well as HQ's inability to remain in compliance with its
debt arrangements, HQ determined that the value of its intangible assets was
impaired.

Depreciation And Amortization. For the years ended December 31, 2001 and 2000,
depreciation and amortization expenses were $70.1 million and $51.4 million,
respectively. The increase in depreciation and amortization expense primarily
relates to the inclusion of a full year of depreciation and amortization expense
from assets acquired in the HQ Merger.

Interest Expense. For the years ended December 31, 2001 and 2000, net interest
expense was $44.4 million and $32.3 million, respectively. The increase in
expense is attributable to an increase in borrowing as a result of the HQ
Merger.

Provision For Income Taxes. For the years ended December 31, 2001 and 2000, the
provision for income taxes, which is comprised entirely of certain minimum state
taxes, was $0.8 million and $3.4 million respectively.

Minority Interest. Minority interest was allocated a loss of $306.0 million and
income of $7.7 million in the years ended December 31, 2001 and 2000,
respectively.


II-10


DISCONTINUED OPERATIONS

YEARS ENDED DECEMBER 31, 2002 AND 2001

Income (Loss) from Discontinued Operations. For the year ended December 31,
2002, income from discontinued operations was $3.4 million, as compared to a
loss of $144.6 million for the year ended December 31, 2001. The period ended
December 31, 2002 includes a gain of $5.4 million, resulting from the sale of
certain assets of the discontinued operation in the United Kingdom for an amount
in excess of their previously estimated net realizable values. Excluding this
gain, loss from discontinued operations was $2.0 million for the year ended
December 31, 2002.

YEARS ENDED DECEMBER 31, 2001 AND 2000

Income (Loss) From Discontinued Operations. For the year ended December 31,
2001, loss from discontinued operations was $144.6 million, as compared to
income for the year ended December 31, 2000 of $1.1 million. The loss from
discontinued operations for the year ended December 31, 2001 contains an asset
impairment charge of $141.2 million, to reduce the carrying vale to its
estimated net realizable value.

PARENT AND OTHER INTERESTS

YEARS ENDED DECEMBER 31, 2002 AND 2001

As a result of the Restructuring discussed above, FrontLine changed from a
company which invested in early stage companies which leveraged the Internet
into one which focused on maximizing the value of HQ.

Parent expenses decreased $24.5 million to $15.6 million in the year ended
December 31, 2002 as compared to 2001, principally due to a $11.1 million
decrease in restructuring costs, a $2.3 million decrease in the amortization of
stock compensation and related awards, a $9.7 million decrease in net interest
expense due to ceasing to accrue further interest on outstanding borrowings
subsequent to the filing of a voluntary petition for relief under Chapter 11 of
the Untied States Bankruptcy Code, and a $1.7 million decrease in general and
administrative expenses. These decreases were partially offset by $0.2 million
of reorganization costs incurred in 2002.

The reorganization costs in 2002 relate to professional fees, and the
restructuring costs in 2002 pertain to compensation related charges. The
restructuring costs recognized in 2001 consist of (1) $5.3 million of
professional fees and other expenses, (2) $2.8 million of the long term
incentive plan ("LTIP") costs related to three executive officers who were
terminated in 2001, (3) $1.9 million of severance and related payments made to
employees who were terminated in 2001 and (4) $1.5 million of accelerated
amortization of stock compensation and related awards that resulted from the
termination of certain employees in connection with the Restructuring.

FrontLine's general and administrative expenses were $2.2 million in 2002
compared to $3.9 million in 2001, reflecting the planned continued reduction in
workforce and the resulting lower recurring general and administrative expenses
from the restructured operations.

A significant portion of FrontLine's net loss has historically been derived from
companies in which it held minority ownership interests. The equity in net loss
and impairment of unconsolidated companies decreased $35.0 million to $1.4
million in 2002 as compared to 2001. The loss for the year ended December 31,
2002 was entirely comprised of equity in the net losses of unconsolidated
companies. The equity in net loss and impairment of unconsolidated companies in
2001 consisted of $5.1 million of equity in net losses and $32.9 million of
impairment charges reflecting estimated decreases in the fair value of certain
of the Company's investments, partially offset by a $1.6 million gain on the
August 2001 sale of the investment in NeoCarta and the December 2001 sale of the
investment in Intuit. The impairment charges in 2001 were determined in
recognition of both the lack of continuing support FrontLine planned to provide
to certain investee entities following the Restructuring and the difficult
market conditions experienced beginning in mid-2000. Of the $32.9 million of
impairment charges recorded, $20.0 million relates to Reckson Strategic. During
the three months ended September 30, 2001, the Company recognized a $20.0
million valuation impairment based on its assessment of value, recoverability


II-11


and probability that this investment would not ultimately be realized at its
otherwise carrying value. Equity losses fluctuate with the number of investee
entities accounted for under the equity method, FrontLine's voting ownership
percentage in these companies, the amortization of goodwill related to newly
acquired equity method entities, and the results of operations of these
companies. In 2001, FrontLine had either sold or written down all of its
interest in its equity method investees. The results of operations of these
entities are not consolidated within the Consolidated Statements of Operations;
however, FrontLine's share of these companies' losses, as well as all estimated
impairment charges, are reflected in the caption "Equity in net loss and
impairment of unconsolidated companies" in the Consolidated Statements of
Operations. (See Note 4 to the accompanying consolidated financial statements).

Dividends on, and accretion of, preferred stock of $2.2 million in 2002 and $5.6
million in 2001 represents dividends on FrontLine's 8.875% Series A Convertible
Cumulative Preferred Stock, which was issued in the first quarter of 2000 and
accretion of FrontLine's Series B Convertible Cumulative Preferred Stock which
was issued in the fourth quarter of 2000. At December 31, 2001, $0.7 million
represents dividends on the Series A Preferred Stock. The Company did not
declare or pay the dividend on the Series A Preferred Stock that was payable on
November 6, 2001 or for any subsequent period. Accrual of dividends and
accretion of Preferred Stock ceased in June 2002 when the Company filed a
voluntary petition for relief under Chapter 11 of the Untied States Bankruptcy
Code.

YEARS ENDED DECEMBER 31, 2001 AND 2000

As a result of the Restructuring discussed above, FrontLine changed from a
company which invested in early stage companies which leveraged the Internet
into one which focused on maximizing the value of HQ.

Parent expenses decreased $33.6 million to $40.1 million in the year ended
December 31, 2001 as compared to 2000, principally due to a $12.6 million
decrease in general and administrative expenses, a $12.1 million decrease in the
amortization of stock compensation and related awards, $10.0 million of costs in
2000 attributable to a development stage company, a $3.5 million increase in net
interest expense reflecting higher average borrowings, a $1.3 million decrease
in restructuring costs and $1.1 million of depreciation and amortization
associated with equipment the Company owned in 2000.

The restructuring costs recognized in 2001 consist of (1) $5.3 million of
professional fees and other expenses, (2) $2.8 million of the long term
incentive plan ("LTIP") costs related to three executive officers who were
terminated in 2001, (3) $1.9 million of severance and related payments made to
employees who were terminated in 2001 and (4) $1.5 million of accelerated
amortization of stock compensation and related awards that resulted from the
termination of certain employees in connection with the Restructuring.

FrontLine's general and administrative expenses were $3.9 million in 2001
compared to $16.5 million in 2000, reflecting the planned reduction in workforce
and the resulting lower recurring general and administrative expenses from the
restructured operations.

A significant portion of FrontLine's net loss is derived from companies in which
it held minority ownership interests. The equity in net loss and impairment of
unconsolidated companies decreased $89.5 million to $36.4 million in 2001 as
compared to 2000. The equity in net loss and impairment of unconsolidated
companies in 2001 consisted of $5.1 million of equity in net losses and $32.9
million of impairment charges reflecting estimated decreases in the fair value
of certain of the Company's investments, partially offset by a $1.6 million gain
on the August 2001 sale of the investment in NeoCarta and the December 2001 sale
of the investment in Intuit. The impairment charges in 2001 were determined in
recognition of both the lack of continuing support FrontLine planned to provide
to certain investee entities following the Restructuring and the difficult
market conditions experienced beginning in mid-2000. Of the $32.9 million of
impairment charges recorded, $20.0 million relates to Reckson Strategic. During
the three months ended September 30, 2001, the Company recognized a $20.0
million valuation impairment based on its assessment of value, recoverability
and probability that this investment would not ultimately be realized at its


II-12


otherwise carrying value. The loss for the year ended December 31, 2000 was
entirely comprised of equity in the net losses of unconsolidated companies.
Equity losses fluctuate with the number of investee entities accounted for under
the equity method, FrontLine's voting ownership percentage in these companies,
the amortization of goodwill related to newly acquired equity method entities,
and the results of operations of these companies. In 2001, FrontLine had either
sold or written down all of its interest in its equity method investees. The
results of operations of these entities are not consolidated within the
Consolidated Statements of Operations; however, FrontLine's share of these
companies' losses, as well as all estimated impairment charges, are reflected in
the caption "Equity in net loss and impairment of unconsolidated companies" in
the Consolidated Statements of Operations. (See Note 4 to the accompanying
consolidated financial statements).

The extraordinary item of $2.6 million in 2000 resulted from the write-off of
deferred financing costs relating to the early extinguishment of a $60.0 million
credit facility in March 2000.

Dividends on, and accretion of, preferred stock of $5.6 million in 2001
represents dividends on FrontLine's 8.875% Series A Convertible Cumulative
Preferred Stock, which was issued in the first quarter of 2000 and accretion of
FrontLine's Series B Convertible Cumulative Preferred Stock which was issued in
the fourth quarter of 2000. At December 31, 2001, $0.7 million represents
dividends on the Series A Preferred Stock. The Company did not declare or pay
the dividend on the Series A Preferred Stock that was payable on November 6,
2001 and February 6, 2002.

LIQUIDITY AND CAPITAL RESOURCES

HQ

On March 13, 2002, HQ filed voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware (the "Court"). HQ will continue to operate and manage
properties in the ordinary course of business during the Chapter 11 proceeding.
HQ anticipates proposing a plan of reorganization in accordance with the federal
bankruptcy laws as administered by the Court.

In connection with HQ's bankruptcy proceeding, HQ received a commitment for a
$30.0 million credit facility ("Debtor-in-Possession Facility"), with borrowings
permitted through December 31, 2002 in accordance with certain operating and
liquidity covenants. HQ and its lenders have agreed to extend the
Debtor-in-Possession Facility through and including July 31, 2003. Any
borrowings, of which there have been none, will incur interest at Prime plus
3.0%.

There can be no assurance as to HQ's ability to execute its business plan and
meet its obligations with respect to its Debtor-in-Possession Facility. The
ability of HQ to obtain confirmation of a plan of reorganization and emerge from
bankruptcy protection is subject to numerous factors, including some that are
beyond HQ's control. In the event HQ is unable to secure a confirmed plan of
reorganization, no assurance can be given that HQ will be able to meet its
future cash requirements.

FRONTLINE

On June 12, 2002, FrontLine filed a voluntary petition for relief under Chapter
11 of the Untied states Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court"). The Company
remains in possession of its assets and properties, and continues to operate its
business and manage its property as a debtor-in-possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the United States Bankruptcy Code.

The deadline to file proofs of claims and interests expired on September 30,
2002. Frontline is currently in the process of reviewing and assessing the
claims and interests that have been filed, and intends to file objections, as
appropriate.


II-13


On November 14, 2002, the Bankruptcy Court issued an order, which, among other
things, extended the exclusive period during which only Frontline may file a
plan of reorganization through and including February 7, 2003. On March 24,
2003, the Bankruptcy Court issued an order which among other things, further
extended the exclusive period during which only Frontline may file a plan of
reorganization through and including June 6, 2003. The Company anticipates
proposing a plan of reorganization in accordance with the federal bankruptcy
laws as administered by the Bankruptcy Court prior to that date. Confirmation of
a Plan of reorganization could materially change the amounts currently recorded
in the financial statements. The financial statements do not give effect to any
adjustment to the carrying value of assets, or amounts and classifications of
liabilities that might be necessary as a consequence of this matter. The Company
has the exclusive right to propose a plan of reorganization through which period
may be extended further by the Bankruptcy Court.

By order dated March 31, 2003, the Bankruptcy Court also authorized Frontline
to, among other things, (a) perform its duties as a debtor-in-possession in
connection with a wholly-owned subsidiary that is a managing member of a limited
liability company, by negotiating and executing definitive documents consistent
with the transactions detailed in the term sheets regarding the proposed
restructuring of Reckson Strategic Venture Partners, LLC and with respect to New
World Realty, LLC annexed to such order (collectively, the "Transactions"), and
(b) to perform such actions and take all steps necessary to implement and
consummate such Transactions.

Historically, FrontLine has funded operations and investing activities through a
combination of borrowings under various credit facilities, issuances of the
Company's equity securities and sales of assets. Since the Restructuring,
FrontLine's cash requirements have been substantially reduced. As of December
31, 2002, there is no remaining availability under any FrontLine credit
facility.

The Company has a credit facility with Reckson in the amount of $100 million
(the "FrontLine Facility"). Additionally, Reckson Strategic has a $100 million
facility (the "Reckson Strategic Facility") with Reckson to fund Reckson
Strategic investments. Note 15 to the consolidated financial statements
summarizes the terms of the FrontLine Facility and Reckson Strategic Facility
(collectively, the "Credit Facilities"). The Company had $93.4 million
outstanding under the FrontLine Facility at December 31, 2002, and due to
outstanding letters of credit and accrued interest, has no remaining
availability. The Company had $49.3 million outstanding under the Reckson
Strategic Facility at December 31, 2002. These borrowings were utilized to fund
Reckson Strategic investments and its general operations. As long as there are
outstanding amounts under the Credit Facilities, the Company is prohibited from
paying dividends on shares of its common stock or, subject to certain
exceptions, incurring additional debt. The Credit Facilities are subject to
certain other covenants and prohibit advances thereunder to the extent the
advances could, in Reckson's determination, endanger the status of Reckson
Associates as a REIT. Under the Credit Facilities, additional indebtedness may
be incurred by the Company's subsidiaries. The Credit Facilities also contain
covenants prohibiting the Company from entering into any merger, consolidation
or similar transaction and from selling all or any substantial part of its
assets, or allowing any subsidiary to do so, unless approved by the lender. The
Credit Facilities also provide for defaults thereunder in the event debt is
accelerated under another of FrontLine's financing agreements. On March 28,
2001, the Company's Board of Directors approved amendments to the Credit
Facilities pursuant to which (i) interest is payable only at maturity and (ii)
Reckson may transfer all or any portion of its rights or obligations under the
Credit Facilities to its affiliates. These changes were requested by Reckson as
a result of changes in REIT tax laws. In addition, the Reckson Strategic
Facility was amended to increase the amount available thereunder to up to $110
million (from $100 million).

On September 11, 2000, FrontLine amended its $25.0 million credit agreement (the
"FrontLine Bank Credit Facility"). Borrowings under the FrontLine Bank Credit
Facility are secured by a 20.51% common ownership interest in HQ and bear
interest at the Prime rate plus 2%. Any outstanding borrowings under the
FrontLine Bank Credit Facility were due on October 25, 2001, as a result of
various extensions exercised by FrontLine in May 2001. At September 30, 2001,
FrontLine had fully borrowed the FrontLine Bank Credit Facility. The FrontLine
Bank Credit Facility provides for a default thereunder in the event debt is
accelerated under another of FrontLine's financing agreements or if there is a
default under certain HQ financing agreements. The FrontLine Bank Credit


II-14


Facility contains, among others, covenants relating to the financial ratios of
HQ and covenants prohibiting the Company from (i) transferring, conveying,
disposing of, pledging or granting a security interest in any of the collateral
previously pledged under the FrontLine Bank Credit Facility, (ii) terminating,
amending or modifying any organizational or other governing documents of the
Company or HQ without first obtaining the lender's prior written consent, (iii)
violating certain specified financial ratios, (iv) exceeding $25,000,000 of new
indebtedness, and (v) declaring or paying cash dividends on any class of the
Company's stock. Subsequent to December 31, 2002, the Company has not repaid the
principal or paid any interest applicable to this period and accordingly is at
the forbearance of the bank. There is no remaining availability under the Credit
Facilities. As a result of the Company's failure to pay the principal and
interest upon maturity on the FrontLine Bank Credit Facility, an event of
default has occurred under the credit facilities with Reckson.

During the three months ended March 31, 2000, the Company completed preferred
stock offerings of 26,000 shares of Series A Preferred Stock at a price of
$1,000 per share with net proceeds of $24.6 million. These shares are
convertible into the Company's common stock at a price of $70.48. The Company
did not declare or pay the quarterly dividend due on these shares commencing
with the payment that was due on November 6, 2001. Accordingly, future dividends
will accrue at a higher rate of 10.875%. Since dividend distributions are in
arrears for more than two quarterly periods, then the holders of such shares are
entitled to elect two additional members to the Company's Board of Directors.

While the Company's $25 million of Series B Preferred Stock is outstanding, the
holders have consent rights for certain significant transactions, including the
incurrence of additional debt by the Company or HQ, the issuance of equity
securities senior to, or on a parity with, the Series B Preferred Stock or the
issuance by HQ of preferred stock. These securities also contain certain
covenants relating to HQ. In addition, the securities include a redemption
premium of 27.5%. Since securities were not redeemed prior to December 13, 2001,
the securities (including the amount of the redemption premium) have become
convertible at the holder's option into FrontLine common stock at the initial
rate of $13.3875 per share, the preferred stock has become a voting security on
an "as-converted" basis, and quarterly dividends have become payable from the
date of initial issuance at the annual rate of 9.25%. In addition, since the
Company did not pay the dividend on the Series B Preferred Stock in December
2001, the holders of such stock have the right to vote on an "as converted"
basis on any matters that holders of common stock are permitted to vote upon and
to elect two members to the Company's Board of Directors. Securities have a
mandatory redemption requirement at a 27.5% premium, which has been triggered as
a result of uncured events of default. In addition, the consent of two-thirds of
the holders of the Company's Series A Preferred Stock is necessary in order to
issue any equity securities ranking senior to the Series A Preferred Stock. The
Company is also prohibited from paying dividends on its common stock unless full
distributions have been paid on both the Series A Preferred Stock and Series B
Preferred Stock. The Company is in arrears with regard to the payment of
dividends on its Series A and Series B Preferred Stock.

Currently, the Company has a short-term letter of credit in the amount of $0.2
million, which is being utilized as a security deposit.

The Company has entered into a stockholders agreement (the "HQ Stockholders
Agreement") with certain of the stockholders of HQ Global which provides them
with rights to put up to approximately 3.1 million shares of HQ Global (the "HQ
Shares") to the Company during the two years subsequent to the HQ Merger if HQ
Global has not completed an initial public offering of its shares. On February
25, 2002, such stockholders irrevocably waived their Put Rights.

FrontLine's operations do not require significant capital expenditures. There
were no significant capital expenditure commitments as of December 31, 2002.

There can be no assurance as to the Company's ability to execute its business
plan and to meet its obligations with respect to its credit facilities. If
additional funds are raised through the issuance of equity securities, existing
shareholders may experience significant dilution. The availability of additional
capital is subject to numerous factors including some that are beyond the
Company's control. In the event the company is unable to access additional
capital, no assurance can be given that it will be able to meet its future cash
requirements.


II-15


The Company has formed a committee of its Board of Directors, comprised solely
of the independent directors of the Board, in order to address conflicts that
may arise in connection with the Company's credit facilities with Reckson
Operating Partnership. The committee has retained legal counsel in connection
with its responsibilities.

In March 2002, the Company's stock was delisted by Nasdaq as a direct result of
the HQ bankruptcy filing. The Company's common stock currently trades on the OTC
Bulletin Board under the symbol FLCGQOB.

INFLATION

HQ

Certain of HQ's leases include increases in annual rent based on changes in the
consumer price index or similar inflation indices. HQ's contracts with clients
generally range from six to twelve months in duration. Accordingly, HQ may have
the ability to pass on any inflation related increased costs at the time of
renewal of such contracts.

FRONTLINE

Management believes that inflation did not have a significant effect on its
results of operations during any of the periods presented.



II-16



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

HQ

Historically, the primary market risk facing HQ was interest rate risk on the HQ
Credit Facility. The HQ Credit Facility bears interest ranging from 2.25% to
3.00% over prime.

