iStar Annual Report 2003

FY2003 Annual Report · iStar

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Welcome

iStar has built its leading
position in the finance
world by consistently
delivering a superior level
of expertise and cus-
tomer service. We offer
a broad range of capital
to fit almost any financial
need with the credibility
that comes from over
11 years of providing
creative and customized
financings to meet the
real estate needs of high-
end borrowers and
Fortune 1,000 companies.

Welcome to iStar
Financial, a Company with
a unique approach to
real estate finance. We
specialize in providing
flexible, custom-tailored
capital to meet the
needs of sophisticated
owners of real estate
nationwide – and we do
it with honesty, integrity
and fairness that have
been a hallmark of iStar
since the day we started.

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Welcome

Directors

Officers

Regional Offices

Jay Sugarman (3)
Chairman and
Chief Executive Officer,
iStar Financial Inc.

Willis Andersen, Jr. (1)
Principal,
REIT Consulting Services

Robert W. Holman, Jr. (4)
Chairman and
Chief Executive Officer,
National Warehouse
Investment Company

Robin Josephs (1) (2)
President, Ropasada, LLC

Matthew J. Lustig (1) (2)
Managing Director,
Lazard Frères
Real Estate Investors, LLC

John G. McDonald (2) (4)
Professor of Finance,
Stanford University
Graduate School of Business

George R. Puskar (3) (4)
Former Chairman,
Lend Lease
Real Estate Investments

Jeffrey A. Weber (3)
President and
Chief Executive Officer,
William A.M. Burden & Co., LP

(1) Audit Committee
(2) Compensation Committee
(3) Investment Committee
(4) Nominating and

Governance Committee

Jay Sugarman
Chairman and
Chief Executive Officer

Catherine D. Rice
Chief Financial Officer

Timothy J. O’Connor
Executive Vice President and
Chief Operating Officer

Nina B. Matis
Executive Vice President and
General Counsel

Barbara Rubin
President – iStar Asset
Services

Executive Vice Presidents

Daniel S. Abrams
Steven R. Blomquist
Roger M. Cozzi
Jeffrey R. Digel
R. Michael Dorsch III
Barclay G. Jones III
H. Cabot Lodge III
Michelle M. MacKay
Diane Olmstead
Andrew C. Richardson

Senior Vice Presidents

Jeffrey N. Brown
Philip S. Burke
James D. Burns
Chase S. Curtis, Jr.
Geoffrey M. Dugan
John F. Kubicko
Elizabeth B. Smith
Colette J. Tretola

Headquarters

iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9494

Super-Regional Offices

One Embarcadero Center,
33rd Floor
San Francisco, CA 94111
tel: (415) 391-4300
fax: (415) 391-6259

3480 Preston Ridge Road,
Suite 575
Alpharetta, GA 30005
tel: (678) 297-0100
fax: (678) 297-0101

180 Glastonbury Blvd.,
Suite 201
Glastonbury, CT 06033
tel: (860) 815-5900
fax: (860) 815-5901

175 Federal Street, 8th Floor
Boston, MA 02110
tel: (617) 292-3333
fax: (617) 423-3322

1250 Poydras Street,
Suite 200
New Orleans, LA 70113
tel: (504) 529-8172
fax: (504) 523-9474

6565 North MacArthur Blvd.
Suite 410
Irving, TX 75039
tel: (972) 506-3131
fax: (972) 501-0078

Employees

At March 14, 2004,
the Company had
155 employees.

Independent Auditors

PricewaterhouseCoopers LLP
New York, NY

Registrar and
Transfer Agent

EquiServe Trust
Company, N.A.
P.O. Box 43069
Providence, RI 02940-3069
tel: (800) 756-8200
http://www.equiserve.com

Dividend
Reinvestment Plan

Registered shareholders may
reinvest dividends through
the Company’s dividend rein-
vestment plan. For more infor-
mation,
please call the Transfer
Agent or
the Company’s headquarters.

Annual Meeting of
Shareholders

May 25, 2004, 9:00 a.m. ET
Sofitel Hotel
45 West 44th Street,
New York, NY 10036

Investor Information Services

For help with questions about
the Company, and to receive
additional corporate informa-
tion,
please contact:

Investor Relations Department
iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9455
e-mail:
investors@istarfinancial.com

Directors

Officers

Regional Offices

Jay Sugarman (3)
Chairman and
Chief Executive Officer,
iStar Financial Inc.

Willis Andersen, Jr. (1)
Principal,
REIT Consulting Services

Robert W. Holman, Jr. (4)
Chairman and
Chief Executive Officer,
National Warehouse
Investment Company

Robin Josephs (1) (2)
President, Ropasada, LLC

Matthew J. Lustig (1) (2)
Managing Director,
Lazard Frères
Real Estate Investors, LLC

John G. McDonald (2) (4)
Professor of Finance,
Stanford University
Graduate School of Business

George R. Puskar (3) (4)
Former Chairman,
Lend Lease
Real Estate Investments

Jeffrey A. Weber (3)
President and
Chief Executive Officer,
William A.M. Burden & Co., LP

(1) Audit Committee
(2) Compensation Committee
(3) Investment Committee
(4) Nominating and

Governance Committee

Jay Sugarman
Chairman and
Chief Executive Officer

Catherine D. Rice
Chief Financial Officer

Timothy J. O’Connor
Executive Vice President and
Chief Operating Officer

Nina B. Matis
Executive Vice President and
General Counsel

Barbara Rubin
President – iStar Asset
Services

Executive Vice Presidents

Daniel S. Abrams
Steven R. Blomquist
Roger M. Cozzi
Jeffrey R. Digel
R. Michael Dorsch III
Barclay G. Jones III
H. Cabot Lodge III
Michelle M. MacKay
Diane Olmstead
Andrew C. Richardson

Senior Vice Presidents

Jeffrey N. Brown
Philip S. Burke
James D. Burns
Chase S. Curtis, Jr.
Geoffrey M. Dugan
John F. Kubicko
Elizabeth B. Smith
Colette J. Tretola

Headquarters

iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9494

Super-Regional Offices

One Embarcadero Center,
33rd Floor
San Francisco, CA 94111
tel: (415) 391-4300
fax: (415) 391-6259

3480 Preston Ridge Road,
Suite 575
Alpharetta, GA 30005
tel: (678) 297-0100
fax: (678) 297-0101

180 Glastonbury Blvd.,
Suite 201
Glastonbury, CT 06033
tel: (860) 815-5900
fax: (860) 815-5901

175 Federal Street, 8th Floor
Boston, MA 02110
tel: (617) 292-3333
fax: (617) 423-3322

1250 Poydras Street,
Suite 200
New Orleans, LA 70113
tel: (504) 529-8172
fax: (504) 523-9474

6565 North MacArthur Blvd.
Suite 410
Irving, TX 75039
tel: (972) 506-3131
fax: (972) 501-0078

Employees

At March 14, 2004,
the Company had
155 employees.

Independent Auditors

PricewaterhouseCoopers LLP
New York, NY

Registrar and
Transfer Agent

EquiServe Trust
Company, N.A.
P.O. Box 43069
Providence, RI 02940-3069
tel: (800) 756-8200
http://www.equiserve.com

Dividend
Reinvestment Plan

Registered shareholders may
reinvest dividends through
the Company’s dividend rein-
vestment plan. For more infor-
mation,
please call the Transfer
Agent or
the Company’s headquarters.

Annual Meeting of
Shareholders

May 25, 2004, 9:00 a.m. ET
Sofitel Hotel
45 West 44th Street,
New York, NY 10036

Investor Information Services

For help with questions about
the Company, and to receive
additional corporate informa-
tion,
please contact:

Investor Relations Department
iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9455
e-mail:
investors@istarfinancial.com

Strategy

Welcome to a better way

iStar is dedicated to
providing a relationship-
oriented, “private
banker” experience in real
estate finance. Unlike
most of our competitors,
we keep all of the real
estate financings we orig-
inate on-balance sheet.
This means that our cus-
tomers have a single point
of contact and receive
“one-call” responsiveness
to their needs through-
out the life of their loan
or sale/leaseback. Our
customers have shown
that they appreciate
this premium service, as
evidenced by our record
of repeat business. Over
50% of our business
has been with customers
who have done business
with us more than once.

By working with only
high-end customers and
leading corporations, we
have built a franchise that
is able to deliver stable,
predictable and growing
earnings that are backed
by a highly diversified
asset base and well-
capitalized customers.

Our equity market capi-
talization now exceeds
$5 billion, and our
size and track record in
providing a high level
of creative, thoughtful
and customer-first
service have made iStar
Financial the leading
public company focused
on commercial real
estate finance.

