ISTAR FINANCIAL INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

/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 NO. 1-15371
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ISTAR FINANCIAL INC.
(Exact name of registrant as specified in its charter)

MARYLAND 95-6881527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1114 AVENUE OF THE AMERICAS, 27TH FLOOR
NEW YORK, NY 10036
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (212) 930-9400
--------------------------

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

Title of each class: Name of Exchange on which registered:
COMMON STOCK, $0.001 PAR VALUE NEW YORK STOCK EXCHANGE
9.375% SERIES B CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
9.200% SERIES C CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
8.000% SERIES D CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE

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

Indicate by check mark whether the registrant: (i) 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 (ii) 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 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 Rule 12-b-2). Yes /X/ No / /

As of June 30, 2002, the aggregate market value of the common stock, $0.001
par value per share of iStar Financial Inc. ("Common Stock"), held by
non-affiliates(1) of the registrant was approximately $2.4 billion, based upon
the closing price of $28.50 on the New York Stock Exchange composite tape on
such date.

As of March 14, 2003, there were 98,622,217 shares of Common Stock
outstanding.

(1) For purposes of this Annual Report only, includes all outstanding Common
Stock other than Common Stock held directly by the registrant's directors
and executive officers.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the registrant's definitive proxy statement for the registrant's
2003 Annual Meeting, to be filed within 120 days after the close of the
registrant's fiscal year, are incorporated by reference into Part III of
this Annual Report on Form 10-K.
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TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

EXPLANATORY NOTE FOR PURPOSES OF THE "SAFE HARBOR PROVISIONS" OF SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
which involve certain risks and uncertainties. Forward-looking statements are
included with respect to, among other things, iStar Financial Inc.'s current
business plan, business strategy and portfolio management. The Company's actual
results or outcomes may differ materially from those anticipated. Important
factors that the Company believes might cause such differences are discussed in
the cautionary statements presented under the caption "Factors That May Affect
the Company's Business Strategy" in Item 1 of this Form 10-K or otherwise
accompany the forward-looking statements contained in this Form 10-K. In
assessing all forward-looking statements, readers are urged to read carefully
all cautionary statements contained in this Form 10-K.

CODE OF CONDUCT

iStar Financial Inc. (the "Company") has adopted a code of business conduct
for all of its employees and directors, including the Company's chief executive
officer, chief financial officer, other executive officers and personnel. A copy
of the Company's code of conduct is attached to this Annual Report on Form 10-K
as Exhibit 10.21 and is also available on the Company's website at
www.istarfinancial.com. The Company intends to post on its website material
changes to, or waivers from, its code of conduct, if any, within two days of any
such event. As of December 31, 2002, there were no such changes or waivers.

OVERVIEW

The Company is the leading publicly-traded finance company focused on the
commercial real estate industry. The Company provides structured financing to
private and corporate owners of real estate nationwide, including senior and
junior mortgage debt, corporate mezzanine and subordinated capital, and
corporate net lease financing. The Company, which is taxed as a real estate
investment trust ("REIT"), seeks to deliver strong dividends and superior
risk-adjusted returns on equity to shareholders by providing innovative and
value-added financing solutions to its customers.

The Company's primary product lines include:

- STRUCTURED FINANCE. The Company provides senior and subordinated loans
that typically range in size from $20 million to $100 million to borrowers
holding high-quality real estate. These loans may be either fixed or
variable rate and are structured to meet the specific financing needs of
the borrowers, including the acquisition or financing of large,
high-quality real estate. The Company offers borrowers a wide range of
structured finance options, including first mortgages, second mortgages,
partnership loans, participating debt and interim facilities. The
Company's structured finance transactions have maturities generally
ranging from three to ten years. As of December 31, 2002, based on gross
carrying values, the Company's structured finance assets represented
27.02% of its assets.

- PORTFOLIO FINANCE. The Company provides funding to regional and national
borrowers who own multiple facilities in geographically diverse
portfolios. Loans are cross-collateralized to give the Company the benefit
of all available collateral and underwritten to recognize inherent
portfolio diversification. Property types include multifamily, suburban
office, hotels and other property types where individual property values
are less than $20 million on average. Loan terms are structured to meet
the specific requirements of the borrower and typically range in size from
$25 million to $150 million. The Company's portfolio finance transactions
have maturities generally ranging from

2

three to ten years. As of December 31, 2002, based on gross carrying
values, the Company's portfolio finance assets represented 7.08% of its
assets.

- CORPORATE FINANCE. The Company provides senior and subordinated capital to
corporations engaged in real estate or real estate-related businesses.
Financings may be either secured or unsecured and typically range in size
from $20 million to $150 million. The Company's corporate finance
transactions have maturities generally ranging from five to ten years. As
of December 31, 2002, based on gross carrying values, the Company's
corporate finance assets represented 12.18% of its assets.

- LOAN ACQUISITION. The Company acquires whole loans and loan participations
which represent attractive risk-reward opportunities. Loans are generally
acquired at a small discount to the principal balance outstanding. Loan
acquisitions typically range in size from $5 million to $100 million and
are collateralized by all major property types. The Company's loan
acquisition transactions have maturities generally ranging from three to
ten years. As of December 31, 2002, based on gross carrying values, the
Company's loan acquisition assets represented 8.60% of its assets.

- CORPORATE TENANT LEASING. The Company provides capital to corporations and
borrowers who control facilities leased to single creditworthy tenants.
The Company's net leased assets are generally mission-critical
headquarters or distribution facilities that are subject to long-term
leases with rated corporate credit tenants, and which provide for all
expenses at the property to be paid by the corporate tenant on a triple
net lease basis. Corporate tenant lease transactions have terms generally
ranging from ten to 20 years and typically range in size from $20 million
to $150 million. As of December 31, 2002, based on gross carrying values,
the Company's corporate tenant lease assets represented 43.64% of its
assets.

- SERVICING. Through its iStar Asset Services division, the Company provides
rated loan servicing to third-party institutional loan portfolios, as well
as to the Company's own assets. The servicing business did not represent a
meaningful percentage of the gross carrying value of the Company's assets
as of December 31, 2002.

As more fully discussed in Note 1 to the Company's Consolidated Financial
Statements, the Company began its business in 1993 through private investment
funds formed to capitalize on inefficiencies in the real estate finance market.
In March 1998, these funds contributed their approximately $1.1 billion of
assets to the Company's predecessor in exchange for a controlling interest in
that company. Since that time, the Company has grown by originating new lending
and leasing transactions, as well as through corporate acquisitions.

Specifically, in September 1998, the Company acquired the loan origination
and servicing business of a major insurance company, and in December 1998, the
Company acquired the mortgage and mezzanine loan portfolio of its largest
private competitor. Additionally, in November 1999, the Company acquired TriNet
Corporate Realty Trust, Inc. ("TriNet" or the "Leasing Subsidiary"), then the
largest publicly-traded company specializing in corporate sale/leaseback
transactions for office and industrial facilities (the "TriNet Acquisition").
The TriNet Acquisition was structured as a stock-for-stock merger of TriNet with
a subsidiary of the Company.

Concurrent with the TriNet Acquisition, the Company also acquired its former
external advisor in exchange for shares of the Company's common stock ("Common
Stock") and converted its organizational form to a Maryland corporation. As part
of the conversion to a Maryland corporation, the Company replaced its former
dual class common share structure with a single class of Common Stock. The
Company's Common Stock began trading on the New York Stock Exchange on
November 4, 1999. Prior to this date, the Company's common shares were traded on
the American Stock Exchange.

3

INVESTMENT STRATEGY

The Company's investment strategy targets specific sectors of the real
estate credit markets in which it believes it can deliver value-added, flexible
financial solutions to its customers, thereby differentiating its financial
products from those offered by other capital providers.

The Company has implemented its investment strategy by:

- Focusing on the origination of large, structured mortgage, corporate and
lease financings where customers require flexible financial solutions.

- Avoiding commodity businesses in which there is significant direct
competition from other providers of capital such as conduit lending and
investment in commercial or residential mortgage-backed securities.

- Developing direct relationships with borrowers and corporate customers as
opposed to sourcing transactions solely through intermediaries.

- Adding value beyond simply providing capital by offering borrowers and
corporate customers specific lending expertise, flexibility, certainty and
continuing relationships beyond the closing of a particular financing
transaction.

- Taking advantage of market anomalies in the real estate financing markets
when the Company believes credit is mispriced by other providers of
capital, such as the spread between lease yields and the yields on
corporate customers' underlying credit obligations.

The Company intends to continue to emphasize a mix of portfolio financing
transactions to create asset diversification and single-asset financings for
properties with strong, long-term competitive market positions. The Company's
credit process will continue to focus on:

- Building diversification by asset type, property type, obligor, loan/lease
maturity and geography.

- Financing high-quality commercial real estate assets in major metropolitan
markets.

- Underwriting assets using conservative assumptions regarding collateral
value and future property performance.

- Requiring adequate cash flow coverage on its investments.

- Stress testing potential investments for adverse economic and real estate
market conditions.

As of December 31, 2002, based on current gross carrying values, the
Company's business consists of the following product lines:

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

PRODUCT LINE

4

The Company seeks to maintain an investment portfolio which is diversified
by asset type, underlying property type and geography. As of December 31, 2002,
based on current gross carrying values, the Company's total investment portfolio
has the following characteristics:

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ASSET TYPE

PROPERTY TYPE

GEOGRAPHY

5

THE COMPANY'S UNDERWRITING PROCESS

The Company discusses and analyzes investment opportunities during regular
weekly meetings which are attended by all of its investment professionals, as
well as representatives from its legal, risk management and capital markets
areas. The Company has developed a process for screening potential investments
called the Six Point Methodology(SM). The Six Point Methodology(SM) reflects the
six fundamental criteria by which the Company evaluates an investment
opportunity prior to beginning its formal commitment process.

THE SIX POINT METHODOLOGY

- First, the Company evaluates the source of the opportunity. The Company
prefers opportunities where it has a direct relationship with the customer
or an intermediary who has worked with the Company before, because it
believes that such relationships enable it to add more value to a
transaction.

- Second, the Company evaluates the quality of the collateral or corporate
credit, as well as its market or industry dynamics.

- Third, the Company evaluates the equity or corporate sponsor, including
factors such as its reputation, financial strength and commitment to the
collateral.

- Fourth, the Company determines whether it can implement an appropriate
legal and financial structure for the transaction given its risk profile,
including the Company's ability to control the collateral under various
circumstances.

- Fifth, the Company performs an alternative investment test. If the Company
believes that it can earn a better risk-adjusted return in a comparable
asset class or different part of the customer's capital structure, then
the proposed investment will score poorly in this category.

- Sixth, the Company evaluates the liquidity of the investment and its
ability to match fund the asset. A security that is too highly structured
is less desirable because it may limit the Company's ability to obtain
appropriately priced financing for the asset, or its ability to sell it if
it ever so desires.

The Company has an intensive underwriting process in place for all potential
investments. This process provides for comprehensive feedback and review by all
disciplines within the Company, including investments, credit, risk management,
legal/structuring and capital markets. Participation is encouraged from all
professionals throughout the entire origination process, from the initial
consideration of the opportunity, through the Six Point Methodology(SM) and into
the preparation and distribution of a comprehensive memorandum for the Company's
internal and Board of Directors investment committees.

Commitments of less than $30.0 million require the unanimous consent of the
Company's internal investment committee, consisting of senior management
representatives from each of the Company's key disciplines. For commitments
between $30.0 million and $50.0 million, the further approval of the Company's
Board of Directors' investment committee is also required. All commitments of
$50.0 million or more must be approved by the Company's full Board of Directors.

FINANCING STRATEGY

The Company has access to a wide range of debt and equity capital resources
to finance its investment and growth strategies. At December 31, 2002, the
Company had over $2.0 billion of tangible book equity capital and a total market
capitalization of approximately $6.6 billion. The Company believes that its
size, diversification, investor sponsorship and track record are competitive
advantages in obtaining attractive financing for its businesses.

6

The Company seeks to maximize risk-adjusted returns on equity and financial
flexibility by accessing a variety of public and private debt and equity capital
sources, including:

- iStar Asset Receivables ("STARs"), the Company's proprietary match-funded,
securitized debt program.

- Long-term, unsecured corporate debt.

- A combined $2.7 billion available under its unsecured and secured
revolving credit facilities at year end.

The Company's business model is premised on significantly lower leverage
than many other commercial finance companies. In this regard, the Company seeks
to:

- Target a maximum consolidated debt/book equity ratio of 2.0x.

- Maintain a large tangible equity base and conservative credit statistics.

- Match fund assets and liabilities.

The Company has not historically utilized, and does not currently plans to
utilize, "off-balance sheet" financing vehicles other than normal corporate
tenant leasing joint ventures with unrelated third parties, which may be
accounted for under the equity method due to the existence of provisions
providing for a sharing of control with the venture partners. Detailed
information on joint ventures in which the Company currently has
investments/operations, including information on the Company's share of the
joint ventures' non-recourse debt, is provided in Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and in Note 6 to the Company's
Consolidated Financial Statements.

A more detailed discussion of the Company's current capital resources is
provided in Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

HEDGING STRATEGY

The Company has variable-rate lending assets and variable-rate debt
obligations. These assets and liabilities create a natural hedge against changes
in variable interest rates. This means that as interest rates increase, the
Company earns more on its variable-rate lending assets and pays more on its
variable-rate debt obligations and, conversely, as interest rates decrease, the
Company earns less on its variable-rate lending assets and pays less on its
variable-rate debt obligations. When the Company's variable-rate debt
obligations exceed its variable-rate lending assets, the Company utilizes
derivative instruments to limit the impact of changing interest rates on its net
income. The Company does not use derivative instruments to hedge assets or for
speculative purposes. The derivative instruments the Company uses are typically
in the form of interest rate swaps and interest rate caps. Interest rate swaps
effectively change variable-rate debt obligations to fixed-rate debt
obligations. Interest rate caps effectively limit the maximum interest rate on
variable-rate debt obligations.

In addition, when appropriate the Company may occasionally enter into
interest rate swaps that convert fixed-rate debt to variable rate in order to
mitigate the risk of changes in fair value of the fixed-rate debt obligations.

The primary risks from the Company's use of derivative instruments is the
risk that a counterparty to a hedging arrangement could default on its
obligation and the risk that the Company may have to pay certain costs, such as
transaction fees or breakage costs, if a hedging arrangement is terminated by
it. As a matter of policy, the Company enters into hedging arrangements with
counterparties that are large, creditworthy financial institutions typically
rated at least "A/A2" by Standard & Poor's and Moody's Investors Service,

7

respectively. The Company's hedging strategy is monitored by its Audit Committee
on behalf of its Board of Directors and may be changed by the Board of Directors
without stockholder approval.

Developing an effective strategy for dealing with movements in interest
rates is complex and no strategy can completely insulate the Company from risks
associated with such fluctuations. There can be no assurance that the Company's
hedging activities will have the desired beneficial impact on its results of
operations or financial condition.

BUSINESS

REAL ESTATE LENDING:

The Company provides structured financing to private and corporate owners of
real estate nationwide, including senior and junior mortgage debt, as well as
corporate mezzanine and subordinated capital.

Set forth below is information regarding the Company's primary real estate
lending product lines as of December 31, 2002:

As more fully discussed in Note 3 to the Company's Consolidated Financial
Statements, the Company continually monitors borrower performance and completes
a detailed, loan-by-loan formal credit review on a quarterly basis. After having
originated or acquired over $6 billion of investment transactions, the Company
and its private investment fund predecessors have experienced minimal actual
losses on their lending investments. Further, based on current reviews of its
portfolio, management is not aware of any factors relating to specific loans
which indicate that such losses may be experienced in the forseeable future.

Despite the Company's historical track record of having minimal credit
losses and loans on non-accrual status, the Company considers it prudent to
reflect provisions for loan losses on a portfolio basis based upon the Company's
assessment of general market conditions, the Company's internal risk management
policies and credit risk rating system, industry loss experience, the Company's
assessment of the likelihood of delinquencies or defaults, and the value of the
collateral underlying its investments. Accordingly, since its first full quarter
operating its current business as a public company (the quarter ended June 30,
1998), management has reflected quarterly provisions for loan losses in its
operating results.

SUMMARY OF INTEREST CHARACTERISTICS

As more fully discussed in Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
as well as in Item 7a.--"Quantitative and Qualitative Disclosures about Market
Risk," the Company utilizes certain interest rate risk management techniques,
including both asset/liability matching and certain other hedging techniques, in
order to mitigate the Company's exposure to interest rate risks.

8

As of December 31, 2002, the Company's Lending Business portfolio has the
following interest rate characteristics:

SUMMARY OF PREPAYMENT TERMS

The Company is exposed to risks of prepayment on its loan assets, and
generally seeks to protect itself from such risks by structuring its loans with
prepayment restrictions and/or penalties.

As of December 31, 2002, the Company's Lending Business portfolio has the
following call protection characteristics:

SUMMARY OF LENDING BUSINESS MATURITIES

As of December 31, 2002, the Company's Lending Business portfolio has the
following maturity characteristics:

9

STRUCTURED FINANCE

The Company provides custom-tailored senior and subordinated loans that
typically range in size from $20 million to $100 million to borrowers holding
institutional-quality real estate. These loans may be either fixed or variable
rate and are structured to meet the specific financing needs of the borrowers,
including the acquisition or refinancing of large, high-quality real estate. The
Company offers borrowers a wide range of structured finance options, including
first mortgages, second mortgages, partnership loans, participating debt and
interim facilities. The Company's structured finance transactions have
maturities generally ranging from three to ten years.

As of December 31, 2002, the Company's structured finance investments have
the following characteristics:

EXPLANATORY NOTES:
- ----------------------------------------

(1) Where Current Carrying Value differs from Current Principal Balance
Outstanding, difference represents contractual amortization, partial
prepayment of loan principal, or amortization of acquired premiums,
discounts or deferred loan fees.

(2) All variable-rate loans assume a one-month LIBOR rate of 1.38% (the actual
one-month LIBOR rate at December 31, 2002).

(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal or the Company's
internal valuation (where no current appraisal available).

(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal or the Company's
internal valuation (where no current appraisal available).

LOAN SERVICING

Through its iStar Asset Services division, the Company provides rated loan
servicing to third-party institutional loan portfolios, as well as to the
Company's own assets. iStar Asset Services is currently rated "above average" by
Standard & Poor's and "CPS2" as a primary servicer and "CMS2-" as a master
servicer by Fitch, Inc. The Company's servicing business focuses on maximizing
risk-adjusted investment returns through active, on-going asset management with
particular focus on risk management, asset financing strategies and
opportunistic responsiveness to changing customer needs.

CORPORATE TENANT LEASING:

The Company, directly and through its Leasing Subsidiary, provides capital
to corporations and borrowers who control facilities leased to single
creditworthy tenants. The Company's net leased assets are generally
mission-critical headquarters or distribution facilities that are subject to
long-term leases with rated corporate credit tenants, and which provide for all
expenses at the property to be paid by the corporate tenant on a triple net
lease basis. Corporate tenant lease ("CTL") transactions have terms generally
ranging from ten to 20 years and typically range in size from $20 million to
$150 million.

12

The Company pursues the origination of CTL transactions by structuring
purchase/leasebacks and by acquiring facilities subject to existing long-term
net leases. In a typical purchase/leaseback transaction, the Company purchases a
corporation's facility and leases it back to that corporation subject to a
long-term net lease. This structure allows the corporate customer to reinvest
the proceeds from the sale of its facilities into its core business, while the
Company capitalizes on its structured financing expertise.

The Company generally intends to hold its CTL assets for long-term
investment. However, subject to certain tax restrictions, the Company may
dispose of an asset if it deems the disposition to be in the Company's best
interests and may either reinvest the disposition proceeds, use the proceeds to
reduce debt, or distribute the proceeds to shareholders.

The Company's CTL investments primarily represent a diversified portfolio of
mission-critical headquarters or distribution facilities subject to net lease
agreements with creditworthy corporate tenants. The Company generally seeks
high-quality, general-purpose real estate with residual values that represent a
discount to current market values and replacement costs. Under a typical net
lease agreement, the corporate customer agrees to pay a base monthly operating
lease payment and all facility operating expenses (including taxes, maintenance
and insurance).

The Company generally seeks corporate tenants with the following
characteristics:

- Established companies with stable core businesses or market leaders in
growing industries.

- Investment-grade credit strength or appropriate credit enhancements if
corporate credit strength is not sufficient on a stand-alone basis.

- Commitment to the facility as a mission-critical asset to their on-going
businesses.

As of December 31, 2002, the Company had 164 corporate customers operating
in more than 21 major industry sectors, including aerospace, energy, finance,
healthcare, manufacturing, technology and telecommunications. The majority of
these customers represent well-recognized national and international companies,
such as Federal Express, IBM, Nike, Nokia, the U.S. Government and Verizon.

As of December 31, 2002, the Company's CTL portfolio has the following
tenant credit characteristics:

EXPLANATORY NOTES:
- ------------------------------

(1) A customer's credit rating is considered "Investment Grade" if it has a
published senior unsecured credit rating of Baa3/BBB- or above by one or
more of the three national rating agencies. Where a customer's credit is
rated investment grade by one agency and non-investment grade by another,
the Company only classifies the credit "Investment Grade" if the agency
rating the credit investment grade is Standard & Poor's or Moody's Investors
Service.

(2) A customer's credit rating is considered "Implied Investment Grade" if it
has no published ratings, but has credit characteristics that the Company
believes warrant an investment grade senior unsecured credit rating.
Examples at December 31, 2002 include Cisco Systems Inc., Mitsubishi
Electronics and Volkswagen of America.

(3) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2002. The operating lease income includes the Company's pro
rata share from facilities owned by the Company's joint ventures.

13

RISK MANAGEMENT STRATEGIES. The Company believes that diligent risk
management of its CTL assets is an essential component of its long-term
strategy. There are several ways to optimize the performance and maximize the
value of CTL assets. The Company monitors its portfolio for changes that could
affect the performance of the markets, credits and industries in which it has
invested. As part of this monitoring, the Company's risk management group
reviews market, customer and industry data and frequently inspects its
facilities. In addition, the Company attempts to develop strong relationships
with its large corporate customers, which provide a source of information
concerning the customers' facilities needs. These relationships allow the
Company to be proactive in obtaining early lease renewals and in conducting
early marketing of assets where the customer has decided not to renew.

As of December 31, 2002, the Company owned 162 office and industrial
facilities principally subject to net leases to 163 customers, comprising
25.4 million square feet in 28 states. The Company also has a portfolio of 17
hotels under a long-term master lease with a single customer. Information
regarding the Company's CTL assets as of December 31, 2002 is set forth below:

EXPLANATORY NOTES:
- ------------------------------

(1) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2002. The operating lease income includes the Company's pro
rata share from facilities owned by the Company's joint ventures.

(2) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2002 as a percentage of annualized total revenue for the
quarter ended December 31, 2002.

POLICIES WITH RESPECT TO OTHER ACTIVITIES

At all times, the Company intends to make investments in a manner consistent
with the requirements of the Code for the Company to qualify as a REIT.

INVESTMENT RESTRICTIONS OR LIMITATIONS

The Company does not have any prescribed allocation among investments or
product lines. Instead, the Company focuses on corporate and real estate credit
underwriting to develop an in-depth analysis of the risk/reward ratios in
determining the pricing and advisability of each particular transaction.

The Company believes that it is not, and intends to conduct its operations
so as not to become, regulated as an investment company under the Investment
Company Act. The Investment Company Act generally exempts entities that are
"primarily engaged in purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" (collectively, "Qualifying Interests").
The Company intends to rely on current interpretations of the Securities and
Exchange Commission in an effort to qualify for this exemption. Based on these
interpretations, the Company, among other things, must maintain at least 55.00%
of its assets in Qualifying Interests and at least 25.00% of its assets in real
estate-related assets (subject to reduction to the extent the Company invests
more than 55.00% of its assets in Qualifying Interests). Generally, the
Company's senior mortgages, corporate tenant lease assets and certain of its
subordinated mortgages constitute Qualifying Interests.