Following the HQ Merger, HQ is conducting more of its operations in foreign
currencies, primarily the British Pound. Due to the nature of foreign currency
markets, there is potential risk for foreign currency losses as well as gains.
Currently, HQ has not hedged its foreign currency risk.

HQ has not, and does not plan to, enter into any derivative financial
instruments for trading or speculative purposes. As of December 31, 2002, HQ had
no other material exposure to market risk.

FRONTLINE

Interest Rate Risk

FrontLine faces interest rate risk on its Credit Facilities and the FrontLine
Bank Credit Facility. The Company has not hedged interest rate risk using
financial instruments. The Credit Facilities bear interest at the greater of the
prime rate plus 2% or 12% (with interest on balances outstanding more than one
year increasing by 4% of the previous year's rate). The FrontLine Bank Credit
Facility bears interest at LIBOR plus 5% for one, two, three or six-month
interest periods, as elected by FrontLine. The rates of interest on the Credit
Facilities and the FrontLine Bank Credit Facility will be influenced by changes
in the prime rate and LIBOR. A significant increase in interest rates may have a
negative impact on the financial results of the Company due to the variable
interest rate (in excess of 12%) under the Credit Facilities.

The following table sets forth FrontLine's obligations with respect to the
Credit Facilities and the FrontLine Bank Credit Facility, principal cash flows
by scheduled maturity, weighted average interest rates and estimated fair market
valued at December 31, 2002 (in thousands, except rates).




FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------- FAIR
2003 2004 2005 2006 2007 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- -------- ------------ -------- --------

Variable rate....... $214,464 -- -- -- -- -- $214,464 $214,464
Average interest
rate............. 11.95% -- -- -- -- -- 11.95% --




II-17



Equity Market Risk

FrontLine faces equity market risk in its ownership interests in its
unconsolidated companies. During the year ended December 31, 2001, FrontLine
recognized impairment charges to reflect decreased valuations for certain of its
investments as a result of unfavorable market conditions and other factors (see
Note 4 to the accompanying consolidated financial statements for further
discussion). As a result of such impairment charges, along with the recognition
of FrontLine's equity in the net losses of certain ownership interests, the
carrying value of FrontLine's ownership interests in and advances to
unconsolidated companies, at December 31, 2002 and 2001 was $12.3 million and
$13.4 million respectively, which represents approximately 6.4% and 4.8% of
total assets respectively, thereby mitigating FrontLine's future equity market
risk related to these interests.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is included in Item 15 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.











II-18



PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following biographical descriptions set forth certain information with
respect to the directors and the executive officers of FrontLine Capital Group
(the "Company" or "FrontLine"), based upon information furnished to the Company
by each director and executive officer.

Scott H. Rechler serves as the President and Chief Executive Officer of
FrontLine and is also Chairman of its Board of Directors. Mr. Rechler has served
as a Director of the Company since 1998 and his term as a Director expires in
2003. Mr. Rechler is also Co-Chief Executive Officer and a Director of Reckson
Associates Realty Corp. ("Reckson Associates") and has been a member of senior
management since 1989. Mr. Rechler also serves as the non-executive Chairman of
the Board of Directors and a former interim executive officer of HQ Global
Workplaces, Inc. ("HQ"), which filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code in March, 2002. Mr. Rechler is a graduate
of Clark University and received a Masters Degree in Finance from New York
University. He is the son of Roger M. Rechler. Mr. Rechler is 35 years old.

Paul Amoruso has served as a Director of FrontLine since 1998. Mr. Amoruso's
term as Director expires in 2003. Since 1983, Mr. Amoruso has been the Managing
Director of Oxford & Simpson Realty, Inc. of Jericho, New York. Prior to that
time, he was President of Lanstar International Realty, Inc., a real estate
advisory services firm. Mr. Amoruso is President of Island Hospitality
Associates and is a member of the Board of Directors of the Nature Conservancy.
He is a co-founder of the Long Island Commercial Industrial Brokers Society and
is a licensed real estate broker in New York and Connecticut. Mr. Amoruso is 42
years old.

Sidney Braginsky has served as a Director of FrontLine since 2000. Mr.
Braginsky's term as Director expires in 2004. Mr. Braginsky has a long history
of leadership in science and technology. Mr. Braginsky was a senior executive
for 30 years with Olympus America, Inc., a global leader in the development and
application of sophisticated optical technology and solutions for consumers,
health care and industry. From 1994 to 2000, Mr. Braginsky was President of
Olympus America. Prior to being President, Mr. Braginsky was Executive Vice
President of the Scientific Products Group. Mr. Braginsky serves on a number of
corporate and academic boards, including serving as Chairman of the Robert
Chambers Laboratory, City College of New York, as a Board Member of the Long
Island Museum of Science and Technology and as Chairman of the Executive Board
of Advisors for the College of Management, C.W. Post College. Mr. Braginsky is
65 years old.

Ronald S. Cooper has served as a Director of FrontLine since 1999. Mr. Cooper's
term as Director expires in 2004. Mr. Cooper was the Managing Partner of the
Long Island office of Ernst & Young LLP. A partner in that firm and its
predecessors from 1973 through 1998, he held several positions including
Partner-in-charge of the New York office's Privately Owned Business Group.
Mr. Cooper is well known in the Long Island business community having served on
numerous civic and charitable boards, including the Long Island Association
where he was Treasurer for eight years. He has a significant contact base among
the investment and banking communities and spent much of his career working with
growth-oriented companies. In 1999, Mr. Cooper co-founded LARC Strategic
Concepts LLC, a consulting firm serving emerging and early-stage companies.
Mr. Cooper is a Director of Concord Camera Corp., a public corporation engaged
in the manufacture of cameras and related products. Mr. Cooper is 64 years old.

Douglas Sgarro has served as a Director of FrontLine since 2000. Mr. Sgarro's
term as Director expires in 2004. Mr. Sgarro has been Senior Vice
President--Administration and Chief Legal Officer of CVS Corporation, the
largest retail drug store chain in the country, and President of CVS Realty Co.,
the real estate and construction division of CVS Corporation, since September
1997. Mr. Sgarro is responsible for overseeing all legal, real estate and
property management matters for CVS. He also oversees a newly-formed
organization responsible for procurement of all not-for-resale items and



III-1


strategic sourcing matters. Mr. Sgarro currently serves on the Board of
Directors of the Rhode Island Economic Development Corporation, and previously
served as a member of the Board of Directors of the Providence Children's
Museum. He also serves on the Business Advisory Council of the University of
Virginia Law School and is a member of the Corporate Executive Board--General
Counsel Roundtable, the American Bar Association--Business Law Section and the
International Council of Shopping Centers. Prior to joining CVS, Mr. Sgarro was
a partner at the Manhattan offices of the international law firm of Brown & Wood
LLP from January 1993 to August 1997. Mr. Sgarro is a graduate of Hamilton
College and the University of Virginia School of Law. Mr. Sgarro is 44 years
old.

James D. Burnham has served as Chief Financial Officer and Treasurer of
FrontLine since August 2001. Mr. Burnham joined the Company in May 1999 as
Senior Vice President of Finance. Mr. Burnham is also President of New York
Metropolitan Area for HQ and serves on HQ's Board of Directors. In addition,
from October 2001 through December 2002, Mr. Burnham was Treasurer and Acting
Chief Financial Officer of HQ. From 1996 to 1999, Mr. Burnham was the Chief
Financial Officer at Cybersmith, a company that declared bankruptcy under
Chapter 11 of the U.S. Bankruptcy Code in 1999. Mr. Burnham is a graduate of
Bentley College and received his Masters Degree in Business Administration from
the Franklin W. Olin Graduate School of Business at Babson College. Mr. Burnham
is 44 years old.

Section 16 Beneficial Ownership Reporting Compliance. Section 16(a) of the
Securities Exchange Act of 934, as amended (the "Exchange Act"), requires the
Company's executive officers and directors, and persons who own more than 10% of
a registered class of the Company's equity securities ("10% Holders"), to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Officers, directors and 10% holders are required
by Commission regulation to furnish the Company with copies of all Section 16(a)
forms that they file. To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company, all Section 16(a) filing
requirements applicable to its executive officers, directors and 10% Holders
were satisfied during 2002.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information regarding the compensation awarded
for the past three fiscal years to Scott H. Rechler, the President and Chief
Executive Officer of the Company, James D. Burnham, the only other executive
officer of the Company, and two former executive officers of the Company whose
total base salary and bonus exceeded $100,000 for the fiscal year ended December
31, 2001 (collectively, the "Named Executive Officers").



ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------------------------------------
SHARES RESTRICTED
UNDERLYING STOCK
OPTIONS AWARDS
NAME & PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) ($) (3) OTHER ($) (5)
---- ---------- --------- --- ------- -------------

Scott H. Rechler......................... 2002 -- -- -- -- --
Chief Executive Officer and President 2001 -- -- -- -- --
2000 -- -- -- -- --

James D. Burnham......................... 2002 9,615 281,250 -- -- --
Chief Financial Officer and Treasurer 2001 218,374 278,667 -- -- --
2000 163,543 82,500 56,667 -- --

Jeffrey D. Neumann (1)................... 2002 -- -- -- -- --
Former Executive Vice President and 2001 198,600 187,500 -- -- 300,000 (6)
Chief Investment Officer 2000 300,000 225,000 -- -- --

Eileen Serra............................. 2002 -- -- -- -- --
Former Executive Vice President and ..... 2001 87.692 75,000 -- -- 200,000 (6)
Chief Operating Officer 2000 72,692 73,600 325,000 -- --




III-2


1. Mr. Neumann ceased to be employed by the Company on June 29, 2001. Salary
for 2001 represents the pro rata portion of his annual salary of $300,000.

2. Ms. Serra joined the Company in September 2000 and ceased to be employed by
the Company on April 6, 2001. Salary for 2001 and 2000 represents the pro
rata portion of her annual salary of $300,000.

3. Through December 31, 2001, the aggregate number of shares of restricted
common stock granted to the Named Executive Officers totaled 305,000 shares
for an aggregate dollar value of $33,550, based on the closing price of the
common stock on December 31, 2001.

4. Represents an award of 50,000 shares (with respect to Mr. Rechler) and
30,000 shares (with respect to Mr. Neumann) of restricted common stock of
the Company at a price of $24.875 per share, the closing price on the date
of grant.

5. Excludes (i) loan forgiveness in fiscal 2000 to Mr. Rechler in the amount
of $537,542, pursuant to the terms of tax loans issued to Mr. Rechler
pursuant to the terms of restricted common stock awards granted for fiscal
1998; (ii) tax gross-up payments in fiscal 2001 to Mr. Neumann in the
amount of $1,109,673 relating to the forgiveness of a loan under the
Company's long-term incentive plan; and (iii) tax gross-up payments in
fiscal 2000 to Mr. Rechler in the amount of $1,511,496 pursuant to the
terms of restricted stock awards granted for fiscal 1998 and 1999.

6. Represents a payment pursuant to the terms of a severance agreement with
the Company.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND AGGREGATED FISCAL YEAR-END
2001 OPTION VALUES

The following table sets forth the value of options held at the end of 2001 by
the Named Executive Officers and information concerning each exercise of stock
options by the Named Executive Officers during the 2001 fiscal year.



NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR END (#) FISCAL YEAR END ($)
-------------------------------------------------------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------ ------------ ----------- ------------- ----------- -------------

Scott H. Rechler -- -- 841,151 166,667
James D. Burnham -- -- -- -- -- --
Jeffery D. Neuman -- -- -- -- -- --
Eileen Serra -- -- -- -- -- --



Director Compensation. Each of the independent directors of the Company receives
an annual director's fee of $7,500. Each independent director also receives $500
for each regular quarterly meeting of the Board of directors attended, $500 for
each special meeting of the Board of Directors attended, $500 for each special
telephonic meeting of the Board of Directors participated in and $500 for each
committee meeting attended. Each independent director appointed or elected for
the first time receives an initial option to purchase 20,000 shares of common
stock at the market price of the common stock on the date of grant. In addition,
following his or her first year of appointment, each of the Company's
independent directors who is serving as a director of the Company in the fifth
business day following each annual meeting of stockholders receives an option to
purchase 10,000 shares of common stock at the market price of the common stock
on the date of grant. All options granted to independent directors vest on the
date of grant. In February 2001, the Board of Directors approved the grant of
10,000 shares of common stock to each of the Company's independent directors;
these grants were later rescinded. During 2001, the Company formed a Special
Committee of the Board of Directors comprised solely of the independent
directors to monitor conflicts with Reckson Associates. In September 2001, each
independent director received a fee of $25,000 for his service on the Special
Committee.



III-3


REPORT ON EXECUTIVE COMPENSATION

Since the Company's restructuring in October 2000, the full Board of Directors
has maintained oversight for compensation at the Company in lieu of the
Company's Compensation Committee.

Executive Compensation. The Company's executive compensation consists primarily
of an annual salary and cash bonuses. Long-term equity-based compensation was
formerly part of executive compensation.

The annual base salaries of the Company's executive officers are set at levels
designed to retain the limited number of individuals who are currently employed
by the Company. Mr. Burnham received no salary from the Company in 2002. Mr.
Rechler has not received an annual salary from the Company since the inception
of the Company.

In determining compensation levels for 2002, the Board of Directors took into
consideration the Company's need to retain its two executive officers and the
financial condition of the Company.

Chief Executive Officer. The Board of Directors determined the 2002 compensation
of Mr. Rechler in accordance with the above discussion. For fiscal 2002, Mr.
Rechler did not receive any salary or bonus from the Company.

Tax Deductibility of Executive Compensation. Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), limits the deductibility on the
Company's federal tax return of compensation over $1 million to any of the Named
Executive Officers of the Company unless, in general, the compensation is paid
pursuant to a plan which is performance-related and non-discretionary and has
been approved by the Company's stockholders. The Compensation Committee's policy
with respect to section 162(m) is to make every reasonable effort to ensure that
compensation is deductible to the extent permitted while simultaneously
providing Company executives with appropriate compensation for their
performance. The Company did not pay any compensation during 2001 that it
believes will be subject to the limitations set forth in section 162(m).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of the Company's common
stock for (i) the Named Executive Officers and directors of the Company, (ii)
each stockholder of the Company holding more than a 5% beneficial interest in
the Company and (iii) directors and executive officers of the Company as a
group.




NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL (2)
- ------------------------ ---------------- --------------------

Scott H. Rechler 2,328,883(3) 6.23%
James D. Burnham -- --
Jeffery D. Neuman -- --
Eileen Serra -- --
Paul Amoruso 41,980(4) --
Sidney Braginsky 35,000(5) --
Ronald Cooper 45,000(6) --
Douglas Sgarro 35,000(5) --
Cohen & Steers Capital Management, Inc 4,634,500(7) 12.41%
JAH Realties, L.P., JLH Realty Management Service, Inc., Veritech 2,672,295(8) 7.15%
Ventures LLC and Jon L. Halpern
Morgan Stanley Dean Witter & Co. and Morgan Stanley Investment 4,408,695(9) 11.80%
Management Inc
All directors and executive officers as a group (6 persons) 2,485,863 6.65%



* Less than one percent.


III-4


1) All information has been determined as of March 18, 2003. For purposes of
this table a person is deemed to have "beneficial ownership" of the number of
shares of common stock that person has the right to acquire pursuant to the
exercise of stock options within 60 days.

(2) For purposes of computing the percentage of outstanding shares of common
stock held by each person, any shares of common stock which such person has the
right to acquire pursuant to the exercise of a stock option exercisable within
60 days is deemed to be outstanding, but is not deemed to be outstanding for the
purposes of computing the percent ownership of any other person.

(3) Represents (a) 1,376,789 shares of common stock owned directly, (b) 4,715
shares of common stock owned through trusts, (c) 22,895 shares of common stock
owned through corporations and partnerships and (d) options to purchase 924,484
shares of common stock.

(4) Represents (a) 6,480 shares of common stock owned directly and (b) options
to purchase 35,500 shares of common stock.

(5) Represents options to purchase 35,000 shares of common stock.

(6) Represents (a) 10,000 shares of common stock owned directly and (b) options
to purchase 35,000 shares of common stock.

(7) This information is based upon information reported by the stockholder in
filings made with the Commission. The address of Cohen & Steers Capital
Management, Inc. is 757 Third Avenue, New York, New York 10017.

(8) This information is based upon information reported by the stockholder in
filings with the Commission. JAH Realties, L.P. ("JAH L.P.") beneficially owns
2,671,093 shares of common stock of the Company, JLH Realty Management Service,
Inc. ("JLH Inc.") beneficially owns 2,671,335 shares of common stock of the
Company, Veritech Ventures LLC ("Veritech") beneficially owns 1,731,597 shares
of common stock of the Company and Jon L. Halpern beneficially owns 2,672,295
shares of common stock of the Company. Mr. Halpern is the sole stockholder of
JLH Inc. JLH Inc. is the general partner of JAH L.P. JAH L.P. is the managing
member of Veritech. The address of each of Mr. Halpern, JLH Inc., JAH L.P. and
Veritech is c/o JAH Realties, L.P., 2 Manhattanville Road, Suite 205, Purchase,
New York 10577.

(9) This information is based upon information reported by the stockholder in
filings made with the Commission. Morgan Stanley Dean Witter & Co. ("MSDW")
beneficially owns 4,408,695 shares of common stock of the Company, of which
Morgan Stanley Investment Management Inc. ("MSIM") beneficially owns 4,405,100
shares of common stock of the Company. The address of MSDW is 1585 Broadway, New
York, New York 10036. The address of MSIM is 1221 Avenue of the Americas, New
York, New York 10020.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Scott H. Rechler, a Director and Officer of FrontLine, serves as an officer and
Director of Reckson Associates, and owns approximately 1.52% of Reckson
Associates' outstanding shares of common stock (assuming the exercise of vested
stock options and the exchange of partnership units in Reckson Operating
Partnership, L.P. ("Reckson Operating Partnership") for shares of common stock
of Reckson Associates) as of March 25, 2002.

The Company has a credit facility with Reckson in the amount of $100 million
(the "FrontLine Facility"). Additionally, Reckson Strategic Venture Partners,
LLC ("Reckson Strategic") has a $100 million facility (the "Reckson Strategic
Facility") with Reckson to fund Reckson Strategic investments. Note 15 to the
consolidated financial statements summarizes the terms of the FrontLine Facility
and Reckson Strategic Facility (collectively, the "Credit Facilities"). The
Company had $93.4 million outstanding under the FrontLine Facility at December
31, 2002, and due to outstanding letters of credit and accrued interest, has no


III-5


remaining availability. The Company had $49.3 million outstanding under the
Reckson Strategic Facility at December 31, 2002. These borrowings were utilized
to fund Reckson Strategic investments and its general operations. As long as
there are outstanding amounts under the Credit Facilities, the Company is
prohibited from paying dividends on shares of its common stock or, subject to
certain exceptions, incurring additional debt. The Credit Facilities are subject
to certain other covenants and prohibit advances thereunder to the extent the
advances could, in Reckson's determination, endanger the status of Reckson
Associates as a REIT. Under the Credit Facilities, additional indebtedness may
be incurred by the Company's subsidiaries. The Credit Facilities also contain
covenants prohibiting the Company from entering into any merger, consolidation
or similar transaction and from selling all or any substantial part of its
assets, or allowing any subsidiary to do so, unless approved by the lender. The
Credit Facilities also provide for defaults thereunder in the event debt is
accelerated under another of FrontLine's financing agreements. On March 28,
2001, the Company's Board of Directors approved amendments to the Credit
Facilities pursuant to which (i) interest is payable only at maturity and (ii)
Reckson Associates may transfer all or any portion of its rights or obligations
under the Credit Facilities to its affiliates. These changes were requested by
Reckson as a result of changes in REIT tax laws. In addition, the Reckson
Strategic Facility was amended to increase the amount available thereunder to up
to $110 million (from $100 million).

FrontLine and Reckson Operating Partnership entered into an intercompany
agreement (the "Reckson Intercompany Agreement") to formalize their relationship
at the time of the spin-off of FrontLine and to limit conflicts of interest.
Under the Reckson Intercompany Agreement, among other provisions, (i) FrontLine
granted Reckson Operating Partnership a right of first opportunity to make any
REIT-qualified investment that becomes available to FrontLine and (ii) Reckson
Operating Partnership granted FrontLine a right to (a) provide Reckson Operating
Partnership and its tenants with commercial services for occupants of office,
industrial and other property types and (b) become the lessee of any real
property acquired by Reckson Operating Partnership if Reckson Operating
Partnership determines that, consistent with the Company's status as a REIT, it
is required to enter into a "master" lease agreement.