First Mortgages
Subordinate Loans/B Notes
Mezzanine Loans
Corporate Loans
Sale/Leasebacks

2003 was a pivotal year in the histor y of our
ﬁrm. We celebrated our ﬁfth year as a public
company, delivered another exceptional
year of returns for shareholders (49.1% total
shareholder return) and ﬁrmly established
our position as the leading provider of capital
to the high end of the commercial real
estate market. Importantly, we believe iStar
achieved these outstanding results and the
strong results of the past ﬁve years despite
several handicaps that materially affected
our business. Chief among these handicaps
were a cost of funds well in excess of
almost ever y other market participant, a
large overhang on our public stock from our
original private shareholders, and secured
credit line arrangements that required us to
share much of our most valuable proprietar y
information with our largest competitors.

Despite these fundamental constraints, we
have proven over the past ﬁve years that our
business model can and does deliver excel-
lent risk-adjusted returns to shareholders by
focusing on the unique strengths of our cus-
tom-tailored service model, our multitalented
management team, and our disciplined
investment strategy. With an equity market
capitalization in excess of $5 billion, a fully
diversiﬁed shareholder base, a cost of funds
and funding strategy that have become less
of a disadvantage, and a portfolio notewor-
thy for both its strength and stabilit y in this
volatile economic environment, iStar is now
ver y well positioned for the coming ﬁve years.
With our historical handicaps behind us
for the most part, we can begin to take full
advantage of the increased scale and scope
of our platform to build a company that will
deliver unprecedented levels of service to its
customers and strong and growing returns
to its shareholders.

Over the past 11 years, we have worked to
build a company focused on providing a high-
quality, highly customized lending and
sale/leaseback capital source to sophisti-
cated owners of real estate in the United
States. We knew that if we gave our cus-
tomers honest and straightforward answers
they could count on, delivered a superior
level of expertise in ever y part of our busi-
ness, built an in-house knowledge base
unmatched in the industr y, and made it a pol-
icy to honor our word in even the most tr ying
of circumstances, then customers would rec-
ognize the meaningful differences between
iStar’s custom-tailored, best-in-class “private
banker” approach and other companies’
volume-focused, commodity-like approach.

Now, after ﬁve years in the public markets,
iStar is altering the way we internally fund
our transactions in order to increase our
speed and ﬂexibility and to create a range of
new ﬁnancial products to meet all of our
customers’ needs. By the time you read this,
iStar will be one of the ﬁve largest issuers
of unsecured debt in the real estate sector,
rapidly moving to access the unsecured
market so we can serve customers more
quickly and with more ﬂexibility, better
protect our valuable proprietar y information,
and free up enormous resources previously
devoted to the logistics of our secured
funding programs. You should also know that
making this transition prior to being rated
investment grade at all three rating agencies
was an expensive decision, but we felt we
simply could not wait any longer to take this
important step, given our business plan
and its focus on ser ving our customers.

We expect 2004 to be the beginning of
a new era for iStar Financial. The competitive
advantages we have built over the last
decade, combined with our increased scale
and improved capital access, will enable
us to further increase our market share and
better serve the high-end customer base
we target. While other capital sources are
beginning to recognize the attractive
returns available in the overall commercial
real estate ﬁnance market, we believe our
targeted business model generates the best
risk-adjusted returns in the industr y, and
we look forward to delivering strong returns
to shareholders in the coming years.

On behalf of all the employees at iStar, I want
to thank you for your support.

Sincerely,

Jay Sugarman
Chairman and Chief Executive Ofﬁcer

Totally Tailored

Tailored Solutions

iStar Financial is a full
service, expert provider
of creative real estate
capital solutions. This
means that we listen
closely to our customers
and provide capital
in a structure that is
customized to meet
their needs.

Our customers recognize
that this “cookie cutter”
approach is not appropri-
ate for many of their
financing needs, and will
pay a premium to have an
experienced capital
provider custom-tailor
transactions to their spe-
cific needs.

Each transaction has an
experienced iStar
Financial executive dedi-
cated to understanding
the customer’s require-
ments and then focusing
our Company’s deep
knowledge and expertise
in real estate finance to
create thoughtful solu-
tions. Our volume-driven
competitors cannot pro-
vide this level of service
and expertise. Their busi-
nesses rely on standard-
ized documentation and
a minimum investment
of time and resources in
order to maximize the
number of transactions
they complete.

See the Solution

Whether we are providing
a $50 million floating
rate first mortgage with
a staged funding sched-
ule or $150 million to an
investment grade corpo-
ration executing a
long-term sale/leaseback,
iStar brings a history
of meeting its customers’
needs with innovative
and state-of-the-art
solutions. Our experience
in crafting such solutions
is one of our greatest
competitive advantages.

Providing a better
financial solution for a
customer often means
seeing the overall
transaction as a series of
carefully crafted provi-
sions that work together
smoothly as a whole.
With expertise honed in
hundreds of successfully
structured transactions,
iStar can reduce even
the most complex trans-
actions down to
straightforward and
efficient solutions for
its customers.

Expertise

Feel the Dif ference

Service

Once an investment
is closed, our customers
always have a single
point of contact with an
iStar Financial profes-
sional who thoroughly
understands their
investment. Most
volume-based lenders
package and sell their
loans into the structured
finance markets.

These loans are then
serviced by a third party
who also services thou-
sands of other loans and
who is contractually
restricted from making
changes to a loan unless
the borrower defaults.
Likewise, in the
sale/leaseback market,
often the ownership is
broken up and sold
off to unsophisticated
investors, making it
impossible for the tenant
to creatively rework
its lease in the future.

Because iStar holds
its investments on-bal-
ance sheet, customers
can confidently turn
to us at any time with
any idea and know
we can respond rapidly
and thoughtfully
to the opportunity.

Peace of Mind

Relationships

So while others might
appear to save them-
selves a few basis points
on their loans or
sale/leasebacks, our cus-
tomers know that with
iStar, they have bought
the most precious thing
a capital provider can
deliver – peace of mind.

Our customers have
made a significant invest-
ment in their real estate
assets, but no matter
how well they execute
their business plans,
unforeseen challenges
can occur. At iStar, we
know it’s not just getting
the deal closed that
matters – it’s having the
ability to work closely
and carefully with a cus-
tomer during the
life of the transaction
that can make the
difference between suc-
cess and failure.

Results

Financial Report

selected financial data 40

management’s discussion and analysis of financial condition and results of operations 43

quantitative and qualitative disclosures about market risk 58

report of independent auditors 6o

consolidated balance sheets 61

consolidated statements of operations 62

consolidated statements of cash flows 63

consolidated statements of changes in shareholders’ equity 64

notes to consolidated financial statements 66

common stock price and dividends 94

39.

selected financial data

The following table sets forth selected financial data on a
consolidated historical basis for the Company. 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.
Accordingly, the results of operations for the Company for
the year ended December 31, 1999, does 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 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” Certain prior year amounts have been reclassified to
conform to the 2003 presentation.

For the Years Ended December 31,

Operating Data:
Interest income
Operating lease income
Other income

Total revenue

Interest expense
Operating costs – corporate tenant lease assets
Depreciation and amortization
General and administrative
General and administrative – stock-based compensation
Provision for loan losses
Loss on early extinguishment of debt
Advisory fees
Costs incurred in acquiring former external advisor(1)

Total costs and expenses

Income before equity in (loss) earnings from joint ventures
and unconsolidated subsidiaries, minority interest
and other items

Equity in (loss) earnings from joint ventures and

unconsolidated subsidiaries

Minority interest in consolidated entities
Cumulative effect of change in accounting principle(2)
Net income from continuing operations
Income from discontinued operations
Gain from discontinued operations
Net income
Preferred dividend requirements
Net income allocable to common shareholders and

HPU holders(3)

Basic earnings per common share(4)(5)
Diluted earnings per common share(5)(6)
Dividends declared per common share(7)

2003

2002

2000
2001
(In thousands, except per share data and ratios)

1999

$ 304,394
265,478
36,677
606,549
194,999
17,371
55,286
38,153
3,633
7,500
–
–
–
316,942

255,631
236,643
27,993
520,267
185,375
13,202
46,948
30,449
17,998
8,250
12,166
–
–
314,388

$ 254,119
179,279
31,000
464,398
169,974
12,029
34,573
24,151
3,574
7,000
1,620
–
–
252,921

$ 268,011
171,247
17,902
457,160
173,549
12,230
33,529
25,706
2,864
6,500
705
–
–
255,083

$ 209,848
40,633
12,900
263,381
91,112
2,111
10,219
6,269
412
4,750
–
16,193
94,476
225,542

289,607

205,879

211,477

202,077

37,839

(4,284)
(249)
–
285,074
1,916
5,167
$ 292,157
(36,908)

$ 255,249
2.52
$
2.43
$
2.65
$

1,222
(162)
–
206,939
7,614
717
$ 215,270
(36,908)

$ 178,362
1.98
$
1.93
$
2.52
$

7,361
(218)
(282)
218,338
10,429
1,145
$ 229,912
(36,908)

$ 193,004
2.24
$
2.19
$
2.45
$

4,796
(195)
–
206,678
7,960
2,948
$ 217,586
(36,908)

$ 180,678
2.11
$
2.10
$
2.40
$

235
(41)
–
38,033
853
–
38,886
(23,843)