Subject to the limitations on ownership of certain types of assets and the
gross income tests imposed by the Code, the Company also may invest in the
securities of other REITs, other entities engaged in real estate activities or
other issuers, including for the purpose of exercising control over such
entities.

15

COMPETITION

The Company is engaged in a competitive business. In originating and
acquiring assets, the Company competes with public and private companies,
including other finance companies, mortgage banks, pension funds, savings and
loan associations, insurance companies, institutional investors, investment
banking firms and other lenders and industry participants, as well as individual
investors. Existing industry participants and potential new entrants compete
with the Company for the available supply of investments suitable for
origination or acquisition, as well as for debt and equity capital. Certain of
the Company's competitors are larger than the Company, have longer operating
histories, may have access to greater capital and other resources, may have
management personnel with more experience than the officers of the Company, and
may have other advantages over the Company in conducting certain businesses and
providing certain services.

REGULATION

The operations of the Company are subject, in certain instances, to
supervision and regulation by state and federal governmental authorities and may
be subject to various laws and judicial and administrative decisions imposing
various requirements and restrictions, which, among other things: (1) regulate
credit granting activities; (2) establish maximum interest rates, finance
charges and other charges; (3) require disclosures to customers; (4) govern
secured transactions; and (5) set collection, foreclosure, repossession and
claims-handling procedures and other trade practices. Although most states do
not regulate commercial finance, certain states impose limitations on interest
rates and other charges and on certain collection practices and creditor
remedies and require licensing of lenders and financiers and adequate disclosure
of certain contract terms. The Company is also required to comply with certain
provisions of the Equal Credit Opportunity Act that are applicable to commercial
loans.

In the judgment of management, existing statutes and regulations have not
had a material adverse effect on the business conducted by the Company. However,
it is not possible to forecast the nature of future legislation, regulations,
judicial decisions, orders or interpretations, nor their impact upon the future
business, financial condition or results of operations or prospects of the
Company.

The Company has elected and expects to continue to make an election to be
taxed as a REIT under Section 856 through 860 of the Code. As a REIT, the
Company must currently distribute, at a minimum, an amount equal to 90.00% of
its taxable income and must distribute 100.00% of its taxable income to avoid
paying corporate federal income taxes. REITs are also subject to a number of
organizational and operational requirements in order to elect and maintain REIT
status. These requirements include specific share ownership tests and assets and
gross income composition tests. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
tax rates. Even if the Company qualifies for taxation as a REIT, the Company may
be subject to state and local income taxes and to federal income tax and excise
tax on its undistributed income.

FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS STRATEGY

The implementation of the Company's business strategy and investment
policies are subject to certain risks, including the effect of economic and
other conditions on underlying property performance, the risks of borrower and
corporate tenant defaults, risks resulting from delays in enforcing remedies or
in gaining control over real estate collateral following a default, risks that
the properties collateralizing debt instruments held by the Company or CTL
assets owned by the Company will not generate revenues sufficient to meet
operating expenses and to pay scheduled debt service, the risk that prepayment
restrictions may be insufficient to deter prepayments, the existence of junior
mortgages that may affect the Company's rights, liability associated with
uninsurable losses and unknown environmental liabilities.

16

ENVIRONMENTAL MATTERS

Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real estate (including, in certain
circumstances, a secured lender that succeeds to ownership or control of a
property) may become liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. Those laws
typically impose cleanup responsibility and liability without regard to whether
the owner or control party knew of or was responsible for the release or
presence of such hazardous or toxic substances. The costs of investigation,
remediation or removal of those substances may be substantial. The owner or
control party of a site may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from a site. Certain environmental laws also impose liability in connection with
the handling of or exposure to asbestos-containing materials, pursuant to which
third parties may seek recovery from owners of real properties for personal
injuries associated with asbestos-containing materials. Absent succeeding to
ownership or control of real property, a secured lender is not likely to be
subject to any of these forms of environmental liability. The Company is not
currently aware of any environmental issues which could materially affect the
Company.

EMPLOYEES

As of March 14, 2003, the Company had 143 employees and believes its
relationships with its employees to be good. The Company's employees are not
represented by a collective bargaining agreement.

WEBSITE ACCESS TO REPORTS

The Company maintains a website at www.istarfinancial.com. Effective as of
January 1, 2003, through the Company's website, the Company makes available free
of charge its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those Reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after the Company electronically
files such material with, or furnishes it to, the SEC.

ITEM 2. PROPERTIES

The Company's principal executive and administrative offices are located at
1114 Avenue of the Americas, New York, NY 10036. Its telephone number, general
facsimile number and web address are (212) 930-9400, (212) 930-9494 and
www.istarfinancial.com, respectively. The lease for the Company's primary
corporate office space expires in February 2010. The Company believes that this
office space is suitable for its operations for the foreseeable future. The
Company also maintains super-regional offices in Atlanta, Georgia; Hartford,
Connecticut; and San Francisco, California, as well as regional offices in
Boston, Massachusetts; Dallas, Texas; and Denver, Colorado.

See Item 1--"Corporate Tenant Leasing" for a discussion of corporate tenant
lease facilities held by the Company and its Leasing Subsidiary for investment
purposes and Item 8--"Schedule III--Corporate Tenant Lease Assets and
Accumulated Depreciation" for a detailed listing of such facilities.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material litigation or legal proceedings,
or to the best of its knowledge, any threatened litigation or legal proceedings
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on its results of operations or financial
condition.

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

There were no matters submitted to a vote of security holders during the
fourth quarter of 2002.

17

PART II

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

The Company's Common Stock trades on the New York Stock Exchange ("NYSE")
under the symbol "SFI."

The high and low sales prices per share of Common Stock are set forth below
for the periods indicated.

On March 14, 2003, the closing sale price of the Common Stock as reported by
the NYSE was $28.50. The Company had approximately 2,619 holders of record of
Common Stock as of March 14, 2003.

At December 31, 2002, the Company had four series of preferred stock
outstanding: Series A Preferred Stock (which currently pays dividends at the
rate of 9.50% per annum), 9.375% Series B Preferred Stock, 9.20% Series C
Preferred Stock and 8.00% Series D Preferred Stock. Each of the Series B, C and
D preferred stock is publicly traded.

DIVIDENDS

The Company's management expects that any taxable income remaining after the
distribution of preferred dividends and the regular quarterly or other dividends
on its Common Stock will be distributed annually to the holders of the Common
Stock on or prior to the date of the first regular quarterly dividend payment
date of the following taxable year. The dividend policy with respect to the
Common Stock is subject to revision by the Board of Directors. All distributions
in excess of dividends on preferred stock or those required for the Company to
maintain its REIT status will be made by the Company at the sole discretion of
the Board of Directors and will depend on the taxable earnings of the Company,
the financial condition of the Company, and such other factors as the Board of
Directors deems relevant. The Board of Directors has not established any minimum
distribution level. In order to maintain its qualifications as a REIT, the
Company intends to make regular quarterly dividends to its shareholders that, on
an annual basis, will represent at least 90.00% of its taxable income (which may
not necessarily equal net income as calculated in accordance with generally
accepted accounting principles), determined without regard to the deduction for
dividends paid and excluding any net capital gains.

Holders of Common Stock will be entitled to receive distributions if, as and
when the Board of Directors authorizes and declares distributions. However,
rights to distributions may be subordinated to the rights of holders of
preferred stock, when preferred stock is issued and outstanding. In any
liquidation, dissolution or winding up of the Company, each outstanding share of
Common Stock will entitle its holder to a proportionate share of the assets that
remain after the Company pays its liabilities and any preferential distributions
owed to preferred shareholders.

18

The following table sets forth the dividends paid or declared by the Company
on its Common Stock:

EXPLANATORY NOTES:
- ------------------------------

(1) For tax reporting purposes, the 2001 dividends were classified as 90.55%
($2.2206) ordinary income and 9.45% ($0.2318) return of capital for those
shareholders who held shares of the Company for the entire year.

(2) For tax reporting purposes, the 2002 dividends were classified as 87.61%
($2.2078) ordinary income, 1.80% ($0.0454) 20.00% capital gain and 10.59%
($0.2668) return of capital for those shareholders who held shares of the
Company for the entire year.

The Company declared dividends aggregating $20.9 million, $4.7 million,
$3.0 million and $8.0 million, respectively, on its Series A, B, C and D
preferred stock, respectively, for the year ended December 31, 2002. There are
no dividend arrearages on any of the preferred shares currently outstanding.

Distributions to shareholders will generally be taxable as ordinary income,
although a portion of such dividends may be designated by the Company as capital
gain or may constitute a tax-free return of capital. The Company annually
furnishes to each of its shareholders a statement setting forth the
distributions paid during the preceding year and their characterization as
ordinary income, capital gain or return of capital.

The Company intends to continue to declare quarterly distributions on its
Common Stock. No assurance, however, can be given as to the amounts or timing of
future distributions, as such distributions are subject to the Company's
earnings, financial condition, capital requirements and such other factors as
the Company's Board of Directors deems relevant.

19

DISCLOSURE OF EQUITY COMPENSATION PLAN INFORMATION

EXPLANATORY NOTES:
- ------------------------------

(1) Stock Options--As more fully discussed in Note 10 to the Company's
Consolidated Financial Statements, there were 4.3 million stock options
outstanding as of December 31, 2002. These 4.3 million options, together
with their weighted-average exercise price, have been included in column (a)
and (b), above. The 1.1 million figure in column (c) represents the
aggregate amount of stock options or restricted stock awards that could be
granted under compensation plans approved by the Company's security holders.

(2) Restricted Stock--As of December 31, 2002, the Company has issued 787,949
shares of restricted stock. The restrictions on 330,255 of such shares
primarily relate to the passage of time for vesting periods which have not
lapsed, and are thus not included in the Company's outstanding share
balance.

Phantom Shares--As more fully discussed in Note 10 to the Company's
Consolidated Financial Statements, the Company has granted 2.0 million
unvested phantom shares, each of which represents one share of the Company's
Common Stock. As of December 31, 2002, 1.0 million of these shares have
contingently vested. These shares, together with their weighted-average
exercise price, have been included in column (a) and (b), above. Shares that
have contingently vested generally are not expected to become fully vested
until March 31, 2004.

(3) High Performance Unit Program--In May 2002, the Company's shareholders
approved the iStar Financial High Performance Unit Program. The Program is
more fully described in the Company's proxy statement dated April 8, 2002
and in Note 10 to the Company's Consolidated Financial Statements. The
program entitles the employee participants to receive cash distributions in
the nature of common stock dividends if the total rate of return on the
Company's Common Stock exceeds certain performance levels. The first tranche
of the program was completed on December 31, 2002. As a result of the
Company's superior performance during the valuation period for the first
tranche, the program participants are entitled to share in cash
distributions equivalent to dividends payable on 819,254 shares of the
Company's Common Stock, in the aggregate, as and when such dividends are
paid by the Company. Such dividend payments begin with the first quarter
2003 dividend and will reduce net income allocable to common stockholders
when paid. No shares of the Company's Common Stock will be issued in
connection with this program and thus no effect has been reflected in the
above table.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data on a consolidated
historical basis for the Company. However, prior to March 1998, the Company's
structured finance operations were conducted by two private investment
partnerships which contributed substantially all their structured finance assets
to the Company in exchange for cash and shares of the Company.

Further, on November 4, 1999, the Company acquired TriNet, which increased
the size of the Company's operations, and also acquired its former external
advisor. Operating results for the year ended December 31, 1999 reflect only the
effects of these transactions subsequent to their consummation.

20

Accordingly, the historical balance sheet information as of December 31,
1998, as well as the results of operations for the Company for all periods prior
to and including the year ended December 31, 1999, do not reflect the current
operations of the Company as a well capitalized, internally-managed finance
company operating in the commercial real estate industry. For these reasons, the
Company believes that the information should be read in conjunction with the
discussions set forth in Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations." Certain prior year amounts have
been reclassified to conform to the 2002 presentation.

21

EXPLANATORY NOTES:
- ------------------------------
(1) This amount represents a non-recurring, non-cash charge of approximately
$94.5 million relating to the acquisition of the Company's formal external
advisor in November 1999.

(2) Represents one-time effect of adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as of January 1, 2001.

(3) Prior to November 1999, earnings per common share excludes 1.00% of net
income allocable to the Company's former class B shares. The former
class B shares were exchanged for Common Stock in connection with the
acquisition of TriNet and other related transactions on November 4, 1999.
As a result, the Company now has a single class of Common Stock
outstanding.

(4) The Company generally declares common and preferred dividends in the month
subsequent to the end of the quarter.

(5) Adjusted earnings represents net income to common shareholders computed in
accordance with GAAP, before depreciation, amortization, gain (loss) from
discontinued operations, extraordinary items and cumulative effect of
change in accounting principle. For the year ended December 31, 2002,
adjusted earnings excludes the $15.0 million non-cash charge related to the
performance based vesting of restricted shares granted under the Company's
long-term incentive plan. For the year ended December 31, 1999, adjusted
earnings excludes the non-recurring, non-cash cost incurred in acquiring
the Company's former external advisor. (See reconciliation in Item 7--
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").

(6) EBITDA is calculated as total revenue plus equity in earnings from joint
ventures and unconsolidated subsidiaries minus the sum of general and
administrative expenses, general and administrative- stock-based
compensation (excluding the non-cash charge related to the performance
based vesting of restricted shares granted under the Company's long-term
incentive plan for the year ended December 31, 2002), provision for loan
losses, operating costs on corporate tenant lease assets and advisory fees.

(7) Each of adjusted earnings and EBITDA should be examined in conjunction with
net income as shown in the Consolidated Statements of Operations. Neither
adjusted earnings nor EBITDA should be considered as an alternative to net
income (determined in accordance with GAAP) as an indicator of the
Company's performance, or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is either measure indicative of funds available to fund the
Company's cash needs or available for distribution to shareholders. The
Company's management believes that adjusted earnings and EBITDA more
closely approximate operating cash flow and are useful measures for
investors to consider, in conjunction with net income and other GAAP
measures, in evaluating the commercial finance company that focuses on real
estate lending and corporate tenant leasing; therefore, the Company's net
income (determined in accordance with GAAP) reflects significant non-cash
depreciation expense on corporate tenant lease assets. It should be noted
that the Company's manner of calculating adjusted earnings and EBITDA may
differ from the calculations of similarly-titled measures by other
companies.

(8) The 1999 and 1998 EBITDA to interest expense ratios on a pro forma basis
would have been 2.83x and 2.84x, respectively.

(9) Combined fixed charges are comprised of interest expense, capitalized
interest, amortization of loan costs and preferred stock dividend
requirements. The 1999 and 1998 EBITDA to combined fixed charges ratios on
a pro forma basis would have been 2.23x and 2.44x, respectively.

(10) For the purposes of calculating the ratio of earnings to fixed charges,
"earnings" consist of income from continuing operations before income
taxes and cumulative effect of changes in accounting principles plus
"fixed charges" and certain other adjustments. "Fixed charges" consist of
interest incurred on all indebtedness related to continuing operations
(including amortization of original issue discount) and the implied
interest component of the Company's rent obligations in the years
presented. For 1999, these ratios include the effect of a non-recurring,
non-cash charge in the amount of approximately $94.5 million relating to
the November 1999 acquisition of the former external advisor to the
Company. Excluding the effect of this non-recurring, non-cash charge, the
ratio of earnings to fixed charges for that period would have been 2.5x
and the Company's ratio of earnings to fixed charges and preferred stock
dividends would have been 2.0x.

(11) As adjusted for one-for-six reverse stock split effected by the Company on
June 19, 1998.

22

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

GENERAL

The Company began its business in 1993 through private investment funds
formed to take advantage of the lack of well-capitalized lenders capable of
servicing the needs of high-end customers in its markets. In March 1998, the
private investment funds contributed their approximately $1.1 billion of assets
to the Company's predecessor in exchange for a controlling interest in that
public company. In November 1999, the Company acquired its leasing subsidiary,
TriNet Corporate Realty Trust, Inc. ("TriNet" or the "Leasing Subsidiary"),
which was then the largest publicly-traded company specializing in corporate
sale/leaseback for office and industrial facilities (the "TriNet Acquisition").
Concurrent with the TriNet Acquisition, the Company also acquired its former
external advisor in exchange for shares of its Common Stock and converted its
organizational form to a Maryland corporation. The Company's Common Stock began
trading on the New York Stock Exchange under the symbol "SFI" in November 1999.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

INTEREST INCOME--Interest income increased by $1.5 million to
$255.6 million for the 12 months ended December 31, 2002 from $254.1 million for
the same period in 2001. This increase was primarily due to $72.5 million of
interest income on new originations or additional fundings, net of a $50.5
million decrease from the repayment of loans and other lending investments. This
increase was partially offset by a decrease in interest income on the Company's
variable-rate lending investments as the result of lower average one-month LIBOR
rates of 1.77% in 2002, compared to 3.88% in 2001.

OPERATING LEASE INCOME--Operating lease income increased by $56.2 million to
$242.1 million for the 12 months ended December 31, 2002 from $185.9 million for
the same period in 2001. Of this increase, $59.5 million was attributable to new
corporate tenant lease investments. This increase was partially offset by
corporate tenant lease dispositions and lower operating lease income on certain
corporate tenant lease assets.

OTHER INCOME--Other income generally consists of prepayment penalties and
realized gains from the early repayment of loans and other lending investments,
financial advisory and asset management fees, lease termination fees, mortgage
servicing fees, loan participation payments and dividends on certain
investments. During the 12 months ended December 31, 2002, other income included
prepayment penalties and realized gains on loan repayments of $12.6 million,
asset management, mortgage servicing and other fees of approximately $9.0
million, lease termination fees of $2.9 million, loan participation payments of
$3.3 million, and other miscellaneous income such as dividend payments and
insurance claims of $994,000.

During the 12 months ended December 30, 2001, other income included loan
participation payments of $13.1 million, prepayment penalties and gains on loan
repayments of $13.0 million and financial advisory, lease termination, asset
management and mortgage servicing fees of $5.3 million.

INTEREST EXPENSE--For the 12 months ended December 31, 2002, interest
expense increased by $15.4 million to $185.4 million from $170.0 million for the
same period in 2001. This increase was primarily due to the higher average
borrowings on the Company's debt obligations, term loans and secured notes, and
by approximately $2.7 million due to additional amortization of deferred
financing costs on the Company's debt obligations in 2002 compared to the same
period in 2001. This increase was partially offset by lower average one-month
LIBOR rates on the Company's variable-rate debt of 1.77% in 2002, compared to
3.88% in 2001.

OPERATING COSTS--CORPORATE TENANT LEASE ASSETS--For the 12 months ended
December 31, 2002, operating costs increased by $1.0 million from $12.8 million
to $13.8 million for the same period in 2001.

23

This increase is primarily related to new corporate tenant lease investments and
higher operating costs on certain corporate tenant lease assets, partially
offset by corporate tenant lease dispositions.

DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased by
$12.4 million to $47.8 million for the 12 months ended December 31, 2002 from
$35.4 million for the same period in 2001. This increase is primarily due to new
corporate tenant lease investments.

GENERAL AND ADMINISTRATIVE--For the 12 months ended December 31, 2002,
general and administrative expenses increased by $6.2 million to $30.4 million,
compared to $24.2 million for the same period in 2001. This increase is
primarily the result of an increase in personnel and related costs.

GENERAL AND ADMINISTRATIVE--STOCK-BASED COMPENSATION--General and
administrative-stock-based compensation increased by $14.4 million primarily due
to a non-cash charge related to the performance-based vesting of 500,000
restricted shares granted under the Company's long-term incentive plan and tied
to overall shareholder performance (see Note 10 to the Company's Consolidated
Financial Statements).

PROVISION FOR LOAN LOSSES--The Company's charge for provision for loan
losses increased to $8.3 million for the 12 months ended December 31, 2002 as
compared to $7.0 million for the same period in 2001. As more fully discussed in
Note 4 to the Company's Consolidated Financial Statements, the Company has
experienced minimal actual losses on its loan investments to date. The Company
considers it prudent to reflect provisions for loan losses on a portfolio basis
based upon the Company's assessment of general market conditions, the Company's
internal risk management policies and credit risk rating system, industry loss
experience, the Company's assessment of the likelihood of delinquencies or
defaults, and the value of the collateral underlying its investments.
Accordingly, since its first full quarter operating its current business as a
public company (the quarter ended June 30, 1998), management has reflected
quarterly provisions for loan losses in its operating results.

EQUITY IN EARNINGS FROM JOINT VENTURES AND UNCONSOLIDATED
SUBSIDIARIES--During the 12 months ended December 31, 2002, equity in earnings
from joint ventures and unconsolidated subsidiaries decreased by approximately
$6.2 million to $1.2 million from $7.4 million for the same period in 2001. This
decrease is primarily due to the consolidation of one of the Company's corporate
tenant lease joint venture investments (see Note 6 to the Company Consolidated
Financial Statements).

INCOME FROM DISCONTINUED OPERATIONS--For the 12-month periods ended
December 31, 2002 and 2001, operating income earned by the Company on corporate
tenant lease assets sold (prior to their sale) and assets held for sale of
approximately $3.6 million and $5.3 million, respectively, is classified as
"Income from discontinued operations," even though such income was earned by the
Company prior to the assets' disposition or classification as "Assets held for
sale."

GAIN FROM DISCONTINUED OPERATIONS--During 2002, the Company disposed of one
corporate tenant lease asset for total proceeds of $3.7 million and recognized a
gain of approximately $595,000. In addition, one of the Company's customers
exercised an option to terminate its lease on 50.00% of the land leased from the
Company. In connection with this termination, the Company realized
$17.5 million in cash lease termination payments, offset by a $17.4 million
impairment change in connection with the termination, resulting in a net gain of
approximately $123,000.

During 2001, the Company disposed of four corporate tenant lease assets for
total proceeds of $26.3 million and recognized net gains of $1.1 million.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the 12 months
ended December 31, 2002, the Company fully repaid the then remaining
$446.2 million of bonds outstanding under its STARs Series 2000-1 financing.
This prepayment resulted in an extraordinary loss of $12.2 million, which
represented approximately $8.2 million in unamortized deferred financing costs
and approximately $4.0 million in prepayment penalties.

24

During the 12 months ended December 31, 2001, the Company repaid a secured
term loan, which had an original maturity date of December 2004. In addition,
the Company prepaid an unsecured revolving credit facility, which had an
original maturity date of May 2002. In connection with these prepayments, the
Company expensed the remaining unamortized deferred financing costs and incurred
certain prepayment penalties, which resulted in an extraordinary loss of
approximately $1.6 million.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

INTEREST INCOME--Interest income decreased by $13.9 million to
$254.1 million for the 12 months ended December 31, 2001 from $268.0 million for
the same period in 2000. Approximately $12.7 million of this decrease is the
result of lower average LIBOR rates on the Company's variable-rate lending
investments of 3.88% in 2001, compared to 6.41% in 2000. This decrease was
partially offset by $55.1 million of interest income on new originations or
additional fundings, net of $51.6 million from the repayment of loans and other
lending investments, in addition to a decrease of $1.5 million from income
earned on cash and cash equivalents.

OPERATING LEASE INCOME--Operating lease income increased by $8.3 million to
$185.9 million for the 12 months ended December 31, 2001 from $177.6 million for
the same period in 2000. Of this increase, $11.8 million was attributable to new
corporate tenant lease investments. This increase was partially offset by
corporate tenant lease dispositions and lower operating lease income on certain
corporate tenant lease assets.