In order to provide some liquidity in respect of the interests granted under the
Company's long-term incentive plan ("LTIP"), in April 2000 the Company made
advances in the amount of $1 million to Scott H. Rechler (the "Loan"). The Loan
bears interest at a rate of 6.6% per year and has a seven year maturity. The
principal amount of the Loan, together with accrued interest, is forgiven upon
maturity, provided Mr. Rechler is still employed by the Company. In addition,
the Loan is forgiven upon a change-in-control of the Company, the death or
permanent disability of Mr. Rechler or a reduction in the nature or scope of his
duties. Mr. Rechler is also entitled to a payment upon forgiveness of the Loan
in an amount equal to his tax liability resulting from such forgiveness.

The Company leases its office space from HQ for its executive office located at
405 Lexington Avenue, New York, New York. for less than $1,000 per month.
FrontLine and Reckson Strategic reimburse Reckson Operating Partnership for
certain general and administrative expenses (including payroll expenses)
incurred by Reckson Operating Partnership for their benefit. During 2001,
FrontLine and Reckson Strategic reimbursed Reckson Operating Partnership
approximately $100,000 for such expenses, but none in 2002.

HQ believes that the terms and pricing of each of the following transactions
with related parties are similar to those negotiated at arms length. Certain
officers and members of HQ's Board of Directors are also officers and/or on the
board of directors of FrontLine, Reckson Associates Realty Corp. ("Reckson
Associates"), Equity Office Properties ("EOP") or CarrAmerica.

HQ is a tenant under several leases with Reckson Associates and affiliates. For
the twelve months ended December 31, 2002, HQ made payments of $3.4 million for
rent, construction and other charges under such leases.

HQ is a tenant under several leases with EOP and affiliates of EOP, which are
affiliated with EOP Operating Limited Partnership, a purchaser of HQ's Series A
Preferred Stock in conjunction with the HQ Merger. For the twelve months ended
December 31, 2002, HQ made payments of $18.3 million for rent and other charges
under such leases.



III-6


HQ is a tenant under several leases with CarrAmerica and affiliates of
CarrAmerica, who received shares of HQ's Voting Common Stock and Nonvoting
Common Stock in conjunction with the HQ Merger. For the twelve months ended
December 31, 2002, HQ made payments of $2.7 million for rent and other charges
under such leases.

In April 2000, the Company entered into an office lease which expires in
December 2010. In January 2001, the Company assigned the lease to HQ. The lease
assignment did not relieve the Company of any of its obligations under the terms
of this lease. At December 31, 2002, HQ was past due on $3.2 million of rent.
The landlord has drawn the full letter on credit of $2.8 million. Of the $57.6
million HQ restructuring charge recorded in 2001, a $4.8 million accrual
applicable to this lease was recorded as an estimate for the cost of terminating
this lease. If the ultimate cost of terminating this lease exceeds the
outstanding letter of credit, then additional cash may need to be paid by either
HQ or the Company. Since HQ is currently in bankruptcy, the landlord is likely
to seek to recover any further damages from FrontLine. As of December 31, 2002,
the remaining lease commitment was $24.0 million.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Registrant's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Registrant's disclosure
controls and procedures (as defined in Rule 13a-14 and 15d-14 under the
Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that those disclosure
controls and procedures were adequate to ensure that information required to be
disclosed by the Registrant in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms. There were no significant
changes in the Registrant's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.



III-7



PART IV

ITEM 15. FINANCIAL STATEMENTS AND SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K

(a) (1 and 2) Financial Statements and Schedules

The following consolidated financial information is included as a separate
section of this annual report on Form 10-K:



PAGE
----

Report of Independent Auditors....................................... IV-44
Consolidated Balance Sheets as of December 31, 2002 and 2001......... IV-45
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000.................................. IV-46
Consolidated Statements of Shareholders' (Deficiency) Equity for the
years ended December 31, 2002, 2001 and 2000...................... IV-47
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.................................. IV-48
Notes to Consolidated Financial Statements........................... IV-49



All schedules are omitted since the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the financial statements and notes thereto.



IV-1



(a) (3) Exhibits



Exhibit Filing
Number Reference Description
- ------ --------- -----------

3.1 4 First Amended and Restated Certificate of Incorporation
3.2 8 Amended and Restated By-Laws of Registrant
4.1 9 Specimen Common Stock Share Certificate
4.2 17 Form of Series A Preferred Stock Certificate
4.3 13 Form of Series B Preferred Stock Certificate (included in Exhibit 4.5)
4.4 17 Certificate of Designations establishing the Company's Series A Convertible Cumulative
Preferred Stock
4.5 13 Certificate of Designations establishing the Company's Series B Convertible Cumulative
Preferred Stock
4.6 12 Rights Agreement, dated as of October 19, 2000, between the Company and American Stock
Transfer & Trust Company, which includes as Exhibit B thereto, the Form of Rights
Certificates
4.7 8 Warrant, dated December 7, 1999, to purchase 100,000 shares of common stock
4.8 8 Warrant, dated December 7, 1999, to purchase 100,000 shares of common stock
4.9 17 Warrant, dated June 29, 2000, to purchase 1,000,000 shares of common stock
4.10 17 Warrant, dated June 29, 2000, to purchase 450,000 shares of common stock
4.11 17 Warrant, dated June 29, 2000, to purchase 50,000 shares of common stock
4.12 17 Form of Warrant for the Company's outstanding public warrants
10.1 8 Amended and Restated Credit Agreement between Reckson Operating Partnership, L.P. ("ROP")
and the Company relating to the operations of Reckson Strategic Venture Partners, LLC,
dated August 4, 1999
10.2 8 Amended and Restated Credit Agreement between ROP and the Company relating to the
operations of the Company, dated August 4, 1999
10.3 10 Amendment to the Amended and Restated Credit Agreements between ROP and the Company, dated
November 30, 1999
10.4 17 Second Amendment to the Amended and Restated Credit Agreements between ROP and the Company
10.5 12 Amended and Restated Revolving Line of Credit Agreement together with the Amended and
Restated Revolving Promissory Note, each dated September 11, 2000, among the Company and
Bankers Trust Company
10.6 18 Letter Amendment, dated as of June 30, 2001, to the Amended and Restated Revolving Line of
Credit Agreement, dated September 11, 2000, between the Company and Bankers Trust Company.
10.7 12 Equity Interest Pledge and Security Agreement, dated as of May 31, 2000, between the
Company and Bankers Trust Company
10.8 12 Confirmation and Amendment of Equity Interest Pledge and Security Agreement, dated as of
September 11, 2000
10.9 13 Securities Purchase Agreement, dated as of December 13, 2000, by and between the Company
and Deutsche Bank Sharps Pixley Inc.
10.10 13 Registration Rights Agreement, dated as of December 13, 2000, by and between the Company
and Deutsche Bank Sharps Pixley Inc.
10.11 4 Intercompany Agreement, between the Company and ROP, dated May 13, 1998
10.12 1 1998 Stock Option Plan
10.13 4 1998 Employee Stock Option Plan
10.14 6 1999 Stock Option Plan
10.15 8 2000 Employee Stock Option Plan
10.16 17 Long-Term Incentive Plan
10.17 1 Employment Agreement of Steven H. Shepsman
10.18 1 Employment Agreement of Seth B. Lipsay
10.19 4 Limited Liability Company Agreement of Interoffice Superholdings, LLC
10.20 1 Limited Liability Company Agreement of OnSite Ventures, LLC
10.21 1 Limited Liability Company Agreement of RSVP Holdings, LLC
10.22 1 Operating Agreement of Reckson Strategic Venture Partners, LLC ("RSVP")
10.23 1 Supplemental Agreement to Operating Agreement of RSVP




IV-2





10.24 2 Operating Agreement of Dominion Venture Group LLC
10.25 5 Investor Rights Agreement, by and among OnSite Access, Inc. and certain investors and
individuals within management
10.26 5 Voting Agreement, by and among OnSite Access, Inc. and certain investors
10.27 5 Purchase Agreement regarding Series B, Series C and Series D Preferred Stock of OnSite
Access, Inc.
10.28 5 Certificate of Designation of Series A, Series B, Series C and Series D Preferred Stock of
OnSite Access, Inc.
10.29 14 Letter Agreement, dated as of September 29, 1999, among the Company, RSI I/O Holdings,
Inc., RSI-OnSite Holdings LLC, RSI-OSA Holdings, Inc., JAH Realties, L.P., Veritech
Ventures LLC and JAH I/O LLC
10.30 14 Letter of Amendment to Letter Agreement, dated as of September 23, 1999, among the
Company, RSI I/O Holdings, Inc., RSI-OnSite Holdings LLC, RSI-OSA Holdings, Inc., JAH
Realties, L.P., Veritech Ventures LLC and JAH I/O LLC
10.31 15 Agreement and Plan of Merger by and among HQ Global Workplaces, Inc. and CarrAmerica
Realty Corporation and VANTAS Incorporated and the Company, dated as of January 20, 2000
10.32 15 Stock Purchase Agreement between CarrAmerica Realty Corporation and the Company, dated as
of January 20, 2000
10.33 15 Stock Purchase Agreement among CarrAmerica Realty Corporation, OmniOffices (UK) Limited
and OmniOffices (Lux) 1929 Holding Company S.A. and VANTAS Incorporated and the Company,
dated as of January 20, 2000
10.34 8 Subscription Agreement, dated as of February 7, 2000 between the Company and VANTAS
Incorporated
10.35 16 First Amendment to Agreement and Plan of Merger by and among VANTAS Incorporated and the
Company, on the one hand, and HQ Global Workplaces, Inc. and CarrAmerica Realty
Corporation, on the other hand.
10.36 16 First Amendment to the Stock Purchase Agreement by and between CarrAmerica Realty
Corporation and the Company
10.37 16 First Amendment to the Stock Purchase Agreement by and between CarrAmerica Realty
Corporation, OmniOffices (UK) Limited, OmniOffices (Lux) 1929 Holding Company S.A., VANTAS
Incorporated and the Company
10.38 11 Second Amendment to the Agreement and Plan of Merger by and among VANTAS Incorporated and
the Company, on the one hand, and HQ Global Workplaces, Inc. and CarrAmerica Realty
Corporation, on the other hand, dated as of May 31, 2000
10.39 11 Stockholders Agreement by and among the Company, HQ Global Workplaces, Inc., CarrAmerica
Realty Corporation and the other parties named therein, dated as of June 1, 2000
10.40 11 Registration Rights Agreement by and among the Company and CarrAmerica Realty Corporation,
dated as of June 1, 2000
10.41 11 Agreement and Plan of Merger by and among HQ Global Workplaces, Inc., HQ Global Holdings,
Inc. and HQ Merger Subsidiary, Inc., dated as of June 1, 2000
10.42 11 Exchange Agreement by and between the Company and HQ Global Holdings, Inc., dated as of
May 31, 2000
10.43 11 Indemnification and Escrow Agreement by and among the Company, CarrAmerica Realty
Corporation and the other parties named therein, dated as of June 1, 2000
10.44 11 Purchase Agreement by and among the Company, HQ Global Holdings, Inc. and EOP Operating
Limited Partnership, dated as of May 31, 2000
10.45 11 Purchase Agreement by and among the Company and Fortress HQ LLC, dated as of May 31, 2000
10.46 11 Purchase Agreement by and among the Company and Stichting Pensioenfonds ABP, dated as of
May 31, 2000
10.47 11 Purchase Agreement by and among the Company and First Union Real Estate Equity and
Mortgage Investments, dated as of May 31, 2000
10.48 11 Purchase Agreement by and among the Company and CIBC WMC Inc., dated as of May 31, 2000
10.49 11 Purchase Agreement by and among the Company and CIBC Employee Private Equity Fund
Partners, dated as of May 31, 2000
10.50 11 Purchase Agreement by and among the Company and AEW Targeted Securities Fund, L.P., dated
as of May 31, 2000



IV-3





10.51 11 Purchase Agreement by and among the Company and AEW Targeted Securities Fund II, L.P.,
dated as of May 31, 2000
10.52 11 Purchase Agreement by and among the Company and Blackacre Capital Partners, L.P., dated as
of May 31, 2000
10.53 11 Purchase Agreement by and among the Company and Paribas North America, Inc., dated as of
May 31, 2000
10.54 11 Stockholders Agreement by and among the Company, HQ Global Holdings, Inc. and certain
holders of Series A Preferred Stock of HQ Global Holdings, Inc. named therein, dated as of
May 31, 2000
10.55 11 Registration Rights Agreement by and between HQ Global Holdings, Inc. and the investors
named therein, dated as of May 31, 2000
10.56 8 Amended and Restated Credit Agreement among VANTAS, Various Banks, and Paribas, as agent,
dated as of January 16, 1997, as amended and restated as of November 6, 1998 and August 3, 1999
10.57 18 Amended and Restated Credit Agreement, dated May 31, 2000, among HQ Global Holdings, Inc.,
VANTAS Incorporated, Various Banks, ING Capital (U.S.) LLC, Bankers Trust Company,
Citicorp Real Estate, Inc. and BNP Paribas.
10.58 18 Second Amendment and Waiver, dated as of March 26, 2001, among HQ Global Holdings, Inc.,
HQ Global Workplaces, Inc., Various Banks, ING Capital (U.S.) LLC, Bankers Trust Company,
Citicorp Real Estate, Inc. and BNP Paribas.
10.59 18 Third Amendment and Agreement, dated as of June 29, 2001, among HQ Global Holdings, Inc.,
HQ Global Workplaces, Inc., Various Banks, ING Capital (U.S.) LLC, Bankers Trust Company,
Citicorp Real Estate, Inc. and BNP Paribas.
10.60 19 Forbearance Agreement, dated as of October 1, 2001, among HQ Global Holdings, Inc., a
Delaware corporation, HQ Global Workplaces, Inc., a Delaware corporation, the Subsidiary
Guarantors party thereto, certain Banks party to the Credit Agreement referred to therein,
ING (U.S.) Capital LLC, as managing agent, Bankers Trust Company, as syndication agent and
co-arranger, Citicorp Real Estate, Inc., as documentation agent and co-arranger, and BNP
Paribas, as administrative agent, collateral agent and arranger
10.61 20 Second Amendment to Forbearance Agreement by and among HQ Global Holdings, Inc., HQ Global
Workplaces, Inc., the Subsidiary Guarantors party thereto, certain Banks party to the
Credit Agreement referred to therein, BNP Paribas, Bankers Trust Company, Citicorp Real
Estate, Inc. and ING (U.S.) Capital LLC
10.62 18 Note and Warrant Purchase Agreement, dated as of August 11, 2000, between HQ Global
Workplaces, Inc., HQ Global Holdings, Inc. and Chase Equity Associates, L.P., CT Mezzanine
Partners I LLC, ARES Leveraged Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P., Highbridge International LLC, Blackstone Mezzanine Partners L.P. and Blackstone
Mezzanine Holdings.
10.63 18 Second Amendment, Agreement and Waiver to Note and Warrant Purchase Agreement, dated as of
June 29, 2001, by and among HQ Global Holdings, Inc., HQ Global Workplaces, Inc., J.P.
Morgan Partners (BHCA) , L.P. (formerly Chase Equity Associates, L.P.), CT Mezzanine
Partners I LLC, Ares Leveraged Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P., Highbridge International LLC, Blackstone Mezzanine Partners L.P. and Blackstone
Mezzanine Holdings L.P.
10.64 20 Forbearance Agreement and Waiver by and among HQ Global Workplaces, Inc., HQ Global
Holdings, Inc., J.P. Morgan Partners (BHCA), L.P., CT Mezzanine Partners I LLC, Ares
Leveraged Investment Fund, L.P., Ares Leveraged Investment Fund II, L.P., Highbridge
International LLC, Blackstone Mezzanine Partners L.P. and Blackstone Mezzanine Holdings L.P.
10.65 7 Warrant Registration Rights Agreement, dated December 7, 1999, by and among Reckson
Service Industries, Inc., Elliot S. Cooperstone and H. Thach Pham
10.66 18 Certificate of Designations establishing the rights and preferences of Series A Preferred
Stock of HQ Global Holdings, Inc.
10.67 18 Certificate of Designations establishing the rights and preferences of Series B Preferred
Stock of HQ Global Holdings, Inc.
21.0 Statement of Subsidiaries
24.0 Powers of Attorney (included in Part IV of this Form 10-K)
- -----------------



IV-4


(1) Previously filed as an exhibit to Registration Statement on Form S-1
(No.333-44419) and incorporated herein by reference.

(2) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on September 11, 1998 and incorporated herein by reference.

(3) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on January 25, 1999 and incorporated herein by reference.

(4) Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on March 31, 1999 and incorporated herein by reference.

(5) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on July 16, 1999 and incorporated herein by reference.

(6) Previously filed as an exhibit to Registration Statement on Form S-8 filed
with the SEC on July 29, 1999 and incorporated herein by reference.

(7) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on March 28, 2000 and incorporated herein by reference.

(8) Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on March 29, 2000 and incorporated herein by reference.

(9) Previously filed as an exhibit to Registration Statement on Form S-3
(No.333-34246) and incorporated herein by reference.

(10) Previously filed as an exhibit to the Company's Form 10-Q filed with the
SEC on May 15, 2000 and incorporated herein by reference.

(11) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on June 16, 2000 and incorporated herein by reference.

(12) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on October 24, 2000 and incorporated herein by reference.

(13) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on December 15, 2000 and incorporated herein by reference.

(14) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on September 1, 1999 and incorporated herein by reference.

(15) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on December 13, 1999 and incorporated herein by reference.

(16) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on May 12, 2000 and incorporated herein by reference.

(17) Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on April 2, 2001 and incorporated herein by reference.

(18) Previously filed as an exhibit to the Company's Form 10-Q filed with the
SEC on August 14, 2001 and incorporated herein by reference.

(19) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on November 5, 2001 and incorporated herein by reference.

(20) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on January 30, 2002 and incorporated herein by reference.


IV-5



(B) REPORTS ON FORM 8-K

During the three months ended December 31, 2002, the Registrant filed
the following reports:

(i) On November 19, 2002, the Registrant submitted a Quarterly Report
on Form 10-Q to report financial results for the quarter ended September 30,
2002.



IV-6


REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
FrontLine Capital Group

We have audited the accompanying consolidated balance sheets of FrontLine
Capital Group and Subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, shareholders' (deficiency) equity, and
cash flows for each of the three years in the period ended December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FrontLine Capital
Group and Subsidiaries at December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming
that FrontLine Capital Group will continue as a going concern. As more fully
described in Note 1, on June 12, 2002 and March 13, 2002, respectively, the
Company and its principal subsidiary HQ Global Holdings, Inc. and certain of its
affiliates filed voluntary petitions for relief under Chapter 11 of Title 11 of
the United States Bankruptcy code. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.