15,043
0.25
0.25
1.86

$
$
$
$

For the Years Ended December 31,

2003

2002

2000
2001
(In thousands, except per share data and ratios)

1999

Supplemental Data:
Adjusted diluted earnings allocable to common

shareholders and HPU holders(8)(10)

EBITDA(9)(10)
Ratio of EBITDA to interest expense(11)
Ratio of EBITDA to combined fixed charges(12)
Ratio of earnings to fixed charges(13)
Ratio of earnings to fixed charges and preferred

stock dividends(13)

Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
Cash flows from:

Operating activities
Investing activities
Financing activities

Balance Sheet Data:
Loans and other lending investments, net
Corporate tenant lease assets, net
Total assets
Debt obligations
Minority interest in consolidated entities
Shareholders’ equity
Supplemental Data:
Total debt to shareholders’ equity

$ 341,177
$ 535,608
2.75x
2.31x
2.49x

$ 262,786
$ 439,424
2.37x
1.98x
2.14x

$ 254,095
$ 425,385
2.49x
2.05x
2.25x

$ 230,371
$ 413,951
2.39x
1.97x
2.18x

$ 127,798
$ 233,881
2.57x
2.03x
2.45x

2.10x
100,314
104,101

1.78x
89,886
92,649

1.86x
86,349
88,234

1.80x
85,441
86,151

1.94x
57,749
60,393

$ 338,262
(974,354)
700,248

$ 348,793
(1,149,070)
800,541

$ 293,260
(349,525)
49,183

$ 219,868

(193,805)
(37,719)

$ 119,625
(143,911)
48,584

$3,702,674
2,535,885
6,660,590
4,113,732
5,106
2,415,228

$ 3,050,342
2,291,805
5,611,697
3,461,590
2,581
2,025,300

$2,377,763
1,781,565
4,380,640
2,495,369
2,650
1,787,778

$2,227,083
1,592,087
4,034,775
2,131,967
6,224
1,787,885

$2,003,506
1,654,300
3,813,552
1,901,204
2,565
1,801,343

1.7x

1.4x

1.2x

1.1x

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.

Explanatory Notes:
(1)
(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) HPU holders are Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program.
(4) 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.
For the 12 months ended December 31, 2003, net income used to calculate earnings per basic and diluted common share excludes $2,006 and $1,994 of net income allocable to
HPU holders, respectively.

(5)

(6) For the 12 months ended December 31, 2003, net income used to calculate earnings per diluted common share includes joint venture income of $167.
(7) The Company generally declares common and preferred dividends in the month subsequent to the end of the quarter.
(8) Adjusted earnings represents net income to common shareholders and HPU holders computed in accordance with GAAP, before depreciation, amortization, gain from discon-
tinued operations, extraordinary items and cumulative effect of change in accounting principle. For the year ended December 31, 2002, adjusted earnings includes the
$15.0 million charge related to the performance based vesting of restricted shares granted under the Company’s long-term incentive plan and $3.9 million of cash paid for pre-
payment penalties associated with early extinguishment of debt. For the years ended December 31, 2001 and 2000, adjusted earnings includes $1.0 million and $317,000 of
cash paid for prepayment penalties associated with early extinguishment of debt. 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 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations.”)

41.

(9) EBITDA is calculated as net income plus the sum of interest expense, depreciation and amortization, minority interest in consolidated entities, cumulative effect of change in

accounting principle and costs incurred in acquiring former advisor minus income from discontinued operations and gain from discontinued operations.

For the Years Ended December 31,

2003

2002

Net income
Add: Interest expense
Add: Depreciation and amortization
Add: Minority interest in consolidated entities
Add: Cumulative effect of change in accounting principle
Add: Costs incurred in acquiring former advisor
Less: Income from discontinued operations
Less: Gain from discontinued operations
EBITDA

$292,157
194,999
55,286
249
–
–
(1,916)
(5,167)
$535,608

$215,270
185,375
46,948
162
–
–
(7,614)
(717)
$439,424

2001
(In thousands)

$229,912
169,974
34,573
218
282
–
(10,429)
(1,145)
$423,385

2000

1999

$217,586
173,549
33,529
195
–
–
(7,960)
(2,948)
$413,951

$ 38,886
91,112
10,219
41
–
94,476
(853)
–
$233,881

(10) 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. This is because, as 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 CTL assets and significant deferred financing costs. Several of the Company’s material borrowing arrangements contain covenants based on adjusted earnings,
therefore, the Company must monitor adjusted earnings in order to ensure compliance with these covenants. 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.

(11) The 1999 EBITDA to interest expense ratio on a pro forma basis would have been 2.83x.
(12) Combined fixed charges are comprised of interest expense, capitalized interest, amortization of loan costs and preferred stock dividend requirements. The 1999 EBITDA to com-

bined fixed charges ratio on a pro forma basis would have been 2.23x.

(13) For the purposes of calculating the ratio of earnings to fixed charges, ‘‘earnings’’ consist of income from continuing operations before adjustment for minority interest in con-
solidated subsidiaries, or income or loss from equity investees, income taxes and cumulative effect of change in accounting principle 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 exclude 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. Including the effect of this non-recurring,
non-cash charge, the ratio of earnings to fixed charges for that period would have been 1.4x and the Company’s ratio of earnings to fixed charges and preferred stock dividends
would have been 1.1x.

management’s discussion and analysis of financial
condition and results of operations

General

The Company is in the business of providing custom-
tailored financing solutions to private and corporate owners of real
estate nationwide. Depending upon market conditions and the
Company’s views about the United States economy generally and the
real estate markets specifically, the Company will adjust its invest-
ment focus from time to time and emphasize certain products, indus-
tries and geographic markets over others.

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 customers in its
markets. In March 1998, the private investment funds contributed
their approximately $1.1 billion of assets to the Company’s prede-
cessor 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 trad-
ing on the New York Stock Exchange under the symbol ‘‘SFI’’ in
November 1999.

The Company has experienced significant growth since its
first quarter as a public company in 1998. Transaction volume for the
fiscal year ended December 31, 2003 was $2.2 billion, compared to
$1.7 billion in 2002 and $1.1 billion in 2001. The Company com-
pleted 60 financing commitments in 2003, compared to 41 in 2002
and 35 in 2001. Repeat customer business has become a key source
of transaction volume for the Company, accounting for approxi-
mately 55.00% of the Company’s cumulative volume through the
end of 2003. Based upon feedback from its customers, the Company
believes that greater recognition of the Company and its reputation
for completing highly structured transactions in an efficient manner
have also contributed to increases in its transaction volume. The ben-
efits of higher investment volumes were mitigated to an extent by
the extremely low interest rate environment in 2002 and 2003. Low
interest rates benefit the Company in that its borrowing costs
decrease, but similarly, earnings on its variable-rate lending invest-
ments also decrease.

During the difficult economic and real estate market condi-
tions of 2002 and 2003, the Company focused its investment activ-
ity on lower risk investments such as first mortgages and corporate
tenant lease transactions that met its risk-adjusted return standards.
The Company has experienced minimal losses on its lending invest-
ments. In 2003, the Company also focused on re-leasing space at its
corporate tenant lease facilities under longer term leases in an effort
to reduce the impact of lease expirations on the Company’s earnings.

The Company has continued to broaden its sources of cap-
ital and was particularly active in the capital markets in 2003. The
Company’s strong performance and the low interest rate environ-
ment enabled the Company to issue equity and debt securities in
2003 (and in early 2004) on attractive pricing terms. The Company
used the proceeds from the issuances to repay secured indebtedness
and to refinance higher cost capital. The Company made significant
progress in 2003 in migrating its debt obligations from secured debt
towards unsecured debt. While the Company considers it prudent to
have a broad array of sources of capital, including secured financing
arrangements, the Company will continue to seek to reduce its use of
secured debt and increase its use of unsecured debt.

Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Interest Income – Interest income increased by $48.8 million
to $304.4 million for the 12 months ended December 31, 2003
from $255.6 million for the same period in 2002. This increase was
primarily due to $102.3 million of interest income on new origina-
tions or additional fundings, offset by a $51.2 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 a result of lower
average one-month LIBOR rates of 1.21% in 2003, compared to
1.77% in 2002.

Operating Lease Income – Operating lease income increased
by $28.9 million to $265.5 million for the 12 months ended
December 31, 2003 from $236.6 million for the same period in
2002. Of this increase, $36.6 million was attributable to new CTL
investments. This increase was partially offset by $7.0 million of
lower operating lease income due to vacancies on certain CTL assets.
Other Income – Other income generally consists of prepay-
ment penalties and realized gains from the early repayment of loans
and other lending investments, financial advisory and asset manage-
ment fees, lease termination fees, mortgage servicing fees, loan par-
ticipation payments and dividends on certain investments. During the
12 months ended December 31, 2003, other income included real-
ized gains on sale of lending investments of $16.3 million, income
from loan repayments and prepayment penalties of $17.3 million,
asset management, mortgage servicing and other fees of approxi-
mately $2.6 million and other miscellaneous income such as dividend
payments of $489,000.