OTHER INCOME--Other income consists primarily of prepayment penalties and
gains from the early repayment of loans and other lending investments, financial
advisory and asset management fees, lease termination fees, mortgage servicing
fees, loan participation payments and dividends on certain investments. During
the year ended December 31, 2001, other income included loan participation
payments of $13.1 million, prepayment penalties and gains on loan repayments of
$13.0 million and financial advisory, lease termination, asset management and
mortgage servicing fees of $5.3 million.

During the year ended December 31, 2000, other income included prepayment
penalties and gains on loan repayments of $10.5 million, $2.1 million in
connection with a loan defeasance, loan participation payments of $1.9 million,
financial advisory, asset management and mortgage servicing fees of
$2.6 million and lease termination fees of $770,000.

INTEREST EXPENSE--For the 12 months ended December 31, 2001, interest
expense decreased by $3.7 million to $170.0 million from $173.7 million for the
same period in 2000. This decrease was primarily due to the lower average LIBOR
rates on the Company's variable-rate debt of 3.88% in 2001, compared to 6.41% in
2000. This decrease was partially offset by the higher average borrowings on the
Company's credit facilities, term loans and unsecured notes and $7.6 million
additional amortization of deferred financing costs on the Company's debt
obligations in 2001 compared to 2000.

OPERATING COSTS--CORPORATE TENANT LEASE ASSETS--For the 12 months ended
December 31, 2001, operating costs were substantially unchanged as compared to
the same period in 2000. Such operating costs represent unreimbursed operating
expenses associated with corporate tenant lease assets.

DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased by
$1.0 million to $35.4 million for the 12 months ended December 31, 2001 from
$34.4 million for the same period in 2000. This increase is due to new corporate
tenant lease investments and additional facility improvements, partially offset
by corporate tenant lease dispositions in 2000.

GENERAL AND ADMINISTRATIVE--For the 12 months ended December 31, 2001,
general and administrative expenses decreased by $1.5 million to $24.2 million,
compared to $25.7 million for the same period in 2000. This decrease is
primarily the result of a reduction in office and related costs and professional
fees, partially offset by an increase in personnel and related costs.

25

GENERAL AND ADMINISTRATIVE--STOCK-BASED COMPENSATION EXPENSE--General and
administrative--stock-based compensation expense increased by approximately
$710,000 as a result of charges relating to grants of stock options and
restricted shares.

PROVISION FOR LOAN LOSSES--The Company's charge for provision for loan
losses increased to $7.0 million for the 12 months ended December 31, 2001 from
$6.5 million for the same period in 2000 as a result of the continued expansion
of the Company's lending operations as well as additional seasoning of its
existing lending portfolio. As more fully discussed in Note 4 to the Company's
Consolidated Financial Statements, the Company has experienced minimal actual
losses on its loan investments to date. The Company considers it prudent to
reflect provisions for loan losses on a portfolio basis based upon the Company's
assessment of general market conditions, the Company's internal risk management
policies and credit risk rating system, industry loss experience, the Company's
assessment of the likelihood of delinquencies or defaults, and the values of the
collateral underlying its investments. Accordingly, since its first full quarter
operating its current business as a public company (the quarter ended June 30,
1998), management has reflected quarterly provisions for loan losses in its
operating results.

EQUITY IN EARNINGS FROM JOINT VENTURES AND UNCONSOLIDATED
SUBSIDIARIES--During the 12 months ended December 31, 2001, equity in earnings
from joint ventures and unconsolidated subsidiaries increased by approximately
$2.6 million to $7.4 million from $4.8 million for the same period in 2001. This
increase is primarily due to new leases commencing in 2001, in addition to a
lease termination payment received at one of the joint ventures (see Note 6 to
the Company Consolidated Financial Statements).

INCOME FROM DISCONTINUED OPERATIONS-- For the 12-month periods ended
December 31, 2001 and 2000, operating income earned by the Company on corporate
tenant lease assets sold (prior to their sale) and assets held for sale of
approximately $5.3 million and $3.2 million, respectively, is classified as
"Income from discontinued operations," even though such income was earned by the
Company prior to the assets' disposition or classification as "Assets held for
sale."

GAIN FROM DISCONTINUED OPERATIONS--During 2001, the Company disposed of four
corporate tenant lease assets for total proceeds of $26.3 million and recognized
net gains of $1.1 million.

During 2000, the Company disposed of 14 corporate tenant lease assets,
including six assets held in joint venture partnerships, for total proceeds of
$256.7 million, and recognized net gains of $2.9 million.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the 12 months
ended December 31, 2001 and 2000, the Company or its joint ventures prepaid debt
obligations of $133.0 million and $24.5 million, respectively. These
transactions resulted in an extraordinary loss on early extinguishment of debt
from prepayment penalties and the expense associated with remaining unamortized
deferred financing costs in the amount of $1.6 million and $705,000 for the
12 months ended December 31, 2001 and 2000, respectively.

ADJUSTED EARNINGS

Adjusted earnings represents net income to common shareholders computed in
accordance with GAAP, before depreciation, amortization, gain (loss) from
discontinued operations, extraordinary items and cumulative effect of change in
accounting principle. Adjustments for unconsolidated partnerships and joint
ventures reflect the Company's share of adjusted earnings calculated on the same
basis.

The Company believes that to facilitate a clear understanding of the
historical operating results of the Company, adjusted earnings should be
examined in conjunction with net income as shown in the Company's Consolidated
Statements of Operations. Adjusted earnings should not be considered as an
alternative to net income (determined in accordance with GAAP) as an indicator
of the Company's performance, or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs or
available for distribution to the Company's shareholders. The Company's
management believes

26

that adjusted earnings more closely approximates operating cash flow and is a
useful measure for investors to consider, in conjunction with net income and
other GAAP measures, in evaluating the Company's financial performance. This is
primarily because the Company is a commercial finance company that focuses on
real estate lending and corporate tenant leasing; therefore, the Company's net
income (determined in accordance with GAAP) reflects significant non-cash
depreciation expense on corporate tenant lease assets. It should be noted that
the Company's manner of calculating adjusted earnings may differ from the
calculation of similarly-titled measures by other companies.

EXPLANATORY NOTES:
- ------------------------------

(1) Represents one-time effect of adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as of January 1, 2001.

(2) Prior to November 1999, adjusted earnings per common share exludes 1.00% of
net income allocable to the Company's former class B shares. The former
class B shares were exchanged for Common Stock in connection with the
acquisition of TriNet and other related transactions on November 4, 1999. As
a result, the Company now has a single class of Common Stock outstanding.

(3) Excludes a $15.0 million non-cash charge related to performance-based
vesting of restricted shares granted under the Company's long-term incentive
plan for the 12 months ended December 31, 2002.

27

RISK MANAGEMENT

FIRST DOLLAR AND LAST DOLLAR EXPOSURE--One component of the Company's risk
management assessment is an analysis of the Company's first and last dollar
loan-to-value percentage with respect to the properties or companies the Company
finances. First dollar loan-to-value represents the average beginning point for
the Company's lending exposure in the aggregate capitalization of the underlying
properties or companies it finances. Last dollar loan-to-value represents the
average ending point for the Company's lending exposure in the aggregate
capitalization of the underlying properties or companies it finances.

NON-ACCRUAL LOANS--The Company transfers loans to non-accrual status at such
time as: (1) management believes that the potential risk exists that scheduled
debt service payments will not be met within the coming 12 months; (2) the loans
become 90 days delinquent; (3) management determines the borrower is incapable
of, or ceased efforts toward, curing the cause of an impairment; or (4) the net
realizable value of the loan's underlying collateral approximates the Company's
carrying value of such loan. Interest income is recognized only upon actual cash
receipt for loans on non-accrual status. As of December 31, 2002, the Company
had three assets on non-accrual status with an aggregate gross book value of
$11.1 million, or 0.20% of the gross book value of the Company's investments.
The Company is currently comfortable that it has adequate collateral to support
the book values of the assets.

One of the three non-accrual loans is a $3.5 million partnership loan on two
shopping malls located in the suburbs of Washington, D.C. This investment was
part of a larger loan originally made by affiliates of Lazard Freres prior to
the Company's acquisition of Lazard's structured finance portfolio in 1998. The
loan matures in September 2003 and bears interest at 12.00%. The Company
received cash payments equal to the interest due on the loan during the
12 months ended December 31, 2002, and the borrower remains current on its
obligations to the Company. However, the Company anticipates that this loan will
remain on non-accrual status for the foreseeable future.

The second non-accrual loan is a partnership loan with a balance of
$5.7 million as of December 31, 2002. The loan is presently secured by
partnership interests in two partnerships owning facilities in Colorado leased
to the U.S. Government. The Company made the loan in anticipation of buying the
facilities upon their completion. The loan matures on March 29, 2003 and bears
interest at LIBOR + 3.50%, with a LIBOR floor of 3.00%. In February 2003 the
borrower breached certain technical provisions of the loan documents,
constituting a technical event of default. The borrower remains current on its
regular interest obligations to the Company and the Company is currently
discussing a possible extension of the loan with the borrower. However, as a
result of the technical default and the uncertainty surrounding the extension
and the timing of the completion of the facilities for the Company's purchase,
the loan has been been placed on non-accrual status.

The third non-accrual loan is a $1.9 million investment in debt securities
of a real estate company which trades on the Mexican Stock Exchange. This
investment was made by TriNet prior to its acquisition by the Company in 1999.
The securities bear interest at 12.00% per annum payable in arrears in December
of each year. In January 2003, the Company received cash payments equal to the
interest due on the investment through December 31, 2002, and the borrower
remains current on its obligations to the Company. However, the Company
anticipates that this investment will remain on non-accrual status for the
foreseeable future.

WATCH LIST ASSETS--The Company conducts a quarterly comprehensive credit
review, resulting in an individual risk rating being assigned to each asset.
This review is designed to enable management to evaluate and proactively manage
asset-specific credit issues and identify credit trends on a portfolio-wide
basis as an "early warning system." As of December 31, 2002, the Company has
four loans and two CTL investments that are on its credit watch list.

In addition to the $5.7 million partnership loan mentioned above, the
Company had three other loans on its credit watch list. The second watch list
loan is a $40.8 million first mortgage secured by a hotel

28

property in New York, New York. This mortgage matures on April 30, 2005 and
bears interest at LIBOR + 4.50%. The borrower remains current on all of its debt
service payments to the Company, and the Company is currently comfortable that
it has adequate collateral to support the book value of the asset. However, due
to poor operating performance exacerbated by the decline in the hotel market in
the New York metropolitan area, this loan remains on the watch list.

The third watch list loan is a $12.9 million junior participation in a first
mortgage loan secured by a hotel property in New York, New York. This loan bears
interest at a fixed rate of 7.91% and matures in June 2006. The borrower remains
current on all of its debt service payments to the Company and has continued to
invest additional equity to fund on-going capital improvements at the property.
The Company is comfortable that it has adequate collateral to support the book
value of the asset. However, due to poor operating performance exacerbated by
the decline in the hotel market in the New York metropolitan area, this loan
remains on the watch list.

The fourth watch list loan is a $35.8 million junior interest in a
$104.5 million first mortgage loan secured by a retail shopping mall in Chicago,
IL. The whole loan bears interest at 8.88% and matures January 1, 2004. The
mall's cash flow has been negatively impacted by the departure of one of four
anchor tenants. The borrower is currently negotiating with one of the anchor
tenants to occupy the vacant space. In addition, the borrower has a significant
equity investment in the property (including approximately $15.0 million of
additional equity invested in 2001), and remains current on all of its debt
service payments to the Company. The Company is currently comfortable that it
has adequate collateral to support the book value of the asset.

The Company also has two CTL investments on its credit watchlist. In January
2002, a customer occupying two office facilities owned by the Company filed a
voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. The customer utilizes these facilities as the U.S. headquarters for one of
its major business lines. Since its bankruptcy filing, the customer has been
consolidating its space needs into the larger of the two facilities, including
approximately 150 of its employees from other area locations. The customer has
also invested approximately $3.0 million of its own capital in the facilities.
In December 2002, the bankruptcy court approved a plan of reorganization. As
part of the reorganization, the customer has attempted to affirm the lease on
the larger facility and terminate the lease on the smaller facility. Since the
two leases are cross-defaulted, the Company believes the the customer's
affirmation of the larger facility lease is also an affirmation of the smaller
facility. The customer remains current on the larger facility's lease payment to
the Company, but has withheld its March payment on the smaller facility pending
a potential negotiated settlement with the Company regarding termination of the
lease on the smaller facility. Therefore, the smaller facility (with a net
carrying value of $3.6 million at December 31, 2002) remains on the Company's
watch list.

The Company also placed on the watch list its investment in a corporate
tenant lease asset held in joint venture due to the financial uncertainty
surrounding one of the facility's primary tenants. As of December 31, 2002, the
Company's equity investment in the venture was $12.4 million and the Company's
share of income from this equity investment for the year ended December 31, 2002
was $1.4 million.

OTHER LOANS--As of December 31, 2002, the Company also has a $15.3 million
second mortgage on a Class A office building in Washington, D.C. which has paid
debt service two months in arrears since December 2002. The loan matures in
October 2005 and, but for a small working capital deficit resulting in the
two-month arrearage, continues to otherwise pay as agreed. Inclusive of the
senior debt on the property, the Company's last-dollar risk exposure on this
asset on a per square foot basis is significantly less than neighboring
buildings have sold for. As a result, the Company currently believes that it has
adequate collateral to support the book value of the asset.

29

LIQUIDITY AND CAPITAL RESOURCES

The Company requires capital to fund its investment activities and operating
expenses. The Company has significant access to capital resources to fund its
existing business plan, which includes the expansion of its real estate lending
and corporate tenant leasing businesses. The Company's capital sources include
cash flow from operations, borrowings under lines of credit, additional term
borrowings, long-term financing secured by the Company's assets, unsecured
financing and the issuance of common, convertible and /or preferred equity
securities. Further, the Company may acquire other businesses or assets using
its capital stock, cash or a combination thereof.

The distribution requirements under the REIT provisions of the Code limit
the Company's ability to retain earnings and thereby replenish or increase
capital committed to its operations. However, the Company believes that its
significant capital resources and access to financing will provide it with
financial flexibility and market responsiveness at levels sufficient to meet
current and anticipated capital requirements, including expected new lending and
corporate tenant leasing transactions.

The Company believes that its existing sources of funds will be adequate for
purposes of meeting its short- and long-term liquidity needs. The Company's
ability to meet its long-term (i.e., beyond one year) liquidity requirements is
subject to obtaining additional debt and equity financing. Any decision by the
Company's lenders and investors to enter into such transactions with the Company
will depend upon a number of factors, such as compliance with the terms of its
existing credit arrangements, the Company's financial performance, industry or
market trends, the general availability of and rates applicable to financing
transactions, such lenders' and investors' resources and policies concerning the
terms under which they make such capital commitments and the relative
attractiveness of alternative investment or lending opportunities.

The Company's longstanding policy is to limit its book debt-to-equity ratio
to approximately 2.0x. As the Company's leverage approaches this level, the
Company will consider equity and other alternatives to reduce leverage. The
exact timing and nature of any equity issuance would be subject to market
conditions.

The following table outlines the contractual obligations related to the
Company's long-term debt agreements and operating lease obligations. There are
no other long-term liabilities of the Company that would constitute a
contractual obligation.

EXPLANATORY NOTES:
- ------------------------------

(1) Assumes exercise of extensions on the Company's long-term debt obligations
to the extent such extensions are at the Company's option.

(2) Based on expected proceeds from principal payments received on loan assets
collateralizing such notes.

(3) The Company also has a $1.0 million letter of credit outstanding as security
for its primary corporate office lease.

The Company has four LIBOR-based secured revolving credit facilities with an
aggregate maximum availability of $2.4 billion, of which $1.3 billion was drawn
as of December 31, 2002 (see Note 7 to the Company's Consolidated Financial
Statements). Availability under these facilities is based on collateral

30

provided under a borrowing base calculation. At December 31, 2002, the Company
also had an unsecured credit facility totaling $300.0 million which bears
interest at LIBOR + 2.125% and matures in July 2004, including a one-year
extension at the Company's option. At December 31, 2002, the Company had not
drawn any amounts under this facility.

RECENT FINANCING ACTIVITIES--On May 17, 2000, the Company closed the
inaugural offering under its proprietary matched funding program, STARs,
Series 2000-1. In the initial transaction, a wholly-owned subsidiary of the
Company issued $896.5 million of investment-grade bonds secured by the
subsidiary's assets, which had an aggregate outstanding principal balance of
approximately $1.2 billion at inception. Principal payments received on the
assets were utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funded the maturity of the
underlying assets financed under the program. Of the assets of the subsidiary
secured by this financing, 73.96% (by gross carrying value) consisted of first
mortgages and subsequent lien positions and the remaining 26.04% consisted of
junior loans. For accounting purposes, this transaction was treated as a secured
financing: the underlying assets and STARs liabilities remained on the Company's
Consolidated Balance Sheets and no gain on sale was recognized. On May 28, 2002,
the Company fully repaid these bonds.

On January 11, 2001, the Company closed a new $700.0 million secured
revolving credit facility which is led by a major commercial bank. The new
facility has a three-year primary term and one-year "term-out" extension option,
and bears interest at LIBOR + 1.40% to 2.15%, depending upon the collateral
contributed to the borrowing base. The new facility accepts a broad range of
structured finance assets and has a final maturity of January 2005. Subsequent
to December 31, 2002, the Company extended the final maturity on this facility
to January 2007.

On February 22, 2001, the Company extended the maturity of its
$350.0 million unsecured revolving credit facility to May 2002. On July 27,
2001, the Company repaid this facility and replaced it with a new
$300.0 million unsecured revolving credit facility.

On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured
notes. These notes were senior unsecured obligations of the Leasing Subsidiary
and ranked equally with the Leasing Subsidiary's other senior unsecured and
unsubordinated indebtedness.

On June 14, 2001, the Company closed $193.0 million of term loan financing
secured by 15 corporate tenant lease assets. The variable-rate loan bears
interest at LIBOR + 1.85% (not to exceed 10.00% in aggregate) and has two
one-year extensions at the Company's option. The Company used these proceeds to
repay a $77.8 million secured term loan maturing in June 2001 and to pay down a
portion of its revolving credit facilities. In addition, the Company extended
the maturity of its $500.0 million secured revolving credit facility to
August 2003. On March 29, 2002, the Company again extended the final maturity of
this facility to August 2005, which includes a one-year "term-out" extension at
the Company's option.

On July 6, 2001, the Company financed a $75.0 million structured finance
asset with a $50.0 million term loan bearing interest at LIBOR + 2.50%. The loan
has a maturity of July 2006, including a one-year extension at the Company's
option. This investment is a $75.0 million term preferred investment in a
publicly-traded real estate customer. The Company's investment carries an
initial current yield of 10.50%, with annual increases of 0.50% in each of the
next two years. In addition, the Company's investment is convertible into the
customer's common stock at a strike price of $25.00 per share. The investment is
callable by the customer between months 13 and 30 of the term at a yield
maintenance premium, and after month 30, at a premium sufficient to generate a
14.62% internal rate of return on the Company's investment. The investment is
putable by the Company to the customer for cash after five years.

On July 27, 2001, the Company completed a $300.0 million unsecured revolving
credit facility with a group of leading financial institutions. The new facility
has an initial maturity of July 2003, with a one-year extension at the Company's
option and another one-year extension at the lenders' option. The new facility
replaces two prior credit facilities maturing in 2002 and 2003, and bears
interest at LIBOR + 2.125%.

31

On August 9, 2001, the Company issued $350.0 million of 8.75% senior notes
due in 2008. The notes are unsecured senior obligations of the Company. The
Company used the net proceeds to partially repay outstanding borrowings under
its secured credit facilities.

On March 29, 2002, the Company extended the maturity of its $500.0 million
secured facility to August 2005, which includes a one-year "term-out" extension
at the Company's option.

On May 28, 2002, the Company repaid the then remaining $446.2 million of
bonds outstanding under its STARs, Series 2000-1 financing. Simultaneously, a
wholly-owned subsidiary of the Company issued STARs, Series 2002-1, consisting
of $885.1 million of investment-grade bonds secured by the subsidiary's
structured finance and corporate tenant lease assets, which had an aggregate
outstanding principal balance of approximately $1.1 billion at inception.
Principal payments received on the assets will be utilized to repay the most
senior class of the bonds then outstanding. The maturity of the bonds match
funds the maturity of the underlying assets financed under the program. The
weighted average interest rate on the bonds, on an all-floating rate basis, is
approximately LIBOR + 0.56% at inception. For accounting purposes, this
transaction was treated as a secured financing: the underlying assets and STARs
liabilities remained on the Company's Consolidated Balance Sheets, and no gain
on sale was recognized.

On July 2, 2002, the Company purchased the remaining interest in the
Milpitas joint venture from the former Milpitas external member for
$27.9 million. Upon purchase of the interest, the Milpitas joint venture became
fully consolidated for accounting purposes and approximately $79.1 million of
secured term debt is reflected on the Company's Consolidated Balance Sheets.

On September 30, 2002, the Company closed a new $500.0 million secured
revolving credit facility with a leading financial institution. The new facility
has a three-year term and bears interest at LIBOR + 1.50% to 2.25%, depending
upon the collateral contributed to the borrowing base. The new facility accepts
a broad range of structured finance and corporate tenant assets and has a final
maturity date of September 2005.

On December 11, 2002, the Company closed a $61.5 million term loan financing
with a leading financial institution. The proceeds were used to fund a portion
of an $82.1 million CTL investment. The non-recourse loan is fixed rate and
bears interest at 6.412%, has a maturity date of December 2012 and amortizes
over a 30-year schedule.

HEDGING ACTIVITIES--The Company has variable-rate lending assets and
variable-rate debt obligations. These assets and liabilities create a natural
hedge against changes in variable interest rates. This means that as interest
rates increase, the Company earns more on its variable-rate lending assets and
pays more on its variable-rate debt obligations and, conversely, as interest
rates decrease, the Company earns less on its variable-rate lending assets and
pays less on its variable-rate debt obligations. When the amount of the
Company's variable-rate debt obligations exceeds the amount of its variable-rate
lending assets, the Company utilizes derivative instruments to limit the impact
of changing interest rates on its net income. The Company does not use
derivative instruments to hedge assets or for speculative purposes. The
derivatives instruments the Company uses are typically in the form of interest
rate swaps and interest rate caps. Interest rate swaps effectively change
variable-rate debt obligations to fixed-rate debt obligations. Interest rate
caps effectively limit the maximum interest rate on variable-rate debt
obligations.

In addition, when appropriate the Company may occasionally enter into
interest rate swaps that convert fixed-rate debt to variable rate in order to
mitigate the risk of changes in fair value of the fixed-rate debt obligations.

The primary risks from the Company's use of derivative instruments is the
risk that a counterparty to a hedging arrangement could default on its
obligation and the risk that the Company may have to pay certain costs, such as
transaction fees or breakage costs, if a hedging arrangement is terminated by
the Company. As a matter of policy, the Company enters into hedging arrangements
with counterparties that are large, creditworthy financial institutions
typically rated at least "A" by Standard & Poor's ("S&P") and "A2" by Moody's
Investors Service ("Moody's"). The Company's hedging strategy is approved and
monitored by

32

the Company's Audit Committee on behalf of its Board of Directors and may be
changed by the Board of Directors without stockholder approval.

The Company has entered into the following cash flow and fair value hedges
that are outstanding as of December 31, 2002. The net value associated with
these hedges is reflected on the Company's Consolidated Balance Sheets (in
thousands).