ERNST & YOUNG LLP

New York, New York
February 28, 2003, except for the information
related to the proposed restructuring included
in Note 1 as to which the date is March 31, 2003



IV-7




FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)



DECEMBER 31,
----------------------------
2002 2001
----------- -----------

ASSETS:
Current Assets:
Cash and cash equivalents ................................................. $ 10,311 $ 18,139
Restricted cash ........................................................... 1,044 878
Accounts receivable, net of allowance for doubtful accounts of
$1,874 and $2,492 at December 31, 2002 and 2001,
respectively (Note 2) ............................................... 4,007 6,865
Other current assets ...................................................... 14,370 4,502
----------- -----------
Total Current Assets .................................................. 29,732 30,384
Ownership interests in and advances to unconsolidated
companies (Note 4) ..................................................... 12,322 13,396
Property and equipment, net (Note 5) ........................................... 122,582 168,486
Deferred financing costs, net .................................................. 7,616 40,274
Net assets from discontinued operations (Note 3) ............................... -- 5,500
Other assets, net .............................................................. 18,798 22,728
----------- -----------
Total Assets .......................................................... $ 191,050 $ 280,768
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY:
Current Liabilities:
Liabilities subject to compromise:
Accounts payable and accrued expenses ..................................... $ 50,073 $ 39,087
Accrued restructuring costs ............................................... 62,818 49,674
Unsecured debt ............................................................ 125,000 125,000
Credit facilities with related parties .................................... 189,464 176,909
Notes payable ............................................................. 25,000 25,000
Other liabilities ......................................................... 2,178 3,111
----------- -----------
Total liabilities subject to compromise ............................... 454,533 418,781
Liabilities not subject to compromise:
Accounts payable and accrued expenses ..................................... 46,096 21,089
Accrued restructuring costs ............................................... 1,029 1,893
Accrued reorganization costs .............................................. 3,440 --
Secured debt .............................................................. 227,433 216,506
Deferred rent payable ..................................................... 43,732 52,448
Other liabilities ......................................................... 31,724 41,526
----------- -----------
Total liabilities not subject to compromise ........................... 353,454 333,462
----------- -----------
Total current liabilities ............................................. 807,987 752,243
Other liabilities not subject to compromise .................................... 5,051 7,890
----------- -----------
Total Liabilities ..................................................... 813,038 760,133

Redeemable convertible preferred stock (aggregate liquidation preference $25,000
at December 31, 2002 and December 31, 2001)
(Note 9) .................................................................. 26,840 25,325

Shareholders' Deficiency (Note 10):

8.875% convertible cumulative preferred stock, $.01 par value,
25,000,000 shares authorized, 26,000 issued and
outstanding, at December 31, 2002 and 2 -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
37,344,039 shares issued and outstanding at
December 31, 2002 and 2001 .............................................. 373 373
Additional paid-in capital ................................................ 398,598 400,793
Accumulated deficit ....................................................... (1,047,799) (905,856)
----------- -----------
Total Shareholders' Deficiency ........................................ (648,828) (504,690)
----------- -----------
Total Liabilities and Shareholders' Deficiency ........................ $ 191,050 $ 280,768
=========== ===========




See accompanying notes to consolidated financial statements.


IV-8



FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)



YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000
---- ---- ----

HQ Operating Revenues:
Workstation revenue ......................................... $ 211,646 $ 310,520 $ 279,561
Support services ............................................ 116,379 160,187 175,929
------------ ------------ ------------
Total HQ Operating Revenues ............................... 328,025 470,707 455,490
------------ ------------ ------------

HQ Operating Expenses:
Rent ........................................................ 182,403 219,826 170,334
Support services ............................................ 37,680 58,055 53,610
Center general and administrative ........................... 69,023 107,641 93,263
General and administrative ................................. 36,846 60,831 50,436
------------ ------------ ------------
Total HQ Operating Expenses ............................... 325,952 446,353 367,643
------------ ------------ ------------

HQ Operating Income ....................................... 2,073 24,354 87,847
------------ ------------ ------------

HQ Other Expenses:
Impairment of assets ........................................ (764) (561,196) --
Depreciation and amortization (Note 2) ...................... (40,055) (70,102) (51,368)
Restructuring costs ......................................... (29,372) (57,553) --
Reorganization costs ........................................ (33,186) -- --
Interest expense, net ....................................... (27,244) (44,387) (32,303)
Merger and integration costs (Note 12) ...................... -- -- (24,701)
------------ ------------ ------------

HQ Loss from Continuing Operations ........................ (128,548) (708,884) (20,525)

Parent Expenses:
General and administrative expenses ......................... (2,241) (3,915) (16,478)
Amortization of deferred charges ............................ -- (2,274) (14,330)
Reorganization costs ........................................ (188) -- --
Restructuring costs (Note 13) ............................... (438) (11,490) (12,788)
Interest expense, net ....................................... (12,690) (22,389) (18,903)
Depreciation and amortization ............................... -- -- (1,123)
Development stage company costs ............................ -- -- (9,999)
------------ ------------ ------------

Loss from continuing operations before income taxes,
minority interest and equity in net loss and impairment
of unconsolidated companies ............................. (144,105) (748,952) (94,146)

Provision for income taxes (Note 8) ............................ -- (792) (3,439)
Minority interest .............................................. -- 305,984 (7,688)
Gain on sale of assets ......................................... 138 -- --
Equity in net loss and impairment of unconsolidated companies
(Note 4) .................................................... (1,407) (36,448) (125,928)
------------ ------------ ------------
Loss before discontinued operations and extraordinary item
from early extinguishment of debt ......................... (145,374) (480,208) (231,201)
Income (loss) from discontinued operations (Note 3) ............ 3,431 (144,618) 1,071
------------ ------------ ------------

Loss before extraordinary item from early extinguishment of
debt .................................................... (141,943) (624,826) (230,130)

Extraordinary item from early extinguishment of debt ........... -- -- (2,648)
------------ ------------ ------------

Net loss ................................................ (141,943) (624,826) (232,778)

Dividends on and accretion of preferred stock .................. (2,195) (5,582) (2,119)
------------ ------------ ------------

Net loss applicable to common shareholders ................ $ (144,138) $ (630,408) $ (234,897)
============ ============ ============

Basic and diluted net loss per weighted average common share ... $ (3.86) $ (17.03) $ (6.73)
============ ============ ============

Basic and diluted weighted average common shares outstanding ... 37,344,039 37,009,891 34,880,709
============ ============ ============



See accompanying notes to consolidated financial statements.


IV-9



FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
(IN THOUSANDS)



ACCUMULATED TOTAL
ADDITIONAL OTHER SHAREHOLDERS'
COMMON PAID-IN ACCUMULATED COMPREHENSIVE (DEFICIENCY)
STOCK CAPITAL DEFICIT INCOME EQUITY
----------- ----------- ----------- ----------- -----------

Shareholders' equity, January 1,
2000 ............................... $ 307 $ 162,054 $ (48,252) $ -- $ 114,109
Issuance of common stock ........... 31 66,019 -- -- 66,050
Issuance of common stock and
warrants in a public offering, net
of costs of $6,667 ............... 26 115,920 -- -- 115,946
Issuance of preferred stock, net ... -- 24,459 -- -- 24,459
Proceeds from the exercise of
employee stock options ........... 2 1,163 -- -- 1,165
Issuance of warrants ............... -- 33,420 -- -- 33,420
Dividends on and accretion of
redeemable preferred stock ....... -- (2,119) -- -- (2,119)
Unrealized gain on marketable
equity securities................ -- -- -- 591 591
Net loss ............................ -- -- (232,778) -- (232,778)
----------- ----------- ----------- ----------- -----------
Shareholders' equity, December 31,
2000 ................................ 366 400,916 (281,030) 591 120,843
Proceeds from the exercise of
employee stock options ........... 7 1,615 -- -- 1,622
Dividends on and accretion of
redeemable preferred stock ....... -- (1,738) -- -- (1,738)
Unrealized gain on marketable
equity securities ............... -- -- -- (591) (591)
Net loss ........................... -- -- (624,826) -- (624,826)
----------- ----------- ----------- ----------- -----------
Shareholders' (deficiency) equity,
December 31, 2001..................... 373 400,793 (905,856) -- (504,690)
Dividends on and accretion of
redeemable preferred stock ....... -- (2,195) -- -- (2,195)
Net loss ........................... -- -- (141,943) -- (141,943)
----------- ----------- ----------- ----------- -----------
Shareholders' (deficiency) equity,
December 31, 2002..................... $ 373 $ 398,598 $(1,047,799) $ -- $ (648,828)
=========== =========== =========== =========== ===========




See accompanying notes to consolidated financial statements.



IV-10



FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)



YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
---- ---- ----

Cash Flows from Operating Activities:
Loss from continuing operations .................................. $(145,374) $(480,208) $(233,849)
Adjustments to reconcile loss from continuing operations to cash
provided by (used in) operating activities:
Depreciation and amortization ................................ 40,055 70,102 52,491
Impairment of assets ......................................... 764 561,196 --
Amortization of deferred financing costs ..................... 8,487 8,908 5,720
Extraordinary loss on early extinguishment of debt ........... -- -- 2,648
Equity in net loss and impairment of unconsolidated companies 1,407 36,448 125,928
Minority interest ............................................ -- (305,984) 7,688
Stock and related compensation ............................... 147 2,076 15,188
Non-cash restructuring costs ................................. 23,012 59,795 8,875
Non-cash reorganization costs ................................ 25,699 -- --
Changes in operating assets and liabilities:
Accounts receivable, net ................................... 2,859 25,123 (19,801)
Acquisition costs and other assets ......................... (8,506) 11,200 17,240
Deferred rent payable ...................................... 4,244 9,896 16,455
Accounts payable and accrued expenses ...................... 34,243 (3,374) (40,754)
Accrued restructuring costs ................................ (8,854) (6,094) --
Other liabilities .......................................... (635) 8,782 16,575
--------- --------- ---------
Net cash used in operating activities
from continuing operations ............................ (22,452) (2,134) (25,596)
Net cash provided by (used in) discontinued operations ... (6,236) 14,423 1,397
--------- --------- ---------
Net cash provided by (used in) operating activities ...... (28,688) 12,289 (24,199)
--------- --------- ---------
Cash Flows from Investing Activities:
Acquisitions of officing solutions centers, net of cash
Proceeds .................................................. -- -- (323,653)
Equipment .................................................... (5,623) (35,381) (60,741)
Restricted cash .............................................. (166) 4,890 22,866
Proceeds from sale of short-term investments ................. 1,010 20,918 --
Acquisition of ownership interests and advances to
unconsolidated companies ................................... (67) (10,426) (68,322)
--------- --------- ---------
Net cash used in continuing investing activities ............. (4,846) (19,999) (429,850)
Net cash provided by (used in) discontinued operations ....... 15,292 (12,011) (2,746)
--------- --------- ---------
Net cash provided by (used in) investing activities .......... 10,446 (32,010) (432,596)
--------- --------- ---------
Cash Flows from Financing Activities:
Issuance of common stock and warrants, net of costs .......... -- -- 156,957
Issuance of preferred stock and redeemable preferred
stock, net of costs ........................................ -- 10,000 38,510
Deferred financing costs ..................................... -- -- (27,161)
Net receipts in credit facilities with related parties ....... -- 6,538 13,675
Capital leases ............................................... (384) (1,984) (2,657)
Net receipts of secured credit facility and notes payable .... 10,927 3,581 55,615
Net proceeds from minority interest .......................... (129) (366) 208,193
Other, net ................................................... -- 426 588
--------- --------- ---------
Net cash provided by financing activities .................... 10,414 18,195 443,720
--------- --------- ---------
Cash and Cash Equivalents:
Net decrease ..................................................... (7,828) (1,526) (13,075)
Beginning of period .............................................. 18,139 19,665 32,740
--------- --------- ---------
End of period .................................................... $ 10,311 $ 18,139 $ 19,665
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest ....................................................... $ 24 $ 11,833 $ 58,245
========= ========= =========
Income taxes ................................................... $ -- $ 1,554 $ 1,499
========= ========= =========


See accompanying notes to consolidated financial statements.


IV-11



FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002

1. BASIS OF PRESENTATION

ORGANIZATION AND BUSINESS

FrontLine Capital Group ("FrontLine" or the "Company") is a holding company,
with two distinct operating segments: one holds FrontLine's interest in HQ
Global Workplaces, Inc., a company in the officing solutions market (see Note 3
for further discussion) and its predecessor companies ("HQ" or the "HQ Global
Segment"), and the other consists of FrontLine (parent company) ("FrontLine
Parent") and its interests in a group of companies (the "Parent and Other
Interests Segment") that provide a range of services. In October 2000, FrontLine
announced that it would focus its resources and capital on the businesses within
its existing portfolio and cease pursuing new investment activities.

FRONTLINE BANKRUPTCY PROCEEDING

On June 12, 2002, Frontline filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court"). The Company
remains in possession of its assets and properties, and continues to operate its
business and manage its property as a debtor-in-possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the United States Bankruptcy Code.

The deadline to file proofs of claims and interests expired on September 30,
2002. Frontline is currently in the process of reviewing and assessing the
claims and interests that have been filed, and intends to file objections, as
appropriate.

On November 14, 2002, the Bankruptcy Court issued an order, which, among other
things, extended the exclusive period during which only Frontline may file a
plan of reorganization through and including February 7, 2003. On March 24,
2003, the Bankruptcy Court issued an order which among other things, further
extended the exclusive period during which only Frontline may file a plan of
reorganization through and including June 6, 2003. The Company anticipates
proposing a plan of reorganization in accordance with the federal bankruptcy
laws as administered by the Bankruptcy Court prior to that date. Confirmation of
a Plan of reorganization could materially change the amounts currently recorded
in the financial statements. The financial statements do not give effect to any
adjustment to the carrying value of assets, or amounts and classifications of
liabilities that might be necessary as a consequence of this matter. The Company
has the exclusive right to propose a plan of reorganization through which period
may be extended further by the Bankruptcy Court.

By order dated March 31, 2003, the Bankruptcy Court also authorized Frontline
to, among other things, (a) perform its duties as a debtor-in-possession in
connection with a wholly-owned subsidiary that is a managing member of a limited
liability company, by negotiating and executing definitive documents consistent
with the transactions detailed in the term sheets regarding the proposed
restructuring of Reckson Strategic Venture Partners, LLC and with respect to New
World Realty, LLC annexed to such order (collectively, the "Transactions"), and
(b) to perform such actions and take all steps necessary to implement and
consummate such Transactions.

HQ GLOBAL BANKRUPTCY PROCEEDING

On March 13, 2002, HQ filed a voluntary petition for relief under Chapter 11 of
the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of
Delaware and received a commitment for $30 million in debtor-in-possession
financing. See Note 3.



IV-12


NOTES PAYABLE, CREDIT FACILITIES AND PREFERRED STOCK DEFAULTS

As of December 31, 2002, the Company has not paid certain principal and interest
due on the FrontLine Bank Credit Facility and both the FrontLine Bank Credit
Facility (Note 8) and the Credit Facilities with Reckson Operating Partnership,
L.P. ("Reckson") (Note 15) are in default. Additionally, the Company did not pay
the dividend that became payable on December 31, 2001 or any subsequent dividend
for the Redeemable Preferred Stock, and is in default under that agreement (Note
9).

The accompanying consolidated financial statements have been prepared on a going
concern basis of accounting and do not reflect any adjustments that might result
should the Company be unable to continue as a going concern. The Company's
inability to repay or refinance its indebtedness when due, and pay dividends on
its redeemable preferred stock, its recent losses from operations and the
related Chapter 11 proceedings of FrontLine and HQ raise concern about its
ability to continue as a going concern. The appropriateness of using the going
concern basis is dependent upon, among other things (i) confirmation of plans of
reorganization for FrontLine and HQ under the Bankruptcy Code, (ii) the ability
to achieve profitable operations after such confirmations and (iii) the ability
to generate sufficient cash from operations and through asset sales to meet its
obligations.

DELISTING BY NASDAQ

In March 2002, the Company's stock was delisted by Nasdaq as a direct result of
the HQ bankruptcy filing. The Company's common stock currently trades on the OTC
Bulletin Board under the symbol FLCGQOB.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements present the consolidated
financial position of the Company and its majority-owned subsidiaries. The
financial position, results of operations and cash flows of the HQ Global
Segment are presented in Note 3. The financial position, results of operations
and cash flows of the Parent and Other Interests Segment are summarized in Note
4. All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements.

The accompanying consolidated financial statements have been presented in
accordance with statement of Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code ("SOP 90-7"). In accordance with SOP
90-7, no interest has been accrued on unsecured debt, no dividends on preferred
stock have been accrued, unamortized premiums and debt issuance costs relating
to unsecured debt have been expensed, costs relating to the bankruptcy
proceeding and interest earned on accumulating cash resulting from the
bankruptcy proceeding and interest earned on accumulating cash resulting from
the bankruptcy proceeding have been reported as reorganization items in the
accompanying statement of operations, and liabilities subject to compromise have
been separately reported in the accompanying balance sheet.

ACCOUNTING FOR OWNERSHIP INTERESTS

The interests that FrontLine owns are accounted for under one of three methods:
consolidation, equity method and cost method. The applicable accounting method
is generally determined based on the Company's voting interest and rights in
each investee.

Consolidation. Entities in which the Company directly or indirectly owns more
than 50% of the outstanding voting securities or controls the board of directors
are generally accounted for under the consolidation method of accounting. Under
this method, an investee's results of operations are reflected within the
Company's Consolidated Statements of Operations. Participation of other
(non-FrontLine) shareholders in the earnings or losses of a consolidated company
is reflected in the caption "Minority interest" in the Company's Consolidated
Statements of Operations. Minority interest adjusts the Company's consolidated
results of operations to reflect only the Company's share of the earnings or
losses of the consolidated company.



IV-13


Equity Method. Investees whose results are not consolidated, but over whom the
Company exercises significant influence, are accounted for under the equity
method of accounting. Under the equity method of accounting, an investee's
accounts are not reflected within the Company's Consolidated Statements of
Operations; however, FrontLine's share of the earnings or losses of the investee
is reflected in the caption "Equity in net loss and impairment of unconsolidated
companies" in the accompanying Consolidated Statements of Operations.

Cost Method. Investees not accounted for under the consolidation or the equity
method of accounting, which are generally those in which the Company has less
than a 20% interest in the voting securities of the investee, are accounted for
under the cost method of accounting. Under this method, the Company's share of
the earnings or losses of such companies is not included in the Consolidated
Statements of Operations.

CASH AND CASH EQUIVALENTS

The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.

HQ's and FrontLine's cash balances are each held primarily at one financial
institution and exceed insurable amounts. The Company believes it mitigates its
risk by investing in or through a major financial institution.

MARKETABLE EQUITY SECURITIES

Available-for-sale marketable equity securities are reported at fair market
value, with the resulting net unrealized gain or loss reported within
shareholders' equity.

RECEIVABLES

HQ licenses office space and provides support services to clients in various
industries, ranging in size from small entrepreneurial entities to local offices
of international corporations. HQ's facilities included in continuing operations
are primarily located in the United States, which limits its exposure to certain
economic risks based upon local economic conditions. HQ performs credit
evaluations of its clients and generally requires approximately two months'
charges as a service retainer. HQ records an allowance for doubtful accounts
which reflects management's estimate of the risk of uncollectible accounts
receivable.

The following represents the activity in HQ's allowance for doubtful accounts
for the years ended December 31, 2002, 2001 and 2000 (in thousands):



YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
-------- -------- --------

Balance at beginning of period $ 2,492 $ 3,393 $ 861
Charged to cost and expenses (252) 9,684 3,050
Recorded in the HQ Merger -- -- 1,335
Accounts written off (366) (10,585) (1,853)
-------- -------- --------
Balance at end of period $ 1,874 $ 2,492 $ 3,393
======== ======== ========




IV-14


PROPERTY AND EQUIPMENT

Property and equipment consists primarily of property and equipment owned by HQ,
and is stated at cost less accumulated depreciation and amortization. Effective
January 1, 1999, the Company adopted Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which requires the capitalization of certain costs incurred in connection
with developing or obtaining internal use software. During 2001 and 2000, HQ
capitalized $1.5 million and $5.7 million, respectively, related to the
development of its enterprise resource system. No amounts were capitalized in
2002.

Office equipment, furniture and fixtures are depreciated using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years. The cost of HQ's enterprise resource system is being amortized over
seven years. Leasehold improvements are amortized over the lesser of the term of
the related lease or the estimated useful lives of the assets.

DEFERRED FINANCING COSTS

The Company amortizes deferred financing costs over the term of the related
debt. Deferred financing costs totaled $7.6 million and $40.3 million at
December 31, 2002 and 2001, respectively, net of accumulated amortization of
$11.8 million and $16.2 million, respectively. Amortization of deferred
financing costs is included as a component of interest expense in the
accompanying consolidated statement of operations.

IMPAIRMENTS OF OWNERSHIP INTERESTS AND ADVANCES TO UNCONSOLIDATED COMPANIES

The Company continually evaluates the carrying value of its ownership interests
in and advances to each of its investments in unconsolidated companies for
possible impairment based on achievement of business plan objectives and
milestones, the value of each ownership interest in the unconsolidated company
relative to carrying value, the financial condition and prospects of the company
and other relevant factors. The fair value of the Company's ownership interests
in and advances to privately held companies is generally determined based on the
value at which independent third parties have invested or have committed to
invest in the companies. The Company recorded a $25.7 million charge during the
year ended December 31, 2000 to recognize impairment charges to reduce the
carrying value of its investments in certain unconsolidated companies. In
recognition of continuing difficult capital market conditions and operating
performance of these ownership interests, the Company recorded an additional
impairment charge of $32.9 million during the year ended December 31, 2001. Of
the $32.9 million charge, $20.0 million related to Reckson Strategic Venture
Partners, LLC ("Reckson Strategic"). See Note 4 for further discussion. These
charges are included in "Equity in net loss and impairment of unconsolidated
companies" in the accompanying Consolidated Statements of Operations. During the
year ended December 31, 2002, the Company determined that no additional
impairment charge was necessary.