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 serv-
icing, 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.

Interest Expense – For the 12 months ended December 31,
2003, interest expense increased by $9.6 million to $195.0 million
from $185.4 million for the same period in 2002. This increase was

43.

primarily due to higher average borrowings on the Company’s debt
obligations, term loans and secured notes. This increase was partially
offset by lower average one-month LIBOR rates, which averaged
1.21% in 2003 compared to 1.77% in 2002 on the unhedged por-
tion of the Company’s variable-rate debt and by a $4.5 million
decrease in amortization of deferred financing costs on the Company’s
debt obligations in 2003 compared to the same period in 2002.

Operating Costs – Corporate Tenant Lease Assets – For the
12 months ended December 31, 2003, operating costs increased by
approximately $4.2 million from $13.2 million to $17.4 million for the
same period in 2002. This increase is primarily related to new CTL
investments and higher unrecoverable operating costs due to vacan-
cies on certain CTL assets.

Depreciation and Amortization – Depreciation and amortization
increased by $8.4 million to $55.3 million for the 12 months ended
December 31, 2003 from $46.9 million for the same period in 2002.
This increase is primarily due to depreciation on new CTL investments.
General and Administrative – For the 12 months ended
December 31, 2003, general and administrative expenses increased
by $7.8 million to $38.2 million, compared to $30.4 million for the
same period in 2002. This increase is primarily due to the consolida-
tion of iStar Operating and the result of compensation expense rec-
ognized for dividends paid on the Chief Executive Officer ’s
contingently vested phantom shares (see Note 10 to the Company’s
Consolidated Financial Statements).

General and Administrative – Stock-Based Compensation –
General and administrative – stock-based compensation decreased
by $14.4 million for the 12 months ended December 31, 2003
compared to the same period in 2002. In 2002, the Company recog-
nized a charge of approximately $15.0 million related to the
performance-based vesting of 500,000 restricted shares granted
under the Company’s long-term incentive plan in 2002 (see Note 10
to the Company’s Consolidated Financial Statements).

Provision for Loan Losses – The Company’s charge for provi-
sion for loan losses decreased to $7.5 million for the 12 months
ended December 31, 2003 compared to $8.3 million in the same
period in 2002. 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 con-
ditions, the Company’s internal risk management policies and credit
risk rating system, industry loss experience, the Company’s assess-
ment 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 quar-
ter ended June 30, 1998), management has reflected quarterly pro-
visions for loan losses in its operating results.

Loss on Early Extinguishment of Debt – During the 12 months
ended December 31, 2003, the Company had no losses on early
extinguishment of debt.

During the 12 months ended December 31, 2002, the
Company had $12.2 million of losses on early extinguishment of debt
associated with the prepayment penalties and amortization of
deferred financing fees related to the repayment of the STARs, Series
2000-1 bonds. This loss of $12.2 million represented approximately
$8.2 million in unamortized deferred financing costs and approxi-
mately $4.0 million in prepayment penalties. In accordance with SFAS
No. 145 these costs were reclassified from ‘‘Extraordinary loss on early
extinguishment of debt’’ into continuing operations for comparative
purposes for financial statements for periods after January 1, 2003.

Equity in (Loss) Earnings from Joint Ventures and Unconsolidated
Subsidiaries – For the 12 months ended December 31, 2003, equity
in (loss) earnings from joint ventures and unconsolidated subsidiaries
decreased by $5.5 million to $(4.3) million from $1.2 million for the
same period in 2002. This decrease is primarily due to certain lease
terminations in one of the Company’s CTL joint venture investments.
(see Note 6 to the Company’s Consolidated Financial Statements).

Income from Discontinued Operations – For the 12 months
ended December 31, 2003 and 2002, operating income earned by
the Company on CTL assets sold (prior to their sale) and assets held
for sale of approximately $1.9 million and $7.6 million, respectively, is
classified as ‘‘discontinued operations,’’ even though such income was
recognized by the Company prior to the asset dispositions or classifi-
cation as ‘‘Assets held for sale’’ on the Company’s Consolidated
Balance Sheets.

Gain from Discontinued Operations – During 2003, the
Company disposed of nine CTL assets for net proceeds of $47.6 mil-
lion, and recognized a gain of approximately $5.2 million.

During 2002, the Company disposed of one CTL asset for
net 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 charge in connection with the termination,
resulting in a net gain of approximately $123,000.

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, offset by 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
$57.3 million to $236.6 million for the 12 months ended December 31,
2002 from $179.3 million for the same period in 2001. Of this
increase, $59.6 million was attributable to new CTL investments. This

increase was partially offset by CTL dispositions and lower operating
lease income due to vacancies on certain CTL assets.

Other Income – Other income generally consists of prepay-
ment penalties and realized gains from the early repayment of loans
and other lending investments, financial advisory and asset manage-
ment fees, lease termination fees, mortgage servicing fees, loan par-
ticipation payments and dividends on certain investments. During the
12 months ended December 31, 2002, other income included pre-
payment 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, pre-
payment penalties and gains on loan repayments of $13.0 million and
financial advisory, lease termination, asset management and mort-
gage 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
approximately $1.2 million from $12.0 million to $13.2 million for the
same period in 2001. This increase is primarily related to new CTL
investments and higher operating costs on certain CTL assets, par-
tially offset by CTL dispositions.

Depreciation and Amortization – Depreciation and amortiza-
tion increased by $12.3 million to $46.9 million for the 12 months
ended December 31, 2002 from $34.6 million for the same period in
2001. This increase is primarily due to new CTL 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 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 share-
holder performance (see Note 10 to the Company’s Consolidated
Financial Statements).

December 31, 2002 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 con-
ditions, the Company’s internal risk management policies and credit
risk rating system, industry loss experience, the Company’s assess-
ment 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 quar-
ter ended June 30, 1998), management has reflected quarterly pro-
visions for loan losses in its operating results.

Loss on Early Extinguishment of Debt – During the 12 months
ended December 31, 2002, the Company had $12.2 million of
losses on early extinguishment of debt associated with the prepay-
ment penalties and amortization of deferred financing fees related to
the repayment of the STARs, Series 2000-1 bonds. This loss of
$12.2 million represented approximately $8.2 million in unamortized
deferred financing costs and approximately $4.0 million in prepay-
ment penalties. In accordance with SFAS No. 145 these costs were
reclassified from ‘‘Extraordinary loss on early extinguishment of debt’’
into continuing operations for comparative purposes for financial
statements for periods after January 1, 2003.

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 unse-
cured 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 a loss of
approximately $1.6 million. In accordance with SFAS No. 145 these
costs were reclassified from ‘‘Extraordinary loss on early extinguish-
ment of debt’’ into continuing operations for comparative purposes
for financial statements for periods after January 1, 2003.

Equity in (Loss) Earnings from Joint Ventures and Unconsolidated
Subsidiaries – During the 12 months ended December 31, 2002, equity
in (loss) earnings from joint ventures and unconsolidated subsidiaries
decreased by approximately $6.2 million to $1.2 million from $7.4 mil-
lion for the same period in 2001. This decrease is primarily due to the
consolidation of one of the Company’s CTL joint venture investments
(see Note 6 to the Company’s Consolidated Financial Statements).

Income from Discontinued Operations – For the 12 months
ended December 31, 2002 and 2001, operating income earned by
the Company on CTL assets sold (prior to their sale) and assets held
for sale of approximately $7.6 million and $10.4 million, respectively,
is classified as ‘‘discontinued operations,’’ even though such income
was recognized by the Company prior to the asset dispositions or
classification as ‘‘Assets held for sale’’ on the Company’s Consolidated
Balance Sheets.

Provision for Loan Losses – The Company’s charge for provi-
sion for loan losses increased to $8.3 million for the 12 months ended

Gain from Discontinued Operations – During 2002, the
Company disposed of one CTL asset for net proceeds of $3.7 million, and

45.

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 charge in connection
with the termination, resulting in a net gain of approximately $123,000.
During 2001, the Company disposed of four CTL assets for
net proceeds of $26.3 million, and recognized net gains of $1.1 million.

Adjusted Earnings

Adjusted earnings represents net income allocable to com-
mon shareholders and HPU holders computed in accordance with
GAAP, before depreciation, amortization, gain 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 understand-
ing of the historical operating results of the Company, adjusted earn-
ings 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 that adjusted
earnings more closely approximates operating cash flow and is a use-
ful measure for investors to consider, in conjunction with net income
and other GAAP measures, in evaluating the Company’s financial per-
formance. 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 CTL assets and significant deferred financing costs. In
addition, several of the Company’s material borrowing arrangements
contain covenants based on adjusted earnings, therefore, the
Company must monitor adjusted earnings in order to ensure compli-
ance with these covenants. It should be noted that the Company’s
manner of calculating adjusted earnings may differ from the calcula-
tion of similarly-titled measures by other companies.