EXPLANATORY NOTE:
- ------------------------------

(1) Acquired in connection with the TriNet Acquisition (see Note 1 to the
Company's Consolidated Financial Statements).

Between January 1, 2001 and December 31, 2002, the Company also had
outstanding the following cash flow hedges that have expired or been settled (in
thousands):

In connection with STARs, Series 2002-1 in May 2002, the Company entered
into a LIBOR interest rate cap struck at 8.00% in the notional amount of
$345.0 million. The Company utilizes the provisions of Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities," with respect to such instruments. SFAS
No. 133 provides that the up-front fees paid on option-based products such as
caps should be expensed into earnings based on the allocation of the premium to
the affected periods as if the agreement were a series of "caplets." These
allocated premiums are then reflected as a charge to income (as part of interest
expense) in the affected period.

On May 28, 2002, in connection with the STARs, Series 2002-1 transaction,
the Company paid a premium of $13.7 million for an interest rate cap. Using the
"caplet" methodology discussed above, amortization of the cap premium is
dependent upon the actual value of the caplets at inception.

In connection with STARs, Series 2000-1 in May 2000, the Company entered
into a LIBOR interest rate cap struck at 10.00% in the notional amount of
$312.0 million, and simultaneously sold a LIBOR interest rate cap with the same
terms. Since these instruments did not change the Company's net interest rate
risk exposure, they did not qualify as hedges and changes in their respective
values were charged to earnings. As the terms of these arrangements were
substantially the same, the effects of a revaluation of these two instruments
substantially offset one another. On May 28, 2002, these instruments were
settled and are no longer outstanding.

33

In connection with a portion of the Company's fixed-rate corporate bonds,
the Company entered into two pay-floating interest rate swaps struck at 3.8775%
and 3.81% and in the notional amounts of $100.0 million and $50.0 million,
respectively. The Company pays one-month LIBOR and receives the stated fixed
rate in return. These swaps mitigate the risk of changes in the fair value of
$150.0 million of the Company's fixed-rate corporate bonds attributable to
changes in LIBOR. For accounting purposes, the difference between the fixed rate
received and the LIBOR rate paid on the notional amount of the swap is recorded
as "Interest expense" in the Company's Consolidated Statements of Operations. In
addition, the Company adjusts the value of the swap to its fair value and
adjusts the carrying amount of the hedged liability by an offsetting amount on a
quarterly basis.

Certain of the Company's CTL joint ventures, have hedging activities which
are more fully described in Note 6 to the Company's Consolidated Financial
Statements.

OFF-BALANCE SHEET TRANSACTIONS--The Company is not dependent on the use of
any off-balance sheet financing arrangements for liquidity. As of December 31,
2002, the Company had investments in three corporate tenant lease joint ventures
accounted for under the equity method, which had total debt obligations
outstanding of approximately $178.7 million. The Company's pro rata share of the
ventures' third-party debt was approximately $77.4 million (see Note 6 to the
Company's Consolidated Financial Statements). These ventures were formed for the
purpose of operating, acquiring and in certain cases, developing corporate
tenant lease facilities. The debt obligations of these joint ventures are
non-recourse to the ventures and the Company and mature between fiscal years
2004 and 2011. As of December 31, 2002, the debt obligations consisted of six
term loans bearing fixed rates per annum ranging from 7.61% to 8.43% and one
variable-rate term loan with a rate of LIBOR + 1.25% per annum.

The Company has certain discretionary and non-discretionary unfunded
commitments related to its loans and other lending investments that it may need
to, or choose to, fund in the future. Discretionary commitments are those under
which the Company has sole discretion with respect to future funding.
Non-discretionary commitments are those under which the Company is generally
obligated to fund at the request of the borrower or upon the occurrence of
events outside of the Company's direct control. As of December 31, 2002, the
Company had nine loans with unfunded commitments totaling $97.7 million, of
which $22.2 million was discretionary and $75.5 million was non-discretionary.

RATINGS TRIGGERS--On July 27, 2001, the Company completed a $300.0 million
unsecured revolving credit facility with a group of leading financial
institutions. The new facility has an initial maturity of July 2003 with a
one-year extension at the Company's option and another one-year extension at the
lenders' option. The new facility replaces two prior credit facilities maturing
in 2002 and 2003, and bears interest at LIBOR + 2.125% based on the Company's
senior unsecured credit ratings of BB+ from S&P, Ba1 from Moody's and BBB- from
Fitch Ratings. If the Company achieves a higher rating from either S&P or
Moody's, the facility's interest rate will improve to LIBOR + 2.00%. If the
Company's credit rating is downgraded by any of the rating agencies (regardless
of how far), the facility's interest rate will increase to LIBOR + 2.25%. In the
event the Company receives two credit ratings that are not equivalent, the
spread over LIBOR shall be determined by the lower of the two such ratings. As
of December 31, 2002, no amounts are outstanding on this facility. Accordingly,
management does not believe any rating changes would have a material adverse
impact on the Company's results of operations. There are no other ratings
triggers in any of the Company's debt instruments or other operating or
financial agreements.

During the 12 months ended December 31, 2002, the Company's senior unsecured
credit rating was upgraded to an investment grade rating of BBB- from BB+ by
Fitch Ratings. In addition, Moody's and S&P raised their ratings outlook for the
Company's senior unsecured credit rating to "positive."

TRANSACTIONS WITH RELATED PARTIES--The Company has an investment in iStar
Operating Inc. ("iStar Operating"), a taxable subsidiary that, through a
wholly-owned subsidiary, services the Company's loans and certain loan
portfolios owned by third parties. The Company owns all of the non-voting
preferred

34

stock and a 95.00% economic interest in iStar Operating. An affiliate of the
Company's largest shareholder is the owner of all the voting common stock and a
5.00% economic interest in iStar Operating. As of December 31, 2002, there have
never been any distributions to the common shareholder, nor does the Company
expect to make any in the future. At any time, the Company has the right to
acquire all of the common stock of iStar Operating at fair market value, which
the Company believes to be nominal. In addition to the direct general and
administrative costs of iStar Operating, the Company allocates a portion of its
general overhead expenses to iStar Operating based on the number of employees at
iStar Operating as a percentage of the Company's total employees.

In addition, the Company has an investment in TMOC, a taxable noncontrolled
subsidiary that has a $2.0 million investment in a real estate company based in
Mexico. The Company owns 95.00% of the outstanding voting and non-voting common
stock (representing 1.00% voting power and 95.00% of the economic interest) in
TMOC. The other two owners of TMOC stock are executives of the Company, who own
a combined 5.00% of the outstanding voting and non-voting common stock
(representing 99.00% voting power and 5.00% economic interest) in TMOC. As of
December 31, 2002, there have never been any distributions to the common
shareholders, nor does the Company expect to make any in the future. At any
time, the Company has the right to acquire all of the common stock of TMOC at
fair market value, which the Company believes to be nominal.

Both iStar Operating and TMOC have elected to be treated as taxable REIT
subsidiaries for purposes of maintaining compliance with the REIT provisions of
the Code and are accounted for under the equity method for financial statement
reporting purposes and are presented in "Investments in and advances to joint
ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance
Sheets. If they were consolidated with the Company for financial statement
purposes, they would not have a material impact on the Company's operations. As
of December 31, 2002, iStar Operating and TMOC have no debt obligations.

The Company entered into an employment agreement with its Chief Executive
Officer as of March 31, 2001. In addition to the salary and bonus provisions of
the agreement, the agreement provides for an award of 2.0 million phantom units
to the executive, each of which notionally represents one share of the Company's
Common Stock. Portions of these phantom units will vest on a contingent basis if
the average closing price of the Company's Common Stock achieves certain levels
(ranging from $25.00 to $37.00 per share) for 60 consecutive calendar days.
Contingently vested units will become fully vested, meaning that they are no
longer subject to forfeiture, if the executive remains employed through
March 30, 2004, or earlier upon certain change of control and termination
events. When and if contingently vested phantom units become fully vested units,
the Company must deliver to the executive either a number of shares of Common
Stock equal to the number of fully vested units or an amount of cash equal to
the then fair market value of that number of shares of Common Stock. If shares
were unavailable under the Company's then long-term incentive plans, this
obligation could require the Company to make a substantial cash payment to the
executive.

DRIP PROGRAM--The Company maintains a dividend reinvestment and direct stock
purchase plan. Under the dividend reinvestment component of the plan, the
Company's shareholders may purchase additional shares of Common Stock without
payment of brokerage commissions or service charges by automatically reinvesting
all or a portion of their Common Stock cash dividends. Under the direct stock
purchase component of the plan, the Company's shareholders and new investors may
purchase shares of Common Stock directly from the Company without payment of
brokerage commissions or service charges. All purchases of shares in excess of
$10,000 per month pursuant to the direct purchase component are at the Company's
sole discretion. Shares issued under the plan may reflect a discount of up to
3.00% from the prevailing market price of the Company's Common Stock. The
Company is authorized to issue up to 8.0 million shares of Common Stock pursuant
to the dividend reinvestment and direct stock purchase plan. During the 12-month
periods ended December 31, 2002 and 2001, the Company issued a total of
1.6 million and approximately 195,000 shares of its Common Stock, respectively,
through the direct stock

35

purchase component of the plan. Net proceeds during the 12-month periods ended
December 31, 2002 and 2001 were approximately $44.4 million and $4.7 million,
respectively.

STOCK REPURCHASE PROGRAM--The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets or loan
repayments and excess cash flow from operations, but also using borrowings under
its credit facilities if the Company determines that it is advantageous to do
so. As of December 31, 2001, the Company had repurchased a total of
approximately 2.3 million shares, at an aggregate cost of approximately
$40.7 million. The Company did not repurchase any shares under the stock
repurchase program in 2002.

CRITICAL ACCOUNTING POLICIES

The Company's Consolidated Financial Statements include the accounts of the
Company and all majority-owned and controlled subsidiaries. The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements. In preparing these
financial statements, management has made its best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The Company does not believe that there is a great likelihood
that materially different amounts would be reported related to the accounting
policies described below. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.

Management has the obligation to ensure that its policies and methodologies
are in accordance with GAAP. During 2002, management reviewed and evaluated its
critical accounting policies and believes them to be appropriate. The Company's
accounting policies are described in Note 3 to the Company's Consolidated
Financial Statements. Management believes the more significant of these to be as
follows:

REVENUE RECOGNITION--The most significant sources of the Company's revenue
come from its lending operations and its corporate tenant lease operations. For
its lending operations, the Company reflects income using the effective yield
method, which recognizes periodic income over the expected term of the
investment on a constant yield basis. For corporate tenant lease assets, the
Company recognizes income on the straight-line method, which effectively
recognizes contractual lease payments to be received by the Company evenly over
the term of the lease. Management believes the Company's revenue recognition
policies are appropriate to reflect the substance of the underlying
transactions.

PROVISION FOR LOAN LOSSES--The Company's accounting policies require that an
allowance for estimated credit losses be reflected in the financial statements
based upon an evaluation of known and inherent risks in its private lending
assets. While the Company and its private predecessors have experienced minimal
actual losses on their lending investments, management considers it prudent to
reflect provisions for loan losses on a portfolio basis based upon the Company's
assessment of general market conditions, the Company's internal risk management
policies and credit risk rating system, industry loss experience, the Company's
assessment of the likelihood of delinquencies or defaults, and the value of the
collateral underlying its investments. Actual losses, if any, could ultimately
differ from these estimates.

IMPAIRMENT OF LONG-LIVED ASSETS--Corporate tenant lease assets represent
"long-lived" assets for accounting purposes. The Company periodically reviews
long-lived assets to be held and used in its leasing operations for impairment
in value whenever any events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. In management's opinion,
based on this analysis, corporate tenant assets to be held and used are not
carried at amounts in excess of their estimated recoverable amounts.

36

RISK MANAGEMENT AND FINANCIAL INSTRUMENTS--The Company has historically
utilized derivative financial instruments only as a means to help to manage its
interest rate risk exposure on a portion of its variable-rate debt obligations
(i.e., as cash flow hedges). The instruments utilized are generally either
pay-fixed swaps or LIBOR-based interest rate caps which are widely used in the
industry and typically with major financial institutions. The Company's
accounting policies generally reflect these instruments at their fair value with
unrealized changes in fair value reflected in "Accumulated other comprehensive
income" on the Company's Consolidated Balance Sheets. Realized effects on the
Company's cash flows are generally recognized currently in income.

However, when appropriate the Company may occasionally enter into interest
rate swaps that convert fixed-rate debt to variable rate in order to mitigate
the risk of changes in fair value of its fixed-rate debt obligations. The
Company reflects these instruments at their fair value and adjusts the carrying
amount of the hedged liability by an offsetting amount.

INCOME TAXES--The Company's financial results generally do no reflect
provisions for current or deferred income taxes. Management believes that the
Company has and intends to continue to operate in a manner that will continue to
allow it to be taxed as a REIT and, as a result, does not expect to pay
substantial corporate-level taxes. Many of these requirements, however, are
highly technical and complex. If the Company were to fail to meet these
requirements, the Company would be subject to Federal income tax.

EXECUTIVE COMPENSATION--The Company's accounting policies generally provide
cash compensation to be estimated and recognized over the period of service.
With respect to stock-based compensation arrangements, as of July 1, 2002 (with
retroactive application to the beginning of the calendar year), the Company has
adopted the fair value method allowed under SFAS No. 123, which values options
on the date of grant and recognizes an expense equal to the fair value of the
option multiplied by the number of options granted over the related service
period. Prior to the third quarter 2002, the Company elected to use APB 25
accounting, which measured the compensation charges based on the intrinsic value
of such securities when they become fixed and determinable, and recognized such
expense over the related service period. These arrangements are often complex
and generally structured to align the interests of management with those of the
Company's shareholders. See Note 10 to the Company's Consolidated Financial
Statements for a detailed discussion of such arrangements and the related
accounting effects.

During 2001, the Company entered into new three-year employment agreements
with its Chief Executive Officer and its President. In addition, during 2002 the
Company entered into a three-year employment agreement with its new Chief
Financial Officer. See Note 10 to the Company's Consolidated Financial
Statements for a more detailed description of these employment agreements.

The following is a hypothetical illustration of the effects on the Company's
net income and adjusted earnings of the full vesting of phantom units under the
employment agreement with the Chief Executive Officer. During the 12 months
ended December 31, 2002, 1.0 million of the phantom shares awarded to the Chief
Executive Officer were contingently vested. Absent an earlier change of control
or termination of employment, these 1,000,000 shares will not become fully
vested until March 31, 2004. Assuming that the market price of the Common Stock
on March 31, 2004 is $28.05 (which was the market price of the Common Stock on
December 31, 2002), the Company would incur a one-time charge to both net income
and earnings at that time equal to $28.0 million (the fair market value of the
1,000,000 shares at $28.05 per share).

On April 29, 2002, the 500,000 unvested restricted shares awarded to the
President became contingently vested as the total shareholder return exceeded
60.00% and became fully vested on September 30, 2002 as all employment
contingencies were met. The Company incurred a non-cash charge of approximately
$15.0 million related to these vested shares, recognized ratably over the
service period from the date of contingent vesting through September 30, 2002.
Accordingly, the non-cash charge recognized for the 12 months ended
December 31, 2002 was approximately $15.0 million.

37

NEW ACCOUNTING STANDARDS

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative financial instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as:
(1) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment; (2) a hedge of the exposure to
variable cash flows of a forecasted transaction; or (3) in certain circumstances
a hedge of a foreign currency exposure. On January 1, 2001, the Company adopted
this pronouncement, as amended by Statement of Financial Accounting Standards
No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133" and Statement of Financial
Accounting Standards No. 138 "Accounting for Certain Hedging Activities--an
Amendment of FASB No. 133." Because the Company has primarily used derivatives
as cash flow hedges of interest rate risk only, the adoption of SFAS No. 133 did
not have a material financial impact on the financial position and results of
operations of the Company. However, should the Company change its current use of
such derivatives, the adoption of SFAS No. 133 could have a more significant
effect on the Company prospectively.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company adopted SAB 101, as
required, in the fourth quarter of fiscal 2000. The adoption of SAB 101 did not
have a material financial impact on the financial position or results of
operations of the Company.

In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
was required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The initial adoption of FIN 44 did not have a
significant impact on the Company.

In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This statement is
applicable for transfers of assets and extinguishments of liabilities occurring
after June 30, 2001. The Company adopted the provisions of this statement as
required for all transactions entered into on or after April 1, 2001. The
adoption of SFAS No. 140 did not have a significant impact on the Company.

In July 2001, the SEC released Staff Accounting Bulletin No. 102
("SAB 102"), "Selected Loan Loss Allowance and Documentation Issues." SAB 102
summarizes certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for loan and
lease losses. Adoption of SAB 102 by the Company did not have a significant
impact on the Company.

In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS No. 141"), "Business Combinations" and Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the purchase method of accounting to be used for
all business combinations initiated after June 30, 2001. SFAS No. 141 also
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in business combinations and requires intangible
assets to be recognized apart from goodwill if certain tests are met.
SFAS No. 142 requires that goodwill not be amortized but instead be measured for
impairment at least annually, or when events indicate that there may be an
impairment. The Company adopted the

38

provisions of both statements, as required, on January 1, 2002 and the adoption
did not have a significant impact on the Company.

In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of
impairment losses on long-lived assets to be held and used or to be disposed of,
and also broadens the definition of what constitutes a discontinued operation
and how the results of a discontinued operation are to be measured and
presented. SFAS No. 144 requires that current operations prior to the
disposition of corporate tenant lease assets and prior period results of such
operations be presented in discontinued operations in the Company's Consolidated
Statements of Operations. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and must be applied at the beginning of a fiscal year. The Company adopted the
provisions of this statement on January 1, 2002, as required, and it did not
have a significant financial impact on the Company.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
rescinds both FASB Statements No. 4 ("SFAS No. 4"), "Reporting Gains and Losses
from Extinguishment of Debt," and the amendment to SFAS No. 4, FASB Statement
No. 64 ("SFAS No. 64"), "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." Through this rescission, SFAS No. 145 eliminates the requirement
(in both SFAS No. 4 and SFAS No. 64) that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. An entity is not
prohibited from classifying such gains and losses as extraordinary items, so
long as they meet the criteria in paragraph 20 of Accounting Principles Board
Opinion No. 30 ("APB 30"), "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions"; however, due to the nature of
the Company's operations, such treatment may not be available to the Company.
Any gains or losses on extinguishments of debt that were previously classified
as extraordinary items in prior periods presented that do not meet the criteria
in APB 30 for classification as an extraordinary item will be reclassified to
income from continuing operations. The provisions of SFAS No. 145 are effective
for financial statements issued for fiscal years beginning after May 15, 2002.
The Company will adopt the provisions of this statement, as required, on
January 1, 2003, at which time ($12.2) million and ($1.6) million will be
reclassified to continuing operations for 2002 and 2001, respectively.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS No. 146"), "Accounting for Exit or Disposal Activities," to
address significant issues regarding the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The scope of SFAS No. 146 also includes: (1) costs related to
terminating a contract that is not a capital lease; and (2) termination benefits
received by employees involuntarily terminated under the terms of a one-time
benefit arrangement that is not an on-going benefit arrangement or an individual
deferred-compensation contract. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company does not expect SFAS No. 146 to have a material effect on the Company's
Consolidated Financial Statements.

In September 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 ("SFAS No. 147"), "Acquisitions of Certain Financial
Institutions," an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for the
acquisitions of financial institutions, except those acquisitions between two or
more mutual enterprises. SFAS No. 147 removes acquisitions of financial
institutions from the scope of both FASB No. 72,

39

"Accounting for Certain Acquisitions of Banking or Thrift Institutions," and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, "When a Savings
and Loan Association or a Similar Institution is Acquired in a Business
Combination Accounted for by the Purchase Method," and requires that those
transactions be accounted for in accordance with SFAS No. 141 and
SFAS No. 142. SFAS No. 147 also amends SFAS No. 144 to include in its scope
long-term, customer-relationship intangible assets of financial institutions
such as depositor-relationship and borrower-relationship intangible assets and
credit cardholder intangible assets. The Company adopted the provisions of this
statement, as required, on October 1, 2002, and it did not have a significant
financial impact on the Company's Consolidated Financial Statements.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting
for Contingencies," Statement of Financial Accounting Standards No. 57, "Related
Party Disclosures," Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" and rescinds FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others, an Interpretation of SFAS No. 5." It requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee regardless if the Company receives
separately identifiable consideration (i.e., a premium). The new disclosure
requirements are effective December 31, 2002. The adoption of FIN 45 did not
have a material impact on the Company's Consolidated Financial Statements, nor
is it expected to have a material impact in the future.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation--Transition and Disclosure," an amendment of FASB Statement
No. 123 ("SFAS No. 123"). This statement provides alternative transition methods
for a voluntary change to the fair value basis of accounting for stock-based
employee compensation. However, this Statement does not permit the use of the
original SFAS No. 123 prospective method of transition for changes to the fair
value based method made in fiscal years beginning after December 15, 2003. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation,
description of transition method utilized and the effect of the method used on
reported results. The transition and annual disclosure provisions of
SFAS No. 148 shall be applied for fiscal years ending after December 15, 2002.
The new interim disclosure provisions are effective for the first interim period
beginning after December 15, 2002. The Company adopted SFAS No. 148 with
retroactive application to January 1, 2002 with no material effect on the
Company's Consolidated Financial Statements.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," an interpretation of ARB 51.
FIN 46 provides guidance on identifying entities for which control is achieved
through means other than through voting rights (a "variable interest entity" or
"VIE"), and how to determine when and which business enterprise should
consolidate a VIE. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. The transitional disclosure requirements will
take effect almost immediately and are required for all financial statements
initially issued after January 31, 2003. The adoption of FIN 46 is not expected
to have a material impact on the Company.

40

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISKS

Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. In
pursuing its business plan, the primary market risk to which the Company is
exposed is interest rate risk. Consistent with its liability management
objectives, the Company has implemented an interest rate risk management policy
based on match funding, with the objective that variable-rate assets be
primarily financed by variable-rate liabilities and fixed-rate assets be
primarily financed by fixed-rate liabilities.

The Company's operating results will depend in part on the difference
between the interest and related income earned on its assets and the interest
expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of real estate financing may lead to a decrease
in the interest rate earned on the Company's interest-bearing assets, which the
Company may not be able to offset by obtaining lower interest costs on its
borrowings. Changes in the general level of interest rates prevailing in the
financial markets may affect the spread (the difference in the principal amount
outstanding) between the Company's interest-earning assets and interest-bearing
liabilities. Any significant compression of the spreads between interest-earning
assets and interest-bearing liabilities could have a material adverse effect on
the Company. In addition, an increase in interest rates could, among other
things, reduce the value of the Company's interest-bearing assets and its
ability to realize gains from the sale of such assets, and a decrease in
interest rates could reduce the average life of the Company's interest-earning
assets.

A substantial portion of the Company's loan investments are subject to
significant prepayment protection in the form of lock-outs, yield maintenance
provisions or other prepayment premiums which provide substantial yield
protection to the Company. Those assets generally not subject to prepayment
penalties include: (1) variable-rate loans based on LIBOR, originated or
acquired at par, which would not result in any gain or loss upon repayment; and
(2) discount loans and loan participations acquired at discounts to face values,
which would result in gains upon repayment. Further, while the Company generally
seeks to enter into loan investments which provide for substantial prepayment
protection, in the event of declining interest rates, the Company could receive
such prepayments and may not be able to reinvest such proceeds at favorable
returns. Such prepayments could have an adverse effect on the spreads between
interest-earning assets and interest-bearing liabilities.