IMPAIRMENTS OF LONG-LIVED ASSETS

Impairment charges are recorded as a permanent reduction in the carrying amount
of the related asset. Effective January 1, 2002, the Company adopted Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, ("FAS 142"). As a result, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized, but
are subject to annual impairment tests. Other intangible assets continue to be
amortized over their useful lives.

As a result of impairment charges recorded in the third and fourth quarters of
2001, discussed below, the Company does not have any goodwill or
indefinite-lived intangible assets recorded at December 31, 2002 or 2001.
Accordingly, adoption of FAS 142 did not have an impact on the Company's
financial condition or results of operations.



IV-15


Effective January 1, 2002, the Company also adopted FAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ("FAS 144"). The FASB's new
rules on asset impairment supersede FAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121").
FAS 144 retains the requirements of FAS 121 to (a) recognize an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows, and (b) measure an impairment loss as the difference
between the carrying amount and fair value of the asset, but removes goodwill
from its scope. FAS 144 will primarily impact the accounting for intangible
assets subject to amortization, property and equipment, and certain other
long-lived assets. The adoption of FAS 144 did not have a significant impact on
the Company's financial condition or results of operations.

Prior to January 1, 2002, the Company reviewed long-lived assets, including
intangible assets, for impairment whenever events or changes in circumstances
indicated that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used was measured by a comparison of the
carrying amount of an asset to the estimated fair value of the asset or business
center. In preparing these estimates, HQ made a number of assumptions concerning
occupancy rates, rates which will be charged to clients for workstations and
services, and rates of growth of rent expense and other operating expenses. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
estimated fair value of the assets.

Based on the trend of operating losses as well as HQ's inability to remain in
compliance with its debt arrangements, HQ determined that the carrying value of
its intangible assets was impaired at September 30, 2001. Therefore, in the
third quarter of 2001, the Company recognized an impairment charge of
approximately $294.1 million, representing the amount by which the carrying
amount of the intangible assets exceeded their estimated fair value. As a result
of continuing operating losses, the Company further revised its projected cash
flows during the fourth quarter of 2001, resulting in an additional impairment
charge of $241.4 million. Assets to be disposed of are reported at the lower of
the carrying amount or estimated fair value less costs to sell. Accordingly, the
Company recorded impairment charges of $0.8 million and $25.7 million related to
restructurings in 2002 and 2001, respectively (Note 14).

RECENT PRONOUNCEMENTS

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This new rule requires companies to recognize costs
associated with exit or disposal activities when the liability is incurred
rather than at the date of commitment to exit from or dispose of an activity as
required by current generally accepted accounting principles. This statement is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. Accordingly, adoption of this new rule will not have a
material affect on the Company's financial statements. However, the Company's
accounting for exit and disposal activities, including restructurings, after
that date will be impacted.

REVENUE RECOGNITION

The Company's operating revenues for all periods presented were attributable to
HQ. Revenues from workstations and business services are recognized as the
related services are provided. Workstation revenues consist of office and
related furniture rental, parking and storage. Business services consist of (1)
technology services comprised of Internet, videoconferencing and
telecommunications services and (2) other business services which include
charges to clients that do not require offices on a full-time basis, conference
and training room usage, catering, copies, management and franchise fees.



IV-16


FRANCHISE FEES

At December 31, 2002, HQ is a franchiser of 15 domestic and 31 international
business centers operated by unrelated franchisees. The financial results of
franchised locations are not included in the consolidated results of the
Company. HQ charges a franchise fee for use of its brand name and marketing
support, which is recorded in the period earned. Franchise fees aggregated $0.8
million, $1.5 million, and $1.8 million for the years ended December 31, 2002,
2001 and 2000, respectively and are included in business service revenues.

RENT EXPENSE

Payments under operating leases are recognized as rent expense on a
straight-line basis over the term of the related lease. The difference between
the rent expense recognized for financial reporting purposes and the actual
payments made in accordance with the lease agreements is recognized as a
deferred rent liability. Rent expense charged to operations for the years ended
December 31, 2002, 2001 and 2000, exceeded actual rental payments by $6.2
million, $9.0 million and $9.2 million, respectively.

During the years ended December 31, 2002, 2001 and 2000, the Company recorded
deferred credits relating to tenant improvements, which are reimbursed or paid
by landlords and amortized against rent expense over the life of the leases, of
$2.8 million, $3.9 million and $8.9 million, respectively. As of December 31,
2002 and 2001, the deferred rent liability includes approximately $17.2 million
and $26.0 million, respectively, representing the unamortized balances of such
deferred credits.

The estimated fair value of favorable lease rates on business centers acquired
in the HQ Merger is being amortized over the terms of the respective leases
acquired (Note 3). At December 31, 2002 and 2001, the remaining unamortized
balances of favorable leases included in "Other assets and deferred charges,
net" totaled $14.6 million and $16.8 million, respectively. At December 31,
2002, the weighted average remaining term of these leases was 7.5 years.

HQ DEPRECIATION AND AMORTIZATION

Depreciation and amortization of the HQ Segment consists of the following (in
thousands):

YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
------- ------- -------

Property and equipment .................. $37,655 $42,538 $28,279
Goodwill ................................ -- 25,164 21,359
Favorable acquired business center leases 2,400 2,400 1,400
Other intangible assets ................. -- -- 330
------- ------- -------
$40,055 $70,102 $51,368
======= ======= =======

STOCK-BASED COMPENSATION

The Company follows Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock options. The Company accounts for stock-based
compensation for non-employees under the fair value method prescribed by
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"). Through December 31, 2002, there have been no
significant grants to non-employees.

Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method prescribed by FAS 123. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 2002, 2001 and 2000,
risk-free interest rate of 5%, no expected dividend yield, a volatility factor
of the expected market price of the Company's common stock of .600 for each
year, and a weighted-average expected life of the option of 7 years. The
volatility assumption reflects the estimated volatility that has occurred and is
expected to continue to occur as a result of FrontLine's revised business plan
following the Restructuring.



IV-17


For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. For the years ended
December 31, 2002, 2001 and 2000 the Company's pro forma information follows (in
thousands, except per share data):



2002 2001 2000
---- ---- ----

Net loss as reported ......................................... $(144,138) $(630,408) $(232,778)
Less: Stock option expense determined under the fair value
recognition methods for all awards ........................... (4,055) (4,101) (18,765)
--------- --------- ---------
Pro forma net loss ........................................... $(148,193) $(634,509) $(251,543)
========= ========= =========
Basic and diluted net loss per share as reported ............. $ (3.86) $ (17.03) $ (6.73)
========= ========= =========
Pro forma basic and diluted net loss per share ............... $ (3.97) $ (17.14) $ (7.21)
========= ========= =========


COMPREHENSIVE LOSS

Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions, events and circumstances from
non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. During
the year ended December 31, 2001, the difference between net loss ($624,826,000)
and total comprehensive loss ($624,235,000) was due to realized gains on
"available-for-sale" marketable securities.

There were no differences between net loss and comprehensive loss in 2002.

SEGMENT REPORTING

The segment information required by SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," relating to the HQ Segment and the
Parent and Other Interests Segment is presented in Notes 3 and 4, respectively.

Each of the segments has a FrontLine senior professional assigned for purposes
of monitoring performance and carrying out operating activity. These
professionals report directly to the Chief Executive Officer and Treasurer, who
along with the Board of Directors have been identified as the Chief Operating
Decision Makers ("CODM") because of their final authority over resource
allocation decisions and performance assessment.

FrontLine's governance and control rights are generally exercised through Board
of Directors seats and through representation on the executive committees of its
investee entities.

FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" requires
the Company to disclose the estimated fair values of its financial instrument
assets and liabilities. The carrying amounts approximate fair value for cash and
cash equivalents, restricted cash, accounts receivable, accounts payable and
accrued expenses because of the short maturity of those instruments. Other than
as disclosed in Notes 9 and 15, the estimated fair values of the Company's
long-term debt approximate the recorded balances.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company adopted the provision of SFAS No. 133 ("SFAS 133") "Accounting for
Derivatives and Hedging Activities," as amended, effective January 1, 2001. SFAS
133 requires the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings.



IV-18


HQ enters into contracts that establish a cap and a floor interest rate on
notional amounts to hedge the interest rate risk on its floating-rate debt. The
Company's policy is that it will not speculate in hedging activities. The effect
of adopting FAS 133 as of January 2001 was not material to the Company's results
of operations. There were no derivatives outstanding at December 31, 2002.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. The most significant assumptions and estimates relate to the
lives and recoverability of long-lived assets. Actual results could differ from
those estimates.

RISK AND UNCERTAINTIES

The future results of operations and financial condition of HQ will be impacted
by the following factors, among others: the competition in the office solutions
business with respect to, among other things, price, service, and location;
dependence on leases and changes in lease costs; the availability of capital for
expansion; the ability to obtain and retain qualified employees; the competition
for future acquisitions; and the ability of HQ to secure adequate capital.

RECLASSIFICATIONS

Certain prior period amounts and segment disclosures have been reclassified to
conform to the current year presentation.

3. INTEREST IN HQ GLOBAL

On June 1, 2000, VANTAS Incorporated ("VANTAS") merged with HQ Global
Workplaces, Inc. ("Old HQ"), in a two-step merger, and HQ Global also acquired
two other entities involved in the executive office suites business outside the
United States (the "HQ Merger"). As a result of the HQ Merger, the combined
company, under the name HQ Global Workplaces, Inc., became a wholly-owned
subsidiary of a newly-formed parent corporation, HQ Global. The HQ Merger was
financed through a combination of debt and HQ Global preferred stock and
warrants. As of December 31, 2000, FrontLine's ownership interest was 56.5% on a
basic basis. Although FrontLine's percentage ownership may vary depending on the
actual preferred stock conversion price, on a fully-diluted basis, assuming the
outstanding preferred stock converted at the HQ Merger conversion price, and
including certain warrants to purchase HQ Global stock, FrontLine would own
approximately 38% of the common stock of HQ Global. To effectuate the HQ Merger,
FrontLine contributed approximately $17 million in cash and its ownership
interest in VANTAS.

The costs of the HQ Merger have been allocated to the respective assets acquired
and liabilities assumed, with the remainder recorded as goodwill, based on
estimates of fair values as follows (dollars in thousands):

Working capital ..................................... $ 7,840
Property and equipment .............................. 107,047
Goodwill ............................................ 407,441
Favorable acquired business center operating leases . 25,690
Other assets ........................................ 32,504
Other liabilities ................................... (45,080)
Notes payable ....................................... (138,693)
---------
Total ............................................... $ 396,749
=========


IV-19


The estimates of fair value were determined by HQ's management based on
information provided by the management of the acquired entities. The above
purchase price allocation has been revised from the original allocation as
estimated amounts have been finalized.

HQ is a provider of flexible officing solutions. As of December 31, 2002, HQ
owned, operated, or franchised 304 business centers which are included in
continuing operations and are primarily located in the United States. There were
19 business centers operating at December 31, 2002 that were held for sale and
are included in discontinued operations or in the process of being closed. A
wholly-owned subsidiary of HQ is also the franchiser of 15 domestic and 31
international business centers for unrelated franchisees. HQ provides a complete
outsourced office solution through furnished and equipped individual offices and
multi-office suites available on short notice with flexible contracts. HQ also
provides business support and information services including:
telecommunications; broadband Internet access; mail room and reception services;
high speed copying, faxing and printing services; secretarial, desktop
publishing and IT support services and various size conference facilities, with
multi-media presentation and video teleconferencing capabilities. HQ also
provides similar services for those businesses and individuals that do not
require offices on a full-time basis.

UNAUDITED PRO FORMA INFORMATION

The unaudited pro forma financial information set forth below is based upon the
historical statements of operations of FrontLine for the year ended December 31,
2000, adjusted to give effect to the HQ Merger as of January 1, 2000. The pro
forma financial information is presented for informational purposes only and may
not be indicative of what actual results of operations would have been had the
HQ Merger occurred as presented, nor does it purport to represent the results of
operations for future periods (in millions, except per share amounts).

YEAR ENDED
DECEMBER 31,
2000
(UNAUDITED)
-----------
Revenues ....................................... $ 612.3
Net loss ....................................... (222.9)
Net loss applicable to common shareholders...... (225.0)
Basic and diluted net loss per common share..... $ (6.45)

OWNERSHIP BY FRONTLINE

To facilitate HQ Global obtaining amendments to certain debt covenants, on June
29, 2001, FrontLine invested an additional $15 million into HQ Global via the
acquisition of a new subordinated series of preferred stock and common stock
warrants.

As of December 31, 2002, FrontLine's ownership interest was approximately 56% on
a basic basis. Although FrontLine's percentage ownership may vary depending on
the actual preferred stock conversion price, on a fully-diluted basis, assuming
the outstanding preferred stock converted at the HQ Merger conversion price, and
including certain warrants to purchase HQ Global stock, FrontLine would own
approximately 39.9% of the common stock of HQ Global.

An HQ Global shareholder has a put option ("Put Option") to require the Company
to purchase all of its interest any time between January 8, 2002 and January 8,
2005, at the then determined fair value of the interest.

The Company entered into a shareholders agreement (the "HQ Stockholders
Agreement") with certain of the stockholders of HQ Global which provides such
stockholders with rights to put up to approximately 3.1 million shares of HQ
Global (the "HQ Shares") to the Company during the two years subsequent to the
HQ Merger if HQ Global has not completed an initial public offering of its
shares. On February 25, 2002, such stockholders irrevocably waived their Put
Rights.


IV-20


HQ GLOBAL BANKRUPTCY

On March 13, 2002, HQ Global and certain of its affiliates (collectively, the
"Debtors") filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the "Court"). The Debtors continue to operate their business and
manage their properties as debtors-in-possession during the Chapter 11
proceeding. The Debtors have the exclusive right to propose a plan of
reorganization until May 13, 2003, which period may be extended further by the
Court. The Debtors are obligated under their debtor-in-possession financing
facility to file with the Delaware Bankruptcy Court, no later than April 30,
2003, a plan of reorganization in a form acceptable to the "Requisite Lenders"
under the facility. The Debtors and their debtor-in-possession lenders have
agreed, subject to approval by the Delaware Bankruptcy Court to an extension of
this deadline to June 30, 2003.

The Debtors anticipate proposing a plan of reorganization in accordance with the
federal bankruptcy laws as administered by the Court. Confirmation of a plan of
reorganization could materially change the amounts currently recorded in the
financial statements. The financial statements do not give effect to any
adjustment to the carrying value of assets, or amounts and classifications of
liabilities that might be necessary as a consequence of this matter.

DISCONTINUED OPERATIONS

In December 2001, HQ's Board of Directors approved a plan to dispose of HQ's
business in Europe. As a result of this transaction, the HQ consolidated balance
sheets for the years ended December 31, 2002 and 2001 and the statements of
operations and cash flows for the years ended December 31, 2002, 2001 and 2000
present the European businesses as a discontinued operation.

On June 24, 2002, HQ sold certain assets of the discontinued operations in the
United Kingdom for cash proceeds of $15.5 million. Of this amount, $11.5 million
was repatriated to the United States. This transaction resulted in a gain of
$5.4 million, representing the excess of the proceeds over the previously
estimated net realizable value of the assets. The gain of $5.4 million was
recorded in the second quarter of 2002 and is included in income from
discontinued operations for the twelve months ended December 31, 2002. There
were no income taxes related to this transaction. Excluding this transaction,
the loss from discontinued operations was $2.0 million for the year ended
December 31, 2002.

Summarized financial information for the discontinued operations is as follows
(in thousands):



YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
--------- --------- ---------

Revenues ................................................. $ 30,004 $ 42,078 $ 8,471
========= ========= =========
Income (loss) before provision for income taxes........... $ 3,431 $(142,780) $ 3,059
Provision for income taxes ............................... -- (1,838) (1,988)
--------- --------- ---------
Income (loss) from discontinued operations, net........... $ 3,431 $(144,618) $ 1,071
========= ========= =========



The loss from discontinued operations for the year ended December 31, 2001
contains an asset impairment charge of $141.2 million.

The net assets of discontinued operations are not significant to the HQ
consolidated balance sheets as of December 31, 2002 and 2001.

FINANCIAL STATEMENTS

The following statements present the portion of the Company's financial
position, results of operations and cash flows represented by HQ Global and
predecessor entities as of and for the periods indicated.


IV-21



3. INTEREST IN HQ GLOBAL AND PREDECESSOR ENTITIES (CONTINUED)

HQ GLOBAL AND PREDECESSOR ENTITIES
BALANCE SHEETS
(IN THOUSANDS)




DECEMBER 31,
2002 2001
--------- ---------

ASSETS:
Current Assets:
Cash and cash equivalents ............................................. $ 10,011 $ 16,151
Restricted cash ....................................................... 1,044 878
Accounts receivable, net of allowance for doubtful accounts of $1,874
and $2,492 at December 31, 2002 and 2001, respectively ............ 4,007 6,865
Other current assets .................................................. 13,516 4,141
--------- ---------
Total Current Assets .............................................. 28,578 28,035
Property and equipment, net ................................................ 122,582 168,486
Deferred financing costs, net .............................................. 7,570 40,127
Net assets from discontinued operations .................................... -- 5,500
Other assets, net .......................................................... 18,161 20,950
--------- ---------
Total Assets ...................................................... $ 176,891 $ 263,098
========= =========
LIABILITIES AND NET BUSINESS UNIT DEFICIENCY:
Current Liabilities Liabilities subject to compromise:
Accounts payable and accrued expenses ................................. $ 44,459 $ 39,087
Accrued restructuring costs ........................................... 62,818 49,674
Unsecured debt ........................................................ 125,000 125,000
Other liabilities ..................................................... 2,178 3,111
--------- ---------
Total liabilities subject to compromise ........................... 234,455 216,872
Liabilities not subject to compromise:
Accounts payable and accrued expenses ................................. 46,096 17,053
Accrued restructuring costs ........................................... 1,029 1,893
Accrued reorganization costs .......................................... 3,440 --
Secured debt .......................................................... 227,433 216,506
Deferred rent payable ................................................. 43,732 52,448
Other liabilities ..................................................... 31,724 41,526
--------- ---------
Total liabilities not subject to compromise ...................... 353,454 329,426
--------- ---------
Total Current Liabilities ........................................ 587,909 546,298
Other liabilities not subject to compromise ................................ 5,051 7,890
--------- ---------
Total Liabilities ................................................ 592,960 554,188
Net business unit deficiency ............................................... (416,069) (291,090)
========= =========
Total Liabilities and Net Business Unit Deficiency ................ $ 176,891 $ 263,098
========= =========



IV-22



3. INTEREST IN HQ GLOBAL AND PREDECESSOR ENTITIES (CONTINUED)

HQ GLOBAL AND PREDECESSOR ENTITIES
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)



YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
---- ---- ----

HQ Operating Revenues:
Workstation revenue ..................................... $ 211,646 $ 310,520 $ 279,561
Support services ........................................ 116,379 160,187 175,929
--------- --------- ---------
Total HQ Operating Revenues ........................... 328,025 470,707 455,490
--------- --------- ---------
HQ Operating Expenses:
Rent .................................................... 182,403 219,826 170,334
Support services ........................................ 37,680 58,055 53,610
Center general and administrative ....................... 69,023 107,641 93,263
General and administrative .............................. 36,846 60,831 50,436
--------- --------- ---------
Total HQ Operating Expenses ........................... 325,952 446,353 367,643
--------- --------- ---------
HQ Operating Income ................................... 2,073 24,354 87,847
--------- --------- ---------
HQ Other Expenses:
Impairment of assets .................................... (764) (561,196) --
Depreciation and amortization ........................... (40,055) (70,102) (51,368)
Restructuring costs ..................................... (29,372) (57,553) --
Reorganization costs .................................... (33,186) -- --
Interest expense, net ................................... (27,244) (44,387) (32,303)
Merger and integration costs ............................ -- -- (24,701)
--------- --------- ---------
Loss from continuing operations before income taxes and
minority interest ................................... (128,548) (708,884) (20,525)
Provision for income taxes ................................. -- (792) (3,439)
Minority interest .......................................... -- 305,984 (7,688)
Gain on sale of assets ..................................... 138 -- --
--------- --------- ---------
Loss before discontinued operations ........................ (128,410) (403,692) (31,652)
Income (loss) from discontinued operations ................. 3,431 (144,618) 1,071
--------- --------- ---------
Net loss attributable to HQ ........................... $(124,979) $(548,310) $ (30,581)
========= ========= =========