For the Years Ended December 31,

2003

2002

2001
(In thousands, unaudited)

2000

1999

Adjusted earnings:
Net income allocable to common shareholders and HPU holders $255,249
593
Add: Joint venture income
55,905
Add: Depreciation
7,417
Add: Joint venture depreciation and amortization
27,180
Add: Amortization of deferred financing costs
(5,167)
Less: Gains from discontinued operations
Add: Cumulative effect of change in accounting principle(1)
–
Less: Net income allocable to class B shares(2)
–
–
Add: Cost incurred in acquiring former external advisor
Adjusted diluted earnings allocable to

$178,362
991
48,041
4,433
31,676
(717)
–
–
–

$193,004
965
35,642
4,044
21,303
(1,145)
282
–
–

$180,678
937
34,514
3,662
13,528
(2,948)
–
–
–

$ 15,043
1,603
11,016
365
6,121
–
–
(826)
94,476

common shareholders and HPU holders(3)(4)(5)
Weighted average diluted common shares outstanding(6)

$341,177
104,248

$262,786
93,020

$254,095
88,606

$230,371
86,523

$127,798
61,750

(3)

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 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.
For the year ended December 31, 2003, adjusted diluted earnings allocable to common shareholders and HPU holders includes $2,659 of adjusted earnings allocable to HPU
holders.
For years ended December 31, 2002, 2001, and 2000, adjusted diluted earnings allocable to common shareholders includes $3,950, $1,037 and $317 of cash paid for prepayment
penalties associated with early extinguishment of debt.
Includes a $15.0 million 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.
In addition to the GAAP defined weighted average diluted shares outstanding these balances include an additional 147,000 shares, 371,000 shares, 372,000 shares, 372,000
shares and 1.4 million shares for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively, relating to the additional dilution of joint venture shares.

(6)

(5)

(4)

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 facilities or companies the Company finances. First dollar loan-
to-value represents the weighted average beginning point for the
Company’s lending exposure in the aggregate capitalization of the
underlying facilities or companies it finances. Last dollar loan-to-
value represents the weighted average ending point for the
Company’s lending exposure in the aggregate capitalization of the
underlying facilities 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 loan becomes 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 approxi-
mates 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, 2003, the Company had three assets on
non-accrual status with an aggregate carrying value of $40.3 million,
or 0.62% of the gross book value of the Company’s investments.
Management believes there is adequate collateral to support the
book values of the assets.

The first non-accrual loan is a $12.8 million junior partici-
pation in a first mortgage loan secured by a hotel facility 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 addi-
tional equity to fund ongoing capital improvements at the facility.
Management believes there is adequate collateral to support the
book value of the asset. However, due to poor operating perfor-
mance, this loan was transferred to non-accrual effective July 1, 2003.
The second non-accrual loan is a partnership loan with a
balance of $349,000 as of December 31, 2003. The loan is
presently secured by a partnership interest in a partnership owning
facilities in Colorado leased to the U.S. Government. The loan bears
interest at LIBOR+3.50%, with a LIBOR floor of 3.00%. The loan
matured on March 29, 2003 and therefore is currently in default. In
April 2003 and November 2003, the Company received $1.2 million
and $4.2 million of principal repayments, respectively. The borrower
remains current on its regular interest obligations to the Company.
However, as a result of the maturity default and the uncertainty sur-
rounding the timing of the completion, sale or refinancing of the facil-
ities, the loan remains on non-accrual status.

The third non-accrual loan is a $27.1 million, 90.00% par-
ticipating interest in a loan secured by a class A office building located

in Pittsburgh, Pennsylvania. The loan was acquired at a premium to its
principal balance as a part of the Company’s acquisition of Lazard
Frères’ structured finance portfolio in 1998. Lazard continues to
retain a 10.00% interest in the loan. The loan matures in March 2008
and bears interest at 17.50%, 11.00% of which is due currently and
6.50% of which is accrued. In August 2003 the borrower stopped
making debt service payments due to insufficient cash flow caused
by vacancies at the facility. Management believes the underlying col-
lateral value supports its basis in the outstanding principal balance of
the loan. During the third quarter of 2003, management determined
that an acquisition premium on the loan with an unamortized balance
of $3.3 million was impaired. As a result in the third quarter of 2003,
the Company took a $3.3 million impairment charge against its loan
loss reserve, bringing the carrying value of the loan to $27.1 million.
Watch List Assets – The Company conducts a quarterly com-
prehensive credit review, resulting in an individual risk rating being
assigned to each asset. This review is designed to enable manage-
ment to evaluate and proactively manage asset-specific credit issues
and identify credit trends on a portfolio-wide basis as an ‘‘early warn-
ing system.’’ As of December 31, 2003, the Company has five loans
that are on its credit watch list, including the three non-accrual loans
mentioned above.

One of the watch list loans not on non-accrual is a
$35.8 million junior interest in a $103.1 million first mortgage loan
secured by a super regional mall in Chicago, Illinois. The whole loan
bears interest at 8.88%. Cash flow at the mall has been negatively
impacted by the departure of an anchor tenant; however, mall man-
agement has been actively negotiating to reconfigure the space for
an existing anchor. To provide for the repositioning of the center and
ultimate refinancing of the loan, the maturity of the loan was
extended for two years to January 1, 2006. The loan is not open for
prepayment until January 1, 2005, at which time it may be repaid in
full at a 3.00% premium for six months and then may be repaid at par
for the six months prior to maturity. The borrower has made signifi-
cant equity investments in the facility, with over $19.0 million
invested in the past three years. The borrower remains current on all
of its debt service payments. Management believes the collateral
value remains adequate to support the book value of the asset.

The other watch list loan not on non-accrual is a $27.2 mil-
lion first mortgage secured by an office facility in Louisville, Kentucky.
The whole loan bears interest at LIBOR+4.50% and matures in
April 2004. On October 14, 2003, the Company acquired the senior
trust certificate from a financial institution. The facility is experiencing
near-term tenant rollover in a soft local real estate market; however,
management believes its last dollar exposure is below replacement
cost, and the loan remains current through December 31, 2003.
Management believes that there is adequate collateral to support the
book value of the asset.

47.

The table below summarizes the Company’s loans and
other lending investments that are more than 60 days past due
in scheduled payments and details the provision for loan losses
associated with the Company’s lending investments for the
12 months ended December 31, 2003 and 2002 (in thousands):

As of December 31,

2003

2002

Carrying value of loans past
due 60 days or more/
As a percentage of loans
and other lending
investments
Provision for loan losses/

$27,480

0.74% $

–

As a percentage of loans
and other lending
investments

Net charge-offs/

As a percentage of loans
and other lending
investments

33,436

0.89% 29,250

0.95%

3,314

0.09%

–

Liquidity and Capital Resources

The Company requires significant capital to fund its
investment activities and operating expenses. The Company has
sufficient 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 com-
mon, 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 access to significant capital resources
and financing will enable the Company to meet current and antici-
pated capital requirements.

The Company believes that its existing sources of funds will
be adequate for purposes of meeting its short- and long-term liquid-
ity 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 provide the Company with financing will depend upon a
number of factors, such as the Company’s compliance with the terms
of its existing credit arrangements, the Company’s financial perfor-
mance, 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
capital commitments and the relative attractiveness of alternative
investment or lending opportunities.

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.

Total

Less Than
1 Year

Principal Payments Due By Period(1)
4–5
Years

2–3
Years

(In thousands)

6–10
Years

After 10
Years

Long-Term Debt Obligations:
Secured revolving credit facilities
Unsecured revolving credit facilities
Secured term loans
iStar Asset Receivables secured notes(2)
Unsecured notes
Other debt obligations
Total
Operating Lease Obligations(3):
Total

$ 696,591
130,000
808,128
1,311,314
1,185,000
34,148
4,165,181
16,067
$4,181,248

–
130,000
60,000
40,010
–
34,148
264,158
2,879
$267,037

$386,227
–
273,805
235,808
50,000
–
945,840
5,878
$951,718

$ 310,364
–
185,852
–
535,000
–
1,031,216
4,761
$1,035,977

–
–
236,847
1,035,496
500,000
–
1,772,343
2,549
$1,774,892

–
–
51,624
–
100,000
–
151,624
–
$151,624

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

Explanatory Notes:
(1)
(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 capacity of $2.4 billion,
of which $696.6 million was drawn as of December 31, 2003 (see
Note 7 to the Company’s Consolidated Financial Statements).
Availability under these facilities is based on collateral provided under
a borrowing base calculation. At December 31, 2003, the Company
also had an unsecured credit facility totaling $300.0 million which bears
interest at LIBOR+2.125% per annum and matures in July 2004. At
December 31, 2003, the Company had drawn $130.0 million under
this facility.