While the Company has not experienced any significant credit losses, in the
event of a significant rising interest rate environment and/or economic
downturn, defaults could increase and result in credit losses to the Company
which adversely affect its liquidity and operating results. Further, such
delinquencies or defaults could have an adverse effect on the spreads between
interest-earning assets and interest-bearing liabilities.

Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
conditions, and other factors beyond the control of the Company. As more fully
discussed in Note 9 to the Company's Consolidated Financial Statements, the
Company employs match funding-based hedging strategies to limit the effects of
changes in interest rates on its operations, including engaging in interest rate
caps, floors, swaps, futures and other interest rate-related derivative
contracts. These strategies are specifically designed to reduce the Company's
exposure, on specific transactions or on a portfolio basis, to changes in cash
flows as a result of interest rate movements in the market. The Company does not
enter into derivative contracts for speculative purposes nor as a hedge against
changes in credit risk of its borrowers or of the Company itself.

Each interest rate cap or floor agreement is a legal contract between the
Company and a third party (the "counterparty"). When the Company purchases a cap
or floor contract, the Company makes an up-front payment to the counterparty and
the counterparty agrees to make payments to the Company in

41

the future should the reference rate (typically one- or three-month LIBOR) rise
above (cap agreements) or fall below (floor agreements) the "strike" rate
specified in the contract. Each contract has a notional face amount. Should the
reference rate rise above the contractual strike rate in a cap, the Company will
earn cap income. Should the reference rate fall below the contractual strike
rate in a floor, the Company will earn floor income. Payments on an annualized
basis will equal the contractual notional face amount multiplied by the
difference between the actual reference rate and the contracted strike rate. The
Company utilizes the provisions of SFAS No. 133 with respect to such
instruments. SFAS No. 133 provides that the up-front fees paid on option-based
products such as caps should be expensed into earnings based on the allocation
of the premium to the affected periods as if the agreement were a series of
"caplets." These allocated premiums are then reflected as a charge to income and
are included in "Interest expense" on the Company's Consolidated Statements of
Operations in the affected period.

Interest rate swaps are agreements in which a series of interest rate flows
are exchanged over a prescribed period. The notional amount on which swaps are
based is not exchanged. In general, the Company's swaps are "pay fixed" swaps
involving the exchange of variable-rate interest payments from the counterparty
for fixed interest payments from the Company. However, when appropriate the
Company may occasionally enter into "pay floating" swaps involving the exchange
of fixed-rate interest payments from the counterparty for variable-rate interest
payments from the Company, which mitigates the risk of changes in fair value of
the Company's fixed-rate debt obligations.

Interest rate futures are contracts, generally settled in cash, in which the
seller agrees to deliver on a specified future date the cash equivalent of the
difference between the specified price or yield indicated in the contract and
the value of the specified instrument (i.e., U.S. Treasury securities) upon
settlement. Under these agreements, the Company would generally receive
additional cash flow at settlement if interest rates rise and pay cash if
interest rates fall. The effects of such receipts or payments would be deferred
and amortized over the term of the specific related fixed-rate borrowings. In
the event that, in the opinion of management, it is no longer probable that a
forecasted transaction will occur under terms substantially equivalent to those
projected, the Company would cease recognizing such transactions as hedges and
immediately recognize related gains or losses based on actual settlement or
estimated settlement value.

While a REIT may freely utilize the types of derivative instruments
discussed above to hedge interest rate risk on its liabilities, the use of
derivatives for other purposes, including hedging asset-related risks such as
credit, prepayment or interest rate exposure on the Company's loan assets, could
generate income which is not qualified income for purposes of maintaining REIT
status. As a consequence, the Company may only engage in such instruments to
hedge such risks on a limited basis.

There can be no assurance that the Company's profitability will not be
adversely affected during any period as a result of changing interest rates. In
addition, hedging transactions using derivative instruments involve certain
additional risks such as counterparty credit risk, legal enforceability of
hedging contracts and the risk that unanticipated and significant changes in
interest rates will cause a significant loss of basis in the contract. With
regard to loss of basis in a hedging contract, indices upon which contracts are
based may be more or less variable than the indices upon which the hedged assets
or liabilities are based, thereby making the hedge less effective. The
counterparties to these contractual arrangements are major financial
institutions with which the Company and its affiliates may also have other
financial relationships. The Company is potentially exposed to credit loss in
the event of nonperformance by these counterparties. However, because of their
high credit ratings, the Company does not anticipate that any of the
counterparties will fail to meet their obligations. There can be no assurance
that the Company will be able to adequately protect against the foregoing risks
and that the Company will ultimately realize an economic benefit from any
hedging contract it enters into which exceeds the related costs incurred in
connection with engaging in such hedges.

42

The following table quantifies the potential changes in net investment
income and net fair value of financial instruments should interest rates
increase or decrease 100 or 200 basis points, assuming no change in the shape of
the yield curve (i.e., relative interest rates). Net investment income is
calculated as revenue from loans and other lending investments and operating
leases (as of December 31, 2002), less related interest expense and operating
costs on corporate tenant lease assets, for the year ended December 31, 2002.
Net fair value of financial instruments is calculated as the sum of the value of
derivative instruments and the present value of cash in-flows generated from
interest-earning assets, less cash out-flows in respect of interest-bearing
liabilities as of December 31, 2002. The cash flows associated with the
Company's assets are calculated based on management's best estimate of expected
payments for each loan based on loan characteristics such as loan-to-value
ratio, interest rate, credit history, prepayment penalty, term and collateral
type. Most of the Company's loans are protected from prepayment as a result of
prepayment penalties and contractual terms which prohibit prepayments during
specified periods. However, for those loans where prepayments are not currently
precluded by contract, declines in interest rates may increase prepayment
speeds. The base interest rate scenario assumes the one-month LIBOR rate of
1.38% as of December 31, 2002. Actual results could differ significantly from
those estimated in the table.

ESTIMATED PERCENTAGE CHANGE IN

EXPLANATORY NOTE:
- ------------------------------

(1) Amounts exclude fair values of non-financial investments, primarily CTL
assets and certain forms of corporate finance investments.

43

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Index to Financial Statements

All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

Financial statements of five owned companies or joint ventures accounted for
under the equity method have been omitted because the Company's proportionate
share of the income from continuing operations before income taxes is less than
20.00% of the respective consolidated amount and the investments in and advances
to each company are less than 20.00% of consolidated total assets.

44

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of iStar Financial Inc.

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of iStar
Financial Inc. and its subsidiaries (the "Company") at December 31, 2002 and
2001, and the 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 of America. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, NY
February 14, 2003, except for Note 17, which is as of March 11, 2003

45

ISTAR FINANCIAL INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

- ------------------------------

* RECLASSIFIED TO CONFORM TO 2002 PRESENTATION.

The accompanying notes are an integral part of the financial statements.

46

ISTAR FINANCIAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

- ------------------------------

* RECLASSIFIED TO CONFORM TO 2002 PRESENTATION.

The accompanying notes are an integral part of the financial statements.

47

ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)

The accompanying notes are an integral part of the financial statements.

48

ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

- ----------------------------------
* RECLASSIFIED TO CONFORM TO 2002 PRESENTATION.

EXPLANATORY NOTE:

(1) For the year ended December 31, 2001, the $264.5 million of common dividends
shown in the table represents five quarters of dividends, of which
$51.4 million relates to the fourth quarter 2000 dividend (paid in January
2001).

The accompanying notes are an integral part of the financial statements.

49

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--BUSINESS AND ORGANIZATION.

BUSINESS--iStar Financial Inc. (the "Company") is the leading
publicly-traded finance company focused on the commercial real estate industry.
The Company provides structured financing to private and corporate owners of
real estate nationwide, including senior and junior mortgage debt, corporate
mezzanine and subordinated capital, and corporate net lease financing. The
Company, which is taxed as a real estate investment trust ("REIT"), seeks to
deliver strong dividends and superior risk-adjusted returns on equity to
shareholders by providing innovative and value-added financing solutions to its
customers.

The Company's primary product lines include:

- STRUCTURED FINANCE. The Company provides senior and subordinated loans
that typically range in size from $20 million to $100 million to borrowers
holding high-quality real estate. These loans may be either fixed or
variable rate and are structured to meet the specific financing needs of
the borrowers, including the acquisition or financing of large,
high-quality real estate. The Company offers borrowers a wide range of
structured finance options, including first mortgages, second mortgages,
partnership loans, participating debt and interim facilities. The
Company's structured finance transactions have maturities generally
ranging from three to ten years. As of December 31, 2002, based on gross
carrying values, the Company's structured finance assets represented
27.02% of its assets.

- PORTFOLIO FINANCE. The Company provides funding to regional and national
borrowers who own multiple facilities in geographically diverse
portfolios. Loans are cross-collateralized to give the Company the benefit
of all available collateral and underwritten to recognize inherent
portfolio diversification. Property types include multifamily, suburban
office, hotels and other property types where individual property values
are less than $20 million on average. Loan terms are structured to meet
the specific requirements of the borrower and typically range in size from
$25 million to $150 million. The Company's portfolio finance transactions
have maturities generally ranging from three to ten years. As of
December 31, 2002, based on gross carrying values, the Company's portfolio
finance assets represented 7.08% of its assets.

- CORPORATE FINANCE. The Company provides senior and subordinated capital to
corporations engaged in real estate or real estate-related businesses.
Financings may be either secured or unsecured and typically range in size
from $20 million to $150 million. The Company's corporate finance
transactions have maturities generally ranging from five to ten years. As
of December 31, 2002, based on gross carrying values, the Company's
corporate finance assets represented 12.18% of its assets.

- LOAN ACQUISITION. The Company acquires whole loans and loan participations
which present attractive risk-reward opportunities. Loans are generally
acquired at a small discount to the principal balance outstanding. Loan
acquisitions typically range in size from $5 million to $100 million and
are collateralized by all major property types. The Company's loan
acquisition transactions have maturities generally ranging from three to
ten years. As of December 31, 2002, based on gross carrying values, the
Company's loan acquisition assets represented 8.60% of its assets.

- CORPORATE TENANT LEASING. The Company provides capital to corporations and
borrowers who control facilities leased to single creditworthy tenants.
The Company's net leased assets are generally mission-critical
headquarters or distribution facilities that are subject to long-term
leases with rated corporate credit tenants, and which provide for all
expenses at the property to be paid by

50

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--BUSINESS AND ORGANIZATION. (CONTINUED)
the corporate tenant on a triple net lease basis. Corporate tenant lease
transactions have terms generally ranging from ten to 20 years and
typically range in size from $20 million to $150 million. As of
December 31, 2002, based on gross carrying values, the Company's corporate
tenant lease assets represented 43.64% of its assets.

- SERVICING. Through its iStar Asset Services division, the Company provides
rated loan servicing to third-party institutional loan portfolios, as well
as to the Company's own assets. The servicing business did not represent a
meaningful percentage of the gross carrying value of the Company's assets
as of December 31, 2002.

The Company's investment strategy targets specific sectors of the real
estate credit markets in which it believes it can deliver value-added, flexible
financial solutions to its customers, thereby differentiating its financial
products from those offered by other capital providers.

The Company has implemented its investment strategy by:

- Focusing on the origination of large, structured mortgage, corporate and
lease financings where customers require flexible financial solutions.

- Avoiding commodity businesses in which there is significant direct
competition from other providers of capital such as conduit lending and
investment in commercial or residential mortgage-backed securities.

- Developing direct relationships with borrowers and corporate customers as
opposed to sourcing transactions solely through intermediaries.

- Adding value beyond simply providing capital by offering borrowers and
corporate customers specific lending expertise, flexibility, certainty and
continuing relationships beyond the closing of a particular financing
transaction.

- Taking advantage of market anomalies in the real estate financing markets
when the Company believes credit is mispriced by other providers of
capital, such as the spread between lease yields and the yields on
corporate customers' underlying credit obligations.

ORGANIZATION--The Company began its business in 1993 through private
investment funds formed to capitalize on inefficiencies in the real estate
finance market. In March 1998, these funds contributed their approximately
$1.1 billion of assets to the Company's predecessor in exchange for a
controlling interest in that company. Since that time, the Company has grown by
originating new lending and leasing transactions, as well as through corporate
acquisitions.

Specifically, in September 1998, the Company acquired the loan origination
and servicing business of a major insurance company, and in December 1998, the
Company acquired the mortgage and mezzanine loan portfolio of its largest
private competitor. Additionally, in November 1999, the Company acquired TriNet
Corporate Realty Trust, Inc. ("TriNet" or the "Leasing Subsidiary"), then the
largest publicly-traded company specializing in corporate sale/leaseback
transactions for office and industrial facilities (the "TriNet Acquisition").
The TriNet Acquisition was structured as a stock-for-stock merger of TriNet with
a subsidiary of the Company.

Concurrent with the TriNet Acquisition, the Company also acquired its former
external advisor in exchange for shares of the Company's common stock ("Common
Stock") and converted its organizational form to a Maryland corporation. As part
of the conversion to a Maryland corporation, the Company

51

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--BUSINESS AND ORGANIZATION. (CONTINUED)
replaced its former dual class common share structure with a single class of
Common Stock. The Company's Common Stock began trading on the New York Stock
Exchange on November 4, 1999. Prior to this date, the Company's common shares
were traded on the American Stock Exchange.

NOTE 2--BASIS OF PRESENTATION

The accompanying audited Consolidated Financial Statements have been
prepared in conformity with generally accepted accounting principles in the
United States of America ("GAAP") for complete financial statements. The
Consolidated Financial Statements include the accounts of the Company, its
qualified REIT subsidiaries, and its majority-owned and controlled partnerships.

Certain other investments in partnerships or joint ventures which the
Company does not control are also accounted for under the equity method (see
Note 5 and 6). All significant intercompany balances and transactions have been
eliminated in consolidation.

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

LOANS AND OTHER LENDING INVESTMENTS, NET--As described in Note 4, "Loans and
Other Lending Investments" includes the following investments: senior mortgages,
subordinate mortgages, corporate/ partnership loans, other lending
investments-loans and other lending investments-securities. Management considers
nearly all of its loan and other lending investments to be held-to-maturity,
although a small number of investments may be classified as available-for-sale.
Items classified as held-to-maturity are reflected at amortized historical cost,
while items classified as available-for-sale are reported at fair values.
Unrealized gains and losses on available-for-sale investments are included in
"Accumulated other comprehensive income" on the Company's Consolidated Balance
Sheets, and are not included in the Company's net income.

CORPORATE TENANT LEASE ASSETS AND DEPRECIATION--Corporate tenant lease
assets are generally recorded at cost less accumulated depreciation. Certain
improvements and replacements are capitalized when they extend the useful life,
increase capacity or improve the efficiency of the asset. Repairs and
maintenance items are expensed as incurred. Depreciation is computed using the
straight-line method of cost recovery over estimated useful lives of 40.0 years
for facilities, five years for furniture and equipment, the shorter of the
remaining lease term or expected life for tenant improvements and the remaining
life of the facility for facility improvements.

Corporate tenant lease assets to be disposed of are reported at the lower of
their carrying amount or fair value less costs to sell. The Company also
periodically reviews long-lived assets to be held and used for an impairment in
value whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. In management's opinion, corporate
tenant lease assets to be held and used are not carried at amounts in excess of
their estimated recoverable amounts.

CAPITALIZED INTEREST--The Company capitalizes interest costs incurred during
the construction period on qualified build-to-suit projects for corporate
tenants, including investments in joint ventures accounted for under the equity
method. Interest capitalized was approximately $70,000 and $1.0 million during
the 12-month periods ended December 31, 2002 and 2001, respectively.

CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash held in
banks or invested in money market funds with original maturity terms of less
than 90 days.

52

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH--Restricted cash represents amounts required to be
maintained in escrow under certain of the Company's debt obligations and leasing
transactions.

REVENUE RECOGNITION--The Company's revenue recognition policies are as
follows:

LOANS AND OTHER LENDING INVESTMENTS: Management considers nearly all of its
loans and other lending investments to be held-to-maturity, although a small
number of investments may be classified as available-for-sale. The Company
reflects held-to-maturity investments at amortized cost less allowance for loan
losses, acquisition premiums or discounts, deferred loan fees and undisbursed
loan funds. Unrealized gains and losses on available-for-sale investments are
included in "Accumulated other comprehensive income" on the Company's
Consolidated Balance Sheets and are not included in the Company's net income. On
occasion, the Company may acquire loans at small premiums or discounts based on
the credit characteristics of such loans. These premiums or discounts are
recognized as yield adjustments over the lives of the related loans. If loans
that were acquired at a premium or discount are prepaid, the Company immediately
recognizes the unamortized premium or discount as a decrease or increase,
respectively, in the prepayment gain or loss. Loan origination or exit fees, as
well as direct loan origination costs, are also deferred and recognized over the
lives of the related loans as a yield adjustment. Interest income is recognized
using the effective interest method applied on a loan-by-loan basis.

A small number of the Company's loans provide for accrual of interest at
specified rates which differ from current payment terms. Interest is recognized
on such loans at the accrual rate subject to management's determination that
accrued interest and outstanding principal are ultimately collectible, based on
the underlying collateral and operations of the borrower.

Prepayment penalties or yield maintenance payments from borrowers are
recognized as additional income when received. Certain of the Company's loan
investments provide for additional interest based on the borrower's operating
cash flow or appreciation of the underlying collateral. Such amounts are
considered contingent interest and are reflected as income only upon certainty
of collection.

LEASING INVESTMENTS: Operating lease revenue is recognized on the
straight-line method of accounting from the later of the date of the origination
of the lease or the date of acquisition of the facility subject to existing
leases. Accordingly, contractual lease payment increases are recognized evenly
over the term of the lease. The cumulative difference between lease revenue
recognized under this method and contractual lease payment terms is recorded as
"Deferred operating lease income receivable" on the Company's Consolidated
Balance Sheets.

PROVISION FOR LOAN LOSSES--The Company's accounting policies require that an
allowance for estimated loan losses be maintained at a level that management,
based upon an evaluation of known and inherent risks in the portfolio, considers
adequate to provide for loan losses. In establishing loan loss provisions,
management periodically evaluates and analyzes the Company's assets, historical
and industry loss experience, economic conditions and trends, collateral values
and quality, and other relevant factors. Specific valuation allowances are
established for impaired loans in the amount by which the carrying value, before
allowance for estimated losses, exceeds the fair value of collateral less
disposition costs on an individual loan basis. Management considers a loan to be
impaired when, based upon current information and events, it believes that it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement on a timely basis. Management
measures these impaired loans at the fair value of the loans' underlying
collateral less estimated disposition costs. Impaired loans may be left on
accrual status during the period the Company is pursuing repayment of the

53

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
loan; however, these loans are placed on non-accrual status at such time as:
(1) management believes that the potential risk exists that scheduled debt
service payments will not be met within the coming 12 months; (2) the loans
become 90 days delinquent; (3) management determines the borrower is incapable
of, or has ceased efforts toward, curing the cause of the impairment; or
(4) the net realizable value of the loan's underlying collateral approximates
the Company's carrying value of such loan. While on non-accrual status, interest
income is recognized only upon actual receipt. Impairment losses are recognized
as direct write-downs of the related loan with a corresponding charge to the
provision for loan losses. Charge-offs occur when loans, or a portion thereof,
are considered uncollectible and of such little value that further pursuit of
collection is not warranted. Management also provides a loan portfolio reserve
based upon its periodic evaluation and analysis of the portfolio, historical and
industry loss experience, economic conditions and trends, collateral values and
quality, and other relevant factors.

The Company's loans are generally secured by real estate assets or are
corporate lending arrangements to entities with significant rental real estate
operations (i.e., an unsecured loan to a company which operates residential
apartments or retail, industrial or office facilities as rental real estate).
While the underlying real estate assets for the corporate lending instruments
may not serve as collateral for the Company's investments in all cases, the
Company evaluates the underlying real estate assets when estimating loan loss
exposure because the Company's loans generally have preclusions as to how much
senior and/or secured debt the customer may borrow ahead of the Company's
position.

INCOME TAXES--The Company is subject to federal income taxation at corporate
rates on its "REIT taxable income"; however, the Company is allowed a deduction
for the amount of dividends paid to its shareholders, thereby subjecting the
distributed net income of the Company to taxation at the shareholder level only.
In addition, the Company is allowed several other deductions in computing its
"REIT taxable income," including non-cash items such as depreciation expense.
These deductions allow the Company to shelter a portion of its operating cash
flow from its dividend payout requirement under federal tax laws. The Company
intends to operate in a manner consistent with and to elect to be treated as a
REIT for tax purposes. iStar Operating Inc. ("iStar Operating") and TriNet
Management Operating Company, Inc. ("TMOC"), the Company's REIT taxable
subsidiaries, are not consolidated for federal income tax purposes and are taxed
as corporations. For financial reporting purposes, current and deferred taxes
are provided for in the portion of earnings recognized by the Company with
respect to its interest in iStar Operating and TMOC. Accordingly, except for the
Company's taxable subsidiaries, no current or deferred taxes are provided for in
the Consolidated Financial Statements. See Note 6 for a detailed discussion on
the ownership structure and operations of iStar Operating and TMOC.

EARNINGS (LOSS) PER COMMON SHARE--In accordance with the Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), the Company presents
both basic and diluted earnings per share ("EPS"). Basic earnings per share
("Basic EPS") excludes dilution and is computed by dividing net income available
to common shareholders by the weighted average number of shares outstanding for
the period. Diluted earnings per share ("Diluted EPS") reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock, where such exercise or conversion
would result in a lower earnings per share amount.

RECLASSIFICATIONS--Certain prior year amounts have been reclassified in the
Consolidated Financial Statements and the related notes to conform to the 2002
presentation.

USE OF ESTIMATES--The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities

54

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.

CHANGE IN ACCOUNTING PRINCIPLE--In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as: (1) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment; (2) a hedge of the exposure to variable cash flows of a forecasted
transaction; or (3) in certain circumstances, a hedge of a foreign currency
exposure. On January 1, 2001, the Company adopted this pronouncement, as amended
by Statement of Financial Accounting Standards No. 137 "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133" and Statement of Financial Accounting Standards No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an Amendment of FASB Statement No. 133." Because the Company has
primarily used derivatives as cash flow hedges of interest rate risk only, the
adoption of SFAS No. 133 did not have a material financial impact on the
financial position and results of operations of the Company. However, should the
Company change its current use of such derivatives, the adoption of SFAS
No. 133 could have a more significant effect on the Company prospectively.

Upon adoption, the Company recognized a charge to net income of
approximately $282,000 and an additional charge of $9.4 million to "Accumulated
other comprehensive income," representing the cumulative effect of the change in
accounting principle.

OTHER NEW ACCOUNTING STANDARDS--In December 1999, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." In June 2000, the SEC
staff amended SAB 101 to provide registrants with additional time to implement
SAB 101. The Company adopted SAB 101, as required, in the fourth quarter of
fiscal 2000. The adoption of SAB 101 did not have a material financial impact on
the financial position or the results of operations of the Company.

In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
was required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The initial adoption of FIN 44 by the Company did
not have a significant impact on the Company.

In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This statement is
applicable for transfers of assets and extinguishments of liabilities occurring
after June 30, 2001. The Company adopted the provisions of this statement as
required for all transactions entered into on or after April 1, 2001. The
adoption of SFAS No. 140 did not have a significant impact on the Company.

55

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In July 2001, the SEC released Staff Accounting Bulletin No. 102 ("SAB
102"), "Selected Loan Loss Allowance and Documentation Issues." SAB 102
summarizes certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for loan and
lease losses. Adoption of SAB 102 by the Company did not have a significant
impact on the Company.