IV-23



3. INTEREST IN HQ GLOBAL AND PREDECESSOR ENTITIES (CONTINUED)

HQ GLOBAL AND PREDECESSOR
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)



YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
---- ---- ----

Cash Flows from Operating Activities:
Loss before discontinued operations attributable to HQ ......... $(128,410) $(403,692) $ (31,652)
Adjustments to reconcile loss before discontinued operations
attributable to HQ to cash provided by (used in)
operating activities:
Depreciation and amortization .............................. 40,055 70,102 51,368
Impairment of assets ....................................... 764 561,196 --
Amortization of deferred financing costs ................... 8,386 8,125 4,920
Minority interest .......................................... -- (305,984) 7,688
Stock and related compensation ............................. 147 (738) 858
Non-cash restructuring costs ............................... 22,880 57,661 --
Non-cash reorganization costs .............................. 25,699 -- --
Changes in operating assets and liabilities:
Accounts receivable, net ................................. 2,859 25,123 (19,801)
Acquisition costs and other assets ....................... (8,820) 5,787 18,975
Deferred rent payable .................................... 4,244 9,896 16,455
Accounts payable and accrued expenses .................... 34,420 6,041 (34,076)
Accrued restructuring costs .............................. (8,854) (6,094) --
Other liabilities ........................................ (13,191) (12,166) 8,206
--------- --------- ---------
Net cash provided by (used in) operating activities
from continuing operations ........................... (19,821) 15,257 22,941
Net cash provided by (used in) discontinued operations . (6,236) 14,423 1,397
--------- --------- ---------
Net cash provided by (used in) operating activities .... (26,057) 29,680 24,338
--------- --------- ---------
Cash Flows from Investing Activities:
Acquisitions of officing solutions centers, net of cash proceeds -- -- (251,051)
Equipment ...................................................... (5,623) (35,381) (57,722)
Restricted cash ................................................ (166) 4,890 22,866
--------- --------- ---------
Net cash used in continuing investing activities ....... (5,789) (30,491) (285,907)
Net cash provided by (used in) discontinued operations . 15,292 (12,011) (2,746)
--------- --------- ---------
Net cash provided by (used in) investing activities .... 9,503 (42,502) (288,653)
--------- --------- ---------
Cash Flows from Financing Activities:
Net proceeds from Parent ....................................... -- 15,000 18,424
Deferred financing costs ....................................... -- -- (25,732)
Net proceeds from notes payable ................................ 10,927 3,581 75,022
Capital leases ................................................. (384) (1,984) (2,657)
Net proceeds from minority interest ............................ (129) (366) 208,193
--------- --------- ---------
Net cash provided by financing activities .............. 10,414 16,231 273,250
--------- --------- ---------
Cash and Cash Equivalents:
Net (decrease) increase ........................................ (6,140) 3,409 8,935
Beginning of period ............................................ 16,151 12,742 3,807
--------- --------- ---------
End of period .................................................. $ 10,011 $ 16,151 $ 12,742
========= ========= =========




IV-24


4. OTHER OWNERSHIP INTERESTS

The Company's ownership interests in its investees are classified according to
the applicable accounting method utilized at December 31, 2002, 2001 and 2000.
The carrying value of equity method investments represents the Company's
acquisition cost less any impairment charges and the Company's share of such
investees' losses. The carrying value of cost method investments represents the
Company's acquisition costs less any impairment charges in such investees. The
Company's ownership interests in and advances to investees as of December 31,
2002, are as follows (in thousands):



DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------------------- -------------------------------
CARRYING VALUE COST CARRYING VALUE COST
-------------- -------------- -------------- -------------

Equity Method......................... $ 12,322 $158,671 $ 13,396 $158,671
Cost Method........................... -- 18,075 -- 18,075
-------- --------
$ 12,322 $ 13,396
======== ========


The following details the Company's equity in net loss and impairment of
unconsolidated companies (in thousands):



YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
--------- --------- ---------

OnSite Access, Inc. and predecessor entity ........... $ -- $ -- $ (39,017)
RealtyIQ Corp. ....................................... -- -- (38,797)
EmployeeMatters, Inc. ................................ -- -- (15,139)
Gain on sale of EmployeeMatters, Inc. (see below) .... -- -- 8,287
Reckson Strategic Venture Partners ................... (1,407) (5,069) (4,421)
Other unconsolidated companies ....................... -- -- (11,101)
Aggregate impairment charges (see Note 14) ........... -- (31,970) (25,740)
Gain on Sale of Intuit, Inc. stock ................... -- 591 --
--------- --------- ---------
Equity in net loss and impairment of unconsolidated
companies ....................................... $ (1,407) $ (36,448) $(125,928)
========= ========= =========



EMPLOYEEMATTERS

On December 20, 2000, the Company sold its interest in EmployeeMatters, Inc.
("EmployeeMatters") to Intuit, Inc. ("Intuit") for 556,027 shares of Intuit
common stock. The fair value of such stock on the closing date of the sale was
$21.3 million. As a result of the sale, the Company recorded a gain of $8.3
million, net of $0.7 million of expenses and other related charges, in the
fourth quarter of the year ended December 31, 2000. Included in the above Intuit
shares are 23,072 shares that were held in escrow in order to collateralize
certain contingent indemnification obligations of the Company. On December 31,
2001, Intuit shares were released from escrow.

SALE OF INTUIT

During the three months ended March 31, 2001, the Company sold all shares of
Intuit not held in escrow at a realized gain of $0.5 million. On January 9,
2002, the Company sold all 23,072 shares of Intuit, which were released from
escrow at December 31, 2001. As a result of this sale, the Company recorded a
gain of $0.1 million.


IV-25


RECKSON STRATEGIC

Reckson Strategic invests in operating companies with experienced management
teams in real estate and real estate related market sectors which are in the
early stages of their growth cycle or offer unique circumstances for attractive
investments, as well as platforms for future growth.

Through RSVP Holdings, LLC ("Holdings"), the Company is a managing member and
100% owner of the common equity of Reckson Strategic. New World Realty, LLC, an
entity owned by two individuals (the "RSVP Managing Directors") retained by
Holdings, acts as a managing member of Holdings, and have a carried interest
which provides for the RSVP Managing Directors to receive a share in the profits
of Reckson Strategic after the Company, Paine Webber Real Estate Securities,
Inc., ("Paine Webber") and Stratum Realty Fund, L.P. ("Stratum") have received
certain minimum returns and a return of capital. Paine Webber and Stratum are
non-managing members and preferred equity owners who have committed $150 million
and $50 million, respectively, in capital and share in profits and losses of
Reckson Strategic with the Company, subject to a maximum internal rate of return
of 16% of invested capital. The carrying values of the Company's investment in
Reckson Strategic were $12.3 million and $13.4 million as of December 31, 2002
and 2001, respectively.

During 2001, the Company recognized a $20.0 million valuation impairment based
on its assessment of value, recoverability and probability that this investment
would not ultimately be realized at its otherwise carrying value.

FINANCIAL STATEMENTS

The following statements present the portion of the Company's financial
position, results of operations and cash flows represented by FrontLine Parent
and other interests as of and for the periods indicated.




IV-26



4. OTHER OWNERSHIP INTERESTS (CONTINUED)

FRONTLINE PARENT AND OTHER INTERESTS
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)



DECEMBER 31,
----------------------------
2002 2001
----------- -----------

ASSETS:
Current Assets:
Cash and cash equivalents .................................. $ 300 $ 1,988
Other current assets ....................................... 854 361
----------- -----------
Total Current Assets ................................... 1,154 2,349
Ownership interests in and advances to unconsolidated companies . 12,322 13,396
Deferred financing costs, net ................................... 46 147
Other assets, net ............................................... 637 1,778
----------- -----------
Total Assets ........................................... $ 14,159 $ 17,670
=========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY:
Current Liabilities:
Liabilites subject to compromise:
Accounts payable and accrued expenses ...................... $ 5,614 $ 4,036
Credit facilities with related parties ..................... 189,464 176,909
Notes payable .............................................. 25,000 25,000
----------- -----------
Total Liabilities subject to compromise ................ 220,078 205,945
Negative ownership interest in HQ Global and predecessor entities 416,069 291,090
Redeemable convertible preferred stock .......................... 26,840 25,325
Shareholders' Deficiency:
Common stock, $.01 par value, 100,000,000 shares authorized,
37,344,039 shares issued and outstanding at
December 31, 2002 and 2001 ............................... 373 373
Additional paid-in capital ................................. 398,598 400,793
Accumulated deficit ........................................ (1,047,799) (905,856)
----------- -----------
Total Shareholders' Deficiency ......................... (648,828) (504,690)
----------- -----------
Total Liabilities and Shareholders' Deficiency ......... $ 14,159 $ 17,670
=========== ===========



IV-27



4. OTHER OWNERSHIP INTERESTS (CONTINUED)

FRONTLINE PARENT AND OTHER INTERESTS
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)



YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
---- ---- ----

Parent Expenses:
General and administrative expenses ........................ $ (2,241) $ (3,915) $ (16,478)
Amortization of deferred charges ........................... -- (2,274) (14,330)
Reorganization costs ....................................... (188) -- --
Restructuring costs ........................................ (438) (11,490) (12,788)
Interest expense, net ...................................... (12,690) (22,389) (18,903)
Depreciation and amortization .............................. -- -- (1,123)
Development stage company costs ............................ -- -- (9,999)
--------- --------- ---------
Loss before equity in net loss and impairment of
unconsolidated companies ............................... (15,557) (40,068) (73,621)
Equity in net loss and impairment of unconsolidated companies . (1,407) (36,448) (125,928)
--------- --------- ---------
Loss before extraordinary item from early extinguishment
of debt ................................................ (16,964) (76,516) (199,549)
Extraordinary item from early extinguishment of debt .......... -- -- (2,648)
--------- --------- ---------
Net loss ............................................... (16,964) (76,516) (202,197)
Dividends on and accretion of preferred stock ................. (2,195) (5,582) (2,119)
--------- --------- ---------
Net loss applicable to common shareholders attributable to
Parent and Other Interests ............................ $ (19,159) $ (82,098) $(204,316)
========= ========= =========



IV-28



4. OTHER OWNERSHIP INTERESTS (CONTINUED)

FRONTLINE PARENT AND OTHER INTERESTS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)



YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
---- ---- ----

Cash Flows from Operating Activities:
Net loss ..................................................... $ (16,964) $ (76,516) $(202,197)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization ............................ -- -- 1,123
Amortization of deferred financing costs ................. 101 783 800
Extraordinary loss on early extinguishment of debt ....... -- -- 2,648
Equity in net loss of unconsolidated companies ........... 1,407 36,448 125,928
Stock and related compensation ........................... -- 2,814 14,330
Non-cash restructuring costs ............................. 132 2,134 8,875
Changes in operating assets and liabilities:
Acquisition costs and other assets ..................... 314 5,413 (1,735)
Accounts payable and accrued expenses .................. (177) (9,415) (6,678)
Other liabilities ...................................... 12,556 20,948 8,369
--------- --------- ---------
Net cash used in operating activities ................ (2,631) (17,391) (48,537)
--------- --------- ---------
Cash Flows from Investing Activities:
Acquisitions of officing solutions centers ................... -- (15,000) (91,026)
Proceeds from sale of short-term investments ................. 1,010 20,918 --
Equipment .................................................... -- -- (3,019)
Acquisition of ownership interests and advances to
unconsolidated companies .................................... (67) (10,426) (68,322)
--------- --------- ---------
Net cash provided by (used in) investing activities... 943 (4,508) (162,367)
--------- --------- ---------
Cash Flows from Financing Activities:
Issuance of common stock and warrants, net of costs .......... -- -- 156,957
Issuance of preferred and redeemable preferred stock, net of --
costs .................................................... 10,000 38,510
Deferred financing costs ..................................... -- -- (1,429)
Net proceeds from credit facilities with related parties ..... -- 6,538 13,675
Net proceeds from notes payable .............................. -- -- (19,407)
Other, net .................................................. -- 426 588
--------- --------- ---------
Net cash provided by financing activities ............ -- 16,964 188,894
--------- --------- ---------
Cash and Cash Equivalents:
Net decrease ................................................. (1,688) (4,935) (22,010)
Beginning of period .......................................... 1,988 6,923 28,933
--------- --------- ---------
End of period ................................................ $ 300 $ 1,988 $ 6,923
========= ========= =========




IV-29



5. PROPERTY AND EQUIPMENT

Property and equipment consists of (in thousands):



DECEMBER 31,
------------------------
2002 2001
--------- ---------

Office equipment, furniture and fixtures ...................... 146,551 $ 156,940
Enterprise resource system .................................... 12,438 12,438
Leasehold improvements ........................................ 65,995 76,711
--------- ---------
224,984 246,089
Less accumulated depreciation and amortization................. (102,402) (77,603)
--------- ---------
$ 122,582 $ 168,486
========= =========



Office equipment, furniture and fixtures include approximately $3.7 million and
$6.7 million of office equipment under capital leases, net of accumulated
depreciation of $2.5 million and $3.6 million as of December 31, 2002 and 2001,
respectively.

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of (in thousands):



DECEMBER 31,
-------------------
2002 2001
------- -------

Liabilities subject to compromise:
Accounts payable .............................................. $24,403 $23,407
Accrued interest .............................................. 12,167 8,839
Other ......................................................... 13,503 6,841
------- -------
$50,073 $39,087
======= =======
Liabilities not subject to compromise:
Accounts payable .............................................. $ 4,865 $ --
Accrued compensation and benefits ............................. 4,747 6,555
Client prepayments ............................................ 4,360 5,698
Accrued interest .............................................. 16,825 508
Other ......................................................... 15,299 8,328
------- -------
$46,096 $21,089
======= =======



7. INCOME TAXES

The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. This method also requires the recognition of
future tax benefits such as net operating loss carry forwards, to the extent
that realization of such benefits is more likely than not. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. A valuation allowance is recognized if it is more likely than not that
some portion of the deferred asset will not be recognized. At December 31, 2002,
all of FrontLine Parent's deferred tax assets have been fully reserved due to
the uncertainty as to whether these assets will provide benefit in future years.



IV-30


The following represents HQ's, the Company's principal subsidiary (i) provision
(benefit) for income taxes (ii) reconciliation of income tax expense (benefit)
computed using the U.S. federal statutory income tax rate to the provision
(benefit) for income taxes and (iii) the deferred tax effects of temporary
difference as of December 31, 2002 and 2001.

HQ's provision (benefit) for income taxes related to continuing operations
consists of the following (in thousands):



YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
---------------------------------------

Current:
Foreign ............................................................ $ -- $ 228 $ 396
State and local .................................................... -- 564 3,043
---------------------------------------
-- 792 3,439
Deferred:
Federal ............................................................ -- -- --
State and local .................................................... -- -- --
---------------------------------------
-- -- --
---------------------------------------
Total (benefit) provision ............................................ $ -- $ 792 $3,439
======================================



The following is HQ's reconciliation of the income tax expense (benefit)
computed using the U.S. federal statutory income tax rate to the provision
(benefit) for income taxes (in thousands):



YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------------------------------------------

Income tax expense (benefit) at federal statutory rate ............... $ (42,451) $(216,083) $ (6,077)
Nondeductible goodwill ............................................... -- 83,401 4,170
State and local income taxes, net of federal income tax benefit ...... -- 564 3,043
Effect of foreign income taxes ....................................... -- 7 (124)
Benefit of net operating losses not recognized ....................... 42,360 132,749 2,220
Other, net ........................................................... 91 154 207
------------------------------------------
Total provision (benefit) ............................................ $ -- $ 792 $ 3,439
==========================================



HQ's deferred tax effects of temporary differences as of December 31, 2002 and
2001 are as follows (in thousands):



YEAR ENDED DECEMBER 31,
------------------------
2002 2001
--------- ---------

Deferred tax assets:
Net operating losses ....................................................... $ 79,035 $ 59,584
Accounts receivable allowance .............................................. 718 942
AMT credit carryforward .................................................... 252 252
Deferred rent payable ...................................................... 9,811 9,616
Accrued compensation ....................................................... 468 --
Deferred restructuring charges ............................................. 39,250 18,488
Fixed assets ............................................................... 7,898 --
Intangible assets .......................................................... 65,438 72,345
Other ...................................................................... 1,669 1,967
--------- ---------
204,539 163,194
Less valuation allowance ..................................................... (204,539) (150,861)
--------- ---------
-- 12,333
Deferred tax liabilities:
Fixed assets ............................................................... -- (11,741)
Intangibles ................................................................ -- --
Other ...................................................................... -- (592)
--------- ---------
-- (12,333)
--------- ---------
Net deferred tax asset after valuation allowance ............................. $ -- $ --
========= =========



IV-31


At December 31, 2002 and 2001, HQ had established valuation allowances of $204.5
million and $150.9 million, respectively, to reduce certain deferred tax assets
to amounts that are more likely than not to be realized.

At December 31, 2002, Frontline has approximately in excess of $304.4 million of
available unused net operating loss carryforwards, which expire beginning in
2017. A change in ownership, as defined for purposes of the Internal Revenue
Code, may have occurred with respect to some or all of these losses and may
limit the annual utilization of a portion of the U.S. Federal net operating loss
carryforward under the applicable Internal Revenue Service regulations. At
December 31, 2002 HQ has available unused net operating loss carryforwards for
U.S. federal income tax purposes of approximately $223.8 million, which expire
beginning in 2017. A change in ownership, as defined for purposes of the
Internal Revenue Code, occurred in 2000 and will limit the annual utilization of
a portion of the U.S. Federal net operating loss carryforward under the
applicable Internal Revenue Service regulations.

8. NOTES PAYABLE

HQ DEBTOR-IN-POSSESSION FACILITY

In connection with HQ's bankruptcy filing (Note 1), HQ received a commitment for
a $30.0 million facility, with borrowings permitted through December 31, 2002 in
accordance with certain operating and liquidity covenants. Any borrowings, of
which there have been none, will incur interest at prime plus 3%. HQ and its
lenders have agreed to extend this facility through and including July 31, 2003.

HQ CREDIT FACILITY

HQ has a pre-petition credit facility (the "HQ Credit Facility") with certain
lending institutions, which, as amended and restated as of June 29, 2001,
provides for borrowings of up to $219.4 million under four term loans (the "Term
Loans") and for borrowings or letters of credit of up to an additional $55.6
million under two revolving loan commitments (the "Revolver Loans").
Availabilities under the Revolver Loans are formula based. As of December 31,
2002, there was $188.7 million in outstanding borrowings under the Term Loans
and $38.8 million in borrowings outstanding under the Revolver Loans. As of
December 31, 2002, HQ had letters of credit outstanding in the aggregate amount
of $16.6 million for landlord security deposits. Such letters of credit are
collateralized by $0.1 million in cash and $16.5 million of Revolver Loans.

The Term Loans are repayable in various quarterly installments through November
2005. Additional annual principal payments of 75% of excess cash flow as defined
are required. Pursuant to such requirement, HQ made an accelerated principal
payment of $15.1 million during the twelve-month period ended December 31, 2001,
based on cash flows for the year ended December 31, 2000. Any outstanding
borrowings under the two Revolver Loans are due on November 6, 2003 and May 31,
2005, respectively. Borrowings under the HQ Credit Facility bear interest
ranging from LIBOR (one-month LIBOR was approximately 4.04% at December 31,
2002) plus 3.25% to 4.0% for one, three or nine-month periods at the election of
HQ or prime (4.25% at December 31, 2002) plus 2.25% to 3.00%. The weighted
average interest rate on borrowings under the Term Loans and the Revolver Loans
at December 31, 2002, were approximately 5.9% and 6.0%, respectively. A
commitment fee of 1/2 of 1.0% per annum is payable on the unused portion of the
HQ Credit Facility.

HQ's lending institutions have an assignment of leases and rents associated with
HQ's business centers and certain preferred security interests to collateralize
the borrowings under the HQ Credit Facility.