Unencumbered Assets/Unsecured Debt – The Company has
made and will continue to make progress in migrating its balance
sheet towards more unsecured debt, which results in a corresponding
reduction of secured debt and an increase in unencumbered assets.
The exact timing in which the Company will issue or borrow unse-
cured debt will be subject to market conditions. The following table
shows the ratio of unencumbered assets to unsecured debt at
December 31, 2003 and 2002 (in thousands):

As of December 31,

Total Unencumbered Assets
Total Unsecured Debt(1)
Unencumbered Assets/Unsecured Debt(2)

2003

2002
$2,167,388 $1,366,909
$1,315,000
$625,000
165%
219%

Explanatory Notes:
(1)

See Note 7 to the Company’s Consolidated Financial Statements for a more detailed
description of the Company’s unsecured debt.

(2) At December 31, 2003, the Company had assets with an aggregate book value of
$346.6 million pledged as collateral to its secured revolving credit facilities for
which there were no amounts drawn. If these assets had been released from the
credit facilities, unencumbered assets/unsecured debt would have been 191% at
December 31, 2003.

Capital Markets Financings – The Company was an active
issuer in the capital markets in 2003 and the beginning of 2004. The
continued strength of the Company’s stock price and the low interest
rate environment provided the Company with the opportunity to
issue equity and debt securities on attractive pricing terms. In 2003
and through March 15, 2004, the Company issued $1,285.0 million
aggregate principal amount of fixed-rate Senior Notes bearing inter-
est at annual rates ranging from 4.875% to 7.00% and maturing
between 2008 and 2014 and $175.0 million aggregate principal
amount of floating-rate Senior Notes bearing interest at annual rates
of three-month LIBOR+1.25% and maturing in 2007. The Company
issued 21.1 million shares of preferred stock in five series with cumu-
lative annual dividend rates ranging from 7.50% to 7.875%. All of the
shares of preferred stock have a liquidation preference of $25.00 per
share. The Company also issued 5.0 million shares of Common Stock
in 2003 at a price to the public of $38.50 per share.

The Company primarily used the proceeds from the
issuances of securities described above to repay secured indebted-
ness as it migrates its balance sheet towards more unsecured debt
and to refinance higher yielding obligations. In 2003 and January 2004,
the Company retired all of its 4.0 million shares of 9.50% Series A

Cumulative Redeemable Preferred Stock, its 3.3 million shares of
Series H Variable Rate Cumulative Redeemable Preferred Stock and
the 6.75% Dealer Remarketable Securities of its Leasing Subsidiary.
The Company called for redemption all of its 2.0 million shares of
9.375% Series B Cumulative Redeemable Preferred Stock and all of
its 1.3 million shares of 9.20% Series C Cumulative Redeemable
Preferred Stock.

On November 14, 2002, the Company completed an
underwritten public offering of 8.0 million primary shares of the
Company’s Common Stock. The Company received approximately
$202.9 million from the offering and used these proceeds to repay a
portion of its secured debt.

On August 9, 2001, the Company issued $350.0 million of
8.75% Senior Notes due in 2008. The Notes are unsecured senior obli-
gations of the Company. The Company used the net proceeds to par-
tially repay outstanding borrowings under its secured credit facilities.

Other Financing Activities – Subsequent to year-end, on
January 13, 2004, the Company closed $200.0 million of term
financing with a leading financial institution that is secured by certain
corporate bond investments and other lending securities. A number
of these investments were previously financed under existing credit
facilities. The new facility bears interest at LIBOR+1.05% – 1.50%
and has a final maturity date of January 2006.

On November 4, 2003, one of the Company’s $500.0 mil-
lion secured facilities was amended to include subordinate and mez-
zanine lending investments as collateral at stated interest rates of
LIBOR+2.15% – 2.25%.

On October 31, 2003, the Company’s $50.0 million term

loan bearing interest at LIBOR+0.60% matured and was repaid.

On September 29, 2003, the Company closed a
$135.0 million term loan secured by a CTL asset it acquired the same
day. The loan has a five-year term and bears interest at LIBOR+1.75%.
On July 24, 2003, the Company closed a $48.0 million term
loan secured by a corporate lending investment it originated in the third
quarter of 2003. The loan has a three-year primary term and two one-
year extension options, and bears interest at LIBOR+2.125%.

On May 21, 2003, a wholly-owned subsidiary of the
Company issued iStar Asset Receivables (‘‘STARs’’), Series 2003-1,
the Company’s proprietary match funding program, consisting of
$645.8 million of investment-grade bonds secured by the subsidiary’s
structured finance and CTL assets, which had an aggregate carrying
value of approximately $738.1 million 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+0.47% 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 May 14, 2003, the Company extended the maturity on

its $300.0 million unsecured facility to July 2004.

49.

On May 8, 2003, the Company extended the maturity on

its $60.0 million term loan to June 2004.

On April 9, 2003, the Company repaid the existing term
loan financing a $75.0 million term preferred investment in a publicly-
traded real estate company and simultaneously entered into another
$50.0 million term loan with a leading financial institution. The new
term loan bears interest at LIBOR+0.60% and has a final maturity
date of October 2003 with amortization payments in July 2003 and
October 2003.

On January 27, 2003, the Company extended the maturity
on one of its $700.0 million secured facilities to January 2007, which
includes a one-year ‘‘term-out’’ at the Company’s option.

On December 11, 2002, the Company closed a $61.5 mil-
lion term loan financing with a leading financial institution. The pro-
ceeds 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.

On September 30, 2002, the Company closed a
$500.0 million secured revolving credit facility with a leading financial
institution. The 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 facility accepts a broad range of struc-
tured finance and corporate tenant assets and has a final maturity
date of September 2005.

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 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 CTL
assets, which had an aggregate outstanding carrying value of approxi-
mately $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 aver-
age interest rate on the bonds, on an all-floating rate basis, is approxi-
mately 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 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.

extension at the lenders’ option. This facility replaces two prior credit
facilities maturing in 2002 and 2003, and bears interest at
LIBOR+2.125%. On May 14, 2003, the Company extended the
maturity of this facility to July 2004.

On July 6, 2001, the Company financed a $75.0 million
structured finance asset with a $50.0 million term loan bearing inter-
est 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 company. 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 April 9, 2003,
the Company repaid this term loan and simultaneously entered into
another $50.0 million term loan bearing interest at LIBOR+0.60%
and with a final maturity of October 2003.

On June 14, 2001, the Company closed $193.0 million of
term loan financing secured by 15 CTL 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 May 15, 2001, the Company repaid its $100.0 million
7.30% unsecured notes. These notes were senior unsecured obliga-
tions of the Leasing Subsidiary and ranked equally with the Leasing
Subsidiary’s other senior unsecured and unsubordinated indebtedness.
On February 22, 2001, the Company extended the matu-
rity 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 January 11, 2001, the Company closed a $700.0 million
secured revolving credit facility which is led by a major commercial
bank. The 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. This
facility accepts a broad range of structured finance assets and has a
final maturity of January 2005. On January 27, 2003, the Company
extended the final maturity on this facility to January 2007.

Hedging Activities – The Company has variable-rate lending
assets and variable-rate debt obligations. These assets and liabilities cre-
ate 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 obliga-
tions. When the amount of the Company’s variable-rate debt obligations
exceeds the amount of its variable-rate lending assets, the Company uti-
lizes 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 obli-
gations 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 enters 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 instru-
ments 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 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, 2003. The net

value (liability) associated with these hedges is reflected on the Company’s Consolidated Balance Sheets (in thousands):

Type of Hedge

Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
LIBOR Cap
LIBOR Cap
LIBOR Cap
LIBOR Cap
Total Estimated Value

Notional
Amount
$125,000
125,000
75,000
200,000
100,000
100,000
50,000
50,000
345,000
135,000
75,000
35,000

Strike
Price or
Swap Rate
2.885%
2.838%
5.580%
4.381%
4.345%
3.878%
3.810%
4.290%
8.000%
6.000%
7.750%
7.750%

Trade
Date
1/23/03
2/11/03
11/4/99(1)
12/17/03
12/17/03
11/27/02
11/27/02
12/17/03
5/22/02
9/29/03
11/4/99(1)
11/4/99(1)

Maturity
Date
6/25/06
6/25/06
12/1/04
12/15/10
12/15/10
8/15/08
8/15/08
12/15/10
5/28/14
10/15/06
12/1/04
12/1/04

Estimated
Value at
December 31,
2003

$ (1,632)
(1,486)
(3,227)
(1,472)
(958)

2,681
1,183

(649)

11,648
418
–
–
$ 6,506

Explanatory Note:
(1)

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

Between January 1, 2002 and December 31, 2003, the Company also had outstanding the following cash flow hedges that have

expired or been settled (in thousands):

Type of Hedge

Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap

Notional
Amount
$125,000
125,000
100,000
100,000

Strike
Price or
Swap Rate
7.058%
7.055%
4.139%
4.643%

Trade
Date
6/15/00
6/15/00
9/29/03
9/29/03

Maturity
Date
6/25/03
6/25/03
1/2/11
1/2/14

These two swaps were settled in connection with the Company’s
issuance of $350.0 million of seven-year Senior Notes and
$150.0 million of 10-year Senior Notes. In addition, effective in
September 2003, the Company entered into a $135.0 million cap
with a rate of 6.00% to hedge the Company’s current outstanding
floating-rate debt. This cap has a three-year term. Further, the

51.