In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS No. 141"), "Business Combinations" and Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the purchase method of accounting to be used for
all business combinations initiated after June 30, 2001. SFAS No. 141 also
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in business combinations and requires intangible
assets to be recognized apart from goodwill if certain tests are met. SFAS
No. 142 requires that goodwill not be amortized but instead be measured for
impairment at least annually, or when events indicate that there may be an
impairment. The Company adopted the provisions of both statements on January 1,
2002, as required, and the adoption did not have a significant impact on the
Company.

In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of
impairment losses on long-lived assets to be held and used or to be disposed of,
and also broadens the definition of what constitutes a discontinued operation
and how the results of a discontinued operation are to be measured and
presented. SFAS No. 144 requires that current operations prior to the
disposition of corporate tenant lease assets and prior period results of such
operations be presented in discontinued operations in the Company's Consolidated
Statements of Operations. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and must be applied at the beginning of a fiscal year. The Company adopted the
provisions of this statement on January 1, 2002, as required, and it did not
have a significant financial impact on the Company.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
rescinds both FASB Statements No. 4 ("SFAS No. 4"), "Reporting Gains and Losses
from Extinguishment of Debt," and the amendment to SFAS No. 4, FASB Statement
No. 64 ("SFAS No. 64"), "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." Through this rescission, SFAS No. 145 eliminates the requirement
(in both SFAS No. 4 and SFAS No. 64) that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. An entity is not
prohibited from classifying such gains and losses as extraordinary items, so
long as they meet the criteria in paragraph 20 of Accounting Principles Board
Opinion No. 30 ("APB 30"), "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions"; however, due to the nature of
the Company's operations, such treatment may not be available to the Company.
Any gains or losses on extinguishments of debt that were previously classified
as extraordinary items in prior periods presented that do not meet the criteria
in APB 30 for classification as an extraordinary item will be reclassified to
income from continuing operations. The provisions of SFAS No. 145 are effective
for financial statements issued for fiscal years beginning after May 15, 2002.
The Company will adopt the provisions of this statement, as required, on
January 1, 2003, at

56

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which time ($12.2) million and ($1.6) million will be reclassified to continuing
operations for 2002 and 2001, respectively.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS No. 146"), "Accounting for Exit or Disposal Activities," to
address significant issues regarding the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The scope of SFAS No. 146 also includes: (1) costs related to
terminating a contract that is not a capital lease; and (2) termination benefits
received by employees involuntarily terminated under the terms of a one-time
benefit arrangement that is not an on-going benefit arrangement or an individual
deferred-compensation contract. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company does not expect SFAS No. 146 to have a material effect on the Company's
Consolidated Financial Statements.

In September 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 ("SFAS No. 147"), "Acquisitions of Certain Financial
Institutions," an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for the
acquisitions of financial institutions, except those acquisitions between two or
more mutual enterprises. SFAS No. 147 removes acquisitions of financial
institutions from the scope of both FASB No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions," and FASB Interpretation No. 9,
Applying APB Opinions No. 16 and 17, "When a Savings and Loan Association or a
Similar Institution is Acquired in a Business Combination Accounted for by the
Purchase Method," and requires that those transactions be accounted for in
accordance with SFAS No. 141 and SFAS No. 142. SFAS No. 147 also amends SFAS
No. 144 to include in its scope long-term, customer-relationship intangible
assets of financial institutions such as depositor-relationship and
borrower-relationship intangible assets and credit cardholder intangible assets.
The Company adopted the provisions of this statement, as required, on
October 1, 2002, and it did not have a significant financial impact on the
Company's Consolidated Financial Statements.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting
for Contingencies," Statement of Financial Accounting Standards No. 57, "Related
Party Disclosures," Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" and rescinds FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others, an Interpretation of SFAS No. 5." It requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee regardless if the Company receives
separately identifiable consideration (i.e., a premium). The new disclosure
requirements are effective December 31, 2002. The adoption of FIN 45 did not
have a material impact on the Company's Consolidated Financial Statements, nor
is it expected to have a material impact in the future.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation--
Transition and Disclosure," an amendment of FASB Statement No. 123 ("SFAS
No. 123"). This statement provides alternative transition methods for a
voluntary change to the fair value basis of accounting for stock-based employee
compensation. However,

57

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
this Statement does not permit the use of the original SFAS No. 123 prospective
method of transition for changes to the fair value based method made in fiscal
years beginning after December 15, 2003. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation, description of transition method utilized and
the effect of the method used on reported results. The transition and annual
disclosure provisions of SFAS No. 148 shall be applied for fiscal years ending
after December 15, 2002. The new interim disclosure provisions are effective for
the first interim period beginning after December 15, 2002. The Company adopted
SFAS No. 148 with retroactive application to January 1, 2002 with no material
effect on the Company's Consolidated Financial Statements.

SFAS No. 148 disclosure requirements, including the effect on net income and
earnings per share if the fair value-based method had been applied to all
outstanding and unvested stock awards in each period, are presented below (in
thousands except per share amounts):

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," an interpretation of ARB 51. FIN
46 provides guidance on identifying entities for which control is achieved
through means other than through voting rights (a "variable interest entity" or
"VIE"), and how to determine when and which business enterprise should
consolidate a VIE. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. The transitional disclosure requirements will
take effect almost immediately and are required for all financial statements
initially issued after January 31, 2003. The adoption of FIN 46 is not expected
to have a material impact on the Company.

58

ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--LOANS AND OTHER LENDING INVESTMENTS

The following is a summary description of the Company's loans and other
lending investments (in thousands)(1):

EXPLANATORY NOTES:
- ----------------------------------

(1) Amounts and details are for loans outstanding as of December 31, 2002.

(2) Substantially all variable-rate loans are based on 30-day LIBOR and reprice
monthly. The 30-day LIBOR on December 31, 2002 was 1.38%. As of
December 31, 2002, three loans with a combined carrying value of
$72.4 million have a stated accrual rate that exceeds the stated pay rate.

(3) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity.

(4) Includes a participation interest in a second mortgage and a subordinate
interest in a private REMIC whose sole asset is a single first mortgage
loan.

(5) Under some of these loans, the lender receives additional payments
representing additional interest from participation in available cash flow
from operations of the property.

(6) Includes one unsecured loan with a carrying value of $403 as of
December 31, 2001 which was subsequently repaid in October 2002.

(7) Generally consists of term preferred stock or debt interests that are
specifically originated or structured to meet customer financing
requirements and the Company's investment criteria. These investments do not
typically consist of securities purchased in the open market or as part of
broadly-distributed offerings. In addition, one of these securities is
classified as available-for-sale and is reflected at fair value with a
corresponding entry to "Accumulated other comprehensive income" on the
Company's Consolidated Balance Sheets.

59

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--LOANS AND OTHER LENDING INVESTMENTS (CONTINUED)

During the 12-month periods ended December 31, 2002 and 2001, respectively,
the Company and its affiliated ventures originated or acquired an aggregate of
approximately $1,403.8 million and $700.6 million in loans and other lending
investments, funded $21.6 million and $99.6 million under existing loan
commitments, and received principal repayments of $672.0 million and
$651.0 million.

As of December 31, 2002, the Company had nine loans with unfunded
commitments. The total unfunded commitment amount was approximately
$97.7 million, of which $22.2 million was discretionary and $75.5 million was
non-discretionary.

The Company's loans and other lending investments are predominantly pledged
as collateral under either the iStar Asset Receivables secured notes, the
secured revolving credit facilities or secured term loans (see Note 7).

The Company has reflected provisions for loan losses of approximately
$8.3 million, $7.0 million and $6.5 million during the years ended December 31,
2002, 2001 and 2000, respectively. These provisions represent loan portfolio
reserves based on management's evaluation of general market conditions, the
Company's internal risk management policies and credit risk ratings system,
industry loss experience, the likelihood of delinquencies or defaults, and the
credit quality of the underlying collateral. No direct impairment reserves on
specific loans were considered necessary.

NOTE 5--CORPORATE TENANT LEASE ASSETS

During the 12-month periods ended December 31, 2002 and 2001, respectively,
the Company acquired an aggregate of approximately $409.1 million and
$223.9 million in corporate tenant lease assets and disposed of corporate tenant
lease assets for net proceeds of approximately $3.7 million and $26.3 million.

The Company's investments in corporate tenant lease assets, at cost, were as
follows (in thousands):

The Company's CTL assets are leased to customers with initial term
expiration dates from 2003 to 2023. Future operating lease payments under
non-cancelable leases, excluding customer reimbursements of expenses, in effect
at December 31, 2002, are approximately as follows (in thousands):

Under certain leases, the Company receives additional participating lease
payments to the extent gross revenues of the corporate tenant exceed a base
amount. The Company earned $0, $0.4 million and $0.6 million of such additional
participating lease payments in the years ended December 31, 2002, 2001

60

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--CORPORATE TENANT LEASE ASSETS (CONTINUED)
and 2000, respectively. In addition, the Company also receives reimbursements
from customers for certain facility operating expenses including common area
costs, insurance and real estate taxes. Customer expense reimbursements for the
12 months ended December 31, 2002, 2001 and 2000 were approximately
$30.3 million, $25.8 million and $25.3 million, respectively, and are included
as a reduction of "Operating costs--corporate tenant lease assets" on the
Company's Consolidated Statements of Operations.

The Company is subject to expansion option agreements with two existing
customers which could require the Company to fund and to construct up to 161,000
square feet of additional adjacent space on which the Company would receive
additional operating lease income under the terms of the option agreements. In
addition, upon exercise of such expansion option agreements, the corporate
tenants would be required to simultaneously extend their existing lease terms
for additional periods ranging from six to ten years.

On September 30, 2002, one of the Company's customers exercised an option to
terminate its lease on 50.00% of the land leased from the Company. In connection
with this termination, the Company realized $17.5 million in cash lease
termination payments, offset by a $17.4 million impairment charge in connection
with the termination, resulting in net gain of approximately $123,000. In the
fourth quarter of 2002, the customer completed a recapitalization transaction
that significantly enhanced its credit. In connection with this
recapitalization, the Company agreed to amend the customer's lease, effective
October 1, 2002. In the lease amendment, the Company received $12.5 million in
cash as prepaid lease payments and the customer agreed to fixed minimum
increases on future lease payments. In exchange, the Company agreed to reduce
the customer's lease obligations for a period not to exceed nine quarters.
Following the reduction period, the customer is required to make additional
lease payments over a 10-year period sufficient to reimburse the Company for a
portion of the temporary reduction in lease payments.

In addition, on May 30, 2002, the Company sold one tenant lease asset for
net proceeds of $3.7 million, and realized a gain of approximately $595,000. As
of December 31, 2002, there were two corporate tenant lease assets with a
combined book value of $28.5 million classified as "Assets held for sale" on the
Company's Consolidated Balance Sheets. The results of operations from corporate
tenant lease assets sold or held for sale in the current period are classified
as "Income from discontinued operations" even though such income was actually
received by the Company prior to the asset sale. Gains on sale from corporate
tenant lease assets are also classified as "Gain from discontinued operations"
on the Company's Consolidated Statements of Operations.

61

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--JOINT VENTURES AND UNCONSOLIDATED SUBSIDIARIES

The Company's ownership percentages, its investments in and advances to
unconsolidated joint ventures and subsidiaries, its respective income (loss) and
the Company's pro rata share of its ventures' third-party, non-recourse debt as
of December 31, 2002 are presented below (in thousands):

EXPLANATORY NOTES:
- ------------------------------

(1) The Company reflects its pro rata share of third-party, non-recourse debt,
rather than the total amount of the joint venture debt, because the
third-party, non-recourse debt held by the joint ventures is not guaranteed
by the Company nor does the Company have any additional commitments to fund
such debt obligations.

(2) Maturity date reflects a one-year extension at the venture's option.

INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES: At
December 31, 2002, the Company had investments in three joint ventures:
(1) TriNet Sunnyvale Partners L.P. ("Sunnyvale"), whose external partners are
John D. O'Donnell, Trustee, John W. Hopkins, and Donald S. Grant, Trustee;
(2) Corporate Technology Centre Associates, LLC ("CTC I"), whose external member
is Corporate Technology Centre Partners, LLC; and (3) ACRE Simon, LLC ("ACRE"),
whose external partner is William E. Simon & Sons Realty Investments, LLC. These
ventures were formed for the purpose of operating, acquiring and, in certain
cases, developing corporate tenant lease facilities.

At December 31, 2002, the ventures comprised 12 net leased facilities. The
Company's combined investment in these joint ventures at December 31, 2002 was
$30.6 million. The joint ventures' carrying value for the 12 facilities owned at
December 31, 2002 was $196.2 million. In aggregate, the joint ventures had total
assets of $236.2 million and total liabilities of $186.4 million as of
December 31, 2002, and net income of $7.0 million for the 12 months ended
December 31, 2002. The Company accounts for these investments under the equity
method because the Company's joint venture partners have certain participating
rights giving them shared control over the ventures.

Effective September 29, 2000, iStar Sunnyvale Partners, LP, which is wholly
owned by Sunnyvale, entered into an interest rate cap agreement limiting the
venture's exposure to interest rate movements on its $24.0 million LIBOR-based
mortgage loan to an interest rate of 9.00% through November 9, 2003. Currently,
the limited partners of Sunnyvale have the option to convert their partnership
interest into cash; however, the Company may elect to deliver 297,728 shares of
Common Stock in lieu of cash.

62

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--JOINT VENTURES AND UNCONSOLIDATED SUBSIDIARIES (CONTINUED)
On April 1, 2002, the former Sierra Land Ventures ("Sierra") joint venture
partner assigned its 50.00% ownership interest in Sierra to a wholly owned
subsidiary of the Company. There was no cash or shares exchanged in this
transaction. As of April 1, 2002, the Company owns 100.00% of the corporate
tenant lease asset previously held by Sierra and therefore consolidates this
asset for accounting purposes.

On July 2, 2002, the Company paid approximately $27.9 million in cash to the
former member of TriNet Milpitas Associates ("Milpitas") joint venture in
exchange for its 50.00% ownership interest. Pursuant to the terms of the joint
venture agreement, the former external member had the right to convert its
interest into 984,476 shares of Common Stock of the Company at any time during
the period February 1, 2002 through January 31, 2003. On May 2, 2002, the former
Milpitas external member exercised this right. Upon the external member's
exercise of its conversion right, the Company had the option to acquire the
partner's interest for cash, instead of shares, for a payment equal to the value
of 984,476 shares of Common Stock multiplied by the ten-day average closing
stock price as of the transaction date. The Company made such election and, as
of July 2, 2002, owns 100.00% of Milpitas, and therefore consolidates these
assets for accounting purposes. The Company accounted for the acquisition of the
external interest using the purchase method.

Income generated from the Company's joint venture investments and
unconsolidated subsidiaries is included in "Equity in earnings from joint
ventures and unconsolidated subsidiaries" on the Company's Consolidated
Statements of Operations.

INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES: The Company has
an investment in iStar Operating, a taxable subsidiary that, through a
wholly-owned subsidiary, services the Company's loans and certain loan
portfolios owned by third parties. The Company owns all of the non-voting
preferred stock and a 95.00% economic interest in iStar Operating. An affiliate
of the Company's largest shareholder is the owner of all the voting common stock
and a 5.00% economic interest in iStar Operating. As of December 31, 2002, there
have never been any distributions to the common shareholder, nor does the
Company expect to make any in the future. At any time, the Company has the right
to acquire all of the common stock of iStar Operating at fair market value,
which the Company believes to be nominal. In addition to the direct general and
administrative costs of iStar Operating, the Company allocates a portion of its
general overhead expenses to iStar Operating based on the number of employees at
iStar Operating as a percentage of the Company's total employees.

In addition, the Company has an investment in TMOC, a taxable noncontrolled
subsidiary that has a $2.0 million investment in a real estate company based in
Mexico. The Company owns 95.00% of the outstanding voting and non-voting common
stock (representing 1.00% voting power and 95.00% of the economic interest) in
TMOC. The other two owners of TMOC stock are executives of the Company, who own
a combined 5.00% of the outstanding voting and non-voting common stock
(representing 99.00% voting power and 5.00% economic interest) in TMOC. As of
December 31, 2002, there have never been any distributions to the common
shareholders, nor does the Company expect to make any in the future. At any
time, the Company has the right to acquire all of the common stock of TMOC at
fair market value, which the Company believes to be nominal.

Both iStar Operating and TMOC have elected to be treated as taxable REIT
subsidiaries for purposes of maintaining compliance with the REIT provisions of
the Code and are accounted for under the equity method for financial statement
reporting purposes and are presented in "Investments in and advances to joint
ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance
Sheets. If they were consolidated with the Company for financial statement
purposes, they would not have a material impact on the Company's operations. As
of December 31, 2002, iStar Operating and TMOC have no debt obligations.

63

NOTE 7--DEBT OBLIGATIONS

As of December 31, 2002 and 2001, the Company has debt obligations under
various arrangements with financial institutions as follows (in thousands):

64

EXPLANATORY NOTES:
- ----------------------------------
(1) Substantially all variable-rate debt obligations are based on 30-day LIBOR
and reprice monthly. The 30-day LIBOR rate on December 31, 2002 was 1.38%.

(2) Maturity date reflects a one-year "term-out" extension at the Company's
option. Subsequent to December 31, 2002, the Company extended the final
maturity date on the $700.0 million facility maturing January 2005 to
January 2007.

(3) Maturity date reflects a one-year extension at the Company's option.

(4) Maturity date reflects two one-year extensions at the Company's option.

(5) Principal payments on these bonds are a function of the principal
repayments on loan or corporate tenant lease assets which collateralize
these obligations. The dates indicated above represent the expected date on
which the final payment would occur for such class based on the assumptions
that the loans which collateralize the obligations are not voluntarily
prepaid, the loans are paid on their effective maturity dates and no
extensions of the effective maturity dates of any of the loans are granted.
The final maturity date for the underlying indenture on class A1 is
May 28, 2017 and the final maturity date for classes A2, B, C, D, E, F, G,
H, J and K is May 28, 2020.

(6) The notes are callable by the Company at any time for an amount equal to
the total of principal outstanding, accrued interest and the applicable
make-whole prepayment premium.

(7) Subject to mandatory tender on March 1, 2003, to either the dealer or the
Company. The initial coupon of 6.75% applies to the first five-year term
through the mandatory tender date. If tendered to the dealer, the notes
must be remarketed. The rates reset to then-prevailing market rates upon
remarketing. Subsequent to December 31, 2002, the Company modified the
terms of these notes (see Note 17).

(8) These obligations were assumed as part of the acquisition of TriNet. As
part of the accounting for the purchase, these fixed-rate obligations were
considered to have stated interest rates which were below the
then-prevailing market rates at which the Leasing Subsidiary could issue
new debt obligations and, accordingly, the Company ascribed a market
discount to each obligation. Such discounts are amortized as an adjustment
to interest expense using the effective interest method over the related
term of the obligations. As adjusted, the effective annual interest rates
on these obligations were 8.81%, 9.51% and 9.04% for the 6.75% Dealer
Remarketable Securities, 7.70% Notes and 7.95% Notes, respectively.

(9) On November 27, 2002, the Company entered into two pay-floating interest
rate swaps struck at 3.8775% and 3.81% and in the notional amounts of
$100.0 million and $50.0 million, respectively. These swaps mitigate the
risk of changes in the fair value of $150.0 million of the Company's 8.75%
Notes attributable to changes in LIBOR. For accounting purposes, quarterly
the Company adjusts the value of the swap to its fair value and adjusts the
carrying amount of the hedged liability by an offsetting amount.

65

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--DEBT OBLIGATIONS (CONTINUED)

Availability of amounts under the secured revolving credit facilities are
based on percentage borrowing base calculations. In addition, certain of the
Company's debt obligations contain covenants. These covenants are both financial
and non-financial in nature. Significant financial covenants include limitations
on the Company's ability to incur indebtedness beyond specified levels,
restrictions on the Company's ability to incur liens on assets and limitations
on the amount and type of restricted payments, such as repurchases of its own
equity securities, that the Company makes. Significant non-financial covenants
include a requirement in its publicly-held debt securities that the Company
offer to repurchase those securities at a premium if the Company undergoes a
change of control. As of December 31, 2002, the Company believes it is in
compliance with both financial and non-financial covenants on its debt
obligations.

On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, STARs, Series 2000-1. In the initial
transaction, a wholly-owned subsidiary of the Company issued $896.5 million of
investment-grade bonds secured by the subsidiary's assets, which had an
aggregate outstanding principal balance of approximately $1.2 billion at
inception. Principal payments received on the assets were utilized to repay the
most senior class of the bonds then outstanding. The maturity of the bonds match
funded the maturity of the underlying assets financed under the program. Of the
assets of the subsidiary secured by this financing, 73.96% (by gross carrying
value) consisted of first mortgages and subsequent lien positions and the
remaining 26.04% consisted of junior loans. For accounting purposes, this
transaction was treated as a secured financing: the underlying assets and STARs
liabilities remained on the Company's Consolidated Balance Sheets and no gain on
sale was recognized. On May 28, 2002, the Company fully repaid these bonds.

On January 11, 2001, the Company closed a new $700.0 million secured
revolving credit facility which is led by a major commercial bank. The new
facility has a three-year primary term and one-year "term-out" extension option,
and bears interest at LIBOR + 1.40% to 2.15%, depending upon the collateral
contributed to the borrowing base. The new facility accepts a broad range of
structured finance assets and has a final maturity of January 2005. Subsequent
to December 31, 2002, the Company extended the final maturity on this facility
to January 2007.

On February 22, 2001, the Company extended the maturity of its
$350.0 million unsecured revolving credit facility to May 2002. On July 27,
2001, the Company repaid this facility and replaced it with a new
$300.0 million unsecured revolving credit facility.

On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured
notes. These notes were senior unsecured obligations of the Leasing Subsidiary
and ranked equally with the Leasing Subsidiary's other senior unsecured and
unsubordinated indebtedness.

On June 14, 2001, the Company closed $193.0 million of term loan financing
secured by 15 corporate tenant lease assets. The variable-rate loan bears
interest at LIBOR + 1.85% (not to exceed 10.00% in aggregate) and has two
one-year extensions at the Company's option. The Company used these proceeds to
repay a $77.8 million secured term loan maturing in June 2001 and to pay down a
portion of its revolving credit facilities. In addition, the Company extended
the maturity of its $500.0 million secured revolving credit facility to
August 2003. On March 29, 2002, the Company again extended the final maturity of
this facility to August 2005, which includes a one-year "term-out" extension at
the Company's option.

On July 6, 2001, the Company financed a $75.0 million structured finance
asset with a $50.0 million term loan bearing interest at LIBOR + 2.50%. The loan
has a maturity of July 2006, including a one-year

66

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--DEBT OBLIGATIONS (CONTINUED)
extension at the Company's option. This investment is a $75.0 million term
preferred investment in a publicly-traded real estate customer. The Company's
investment carries an initial current yield of 10.50%, with annual increases of
0.50% in each of the next two years. In addition, the Company's investment is
convertible into the customer's common stock at a strike price of $25.00 per
share. The investment is callable by the customer between months 13 and 30 of
the term at a yield maintenance premium, and after month 30, at a premium
sufficient to generate a 14.62% internal rate of return on the Company's
investment. The investment is putable by the Company to the customer for cash
after five years.

On July 27, 2001, the Company completed a $300.0 million unsecured revolving
credit facility with a group of leading financial institutions. The new facility
has an initial maturity of July 2003, with a one-year extension at the Company's
option and another one-year extension at the lenders' option. The new facility
replaces two prior credit facilities maturing in 2002 and 2003, and bears
interest at LIBOR + 2.125%.

On August 9, 2001, the Company issued $350.0 million of 8.75% senior notes
due in 2008. The notes are unsecured senior obligations of the Company. The
Company used the net proceeds to repay outstanding borrowings under its secured
credit facilities.