During 2001, interest on borrowings under the Credit Facility ranged from LIBOR
(one month LIBOR was approximately 4.15% at December 31, 2001) plus 3.25% to
4.0% for a one, three or six month period, at the election of the Company or
Prime (4.75% at December 31, 2001). During 2000, interest on borrowings under
the Credit Facility ranged from LIBOR (one month LIBOR was approximately 6.8% at
December 31, 2000) plus 3.00% to 3.5% for a one, three or six month period, at
the election of the Company or Prime (9.5% at December 31, 2000).



IV-32


The stated maturities of borrowings outstanding under the HQ Credit Facility
subsequent to December 31, 2002 are as follows (in thousands):

TWELVE MONTHS ENDED
DECEMBER 31, AMOUNT
----------------------------------------
2003 and arrears........... $ 68,445
2004....................... 58,976
2005....................... 100,012
--------
Total...................... $227,433
========


MEZZANINE LOAN/UNSECURED DEBT

On May 31, 2000, HQ entered into a Senior Subordinated Credit Facility (the
"Bridge Loan") in the amount of $125.0 million. The Bridge Loan carried an
interest rate of LIBOR plus 6.5% and was to mature on May 31, 2007. On August
11, 2000, HQ replaced the Bridge Loan with a $125.0 million Note and Warrant
Purchase Agreement (the "Mezzanine Loan"). The Mezzanine Loan bears interest at
13.5% per annum and matures on May 31, 2007. The entire balance was outstanding
at December 31, 2002 and 2001.

In connection with the Mezzanine Loan, the Mezzanine Loan lenders received
503,545 Series A Warrants and 227,163 Series B Warrants to purchase common
stock. The fair value of the Series A Warrants to purchase Common Stock issued
to the lenders was recorded as debt issuance costs and is being amortized over
the terms of the related loan resulting in an effective interest rate of 15.6%.
No value was assigned to the Series B Warrants.

EVENTS OF DEFAULT AND COMPLIANCE WITH COVENANTS

The HQ Credit Facility and Mezzanine Loan contain certain covenants, including a
defined maximum ratio of consolidated indebtedness to consolidated earnings
before interest, income taxes, depreciation and amortization. In addition, there
are other covenants pertaining to financial ratios and limitations on capital
expenditures. Also, the HQ Credit Facility and Mezzanine Loan prohibit the
declaration or payment of dividends by HQ Global or any of its subsidiaries,
except for the payment of dividends in kind on its preferred stock.

In addition to not complying with certain financial covenants, in September
2001, HQ defaulted on its principle payments due under the HQ Credit Facility
and, in February 2002, commenced defaulting on interest payments. As a result of
entering into forbearance agreements, additional borrowings under the HQ Credit
Facility were permitted from September 30, 2001 to February 14, 2002. Due to
these defaults, outstanding borrowings are reflected as a current liability as
of December 31, 2002 and 2001.

HQ also has defaulted on the interest payments on the Mezzanine Loan beginning
September 30, 2001. As a result of these defaults and non-compliance with
financial covenants, the Mezzanine Loan has been classified as a current
liability as of December 31, 2002 and 2001.

HQ was not in compliance with certain financial covenants set forth in the
Debtor-in-Possession facility as of December 31, 2002. However, HQ has received
a waiver for these financial covenants from its lenders through March 31, 2003
that was also approved by the Bankruptcy court.



IV-33


FRONTLINE BANK CREDIT FACILITY/NOTES PAYABLE

On September 11, 2000, FrontLine entered into a $25.0 million line of credit
agreement (the "FrontLine Bank Credit Facility"). Borrowings under the FrontLine
Bank Credit Facility are secured by a 20.51% common ownership interest in shares
of HQ Global and bear interest at the Prime rate plus 2%. Any outstanding
borrowings under the FrontLine Bank Credit Facility were originally due on March
11, 2001. In January 2001, FrontLine exercised its option to extend the maturity
date until June 11, 2001. In May 2001, the Company further extended the maturity
date to September 11, 2001. In September 2001, the Company further extended the
maturity date to October 25, 2001. At December 31, 2001, FrontLine had borrowed
$25.0 million under the amended FrontLine Bank Credit Facility. Since the entire
outstanding balance of $25 million and accrued interest was not repaid at that
time, FrontLine became in default. Such amount is classified as current in the
accompanying Consolidated Balance Sheet. The weighted average interest rate of
the outstanding borrowings at such date was 7.66%.

The restructuring of the Company's indebtedness may result in significant
dilution to holders of the Company's common stock or the elimination of their
interest.

9. REDEEMABLE PREFERRED STOCK

On December 13, 2000, FrontLine obtained a $25.0 million preferred equity
facility (the "Preferred Equity Facility") with a major financial institution.
At the inception of the Preferred Equity Facility, the Company drew $15.0
million, for net proceeds of $13.9 million; the remaining amount was drawn by
FrontLine during the three months ended March 31, 2001, for net proceeds of
$10.0 million.

The Preferred Equity Facility is comprised of a series of redeemable convertible
preferred securities (the "Series B Preferred Stock"). The holders have consent
rights for certain significant transactions, including the incurrence of
additional debt by the Company or HQ, the issuance of equity securities senior
to, or on a parity with, the Series B Preferred Stock or the issuance by HQ of
preferred stock. These securities also contain certain covenants relating to HQ.
In addition, the securities include a redemption premium of 27.5%. Since the
securities were not redeemed prior to December 13, 2001, the securities
(including the amount of the redemption premium) have become convertible at the
holder's option into FrontLine common stock at the initial rate of $13.3875 per
share, the preferred stock has become a voting security on an "as-converted"
basis, and quarterly dividends have become payable from the date of initial
issuance at the annual rate of 9.25%. Securities have a mandatory redemption
requirement at a 27.5% premium, which has been triggered as a result of uncured
events of default. Accordingly, the securities are classified as "Redeemable
convertible preferred stock" in the accompanying consolidated balance sheet at
December 31, 2002.

The initial net proceeds of the securities are being accreted to the mandatory
redemption price of 127.5% of face value over the five-year period through the
mandatory redemption date.

At December 31, 2002, the Company did not pay the dividend that was payable at
that time and accordingly is in default. The Company is in arrears with regard
to the payment of dividends on its Series A and Series B Preferred Stock.

10. SHAREHOLDERS' DEFICIENCY

The Company has established the 1998 stock option plan, the 1998 employee stock
option plan, the 1999 stock option plan and the 2000 employee stock option plan
(the "Plans") for the purpose of attracting and retaining directors, executive
officers, other key employees and advisory board members. As of December 31,
2002, 3,700,376, 100,000, 1,750,000 and 2,500,000 of the Company's authorized
shares have been reserved for issuance under the 1998 stock option plan, the
1998 employee stock option plan, the 1999 stock option plan and the 2000
employee stock option plan, respectively.



IV-34


The following table sets forth the outstanding options by plan and their
corresponding exercise price ranges:



EXERCISE PRICE RANGE
OUTSTANDING ------------------------------
OPTIONS FROM TO
---------------- ------------- -------------

1998 Stock Option Plan ..................................... 757,818 $ 1.04 $ 2.00
1998 Employee Stock Option Plan ............................ 1,000 $ 2.00 $ 2.00
1999 Stock Option Plan ..................................... 122,500 $ 4.63 $29.25
2000 Employee Stock Option Plan ............................ 409,000 $10.63 $58.00
---------
Total ...................................................... 1,290,318
=========



A summary of the Company's stock option activity and related information is as
follows:



WEIGHTED
AVERAGE
OPTIONS OPTION PRICE OPTION PRICE
---------- -------------- -------------

Stock Options Outstanding - December 31, 1999 ............. 4,840,041 $ 1.04 - $29.25 $ 4.69
Granted ................................................... 2,159,792 (a) $10.63 - $58.00 $21.88
Exercised ................................................. (260,333) $ 1.04 - $13.31 $ 4.48
Forfeited ................................................. (839,169) $ 4.63 - $29.25 $17.32
----------
Outstanding - December 31, 2000 ........................ 5,900,331 $ 1.04 - $58.00 $ 9.19
Exercised ................................................. (139,000) $ 5.52 - $ 8.42 $ 4.48
Forfeited ................................................. (4,471,013) $ 4.63 - $29.25 $17.32
----------
Outstanding - December 31, 2001and 2002 ................ 1,290,318 $ 1.04 - $58.00 $ 9.19



(a) The weighted average grant date fair value per option (see discussion of
valuation below) was $13.23 and $13.15 for the years ended December 31, 1999 and
2000 respectively.

The following table sets forth information relating to stock options outstanding
and exercisable at December 31, 2002:



STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
OUTSTANDING WEIGHTED WEIGHTED OUTSTANDING WEIGHTED
AS OF AVERAGE AVERAGE AS OF AVERAGE
DECEMBER 31, YEARS OPTION DECEMBER 31, OPTION
OPTION PRICE 2002 REMAINING PRICE 2002 PRICE
- ---------------------------- -------------- ------------- ------------- -------------- -------------

$1.04 629,477 5.25 $ 1.04 629,477 $ 1.04
$1.10 - $4.63 130,341 5.01 $ 1.13 130,341 $ 1.13
$10.63 - $21.19 119,500 7.89 $16.46 119,500 $16.46
$24.88 271,000 7.35 $24.88 207,332 $24.88
$26.72 - $29.25 120,000 6.90 $28.35 80,004 $28.35
$58.00 20,000 7.05 $58.00 13,334 $58.00
----------- -----------
1,290,318 6.09 $10.91 1,179,988 $ 8.50
=========== ===========


Options granted to officers under the 1998 stock option plan were fully vested
on January 1, 1999. Options granted to new employees generally vest in three
equal installments on the first, second and third anniversaries of the date of
the grant. Options granted under the Plans are generally exercisable at the
market price on the date of the grant and, subject to termination of employment,
expire ten years from date of the grant, are not transferable other than on
death.

In December 1999, the Company formed an advisory board to provide strategic
guidance and be actively involved in the development of the Company's investee
companies. As of December 31, 2000, the advisory board consists of seven
members. These members were granted a total of 140,000 options under the 1999
stock option plan with exercise prices ranging from $26.72 to $58.00 (weighted
average $32.58). These options vest in three equal installments on the first,


IV-35


second and third anniversaries of the date of the grant. In accordance with FAS
123, the Company was amortizing to compensation expense over three years the
fair values of these options determined by the Black-Scholes option valuation
model. As a result of the Company's new strategic objectives in connection with
the Restructuring, the Company will not require substantial assistance from the
advisory board subsequent to 2000. Accordingly, the remaining value of the
related options was recognized in the fourth quarter of 2000.

In connection with the 1999 stock grants the Company made loans to employees to
cover the associated tax liabilities. Such loans were forgiven over the one-year
period following the date of grant. In connection with 200,000 of the shares
granted in 2000, the Company made payments on behalf of its employees to cover
the associated tax liabilities.

On December 16, 1999, the Company issued 1,437,500 shares of its common stock in
a public offering at $47.25 per share for an aggregate consideration of $63.9
million.

During the three months ended March 31, 2000, the Company completed preferred
stock offerings of 26,000 shares of 8.875% Convertible Cumulative Preferred
Stock (the "Series A Preferred Stock") at a price of $1,000 per share with net
proceeds of $24.6 million. These shares are convertible into the Company's
common stock at a price of $70.48. The Company did not declare or pay the
quarterly dividend due on these shares on November 6, 2001 or February 6, 2002.
Accordingly, future dividends will accrue at a higher rate of 10.875%. If
dividend distributions are in arrears for more than two quarterly periods, then
the holders of such shares will be entitled to elect two additional members to
the Company's Board of Directors.

On March 7, 2000, an investment partnership invested $30 million to purchase 1.5
million warrants to acquire FrontLine's common stock at an exercise price of $70
per share. The warrants have a term of 3.25 years. On June 29, 2000, the
investment partnership invested an additional $3.0 million to obtain a reduction
in the warrant exercise price to $47.25 per share and to extend the expiration
of the warrant to March 2005. Simultaneously with this transaction, the Company
issued 1,075,000 shares of its common stock for an additional 2.5% ownership
interest in HQ Global in connection with an agreement with the investment
partnership, which had originally owned preferred stock of VANTAS.

As a result of the Series B Preferred Stock sold in December 2000, the exercise
price for the March 7, 2000 warrants was automatically decreased to $45.01 per
share.

On March 31, 2000, the Company sold approximately 2.6 million shares of its
common stock at a price of $47.25 per share for an aggregate consideration of
$122.6 million. Proceeds from the sale were utilized to repay the remaining
portion of a then-existing credit facility. As a result, certain deferred
financing costs of $2.6 million incurred in connection with the establishment of
such credit facility were expensed as an extraordinary loss in the accompanying
Consolidated Statements of Operations. As a part of this transaction, the
Company issued 128,750 warrants to purchase the Company's common stock with an
exercise price of $47.25 per share for three years.

On September 20, 2000, the Company issued 331,400 shares of its common stock at
a price of $15.0875 per share for gross proceeds of $5.0 million.

On October 17, 2000, the Company's Board of Directors announced that it adopted
a Shareholder Rights Plan (the "Rights Plan") designed to protect shareholders
from various abusive takeover tactics, including attempts to acquire control of
the Company at an inadequate price, depriving shareholders of the full value of
their investment. The Rights Plan is designed to allow the Board of Directors to
secure the best available transaction for all the Company's shareholders. The
Rights Plan was not adopted in response to any known effort to acquire control
of the Company.

Under the Rights Plan, each shareholder received a dividend of one Right for
each share of the Company's outstanding common stock owned. The Rights are
exercisable only if a person or group acquires, or announces their intent to
acquire, 15% or more of the Company's common stock, or announces a tender offer
the consummation of which would result in beneficial ownership by a person or


IV-36


group of 15% or more of the common stock. Each Right entitles the holder to
purchase one one-hundreth of a share of a new series of junior participating
preferred stock of the Company at an initial exercise price of $60.00. If any
person acquires beneficial ownership of 15% or more of the outstanding shares of
common stock, then all Rights holders except the acquiring person will be
entitled to purchase the Company's common stock at a price discounted from the
then market price. If the Company is acquired in a merger after such an
acquisition, all Rights holders except the acquiring person will also be
entitled to purchase stock in the buyer at a discount in accordance with the
Rights Plan. The distribution of Rights was made to all common stockholders of
record at the close of business on November 3, 2000 and shares of common stock
that are newly-issued after that date will also carry Rights until the Rights
become detached from the common stock. The Rights expire at the close of
business on October 15, 2010, unless earlier redeemed by the Company. The Rights
distribution was not taxable to stockholders.

11. MERGER AND INTEGRATION COSTS

Merger and integration costs from continuing operations related to the HQ Merger
incurred and charged to expense during the year ended December 31, 2000 were
comprised of the following (in thousands):





Payments to cancel options to purchase VANTAS common stock held by officers and
Employees..................................................................................... $ 11,382
Severance, retention incentives and other benefits............................................... 9,412
Professional fees and other expenses............................................................. 3,907
--------
$ 24,701
========


Of the total merger and integration costs incurred through December 31, 2000 of
$24.7 million, approximately $23.4 million required cash outlays.

In connection with the HQ Merger, HQ consolidated and relocated the former
headquarters of VANTAS and Old HQ in New York, New York and Atlanta, Georgia,
respectively, into a new corporate headquarters in Dallas, Texas. Due to the HQ
Merger and relocations, VANTAS and Old HQ entered into incentive bonus
agreements with certain key executives and employees, which bonuses will be
earned as long as such executives and employees remain with HQ through a
specified date. Relocation costs and retention incentives are being charged to
expense as incurred.

12. LONG-TERM INCENTIVE PLAN

In March 2000, the Compensation Committee of the Board of Directors adopted a
long-term incentive plan (the "LTIP"). Under the long-term incentive plan,
participants may purchase or be granted interests in limited partnerships
established by the Company to hold a profit participation interest in the
investments made by the Company. The plan contemplates the allocation to such
partnerships of up to a 12.5% profits interest in each investment made by the
Company. FrontLine, through a wholly-owned subsidiary, will act as the general
partner of each partnership and will retain an 87.5% or greater interest in each
partnership depending upon the vesting and type of interest participants
receive. FrontLine generally must receive a minimum return on its holdings in a
particular partnership, typically 100% of the cost of its investment, before
participants receive distributions from such partnership. A partnership will
generally distribute the securities or cash it holds to its partners after five
to ten years, but may distribute securities or cash earlier if the company has
completed an initial public offering or been sold. The plan also permits the
award of equivalent grants without the use of a limited partnership. In April
2000, FrontLine paid advances aggregating $2.8 million on future payments under
the long-term incentive plan to its four executive officers. During the three
months ended September 30, 2001, $1.8 million of these advances were forgiven as
a result of the termination of three of these executives. Including related
income tax accruals, the resulting expenses relating to the forgiveness of the
advances to these three executives was $2.8 million in the twelve months ended
December 31, 2001, respectively.



IV-37


The Company is continuing to amortize the remaining $1.0 million and related tax
payments through April 2007, the end of the required service period, for the
remaining executive officer who is still employed with the Company. During each
of the twelve months ended December 31, 2002 and 2001, $0.2 million of
amortization related to the LTIP was recorded.

13. REORGANIZATION COSTS

HQ

In 2002, HQ recorded $8.5 million of professional services costs associated with
the Chapter 11 proceeding and a $24.7 million non-cash charge associated with
the write-off of deferred financing costs associated with the Mezzanine Loan.

The following table summarizes the accrued charges related to reorganization (in
thousands):



Professional Write off of
Services Deferred Financing
Costs Costs non-cash Total
------------ ------------------ -----------

2002 charges $ 8,464 $ 24,722 $ 33,186
Non-cash reduction -- (24,722) (24,722)
Cash expenditures (5,024) -- (5,024)
-------- -------- --------
Balance at December 31, 2002 $ 3,440 $ -- $ 3,440
======== ======== ========



14. RESTRUCTURING

HQ

In the second quarter of 2001, HQ initiated a restructuring program to close
certain of its business centers and eliminate certain other business center and
corporate positions. This restructuring program resulted in a charge of $11.3
million in the third quarter of 2001 consisting of employee severance and its
estimate of future lease payments it would be required to make following closure
of the centers. Subsequent to the initiation of the plan, HQ has filed
bankruptcy and has revised its estimates of severance and lease costs based on
the expected costs of buying out its lease obligations resulting in a reduction
of accrued restructuring costs of $3.2 million in the fourth quarter of 2001.

In the fourth quarter of 2001, HQ expanded its restructuring program to include
the closure of additional business centers resulting in an additional
restructuring charge of $49.4 million consisting primarily of HQ's estimate of
the future lease payments, it will be required to make following closure of
these centers. Restructuring costs in 2001 also included $5.7 million of
professional costs associated with this restructuring and HQ's Chapter 11
proceeding (Note 1).

In 2002, HQ recorded restructuring charges of $29.4 million related to
additional planned center closures and employee severance.

During the twelve months ended December 31, 2002, various landlords drew down
$10.9 million of letters of credit, which reduced the estimated liability
related to center closures.


IV-38


The following table summarizes the accrued charges related to restructuring (in
thousands):



Professional
Severance Lease Costs Services Costs Total
--------- ----------- -------------- ------------

2001 Charges $ 4,903 $ 46,979 $ 5,671 $ 57,553
Cash expenditures (2,208) -- (3,778) (5,986)
-------- -------- -------- --------
Balances at December 31, 2001 2,695 46,979 1,893 51,567
2002 Charges 1,105 28,267 -- 29,372
Cash expenditures (957) (14,241) (1,893) (17,091)
-------- -------- -------- --------
Balance at December 31, 2002 $ 2,843 $ 61,005 $ -- $ 63,848
======== ======== ======== ========


At December 31, 2001, the program had resulted in a reduction of 363 employees.
This restructuring also resulted in an impairment of related fixed assets of
$20.9 million and impairment of favorable leases of $4.8 million included in the
Company's fourth quarter 2001 impairment charge. During 2002, the restructuring
program resulted in an additional reduction of approximately 350 employees.
Severance costs include management retention which is expected to be paid in
2003, while lease costs are expected to be paid in 2003 and future years.

Subsequent to December 31, 2002, the Company made the determination to close
approximately twenty additional centers as part of the Company's restructuring
plan. Until the Bankruptcy Court approves a plan of reorganization, the Company
will continue to assess the need for additional center closures based on
profitability, landlord rent concessions and other operational factors.