Company entered into two $125.0 million forward starting swaps.
These pay-fixed swaps were effective in June 2003 and replaced the
two $125.0 million pay-fixed swaps mentioned above. The two new
pay-fixed swaps have a three-year term and expire on June 25, 2006.
In addition, in connection with a portion of the Company’s
fixed-rate corporate bonds, the Company entered into three pay-
floating interest rate swaps in December 2003 struck at 4.381%,
4.345% and 4.29% with notional amounts of $200.0 million,
$100.0 million and $50.0 million, respectively, and maturing on
December 15, 2010, and entered into two pay-floating interest rate
swaps in November 2002 struck at 3.8775% and 3.81% with
notional amounts of $100.0 million and $50.0 million, respectively,
and maturing on August 15, 2008. The Company pays six-month
LIBOR on the swaps entered into in December 2003 and one-month
LIBOR on the swaps entered into in November 2002 and receives the
stated fixed rate in return. These swaps mitigate the risk of changes
in the fair value of $350.0 million of seven-year Senior Notes and
$150.0 million of 10-year Senior Notes 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’’ on 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.

In connection with STARs, Series 2003-1 in May 2003,
the Company entered into a LIBOR interest rate cap struck at 6.95%
in the notional amount of $270.6 million, and simultaneously sold a
LIBOR interest rate cap with the same terms. Since these instruments
do not change the Company’s net interest rate risk exposure, they do
not qualify as hedges and changes in their respective values are
charged to earnings. As the terms of these arrangements are sub-
stantially the same, the effects of a revaluation of these two instru-
ments substantially offset one another.

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 upfront fees paid on option-based prod-
ucts such as caps should be expensed into earnings based on the allo-
cation 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 this interest rate cap. Using the ‘‘caplet’’ method-
ology discussed above, amortization of the cap premium is depend-
ent upon the actual value of the caplets at inception.

amortizes over an approximately 22-year schedule. The term loan
represented forecasted transactions for which the Company had pre-
viously 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 term loan over its effective ten-year term.

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 arrange-
ments for liquidity. As of December 31, 2003, the Company had
investments in three CTL joint ventures accounted for under the
equity method, which had total debt obligations outstanding of
approximately $175.3 million. The Company’s pro rata share of the
ventures’ third-party debt was approximately $76.7 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 CTL 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, 2003, 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’s STARs securitizations are all on-balance

sheet financings.

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, 2003, the Company had 18 loans with unfunded
commitments totaling $208.6 million, of which $80.2 million was
discretionary and $128.4 million was non-discretionary.

Ratings Triggers – On July 27, 2001, the Company com-
pleted a $300.0 million unsecured revolving credit facility with a
group of leading financial institutions. The facility has an initial matu-
rity of July 2003 with a one-year extension at the Company’s option
and another one-year extension at the lenders’ option. On May 14,
2003, the Company extended the final maturity to July 2004. This
facility replaces two prior credit facilities maturing in 2002 and 2003,
and bears interest at LIBOR+2.125% per annum 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% per annum. 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% per

annum. 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, 2003,
$130.0 million was outstanding on this facility. Accordingly, manage-
ment 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.

On July 30, 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 ‘‘posi-
tive.’’ On October 22, 2003, Moody’s confirmed its rating of Ba1 and
its ratings outlook of ‘‘positive’’ for the Company. On November 20,
2003, S&P also reaffirmed its rating of BB+ and its ratings outlook of
‘‘positive’’ for the Company.

Transactions with Related Parties – The Company has an invest-
ment 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 stock and a 95.00%
economic interest in iStar Operating. The common shareholder, an
entity controlled by a former director of the Company, is the owner
of all the voting common stock and a 5.00% economic interest in
iStar Operating. As of December 31, 2003, 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.

iStar Operating has elected to be treated as a taxable REIT
subsidiary for purposes of maintaining compliance with the REIT pro-
visions of the Code and prior to July 1, 2003 was accounted for
under the equity method for financial statement reporting purposes
and was presented in ‘‘Investments in and advances to joint ventures
and unconsolidated subsidiaries’’ on the Company’s Consolidated
Balance Sheets. As of July 1, 2003, the Company consolidates this
entity as a VIE (see Note 3 to the Company’s Consolidated Financial
Statements) with no material impact. Prior to its consolidation, the
Company charged an allocated 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.
These general overhead expenses were in addition to the direct gen-
eral and administrative costs of iStar Operating. As of December 31,
2003, iStar Operating had no debt obligations.

In addition, the Company had an investment in TriNet
Management Operating Company, Inc. (‘‘TMOC’’), an entity originally
formed to make a $2.0 million investment in the convertible 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. Prior to March 29, 2003, the
Company owned 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 owners of the remaining TMOC
stock were two executives of the Company. On March 29, 2003, the
Company purchased the remaining 5.00% interest from the execu-
tives for approximately $2,000, an amount that was equal to the
carrying value, which was less than their original investment.
Following this purchase, the Company owned 100.00% of TMOC and
therefore consolidated the entity for accounting purposes. On
June 30, 2003, the $2.0 million investment was fully repaid and prior
to December 31, 2003, the entity was liquidated.

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 con-
tingent 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. The total rate of return
(share price appreciation plus the reinvestment of dividends at mar-
ket price on the date of distribution) from December 31, 2000
through December 31, 2003 was 155.10%. Contingently vested
units will become fully vested, meaning that they are no longer sub-
ject to forfeiture, if the executive remains employed through
March 30, 2004, or earlier upon certain change of control and termi-
nation events. When and if contingently vested phantom units
become fully vested units, the Company must deliver to the execu-
tive 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 mar-
ket 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 pay-
ment to the executive. See ‘‘Critical Accounting Policies – Executive
Compensation’’ below for a discussion of the accounting treatment
applicable to the compensation awarded to the Chief Executive
Officer under this agreement.

As more fully described in Note 10 to the Company’s
Consolidated Financial Statements certain affiliates of SOF IV and the
Company’s Executive Officer have agreed to reimburse the Company
for the value of restricted shares awarded to the former President in
excess of 350,000 shares.

DRIP/Stock Purchase Plan – 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 rein-
vesting 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

53.

$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 months
ended December 31, 2003 and 2002, the Company issued a total of
approximately 2.6 million and 1.6 million shares of its Common Stock,
respectively, through the direct stock purchase component of the
plan. Net proceeds during the 12 months ended December 31, 2003
and 2002 were approximately $89.1 million and $44.4 million,
respectively. There are approximately 3.6 million shares available for
issuance under the plan as of December 31, 2003.

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 mil-
lion 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, 2003, the Company had repurchased a
total of approximately 2.3 million shares at an aggregate cost of
approximately $40.7 million. The Company has not repurchased any
shares under the stock repurchase program since November 2000.

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 assump-
tions 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 2003, man-
agement 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 CTL

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 CTL 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 pro-
visions 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 expe-
rience, 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.

Allowance for Doubtful Accounts – The Company’s accounting
policy requires a reserve on the Company’s accrued operating lease
income receivable balances and on the deferred operating lease
income receivable balances. The reserve covers asset specific prob-
lems (e.g., bankruptcy) as they arise, as well as, a portfolio reserve
based on management’s evaluation of the credit risks associated with
these receivables.

Impairment of Long-Lived Assets – CTL 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 circum-
stances indicate that the carrying amount of the assets may not be
recoverable. In management’s opinion, based on this analysis, CTL
assets to be held and used are not carried at amounts in excess of
their estimated recoverable amounts.

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
(losses)’’ on the Company’s Consolidated Balance Sheets. Realized
effects on the Company’s cash flows are generally recognized cur-
rently in income.

However, when appropriate the Company enters 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
not reflect provisions for current or deferred income taxes. Manage-
ment 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 compensa-
tion 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 on a prospective basis,
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 account-
ing effects.

During 2001, the Company entered into three-year
employment agreements with its Chief Executive Officer and its for-
mer President. In addition, during 2002 the Company entered into a
three-year employment agreement with its 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, 2003,
2.0 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 2.0 million shares will not
become fully vested until March 30, 2004. Assuming that the market
price of the Common Stock on March 30, 2004 is $38.90 (which
was the market price of the Common Stock on December 31, 2003),
the Company would incur a one-time charge to earnings at that time
of approximately $77.8 million (the fair market value of the 2.0 mil-
lion shares at $38.90 per share) subject to the availability of 2.0 mil-
lion shares under the Company’s 1996 Long-Term Incentive Plan.

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.