On March 29, 2002, the Company extended the maturity of its $500.0 million
secured facility to August 2005, which includes a one-year "term-out" extension
at the Company's option.

On May 28, 2002, the Company fully repaid the then remaining $446.2 million
of bonds outstanding under its STARs, Series 2000-1 financing. Simultaneously, a
wholly-owned subsidiary of the Company issued STARs, Series 2002-1, consisting
of $885.1 million of investment-grade bonds secured by the subsidiary's
structured finance and corporate tenant lease assets, which had an aggregate
outstanding principal balance of approximately $1.1 billion at inception.
Principal payments received on the assets will be utilized to repay the most
senior class of the bonds then outstanding. The maturity of the bonds match
funds the maturity of the underlying assets financed under the program. The
weighted average interest rate on the bonds, on an all-floating rate basis, was
approximately LIBOR + 0.56% at inception. For accounting purposes, this
transaction was treated as a secured financing: the underlying assets and STARs
liabilities remained on the Company's Consolidated Balance Sheets, and no gain
on sale was recognized.

On July 2, 2002, the Company purchased the remaining interest in the
Milpitas joint venture from the former Milpitas external member for
$27.9 million. Upon purchase of the interest, the Milpitas joint venture became
fully consolidated for accounting purposes and approximately $79.1 million of
secured term debt is reflected on the Company's Consolidated Balance Sheets.

On September 30, 2002, the Company closed a new $500.0 million secured
revolving credit facility with a leading financial institution. The new facility
has a three-year term and bears interest at LIBOR + 1.50% to 2.25%, depending
upon the collateral contributed to the borrowing base. The new facility accepts
a broad range of structured finance and corporate tenant assets and has a final
maturity date of September 2005.

On December 11, 2002, the Company closed a $61.5 million term loan financing
with a leading financial institution. The proceeds were used to fund a portion
of an $82.1 million CTL investment. The non-recourse loan is fixed rate and
bears interest at 6.412%, has a maturity date of December 2012 and amortizes
over a 30-year schedule.

67

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--DEBT OBLIGATIONS (CONTINUED)
During the years ended December 31, 2002 and 2001, the Company incurred an
extraordinary loss of approximately $12.2 million and $1.6 million,
respectively, as a result of the early retirement of certain debt obligations.

Subsequent to December 31, 2002, the Company modified the terms of the 6.75%
Dealer Remarketable Securities (see Note 17).

As of December 31, 2002, future expected/scheduled maturities of outstanding
long-term debt obligations are as follows (in thousands)(1):

EXPLANATORY NOTE:
- ------------------------------

(1) Assumes exercise of extensions to the extent such extensions are at the
Company's option.

NOTE 8--SHAREHOLDERS' EQUITY

The Company's charter provides for the issuance of up to 200.0 million shares
of Common Stock, par value $0.001 per share, and 30.0 million shares of
preferred stock. The Company has 4.4 million shares of 9.50% Series A Cumulative
Redeemable Preferred Stock, 2.3 million shares of 9.375% Series B Cumulative
Redeemable Preferred Stock, 1.5 million shares of 9.20% Series C Cumulative
Redeemable Preferred Stock, and 4.6 million shares of 8.00% Series D Cumulative
Redeemable Preferred Stock. The Series A, B, C and D Cumulative Redeemable
Preferred Stock are redeemable without premium at the option of the Company at
their respective liquidation preferences beginning on December 15, 2003,
June 15, 2001, August 15, 2001 and October 8, 2002, respectively.

On December 15, 1998, the Company issued warrants to acquire 6.1 million
shares of Common Stock, as adjusted for dilution, at $34.35 per share. The
warrants are exercisable on or after December 15, 1999 at a price of $34.35 per
share and expire on December 15, 2005.

CONCENTRATION OF SHAREHOLDER OWNERSHIP--On October 30, 2001, SOF IV SMT
Holdings, L.P. ("SOF IV") and certain of its affiliates sold 18.975 million
shares of Common Stock owned by them (including the subsequently-exercised
2.475 million share over-allotment option granted to the underwriters). In
addition, on May 15, 2002, SOF IV sold 10.808 million shares of Common Stock
owned by them (including the subsequently-exercised 808,200 share over-allotment
option granted to the underwriters). Further, on November 14, 2002, SOF IV sold
3.5 million shares of Common Stock owned by them (including the
subsequently-exercised 1.5 million over-allotment option granted to the
underwriters). The Company did not sell any shares in the first two offerings.
In the November 2002 offering, the

68

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--SHAREHOLDERS' EQUITY (CONTINUED)
Company sold 8.0 million primary shares and received net proceeds of
approximately $202.9 million. As a result of the secondary offerings, SOF IV
currently owns approximately 19.84% of the Company's Common Stock (based on the
diluted sharecount as of December 31, 2002).

DRIP PROGRAM--The Company maintains a dividend reinvestment and direct stock
purchase plan. Under the dividend reinvestment component of the plan, the
Company's shareholders may purchase additional shares of Common Stock without
payment of brokerage commissions or service charges by automatically reinvesting
all or a portion of their Common Stock cash dividends. Under the direct stock
purchase component of the plan, the Company's shareholders and new investors may
purchase shares of Common Stock directly from the Company without payment of
brokerage commissions or service charges. All purchases of shares in excess of
$10,000 per month pursuant to the direct purchase component are at the Company's
sole discretion. Shares issued under the plan may reflect a discount of up to
3.00% from the prevailing market price of the Company's Common Stock. The
Company is authorized to issue up to 8.0 million shares of Common Stock pursuant
to the dividend reinvestment and direct stock purchase plan. During the 12-month
periods ended December 31, 2002 and 2001, the Company issued a total of
1.6 million and approximately 195,000 shares of its Common Stock, respectively,
through the direct stock purchase component of the plan. Net proceeds during the
12-month periods ended December 31, 2002 and 2001 were approximately
$44.4 million and $4.7 million, respectively.

STOCK REPURCHASE PROGRAM--The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets or loan
repayments and excess cash flow from operations, but also using borrowings under
its credit facilities if the Company determines that it is advantageous to do
so. As of December 31, 2001, the Company had repurchased a total of
approximately 2.3 million shares at an aggregate cost of approximately
$40.7 million. The Company did not repurchase any shares under the stock
repurchase program in 2002.

NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

RISK MANAGEMENT--In the normal course of its on-going business operations,
the Company encounters economic risk. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or different bases, than its
interest-earning assets. Credit risk is the risk of default on the Company's
lending investments that results from a property's, borrower's or corporate
tenant's inability or unwillingness to make contractually required payments.
Market risk reflects changes in the value of loans due to changes in interest
rates or other market factors, including the rate of prepayments of principal
and the value of the collateral underlying loans and the valuation of corporate
tenant lease facilities held by the Company.

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NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)

USE OF DERIVATIVE FINANCIAL INSTRUMENTS--The Company's use of derivative
financial instruments is primarily limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposure. The
principal objective of such arrangements is to minimize the risks and/or costs
associated with the Company's operating and financial structure as well as to
hedge specific anticipated transactions. The counterparties to these contractual
arrangements are major financial institutions with which the Company and its
affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of nonperformance by these
counterparties. However, because of their high credit ratings, the Company does
not anticipate that any of the counterparties will fail to meet their
obligations.

The Company has entered into the following cash flow and fair value hedges
that are outstanding as of December 31, 2002. The net value associated with
these hedges is reflected on the Company's Consolidated Balance Sheets (in
thousands).

In connection with STARs, Series 2002-1 in May 2002, the Company entered
into a LIBOR interest rate cap struck at 8.00% in the notional amount of
$345.0 million. The Company utilizes the provisions of SFAS No. 133 with respect
to such instruments. SFAS No. 133 provides that the up-front fees paid on
option-based products such as caps should be expensed into earnings based on the
allocation of the premium to the affected periods as if the agreement were a
series of "caplets." These allocated premiums are then reflected as a charge to
income (as part of interest expense) in the affected period.

On May 28, 2002, in connection with the STARs, Series 2002-1 transaction,
the Company paid a premium of $13.7 million for an interest rate cap. Using the
"caplet" methodology discussed above, amortization of the cap premium is
dependent upon the actual value of the caplets at inception.

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NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
In connection with STARs, Series 2000-1 in May 2000, the Company entered
into a LIBOR interest rate cap struck at 10.00% in the notional amount of
$312.0 million, and simultaneously sold a LIBOR interest rate cap with the same
terms. Since these instruments did not change the Company's net interest rate
risk exposure, they did not qualify as hedges and changes in their respective
values were charged to earnings. As the terms of these arrangements were
substantially the same, the effects of a revaluation of these two instruments
substantially offset one another. On May 28, 2002, these instruments were
settled and are no longer outstanding.

In connection with the Company's $350.0 million of fixed-rate corporate
bonds, the Company entered into two pay-floating interest rate swaps struck at
3.8775% and 3.81% and in the notional amounts of $100.0 million and
$50.0 million, respectively. The Company pays one-month LIBOR and receives the
fixed rate in return. These swaps mitigate the risk of changes in the fair value
of $150.0 million of the Company's fixed-rate corporate bonds attributable to
changes in LIBOR. For accounting purposes, the difference between the fixed rate
received and the LIBOR rate paid on the notional amount of the swap is recorded
as "Interest expense" in the Company's Consolidated Statements of Operations. In
addition, quarterly the Company adjusts the value of the swap to its fair value
and adjusts the carrying amount of the hedged liability by an offsetting amount.

During the year ended December 31, 1999, the Company settled an aggregate
notional amount of approximately $63.0 million that was outstanding under
certain hedging agreements which the Company had entered into in order to hedge
the potential effects of interest rate movements on anticipated fixed-rate
borrowings. The settlement of such agreements resulted in a receipt of
approximately $0.6 million which had been deferred pending completion of the
planned fixed-rate financing transaction. Subsequently, the transaction was
modified and was actually consummated as a variable-rate financing transaction.
As a result, the previously deferred receipt no longer qualified for hedge
accounting treatment and the $0.6 million was recognized as a gain included in
"Other income" in the Company's Consolidated Statements of Operations for the
year ended December 31, 2000 in connection with the closing of STARs,
Series 2000-1 in May 2000.

During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented forecasted transactions for which the Company had
previously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the settlement of such hedges has been deferred and is
being amortized as an increase to the effective financing cost of the new term
loan over its effective ten-year term.

CREDIT RISK CONCENTRATIONS--Concentrations of credit risks arise when a
number of borrowers or customers related to the Company's investments are
engaged in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their ability to meet
contractual obligations, including those to the Company, to be similarly
affected by changes in economic conditions. The Company regularly monitors
various segments of its portfolio to assess potential concentrations of credit
risks. Management believes the current credit risk portfolio is reasonably well
diversified and does not contain any unusual concentration of credit risks.

Substantially all of the Company's corporate tenant lease assets (including
those held by joint ventures) and loans and other lending investments are
collateralized by facilities located in the United States, with significant
concentrations (i.e., greater than 10.00%) as of December 31, 2002 in California

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
(22.72%) and Texas (10.32%). As of December 31, 2002, the Company's investments
also contain greater than 10.00% concentrations in the following asset types:
office-CTL (27.42%), office-lending (19.67%), industrial (15.00%) and
hotel-lending (11.99%).

The Company underwrites the credit of prospective borrowers and customers
and often requires them to provide some form of credit support such as corporate
guarantees, letters of credit and/or cash security deposits. Although the
Company's loans and other lending investments and corporate customer lease
assets are geographically diverse and the borrowers and customers operate in a
variety of industries, to the extent the Company has a significant concentration
of interest or operating lease revenues from any single borrower or customer,
the inability of that borrower or customer to make its payment could have an
adverse effect on the Company. As of December 31, 2002, the Company's five
largest borrowers or corporate tenants collectively accounted for approximately
15.67% of the Company's aggregate annualized interest and operating lease
revenue.

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS

The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to
provide incentive compensation for officers, other key employees and directors
of the Company. The Plan provides for awards of stock options and shares of
restricted stock and other performance awards. The maximum number of shares of
Common Stock available for awards under the Plan is 9.00% of the outstanding
shares of Common Stock, calculated on a fully diluted basis, from time to time;
provided that the number of shares of Common Stock reserved for grants of
options designated as incentive stock options is 5.0 million, subject to certain
antidilution provisions in the Plan. All awards under the Plan, other than
automatic awards to non-employee directors, are at the discretion of the Board
or a committee of the Board. At December 31, 2002, a total of approximately
9.1 million shares of Common Stock were available for awards under the Plan, of
which options to purchase approximately 4.3 million shares of Common Stock were
outstanding and approximately 330,000 shares of restricted stock were
outstanding.

In March 1998, the Company issued approximately 2.5 million (as adjusted)
fully vested and immediately exercisable options to purchase shares of Common
Stock at $14.72 per share (as adjusted) to its former advisor with a term of ten
years. The former advisor granted a portion of these options to its employees
and the remainder was allocated to an affiliate. Upon the Company's acquisition
of its former advisor, these individuals became employees of the Company. In
general, the grants to these employees provided for scheduled vesting over a
predefined service period of three to five years and, under certain conditions,
provide for accelerated vesting. These options expire on March 15, 2008.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
Changes in options outstanding during each of fiscal 2000, 2001 and 2002 are
as follows:

The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2002:

EXPLANATORY NOTE:
- ------------------------------

(1) Includes approximately 764,000 options which were granted, on a fully
exercisable basis, in March 1998, and which are now held by an affiliate of
SOF IV. Beneficial interests in these options were subsequently regranted by
that affiliate to employees of it and its affiliates, subject to vesting
requirements. In the event that these employees forfeit such options, they
revert to an affiliate of SOF IV, which may regrant them at its discretion.
As of December 31, 2002, approximately 468,000 of these options have become
exercisable by the beneficial owners. Of this total, approximately 288,000
have been exercised as of December 31, 2002.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
In the third quarter 2002 (with retroactive application to the beginning of
the calendar year), the Company adopted the fair value method for accounting for
options issued to employees or directors, as allowed under Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Accordingly, the Company recognizes a charge equal to
the fair value of these options at the date of grant multiplied by the number of
options issued. This charge will be amortized over the related remaining vesting
terms to individual employees as additional compensation. The impact for options
issued since January 1, 2002 is approximately $110,000, which is reflected under
"General and administrative--stock-based compensation" on the Company's
Consolidated Statements of Operations.

Prior to the third quarter 2002, the Company had elected to use the
intrinsic method for accounting for options issued to employees or directors, as
allowed under SFAS No. 123 and, accordingly, recognized no expense in connection
with these options to the extent that the options' exercise prices equaled or
exceeded the quoted prices of the Company's shares of Common Stock on the grant
or investment dates. However, in connection with the acquisition of the
Company's former external advisor, the Company recognized a deferred stock-based
compensation charge of approximately $5.1 million. This deferred charge
represents the difference between the Company's closing stock price on the date
it acquired its former external advisor (which was $20.25), and the strike price
of $14.72 per share (as adjusted) for the unvested portion of the options
granted to the former external advisor's employees, who are now employees of the
Company. This deferred charge is being amortized over the related remaining
vesting terms to the individual employees as an additional expense under
"General and administrative--stock-based compensation" on the Company's
Consolidated Statements of Operations.

If the Company's compensation costs had been determined using the fair value
method of accounting for stock options issued under the Plan to employees and
directors prescribed by SFAS No. 123 prior to 2002, the Company's net income for
the fiscal years ended December 31, 2002, 2001 and 2000 would have been reduced
on a pro forma basis by approximately $565,000, $705,000 and $275,000
respectively. This would not have significantly impacted the Company's earnings
per share.

The fair value of each significant option grant is estimated on the date of
grant (May 29, 2002 for the 2002 options) using the Black-Scholes model. For the
above SFAS No. 123 calculation, the following assumptions were used for the
Company's fair value calculations of stock options:

Future charges may be taken to the extent of additional option grants, which
are at the discretion of the Board of Directors.

During the 12 months ended December 31, 2002, the Company granted 194,558
restricted shares to employees. Of these shares, 39,558 will vest
proportionately over three years on the anniversary date of the initial grant.
The balance of 155,000 restricted shares will vest on March 31, 2004 if:
(1) the employee remains employed until that date; and (2) the 60-day average
closing price of the Company's Common Stock equals or exceeds a set floor price
as of such date. Dividends will be paid on the restricted shares as dividends
are paid on shares of the Company's Common Stock. Assuming the shares become
fully vested

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NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
on March 31, 2004 and the market price of the stock is $28.05 (which was the
market price of the Common Stock on December 31, 2002), the Company would incur
a one-time charge to both net income and earning at that time equal to
$4.3 million (the fair market value of the 155,000 shares at $28.05 per share).
During the 12 months ended December 31, 2002, the Company also granted 208,980
restricted shares to its Chief Financial Officer (see detailed information
below).

During the year ended December 31, 2001, the Company granted 94,943
restricted shares to employees in lieu of cash bonuses for the year ended
December 31, 2000 at the employees' election. These restricted shares were
immediately vested on the date of grant and were not transferable for a period
of one year following vesting.

During the year ended December 31, 2000, the Company granted 140,402
restricted shares to employees. Of this total, 71,752 restricted shares were
granted in lieu of cash bonuses at the employees' election, were immediately
vested on the date of grant, and were not transferable for a period of one year
following vesting. An additional 68,650 of such restricted shares vest over
periods ranging from one to three years following the date of grant and are
transferable upon vesting.

For accounting purposes, the Company measures compensation costs for these
shares, not including the contingently issuable shares, as of the date of the
grant and expenses such amounts against earnings, either at the grant date (if
no vesting period exists) or ratably over the respective vesting period. Such
amounts appear on the Company's Consolidated Statements of Operations under
"General and administrative--stock-based compensation expense."

During the year ended December 31, 2002, the Company entered into a
three-year employment agreement with its new Chief Financial Officer. Under the
agreement, the Chief Financial Officer receives an annual base salary of
$225,000. She may also receive a bonus, which is targeted to be $325,000,
subject to an annual review for upward or downward adjustment. In addition, the
Company granted the Chief Financial Officer 108,980 contingently vested
restricted stock awards. These awards become vested on December 31, 2005 if the
executive's employment with the Company has not terminated before such date.
Dividends will be paid on the restricted shares as dividends are paid on shares
of the Company's Common Stock. For accounting purposes, the Company will take a
total charge of approximately $3.0 million related to the restricted stock
awards, which will be amortized over the period from November 6, 2002 through
December 31, 2005. This charge is reflected on the Company's Consolidated
Statements of Operations under "General and administrative--stock-based
compensation."

Further, the Company granted the Chief Financial Officer 100,000 restricted
shares which vest in whole or in part if the Company's shareholders realize
total rates of shareholder return (dividends plus share price appreciation) of
between 0.00% and 20.00%, achieved by the Company between January 2, 2003 and
January 31, 2004. Vested shares would be subject to forfeiture if the
executive's employment with the Company terminated under certain circumstances.
Assuming the shares became fully vested on January 31, 2004 and the market price
of the stock is $28.05 (which was the market price of the Common Stock on
December 31, 2002), the Company would incur a one-time charge to both net income
and earnings at that time equal to $2.8 million (the fair market value of the
100,000 shares at $28.05 per share). For accounting purposes, the employment
arrangement described above is treated as a contingent, variable plan until
January 31, 2004.

During the year ended December 31, 2001, the Company entered into a new
three-year employment agreement with its Chief Executive Officer. Under the
agreement, the Chief Executive Officer receives an annual base salary of
$1.0 million. He may also receive a bonus, which is targeted to be an amount
equal to

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NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
his base salary, if the Company achieves certain performance targets set by the
Compensation Committee. The bonus award may be increased or reduced from the
target depending upon the degree to which the performance goals are exceeded or
are not met, and may not exceed 200.00% of his base salary. The bonus is reduced
by the amount of any dividends paid to the Chief Executive Officer in respect of
phantom shares (described below) which are awarded to him and have contingently
vested. The Chief Executive Officer received approximately $2.1 million in such
dividends in 2002. As such, no additional bonus was paid. As part of this
agreement, the Company confirmed a prior grant of 750,000 stock options made to
the executive on March 2, 2001 with an exercise price of $19.69, which
represented the market price at the date of the original contingent grant.
However, because the grant required further approval by the Compensation
Committee and the Board of Directors, no measurement date occurred for
accounting purposes until such approvals were made, at which point the market
price of the Company's Common Stock was $24.90. Accordingly, an aggregate charge
of approximately $3.9 million is being recognized with respect to these options
over the term of this agreement and is reflected on the Company's Consolidated
Statements of Operations under "General and administrative--stock-based
compensation." These options will vest in three equal installments of 250,000
shares in each January beginning in January 2002.

The Company also granted the executive 2.0 million unvested phantom shares,
each of which represents one share of the Company's Common Stock. These shares
will vest in installments of 350,000 shares, 650,000 shares, 600,000 shares and
400,000 shares on a contingent basis if the 60-day average closing price of the
Company's Common Stock achieves thresholds of $25.00, $30.00, $34.00 and $37.00,
respectively. As of December 31, 2002, the $25.00 and $30.00 thresholds have
been attained, and a total of 1.0 million of these shares have contingently
vested. Assuming that the market price of the Common Stock on March 31, 2004) is
$28.05 (which was the market price of the Common Stock on December 31, 2002),
the Company would incur a one-time charge to both net income and earnings at
that time equal to $28.0 million (the fair market value of the
1.0 million shares at $28.05 per share). Shares that have contingently vested
generally will not become fully vested until the end of the three-year term of
the agreement, except upon certain termination or change of control events.
Further, if the average stock price drops below certain specified levels for a
60-day period prior to such date, such phantom shares would not fully vest and
would be forfeited. If the Company is not authorized to issue shares to the
executive upon full vesting of the phantom shares, then the vesting will be
settled through a cash payment based upon the market price of the Common Stock
during a recent trading period. The executive will receive dividends on shares
that have contingently or fully vested and have not been forfeited under the
terms of the agreement, if and when the Company declares and pays dividends on
its Common Stock. Because no shares have been issued, dividends received on
these phantom shares, if any, will be reflected as compensation expense by the
Company. For accounting purposes, this arrangement will be treated as a
contingent, variable plan and no additional compensation expense will be
recognized until the shares, in whole or in part, become irrevocably vested,
whereupon the Company will reflect a charge equal to the then fair value of the
phantom shares irrevocably vested.

In addition, during the year ended December 31, 2001, the Company entered
into a three-year employment agreement with its former President. Under the
agreement, in lieu of salary and bonus, the Company granted the executive
500,000 restricted shares. These shares became fully-vested on September 30,
2002 as a result of the Company achieving a 60.00% total shareholder rate of
return (dividends plus share price appreciation) since January 1, 2001. Upon the
restricted shares becoming fully vested, the Company withheld 250,000 of such
shares from the executive to cover the tax obligations associated with the
vesting of such shares. These shares are reflected as "Treasury stock" on the
Company's Consolidated Statements of Changes in Shareholders' Equity. For
accounting purposes, the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
employment arrangement described above was treated as a contingent, variable
plan until the April 29, 2002 contingent vesting date. The Company incurred a
total non-cash charge of approximately $15.0 million related to the vesting of
the shares, recognized ratably over the period from April 29, 2002 through
September 30, 2002. Accordingly, the non-cash charge recognized for the
12 months ended December 31, 2002 was approximately $15.0 million.

The executive received dividends on the share grant from the date of the
agreement as and when the Company declared and paid dividends on its Common
Stock. For financial statement purposes, such dividends were accounted for in a
manner consistent with the Company's normal Common Stock dividends as a
reduction to retained earnings.