FRONTLINE

On October 18, 2000, FrontLine announced a restructuring of its strategic plan,
the steps under which are collectively referred to herein as the Restructuring
(see Note 1). In connection with the Restructuring, FrontLine terminated
approximately 90% of its headquarters personnel, which has occurred during a
transition period through the fourth quarter of 2001. As a result of this
Restructuring, FrontLine has recognized cash and non-cash restructuring charges
of $0.4 million, $13.6 million and $12.8 million during the twelve months ended
December 31, 2002, 2001 and 2000, respectively.

The restructuring costs recognized during 2002 consist principally of (1) $0.2
million of severance and related payments made to employees who were terminated
in 2002 and (2) $0.2 million of LTIP amortization for the remaining officer.
Approximately $0.2 million of these costs have not been paid as of December 31,
2002.

The restructuring costs recognized during 2001 consist principally of (1) $5.3
million of professional fees and other expenses, (2) $2.8 million of LTIP costs
related to three executives who were terminated in 2001, (3) $1.9 million of
severance and related payments made to employees who were terminated in 2001 and
(4) $1.5 million of accelerated amortization of stock compensation and related
awards that resulted from the termination of certain employees. Approximately
$2.1 million of these costs had not been paid as of December 31, 2001.

In conjunction with the Restructuring, FrontLine re-evaluated the carrying
values of its investments and recorded aggregate impairment charges of $57.7
million through December 31, 2002 and 2001 and $25.7 million in the fourth
quarter of the year ended December 31, 2000, in order to reduce the carrying
value of these investments to fair value. Such writedowns were determined in
recognition of both the lack of continuing financial support FrontLine planned
to provide to certain investees following the Restructuring and the difficult
market conditions experienced in mid-2000 and 2001. Such charges are included in
"Equity in net loss and impairment of unconsolidated companies" in the
accompanying Consolidated Statements of Operations.


IV-39


15. TRANSACTIONS WITH RELATED PARTIES

HQ

HQ believes that the terms and pricing of each of the following transactions
with related parties are similar to those negotiated at arms length. Certain
officers and members of HQ's Board of Directors are also officers and/or on the
board of directors of FrontLine, Reckson Associates Realty Corp. ("Reckson
Associates"), Equity Office Properties ("EOP") or CarrAmerica.

During the year ended December 31, 2001, in connection with the June 29, 2001
Series B Preferred Stock issuance, the Company contributed approximately $15
million in capital to HQ which has been recorded as a capital contribution.

HQ is a tenant under several leases with Reckson Associates and affiliates. For
the years ended December 31, 2002, 2001 and 2000, HQ made payments aggregating
approximately $3.4 million, $4.7 million and $5.2 million for rent, construction
and other charges under such leases.

HQ is a tenant under several leases with EOP and affiliates of EOP, which are
affiliated with EOP Operating Limited Partnership, a purchaser of HQ's Series A
Preferred Stock in conjunction with the HQ Merger. For the years ended December
31, 2002, 2001 and 2000, HQ made payments aggregating approximately $18.3
million, $18.6 million and $6.7 million, respectively, for rent and other
charges under such leases.

HQ is a tenant under several leases with CarrAmerica and affiliates of
CarrAmerica, who received shares of HQ's Voting Common Stock and Nonvoting
Common Stock in conjunction with the HQ Merger. For the years ended December 31,
2002, 2001 and 2000, HQ made payments aggregating approximately $2.7 million,
$3.6 million and $2.8 million, respectively, for rent and other charges under
such leases.

FRONTLINE

On June 15, 1998, the Company established a credit facility with Reckson
Operating Partnership, L.P. ("Reckson"), a subsidiary of Reckson Associates, in
the amount of $100 million (the "FrontLine Facility") for their service sector
operations and other general corporate purposes. Reckson has advanced the
Company $93.4 million at December 31, 2002 under the FrontLine Facility.
Additionally, Reckson Strategic has a $100 million commitment from Reckson to
fund its investment activities (the "Reckson Strategic Facility"). Draws on the
Reckson Strategic Facility occur either in the form of loans to FrontLine (the
"Reckson Strategic Facility" and, collectively with the FrontLine Facility, the
"Credit Facilities") under terms similar to the FrontLine Facility or whereby
Reckson makes direct investments with Reckson Strategic in joint ventures. As of
December 31, 2002, Reckson has advanced FrontLine $49.3 million under the
Reckson Strategic Facility. The aggregate principal amount outstanding and due
Reckson at December 31, 2002 under both credit facilities was $142.7 million.
Interest accrued on these facilities at December 31, 2002, was $46.7 million.
Both of the FrontLine and Reckson Strategic Facilities expire in June 2003.
Currently, the Company has an outstanding letter of credit in the amount of $0.2
million.

In November 1999, the Boards of Directors of FrontLine and Reckson approved
amendments to the FrontLine Facility and Reckson Strategic Credit Facility
necessary in order for FrontLine to proceed with certain short-term financings
for proposed acquisitions. As consideration for such approvals, FrontLine paid a
fee to Reckson in the form of 176,186 shares of FrontLine common stock which
were valued at $20.31 per share. The fee of approximately $3.6 million was
included in deferred financing costs and was amortized over the estimated
nine-month benefit period.



IV-40


On March 28, 2001, the Company's Board of Directors approved amendments to the
Credit Facilities pursuant to which (i) interest is payable only at maturity and
(ii) Reckson may transfer all or any portion of its rights or obligations under
the Credit Facilities to its affiliates. In addition, the Reckson Strategic
Facility was amended to increase the amount available thereunder to up to $110
million. Reckson has advanced approximately $59.8 million under the Reckson
Strategic Facility to fund additional Reckson Strategic-controlled joint
ventures through December 31, 2002. There is no remaining availability under the
Credit Facilities. At December 31, 2002, as a result of the Company's failure to
pay the principal and interest due upon maturity on the FrontLine Bank Credit
Facility, an event of default has occurred upon the Credit Facilities with
Reckson. As a result of the default under the Credit Facilities, interest
borrowings currently bear interest at 14.62% per annum.

The Company is entitled to a cumulative annual management fee of $2 million with
respect to Reckson Strategic, of which $1.5 million is subordinate to UBS Real
Estate receiving an annual minimum rate of return of 16% and a return of its
capital. The non-subordinated portion of the fee for the years ended December
31, 2002, 2001 and 2000 were $0.1 million, $0.1 million and $0.5 million,
respectively.

The Company reimburses Reckson with respect to general and administrative
expenses (including payroll expenses) incurred by Reckson for the benefit of the
Company. These services include payroll, human resources, accounting and other
advisory services. The Company did not incur such costs during 2002. In 2001 and
2000, the Company incurred $0.1 million and $1.3 million, respectively, for such
activities.

16. BENEFIT PLAN

HQ has a 401(k) voluntary savings and investment plan (the "Plan") open to all
employees who meet certain minimum requirements. HQ can make voluntary
contributions to the Plan not to exceed 6% of eligible participant compensation.
Participants vest 100% in its contributions after 3 years of service. HQ
contributed approximately $0.9 million and $0.3 million to the Plan for the
years ended December 31, 2001 and 2000. HQ ceased contributions to the plan on
November 1, 2001.

17. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

HQ and its subsidiaries lease certain business center facilities related to
continuing operations and their corporate offices under non-cancelable operating
leases expiring at various dates through 2011. Certain of these operating leases
provide for renewal options. HQ is also generally obligated to reimburse the
lessor for its proportionate share of operating expenses, which are not included
in the minimum lease commitments below. HQ also leases equipment under operating
and capital leases which expire at various dates through 2003.

Minimum future rental payments for continuing operations under theses
non-cancelable leases for each of the next five years and in the aggregate as of
December 31, 2002 are as follows (in thousands):




CAPITAL OPERATING
LEASES LEASES
-------- ---------

2003 ...................................................... $ 1,577 $134,613
2004 ...................................................... 878 121,552
2005 ...................................................... 237 111,488
2006 ...................................................... -- 96,467
2007 ...................................................... -- 85,061
Thereafter ................................................ -- 212,532
-------- --------
Total minimum lease payments .......................... 2,692 $761,713
========
Less amount representing interest ......................... (268)
--------
Present value of minimum lease commitments............. $ 2,424
========



IV-41


Total rent expense for the years ended December 31, 2002, 2001 and 2000 was
$184.1 million, $223.1 million and $172.5 million, respectively. Future rental
payments for office rent expense are typically subject to adjustments for
operating expenses and inflation increases as measured by the Consumer Price
Index. As of December 31, 2002, HQ had incurred $11.7 million of rent
obligations which were overdue by 30 days or more, representing pre-petition
rent for certain leases.

CUSTODIAL ACCOUNTS

HQ acts as a trustee in connection with business centers that it manages for
unrelated property owners. The cash held in trust and not reflected on the
accompanying consolidated balance sheets approximated $0.6 million and $0.8
million as of December 31, 2002 and 2001, respectively.

LITIGATION

On February 4, 1999, a lawsuit captioned OmniOffices, Inc. et al. v. Joseph
Kaidanow, et al., (Civil Action No. 99-0260) was filed in the United States
District Court for the District of Columbia. This litigation (the "D.C.
Action"), is with two stockholders of Old HQ (f/k/a OmniOffices, Inc.) and
involves the conversion of approximately $111 million of debt previously loaned
to Old HQ by CarrAmerica, into HQ's non-voting common stock. CarrAmerica and Old
HQ initiated the action by filing a complaint seeking a declaratory judgment
that the conversion price was fair, following threats by Messrs. Kaidanow and
Arcoro ("Defendants") to challenge the conversion price. Defendants filed
counterclaims against CarrAmerica, Old HQ and the then current directors of Old
HQ, seeking a judgment declaring the conversion void or voidable, or in the
alternative, compensatory and punitive damages. The stockholders' counterclaim
makes no allegations against HQ. By January 2000, discovery was complete, the
case was fully briefed, and the parties were awaiting a court ruling on HQ and
CarrAmerica's ("Plaintiffs") motion for summary judgment and Defendants' motion
to modify the scheduling order and motion to seal. The case was reassigned
twice, and the two motions were then dismissed without prejudice on September
19, 2000 and September 26, 2000. On November 13, 2000, Plaintiffs filed a motion
to reinstate their summary judgment motion. Defendants filed a cross-motion for
leave to file a cross-motion for summary judgment. The Court permitted the
refiling and took the motion and cross-motion for summary judgment under
advisement. On September 12, 2001, without holding oral argument, the Court
denied Plaintiffs' motion for summary judgment, but granted the Defendants'
cross-motion for summary judgment. Plaintiffs and the directors of old HQ filed
a Notice of Appeal in October 2001. On February 15, 2002, the D.C. Circuit
announced that oral argument was scheduled for January 16, 2003. In March 2002,
the D.C. Circuit referred the appeal to its Appellate Mediation Program. On
April 24, 2002, HQ filed a notice of bankruptcy stay in respect of its March 13,
2002 Chapter 11 proceeding. HQ informed the D.C. Circuit that the appeal was
stayed as to HQ pursuant to the automatic stay provisions of the U.S. Bankruptcy
Code. The D.C. Circuit reversed the District Court in an opinion dated March 7,
2003.

In re HQ Global Workplaces, Inc. Shareholder Litigation, No. 17996-NC. The
original lawsuit (the "Fiduciary Action"), was brought in Delaware State
Chancery Court on April 17, 2000 by Kaidanow and Arcoro ("Plaintiffs") but was
removed to the Federal District Court for the District of Delaware and then
remanded on Plaintiffs' motion back to Delaware Chancery Court. The action
alleges a breach of fiduciary duty by CarrAmerica Realty Corporation and Old
HQ's directors in approving the HQ Merger transaction. The complaint alleges
among other things that allocation of the purchase price between the UK and U.S.
companies failed to meet the standard of entire fairness, and that CarrAmerica
breached its obligations under the Tag-Along Rights Agreement between Plaintiffs
and CarrAmerica. The lawsuit also alleges an aiding and abetting claim against
the Company as well as a tortuous interference claim against HQ and the Company.
The Plaintiffs in the Fiduciary Action have also brought an appraisal action in
the Chancery Court requesting appraisal of 100,000 of their shares sold in the
HQ Merger. Modest discovery has occurred in the Appraisal Action. The Appraisal
Action and the Fiduciary Action have now been consolidated into one action. On
March 8, 2002, Plaintiffs filed a motion for leave to amend their complaint to
add, inter alia, a breach of warrant agreements claim against HQ and other



IV-42


claims against FrontLine. On March 15, 2002, HQ filed a notice of bankruptcy
stay, stemming from its March 13, 2002 voluntary petition for Chapter 11
bankruptcy protection in the United States Bankruptcy Court for the District of
Delaware. HQ informed the Court that the consolidated action should be stayed as
to HQ pursuant to the automatic stay provisions of the Bankruptcy Code.
Co-defendant CarrAmerica Realty Corporation filed a motion requesting that, in
light of HQ's bankruptcy, the consolidated litigation be stayed as to all
defendants. At a status conference held on March 25, 2002, the Vice Chancellor
ordered the parties to work out a scheduling order for the briefing of the
motion regarding the stay of the proceedings. At a hearing on this motion on
September 9, 2002, the Vice Chancellor stayed the proceedings until November 13,
2002. The former director co-defendants in the consolidated action separately
filed an adversary proceeding in the Delaware Bankruptcy Court seeking to stay
the consolidated action as to the former directors. After a hearing on June 25,
2002, the Delaware Bankruptcy Court denied the requested relief.

On September 9, 2002, HQ Global Workplaces, Inc. filed an adversary proceeding
in the Delaware Bankruptcy Court seeking to subordinate, pursuant to Section
510(b) of the Bankruptcy Code, the claims of Messrs. Kaidanow and Arcoro on the
basis that the claims arose from the purchase or sale of an equity security.

On or about October 3, 2001, Burgess Services, LLC ("Burgess Services"),
Dominion Venture Group, LLC ("Dominion Venture Group") and certain affiliated
parties commenced an action in Oklahoma State Court against Reckson Strategic
Venture Partners, LLP ("RSVP"), Reckson Associates Realty Corp. ("Reckson"), and
RAP-Dominion LLC ("RAP-Dominion"), a joint venture through which RSVP and
Reckson invested in a venture with certain of the plaintiffs. On April 10, 2002,
the litigation was settled without liability on the part of the Company or the
defendant. In connection with the settlement, the joint venture will be
terminated. As a result of this settlement, the Company determined that no
further impairment was necessary on its carrying value in its investment in
Reckson Strategic.

In April 2000, the Company entered into an office lease which expires in
December 2010. In January 2001, the Company assigned the lease to HQ. The lease
assignment did not relieve the Company of any of its obligations under the terms
of this lease. At December 31, 2002, HQ was past due on $0.9 million of rent.
The landlord has drawn the full letter on credit of $2.8 million. Of the $57.6
million HQ restructuring charge recorded in 2001, a $4.8 million accrual
applicable to this lease was recorded as an estimate for the cost of terminating
this lease. If the ultimate cost of terminating this lease exceeds the
outstanding letter of credit, then additional cash may need to be paid by either
HQ or the Company. Since HQ is currently in bankruptcy, the landlord is likely
to seek to recover any further damages from FrontLine. As of December 31, 2002,
the remaining lease commitment was $23.4 million.

The Equal Employment Opportunity Commission has filed a suit (N.D. 111., Cause
No. 02 C 6623, on September 1, 2002), on behalf of a former employee alleging
discrimination under the Americans with Disability Act and Title 1 of the Civil
Rights Act of 1991. HQ is currently evaluating the information and has not yet
filed a response.

The Company also has potential liability under its indemnification of
CarrAmerica for liabilities of Carr America under its guarantees relating to
four HQ leases. In conjunction with the HQ Merger, FrontLine agreed to indemnify
CarrAmerica for its guarantees of certain HQ leases. As of December 31, 2002,
the remaining lease commitments in excess of the existing letter of credit was
$27.4 million.

In addition to the cases set forth above, the Company and its investee entities
are party to claims and administrative proceedings arising in the ordinary
course of business or which are otherwise subject to indemnification, some of
which are expected to be covered by liability insurance (subject to policy
deductibles and limitations of liability) and all of which, including the cases
discussed above, collectively are not expected to have a material adverse effect
on the Company's financial position or results of operations.

Management does not anticipate that these legal litigations will negatively
impact future operations of the Company.



IV-43


18. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following summary represents the Company's results of operations for each
quarter during 2002 and 2001 (in thousands, except share amounts):



FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER
- ---- ------------ ------------ ------------ ------------

Total revenues ............................... $ 88,458 $ 83,543 $ 79,825 $ 76,199
Total expenses ............................... 126,135 118,576 108,037 119,382
Equity in net loss and impairment of
unconsolidated companies .................. (288) (1,047) (197) 125
Net loss ..................................... (37,893) (33,201) (28,455) (42,394)
Net loss applicable to common
Shareholders .............................. $ (38,592) $ (33,922) $ (28,839) $ (42,785)
Basic and diluted net loss per weighted
average common share ...................... $ (1.03) $ (0.91) $ (0.77) $ (1.15)
Basic and diluted weighted average
common shares outstanding ................. 37,344,039 37,344,039 37,344,039 37,344,039






FIRST SECOND THIRD FOURTH
2001 QUARTER QUARTER QUARTER QUARTER
- ---- ------------ ------------ ------------ ------------

Total revenues .............................. $ 137,442 $ 123,151 $ 108,700 $ 101,414
Total expenses .............................. 156,543 170,701 458,358 434,057
Equity in net loss and impairment of
unconsolidated companies ................. (9,958) (1,416) (24,031) (1,043)
Minority interest ........................... (1,532) 10,511 105,364 191,641
Net loss .................................... (30,216) (39,072) (256,556) (298,982)
Net loss applicable to common
Shareholders ............................. (33,208) (40,009) (257,495) (299,696)
Basic and diluted net loss per weighted
average common share ..................... $ (0.91) $ (1.08) $ (6.93) $ (8.02)
Basic and diluted weighted average
common shares outstanding ................ 36,660,417 36,876,113 37,180,073 37,369,705





IV-44


Signatures

Pursuant to the requirements of Section 13 or 15(d) 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 on April 14, 2003.


FRONTLINE CAPITAL GROUP

By: /s/ Scott H. Rechler
------------------------------------
(Scott H. Rechler)
President, Chief Executive
Officer and Director



KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors
of FrontLine Capital Group, hereby severally constitute Scott H. Rechler and
James D. Burnham, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, the Form 10-K filed herewith and any and all
amendments to said Form 10-K, and generally to do all such things in our names
and in our capacities as officers and directors to enable FrontLine Capital
Group to comply with the provisions of the Securities Exchange Act of 1934, and
all requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorneys, or any of
them, to said Form 10-K and any and all amendments thereto.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.



NAME TITLE DATE
---- ----- ----


/s/ Scott H. Rechler Chairman of the Board, President, Chief Executive April 14, 2003
- ----------------------- Officer
(Scott H. Rechler) and Director (Principal Executive Officer)


/s/ James D. Burnham Chief Financial Officer and Treasurer April 14, 2003
- ----------------------- (Chief Accounting Officer)
(James D. Burnham)

/s/ Paul F. Amoruso Director
- -----------------------
(Paul F. Amoruso)

/s/ Sidney Braginsky Director
- -----------------------
(Sidney Braginsky)

/s/ Ronald S. Cooper Director
- -----------------------
(Ronald S. Cooper)

/s/ Douglas A. Sgarro Director
- -----------------------
(Douglas A. Sgarro)




IV-45


CERTIFICATIONS

I, Scott H. Rechler, certify that:

1. I have reviewed this quarterly report on Form 10-K of Frontline Capital
Group;

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

3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;

4. The registrant's other certifying officers and I are responsible 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 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 report
(the "Evaluation Date"); and

c) Presented in this 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

6. The registrant's other certifying officers and I have indicated in this
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: April 14, 2003. /S/ SCOTT H. RECHLER
-------------------------------------
Scott H. Rechler
President and Chief Executive Officer
(Principal Executive Officer)


IV-46



I, James D. Burnham, certify that:

1. I have reviewed this quarterly report on Form 10-K of Frontline Capital
Group;

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

3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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 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 report
(the "Evaluation Date"); and

c) Presented in this 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

6. The registrant's other certifying officers and I have indicated in this
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: April 14, 2003.

/s/ JAMES D. BURNHAM
-------------------------------------
James D. Burnham
Chief Financial Officer and Treasurer
(Chief Accounting Officer)



IV-47