Certain affiliates of SOF IV and the Company's Chief Executive Officer have
agreed to reimburse the Company for the value of restricted shares awarded to
the President in excess of 350,000 shares, net of tax benefits realized by the
Company or its shareholders on account of compensation expense deductions. The
reimbursement obligation arose once the restricted share award became fully
vested on September 30, 2002. In the case of the SOF IV affiliates, the
reimbursement payment must be made through the delivery of approximately
$2.4 million in cash or 131,250 shares of Common Stock. As of December 31, 2002,
the SOF IV affiliates have paid approximately $506,000 in cash, which is
reflected as "Additional paid-in capital" on the Company's Consolidated Balance
Sheets. In the case of the Chief Executive Officer, the reimbursement payment
was made through the delivery of 12,343 vested shares of Common Stock as of
December 31, 2002. These reimbursement payments are reflected as "Additional
paid-in capital" on the Company's Consolidated Balance Sheets, and not as an
offset to the non-cash charge referenced above.

On July 28, 2000, the Company granted to its employees profits interests in
a wholly-owned subsidiary of the Company called iStar Venture Direct Holdings,
LLC. At December 31, 2002, iStar Venture Direct Holdings, LLC had a net
investment of approximately $606,000 in the preferred stock of a real estate-
related software company. The profits interests have three-year vesting
schedules, and are subject to forfeiture in the event of termination of
employment for cause or a voluntary resignation. The Company currently estimates
that the profits interests have minimal or no value.

HIGH PERFORMANCE UNIT PROGRAM

In May 2002, the Company's shareholders approved the iStar Financial High
Performance Unit Program. The program, as more fully described in the Company's
annual proxy statement dated April 8, 2002, is a performance-based employee
compensation plan that only has material value to the participants if the
Company provides superior returns to its shareholders. The program entitles the
employee participants to receive cash distributions in the nature of common
stock dividends if the total rate of return on the Company's Common Stock (share
price appreciation plus dividends) exceeds certain performance levels.

Initially, there were three plans within the program: the 2002 plan, the
2003 plan, and the 2004 plan. Each plan has 5,000 shares of High Performance
Common Stock associated with it. Each share of High Performance Common Stock
carries 0.25 votes per share.

For these three plans, the Company's performance is measured over a one-,
two-, or three-year valuation period, beginning on January 1, 2002 and ending on
December 31, 2002, December 31, 2003 and December 31, 2004, respectively. The
end of the valuation period (i.e., the "valuation date") will be accelerated if
there is a change in control of the Company. The High Performance Common Stock
has a nominal value unless the total rate of shareholder return for the relevant
valuation period exceeds the greater of: (1) 10.00%, 20.00%, or 30.00% for the
2002 plan, the 2003 plan and the 2004 plan, respectively;

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
and (2) a weighted industry index total rate of return consisting of equal
weightings of the Russell 1000 Financial Index and the Morgan Stanley REIT Index
for the relevant period.

If the total rate of return on the Company's Common Stock exceeds the
threshold performance levels for a particular plan, then distributions will be
paid on the shares of High Performance Common Stock related to that plan in the
same amounts and at the same times as distributions are paid on a number of
shares of the Company's Common Stock equal to the following: 7.50% of the
Company's excess total rate of return (over the higher of the two threshold
performance levels) multiplied by the weighted average market value of the
Company's common equity capitalization during the measurement period, all as
divided by the average closing price of a share of the Company's Common Stock
for the 20 trading days immediately preceding the applicable valuation date.

If the total rate of return on the Company's Common Stock does not exceed
the threshold performance levels for a particular plan, then the shares of High
Performance Common Stock related to that plan will have only nominal value. In
this event, each of the 5,000 shares will be entitled to dividends equal to 0.01
times the dividend paid on a share of Common Stock, if and when dividends are
declared on the common stock.

Regardless of how much the Company's total rate of return exceeds the
threshold performance levels, the dilutive impact to the Company's shareholders
resulting from distributions on High Performance Common Stock in each plan is
limited to 1.00% of the number of shares of the Company's Common Stock
outstanding, on a fully diluted basis, on the valuation date for each plan.

The employee participants have purchased their interests in High Performance
Common Stock through a limited liability company at purchase prices approved by
the Company's Board of Directors. The Company's Board has established the prices
of the High Performance Common Stock based upon, among other things, an
independent valuation from a major securities firm. The aggregate initial
purchase prices were set on June 25, 2002 and were approximately $2.8 million,
$1.8 million and $1.3 million for the 2002, 2003 and 2004 plans, respectively.
No employee is permitted to exchange his or her interest in the LLC for shares
of High Performance Common Stock prior to the applicable valuation date.

The total shareholder return for the valuation period under the 2002 plan
was 21.94%, which exceeded both the fixed performance threshold of 10.00% and
the industry index return of (5.83%). As a result of this superior performance,
the participants in the 2002 plan are entitled to receive cash distributions
equivalent to the amount of cash dividends payable on 819,254 shares of the
Company's Common Stock, as and when such dividends are paid. Such dividend
payments begin with the first quarter 2003 dividend and will reduce net income
allocable to common shareholders when paid. The Company will pay dividends on
the 2002 plan shares in the same amount per share and on the same distribution
dates that shares of the Company's Common Stock are paid. The Company has the
right, but not the obligation, to repurchase at cost 50.00% of the interests
earned by an employee in the 2002 plan if the employee breaches certain
non-competition, non-solicitation and confidentiality covenants through January
1, 2005.

A new 2005 plan has been established with a three-year valuation period
ending December 31, 2005. Awards under the 2005 plan were approved on
January 14, 2003. The 2005 plan has 5,000 shares of High Performance Common
Stock with an aggregate initial purchase price of $573,000. The provisions of
the 2005 plan are substantially the same as the prior plans.

The additional equity from the issuance of the High Performance Common Stock
is recorded as a separate class of stock and included within shareholders'
equity. Future distributions, if any, will be deducted from net income available
for common shareholders.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
401(K) PLAN

Effective November 4, 1999, the Company implemented a savings and retirement
plan (the "401(k) Plan"), which is a voluntary, defined contribution plan. All
employees are eligible to participate in the 401(k) Plan following completion of
three months of continuous service with the Company. Each participant may
contribute on a pretax basis between 2.00% and 15.00% of such participant's
compensation. At the discretion of the Board of Directors, the Company may make
matching contributions on the participant's behalf of up to 50.00% of the first
10.00% of the participant's annual compensation. The Company made gross
contributions of approximately $356,000, $319,000 and $320,000 to the 401(k)
Plan for the years ended December 31, 2002, 2001 and 2000, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--EARNINGS PER SHARE

The following table presents a reconciliation of the numerators and
denominators of the basic and diluted EPS calculations for the years ended
December 31, 2002, 2001 and 2000, respectively (in thousands, except per share
data):

80

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--EARNINGS PER SHARE (CONTINUED)
In addition, there were approximately 167,000, 261,000 and 632,000 stock
options, 6.1 million, 6.1 million and 6.1 million warrants and 371,000, 373,000
and 373,000 joint venture shares that were antidilutive for the 12-month periods
ended December 31, 2002, 2001 and 2000, respectively.

NOTE 12--COMPREHENSIVE INCOME

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" effective for fiscal
years beginning after December 15, 1997. The statement changes the reporting of
certain items currently reported as changes in the shareholders' equity section
of the balance sheet and establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all components of comprehensive
income shall be reported in the financial statements in the period in which they
are recognized. Furthermore, a total amount for comprehensive income shall be
displayed in the financial statements. The Company has adopted this standard
effective January 1, 1998. Total comprehensive income was $228.1 million,
$214.8 million and $217.8 million for the years ended December 31, 2002, 2001
and 2000, respectively. The primary components of comprehensive income other
than net income consist of amounts attributable to the adoption and continued
application of SFAS No. 133 to the Company's cash flow hedges and changes in the
fair value of the Company's available-for-sale investments.

For the years ended December 31, 2002 and 2001, the change in fair market
value of the Company's cash flow hedges and fair value hedges was an increase of
$5.2 million and a decrease of $11.3 million, respectively, and was recorded as
an adjustment to other comprehensive income. The reconciliation to other
comprehensive income is as follows (in thousands):

Unrealized gains on available-for-sale investments are recorded as
adjustments to shareholders' equity (through "Accumulated other comprehensive
income" on the Company's Consolidated Balance Sheets), and are not included in
adjusted earnings or net income unless realized.

81

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--COMPREHENSIVE INCOME (CONTINUED)
As of December 31, 2002 and 2001, accumulated other comprehensive income
reflected in the Company's shareholders' equity is comprised of the following
(in thousands):

NOTE 13--DIVIDENDS

In order to maintain its election to qualify as a REIT, the Company must
currently distribute, at a minimum, an amount equal to 90.00% of its taxable
income and must distribute 100.00% of its taxable income to avoid paying
corporate federal income taxes. The Company anticipates it will distribute all
of its taxable income to its shareholders. Because taxable income differs from
cash flow from operations due to non-cash revenues or expenses (such as
depreciation), in certain circumstances, the Company may generate operating cash
flow in excess of its dividends or, alternatively, may be required to borrow to
make sufficient dividend payments.

For the year ended December 31, 2002, total dividends declared by the
Company aggregated $231.3 million, or $2.52 per common share, consisting of
quarterly dividends of $0.63 per share which were declared on April 1, 2002,
July 1, 2002, October 1, 2002 and December 2, 2002. The Company also declared
dividends aggregating $20.9 million, $4.7 million, $3.0 million and
$8.0 million, respectively, on its Series A, B, C and D preferred stock,
respectively, for the year ended December 31, 2002. There are no divided
arrearages on any of the preferred shares currently outstanding.

The Series A preferred stock has a liquidation preference of $50.00 per
share and carries an initial dividend yield of 9.50% per annum. The dividend
rate on the preferred shares will increase to 9.75% on December 15, 2005, to
10.00% on December 15, 2006 and to 10.25% on December 15, 2007 and thereafter.
Dividends on the Series A preferred shares are payable quarterly in arrears and
are cumulative.

Holders of shares of the Series B preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.375% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.34 per share. Dividends are cumulative from the date of
original issue and are payable quarterly in arrears on or before the 15th day of
each March, June, September and December or, if not a business day, the next
succeeding business day. Any dividend payable on the Series B preferred stock
for any partial dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends will be payable to holders of
record as of the close of business on the first day of the calendar month in
which the applicable dividend payment date falls or on another date designated
by the Board of Directors of the Company for the payment of dividends that is
not more than 30 nor less than ten days prior to the dividend payment date.

Holders of shares of the Series C preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.20% per annum of the $25.00 liquidation preference, equivalent to a fixed

82

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--DIVIDENDS (CONTINUED)
annual rate of $2.30 per share. The remaining terms relating to dividends of the
Series C preferred stock are substantially identical to the terms of the
Series B preferred stock described above.

Holders of shares of the Series D preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 8.00% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.00 per share. The remaining terms relating to dividends of the
Series D preferred stock are substantially identical to the terms of the
Series B preferred stock described above.

The 2002 High Performance Common Stock plan reached its valuation date on
December 31, 2002 and shares of High Performance Common Stock, equivalent to
819,254 shares of Common Stock became vested. The Company will pay dividends on
these units in the same amount per share and on the same distribution dates as
shares of the Company's Common Stock. Such dividends payments begin with the
first quarter 2003 dividend and will reduce net income allocable to common
shareholders when paid.

The exact amount of future quarterly dividends to common shareholders will
be determined by the Board of Directors based on the Company's actual and
expected operations for the fiscal year and the Company's overall liquidity
position.

NOTE 14--FAIR VALUES OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS
No. 107"), requires the disclosure of the estimated fair values of financial
instruments. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Quoted market prices, if available,
are utilized as estimates of the fair values of financial instruments. Because
no quoted market prices exist for a significant part of the Company's financial
instruments, the fair values of such instruments have been derived based on
management's assumptions, the amount and timing of future cash flows and
estimated discount rates. The estimation methods for individual classifications
of financial instruments are described more fully below. Different assumptions
could significantly affect these estimates. Accordingly, the net realizable
values could be materially different from the estimates presented below. The
provisions of SFAS No. 107 do not require the disclosure of the fair value of
non-financial instruments, including intangible assets or the Company's
corporate tenant lease assets.

In addition, the estimates are only indicative of the value of individual
financial instruments and should not be considered an indication of the fair
value of the Company as an operating business.

SHORT-TERM FINANCIAL INSTRUMENTS--The carrying values of short-term
financial instruments including cash and cash equivalents and short-term
investments approximate the fair values of these instruments. These financial
instruments generally expose the Company to limited credit risk and have no
stated maturities, or have an average maturity of less than 90 days and carry
interest rates which approximate market.

LOANS AND OTHER LENDING INVESTMENTS--For the Company's interests in loans
and other lending investments, the fair values were estimated by discounting the
future contractual cash flows (excluding participation interests in the sale or
refinancing proceeds of the underlying collateral) using estimated current
market rates at which similar loans would be made to borrowers with similar
credit ratings for the same remaining maturities.

83

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
MARKETABLE SECURITIES--Securities held for investment, securities available
for sale, loans held for sale, trading account instruments, long-term debt and
trust preferred securities traded actively in the secondary market have been
valued using quoted market prices.

OTHER FINANCIAL INSTRUMENTS--The carrying value of other financial
instruments including, restricted cash, accrued interest receivable, accounts
payable, accrued expenses and other liabilities approximate the fair values of
the instruments.

DEBT OBLIGATIONS--A substantial portion of the Company's existing debt
obligations bear interest at fixed margins over LIBOR. Such margins may be
higher or lower than those at which the Company could currently replace the
related financing arrangements. Other obligations of the Company bear interest
at fixed rates, which may differ from prevailing market interest rates. As a
result, the fair values of the Company's debt obligations were estimated by
discounting current debt balances from December 31, 2002 and 2001 to maturity
using estimated current market rates at which the Company could enter into
similar financing arrangements.

INTEREST RATE PROTECTION AGREEMENTS--The fair value of interest rate
protection agreements such as interest rate caps, floors, collars and swaps used
for hedging purposes (see Note 9) is the estimated amount the Company would
receive or pay to terminate these agreements at the reporting date, taking into
account current interest rates and current creditworthiness of the respective
counterparties.

The book and fair values of financial instruments as of December 31, 2002
and 2001 were (in thousands):

NOTE 15--SEGMENT REPORTING

Statement of Financial Accounting Standard No. 131 ("SFAS No. 131")
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected financial information about operating
segments in interim financial reports issued to shareholders.

The Company has two reportable segments: Real Estate Lending and Corporate
Tenant Leasing. The Company does not have substantial foreign operations. The
accounting policies of the segments are the same as those described in Note 3.
The Company has no single customer that accounts for more than 4.03% of revenues
(see Note 9 for other information regarding concentrations of credit risk).

84

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15--SEGMENT REPORTING (CONTINUED)
The Company evaluates performance based on the following financial measures
for each segment:

EXPLANATORY NOTES:
- ------------------------------

(1) Corporate and Other represents all corporate level items, including general
and administrative expenses and any intercompany eliminations necessary to
reconcile to the consolidated Company totals. This caption also includes the
Company's servicing business, which is not considered a material separate
segment.

(2) Total revenues represents all revenues earned during the period from the
assets in each segment. Revenue from the Real Estate Lending business
primarily represents interest income and revenue from the Corporate Tenant
Leasing business primarily represents operating lease income.

(3) Total operating and interest expense represents provision for loan losses
for the Real Estate Lending business and operating costs on corporate tenant
lease assets for the Corporate Tenant Leasing business, as well as interest
expense specifically related to each segment. Interest expense on unsecured
notes, general and administrative expense and general and
administrative-stock-based compensation is included in Corporate and Other
for all periods. Depreciation and amortization of $47,821, $35,411 and
$34,384 in 2002, 2001 and 2000, respectively, are included in the amounts
presented above.

(4) Net operating income represents net operating income before minority
interest, income from discontinued operations, gain (loss) from discontinued
operations, extraordinary loss on early extinguishment of debt and
cumulative effect of change in accounting principle. Net operating income
excludes income from discontinued operations of $3,583, $5,299 and $3,155
for the years ended December 31, 2002, 2001 and 2000, respectively.

(5) Total long-lived assets is comprised of Loans and Other Lending Investments,
net and Corporate Tenant Lease Assets, net, for each respective segment.

85

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth the selected quarterly financial data for the
Company (in thousands, except per share amounts).

NOTE 17--SUBSEQUENT EVENTS

Subsequent to December 31, 2002, the Company modified the terms of the 6.75%
Dealer Remarketable Securities, increased the principal amount and sold
additional notes in an amount totaling $150.0 million. The notes were modified
to become obligations of the Company (as opposed to the Leasing Subsidiary), the
covenants were modified to reflect the covenants contained in the Company's
other unsecured notes, and the maturity date was modified to be March 2008. The
new interest rate on the modified notes is set at 7.00%.

86

ISTAR FINANCIAL INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(IN THOUSANDS)

EXPLANATORY NOTE:
- ------------------------------

(1) See Note 4 to the Company's Consolidated Financial Statements.

87

ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

88

ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

89

ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

90

ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

91

ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

EXPLANATORY NOTE:
- ------------------------------

(1) Represents a direct financing lease.

92

ISTAR FINANCIAL INC.

NOTES TO SCHEDULE III

DECEMBER 31, 2002

(DOLLARS IN THOUSANDS)

1. RECONCILIATION OF CORPORATE TENANT LEASE ASSETS:

The following table reconciles Corporate Tenant Lease Assets from
January 1, 2000 to December 31, 2002:

2. RECONCILIATION OF ACCUMULATED DEPRECIATION:

The following table reconciles Accumulated Depreciation from January 1, 2000
to December 31, 2002:

93

ISTAR FINANCIAL INC.

SCHEDULE IV-LOANS AND OTHER LENDING INVESTMENTS

AS OF DECEMBER 31, 2002

(DOLLARS IN THOUSANDS)

EXPLANATORY NOTES:
- ----------------------------------
(1) Loan is a part of a common borrowing provided by the Company (see
corresponding letter reference).
(2) Represents only third-party liens and excludes senior loans held by the
Company from the same borrower on the same collateral.
(3) P&I = principal and interest, IO = interest only.
(4) Represents value of a ground lease senior to the Company's first mortgage.

94

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Portions of the Company's definitive proxy statement for the 2003 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Portions of the Company's definitive proxy statement for the 2003 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Portions of the Company's definitive proxy statement for the 2003 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Portions of the Company's definitive proxy statement for the 2003 annual
meeting of the shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Securities
and Exchange Act of 1934 (the "Exchange Act") reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. The Company has formed a Disclosure Committee that is responsible
for considering the materiality of information and determining the disclosure
obligations of the Company on a timely basis. The Disclosure Committee reports
directly to the Company's Chief Executive Officer and the Audit Committee.

Within the 90-day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Disclosure Committee and other members of management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to timely alert them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's Exchange Act filings.

There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date that the Company carried out its evaluation.

ITEM 16. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

Portions of the Company's definitive proxy statement for the 2003 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated by reference.

95

PART IV

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

a. and (d). Financial statements and schedules--see Index to Financial
Statements and Schedules included in Item 8.

b. Reports on Form 8-K.

On November 12, 2002, a Current Report on Form 8-K was filed which
included financial statements and exhibits on Company information used as
materials for the Company's primary equity offering on November 14, 2002.

On November 14, 2002, a Current Report on Form 8-K was filed which
included the certification of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

On November 19, 2002, a Current Report on Form 8-K was filed which
included the purchase agreement for the 8,000,000 shares of Common Stock
sold by the Company in its primary equity offering on November 14, 2002.

c. Exhibits--see index on following page.

96

INDEX TO EXHIBITS

EXPLANATORY NOTES:
- ------------------------

(1) Incorporated by reference from the Company's Registration Statement on
Form S-4 filed on May 12, 1998.

(2) Incorporated by reference from the Company's Annual Report on Form 10- K
for the year ended December 31, 1997 filed on April 2, 1998.

(3) Incorporated by reference from the Company's Form 8-K filed on
December 23, 1998.

(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
on June 22, 1999.

(5) Incorporated by reference to the Company's Registration Statement on
Form S-4 filed on August 25, 1999.

(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 filed on March 30, 2000.

(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000 filed on May 15, 2000.

(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 filed on August 14, 2000.

(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 filed on March 30, 2001.

(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 filed on November 14, 2001.

(11) Incorporated by reference from the Company's Form 8-K filed on November 5,
2001.

(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 filed on August 3, 2001.

(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001 filed on May 15, 2001.

(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002.

(15) Incorporated by reference from the Company's Form 8-K filed on
November 19, 2002.

99

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

iSTAR FINANCIAL INC.
REGISTRANT

Date: March 27, 2003 /s/ JAY SUGARMAN
------------------------------------------------
Jay Sugarman
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER

Date: March 27, 2003 /s/ CATHERINE D. RICE
------------------------------------------------
Catherine D. Rice
CHIEF FINANCIAL OFFICER

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

Date: March 27, 2003 /s/ JAY SUGARMAN
-------------------------------------------
Jay Sugarman
CHIEF EXECUTIVE OFFICER AND DIRECTOR

Date: March 27, 2003 /s/ WILLIS ANDERSEN JR.
-------------------------------------------
Willis Andersen Jr.
DIRECTOR

Date: March 27, 2003 /s/ JEFFREY G. DISHNER
-------------------------------------------
Jeffrey G. Dishner
DIRECTOR

Date: March 27, 2003 /s/ ANDREW L. FARKAS
-------------------------------------------
Andrew L. Farkas
DIRECTOR

Date: March 27, 2003 /s/ MADISON F. GROSE
-------------------------------------------
Madison F. Grose
DIRECTOR

100

Date: March 27, 2003 /s/ SPENCER B. HABER
-------------------------------------------
Spencer B. Haber
DIRECTOR

Date: March 27, 2003 /s/ ROBERT W. HOLMAN, JR.
-------------------------------------------
Robert W. Holman, Jr.
DIRECTOR

Date: March 27, 2003 /s/ ROBIN JOSEPHS
-------------------------------------------
Robin Josephs
DIRECTOR

Date: March 27, 2003 /s/ MERRICK R. KLEEMAN
-------------------------------------------
Merrick R. Kleeman
DIRECTOR

Date: March 27, 2003 /s/ H. CABOT LODGE III
-------------------------------------------
H. Cabot Lodge III
DIRECTOR

Date: March 27, 2003 /s/ MATTHEW J. LUSTIG
-------------------------------------------
Matthew J. Lustig
DIRECTOR

Date: March 27, 2003 /s/ WILLIAM M. MATTHES
-------------------------------------------
William M. Matthes
DIRECTOR

Date: March 27, 2003 /s/ JOHN G. MCDONALD
-------------------------------------------
John G. McDonald
DIRECTOR

Date: March 27, 2003 /s/ STEPHEN B. ORESMAN
-------------------------------------------
Stephen B. Oresman
DIRECTOR

Date: March 27, 2003 /s/ GEORGE R. PUSKAR
-------------------------------------------
George R. Puskar
DIRECTOR

Date: March 27, 2003
-------------------------------------------
Barry S. Sternlicht
DIRECTOR

101

CERTIFICATIONS

I, Jay Sugarman, certify that:

1. I have reviewed this annual report on Form 10-K of iStar
Financial Inc.;

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 annual report;

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

c. presented in this annual 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 functions):

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
annual 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: March 27, 2003 /s/ JAY SUGARMAN
---------------------------------------------
Name: Jay Sugarman
Title: Chief Executive Officer

102

I, Catherine D. Rice, certify that:

1. I have reviewed this annual report on Form 10-K of iStar
Financial Inc.;

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 annual report;

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

c. presented in this annual 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 functions):

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
annual 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: March 27, 2003 /s/ CATHERINE D. RICE
---------------------------------------------
Name: Catherine D. Rice
Title: Chief Financial Officer

103