New CEO Employment Agreement – The March 2001 employ-
ment agreement with the Company’s Chief Executive Officer expires
on March 30, 2004. Subsequent to December 31, 2003, the
Company entered into a new employment agreement with its Chief
Executive Officer which will take effect upon the expiration of the old
agreement. The new agreement has an initial term of three years and
provides for the following compensation:
• an annual salary of $1.0 million;
• a potential annual cash incentive award of up to $5.0 million if per-
formance goals set by the Compensation Committee of the Board
of Directors in consultation with the Chief Executive Officer are
met; and

• a one-time award of Common Stock with a value of $10.0 million
at March 31, 2004 (based upon the trailing 20-day average clos-
ing price of the Common Stock); the award will be fully vested
when granted and dividends will be paid on the shares from the
date of grant, but the shares cannot be sold for five years unless
the price of the Common Stock during the 12 months ending
March 31 of each year increases by at least 15.00%, in which case
the sale restrictions on 25.00% of the shares awarded will lapse in
respect of each 12-month period.

In addition, the Chief Executive Officer will purchase an
80.00% interest in the Company’s 2006 High Performance Unit
Program for directors and executive officers. This performance pro-
gram was approved by the Company’s shareholders in 2003 and is
described in detail in the Company’s 2003 annual proxy statement.
The purchase price to be paid by the Chief Executive Officer will be
based upon a valuation prepared by an independent investment
banking firm. The interests purchased by the Chief Executive Officer
will only have nominal value to him unless the Company achieves total
shareholder returns in excess of those achieved by peer group
indices, all as more fully described in the Company’s 2003 annual
proxy statement.

New Accounting Standards

In December 2003, the SEC issued Staff Accounting
Bulletin No. 104 (‘‘SAB 104’’), ‘‘Revenue Recognition’’ which
supercedes SAB 101, ‘‘Revenue Recognition in Financial Statements.’’
SAB 104’s primary purpose is to rescind the accounting guidance
contained in SAB 101 related to multiple element revenue arrange-
ments, superceded as a result of the issuance of EITF 00-21. The
Company adopted the provisions of this statement immediately, as

55.

required, and it did not have a significant impact on the Company’s
Consolidated Financial Statements.

EITF 00-21, ‘‘Accounting for Revenue Arrangements with
Multiple Deliverables,’’ issued during the third quarter of 2003, pro-
vides guidance on revenue recognition for revenues derived from
a single contract that contain multiple products or services.
EITF 00-21 also provides additional requirements to determine when
these revenues may be recorded separately for accounting purposes.
The Company adopted EITF 00-21 on July 1, 2003, as required, and
it did not have a significant impact on the Company’s Consolidated
Financial Statements.

In May 2003, the FASB issued Statement of Financial
Accounting Standards No. 150 (‘‘SFAS No. 150’’), ‘‘Accounting for
Certain Financial Instruments With Characteristics of Both Liabilities
and Equity.’’ This standard requires issuers to classify as liabilities the
following three types of freestanding financial instruments: (1) manda-
torily redeemable financial instruments, (2) obligations to repurchase
the issuer’s equity shares by transferring assets; and (3) certain obliga-
tions to issue a variable number of shares. The FASB recently issued
FASB Staff Position (‘‘FSP’’) 150-3, which defers the provisions of
paragraphs 9 and 10 of SFAS No. 150 indefinitely as they apply to
mandatorily redeemable noncontrolling interests associated with finite-
lived entities. The Company adopted the provisions of this statement,
as required, on July 1, 2003, and it did not have a significant financial
impact 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
took effect immediately and were required for all financial state-
ments initially issued or modified after January 31, 2003. Immediate
consolidation is required for VIEs entered into or modified after
February 1, 2003 in which the Company is deemed the primary
beneficiary. For VIEs which the Company entered into prior to
February 1, 2003 the FASB recently issued FSP to defer FIN 46 for
those older entities to the reporting period ending after March 15,
2004. The adoption of the additional consolidation provisions of
FIN 46 is not expected to have a material impact on the Company’s
Consolidated Financial Statements.

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 amend-
ment 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 com-
pensation. 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 dis-
closure requirements of SFAS No. 123 to require prominent disclo-
sures 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 Company adopted SFAS
No. 148 with retroactive application to grants made subsequent to
January 1, 2002 with no material effect 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 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 (e.g., a premium). The 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 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.

of debt” in income from continuing operations on the Company’s
Consolidated Statements of Operations.

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 cap-
ital lease; and (2) termination benefits received by employees invol-
untarily terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an indi-
vidual deferred-compensation contract. The Company adopted the
provisions of SFAS 146 on December 31, 2002, as required, and it
did not have a material effect on the Company’s Consolidated
Financial Statements.

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 classi-
fying 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 opera-
tions, 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 adopted the pro-
visions of this statement, as required, on January 1, 2003. For the
years ended December 31, 2002 and 2001, the Company reclassified
$12.2 million and $1.6 million, respectively from “Extraordinary loss
from early extinguishment of debt” into “Loss on early extinguishment

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 pro-
vides 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 CTL assets and prior period results of such operations be pre-
sented in discontinued operations in the Company’s Consolidated
Statements of Operations. The provisions of SFAS No. 144 are effec-
tive 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 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 combina-
tions 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 for trans-
actions initiated after June 30, 2001, as required, and the adoption
did not have a significant impact on the Company.

In July 2001, the SEC released Staff Accounting Bulletin
No. 102 (“SAB 102”), “Selec ted Loan Loss Allowance and
Documentation Issues.” SAB 102 summarizes certain of the SEC’s
views on the development, documentation and application of a sys-
tematic methodology for determining allowances for loan and lease
losses. Adoption of SAB 102 by the Company did not have a signifi-
cant 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.

57.

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. Consis-
tent 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 prima-
rily financed by variable-rate liabilities and fixed-rate assets be pri-
marily 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 prepay-
ments 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 environ-
ment 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 con-
trol 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 upfront payment to the counterparty and the counterparty agrees
to make payments to the Company in the future should the reference
rate (typically one- or three-month LIBOR) rise above (cap agree-
ments) 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 provi-
sions of SFAS No. 133 with respect to such instruments. SFAS No. 133
provides that the upfront fees paid on option-based products such as
caps be expensed into earnings based on the allocation of the pre-
mium 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 gen-
eral, 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 enters into “pay floating” swaps involving
the exchange of fixed-rate interest payments from the counterparty
for variable-rate interest payments from the Company, which miti-
gates 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 settle-
ment if interest rates rise and pay cash if interest rates fall. The
effects of such receipts or payments would be deferred and amor-
tized 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 derivative instruments 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 chang-
ing 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 obliga-
tions. 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.

The following table quantifies the potential changes in net
investment income and net fair value of financial instruments should
interest rates increase or decrease 25, 50, 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, 2003), less related interest expense and operating
costs on CTL assets, for the year ended December 31, 2003. 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 gener-
ated from interest-earning assets, less cash out-flows in respect of
interest-bearing liabilities as of December 31, 2003. The cash flows
associated with the Company’s assets are calculated based on man-
agement’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 pre-
payment 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 1.12% as of December 31, 2003. Actual
results could differ significantly from those estimated in the table.

Change in Interest Rates

–50 Basis Points
–25 Basis Points
Base Interest Rate
+100 Basis Points
+200 Basis Points

Estimated Percentage Change In

Net Investment

Income(1)
2.37%
1.19%
0.00%
(3.81)%
(5.52)%

Net Fair Value
of Financial
Instruments(2)
2.53%
1.23%
0.00%
(1.58)%
7.43%

Explanatory Notes:
(1) At December 31, 2003, the pro forma estimated percentage changes in net investment
income for a decrease of 25 and 50 basis points and an increase of 100 and 200
basis points, giving effect to the $635.0 million pay-fixed swaps entered into in
March 2004, are 0.74%, 1.48%, (2.03)% and (1.97)%, respectively (see Note 17 to the
Company’s Consolidated Financial Statements).

(2) Amounts exclude fair values of non-financial investments, primarily CTL assets

and certain forms of corporate finance investments.

59.

report of independent auditors

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

In our opinion, the accompanying consolidated balance
sheets and the related consolidated statements of operations, of
changes in shareholders’ equity and of cash flows present fairly, in all
material respects, the financial position of iStar Financial Inc. and its
subsidiaries (the “Company”) at December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the
Company’s management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our
audits 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 man-
agement, 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 20, 2004, except for Note 17, which is as of March 12, 2004

consolidated balance sheets

As of December 31,

Assets
Loans and other lending investments, net
Corporate tenant lease assets, net
Investments in and advances to joint ventures and unconsolidated subsidiaries
Assets held for sale
Cash and cash equivalents
Restricted cash
Accrued interest and operating lease income receivable
Deferred operating lease income receivable
Deferred expenses and other assets

Total assets

Liabilities and Shareholders’ Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities
Dividends payable
Debt obligations

Total liabilities
Commitments and contingencies
Minority interest in consolidated entities
Shareholders’ equity:
Series A Preferred Stock, $0.001 par value, liquidation preference $50.00 per share, 0 and

4,400 shares issued and outstanding at December 31, 2003 and 2002, respectively

Series B Preferred Stock, $0.001 par value, liquidation preference $25.00 per share,

2,000 shares issued and outstanding at December 31, 2003 and 2002

Series C Preferred Stock, $0.001 par value, liquidation preference $25.00 per share,

1,300 shares issued and outstanding at December 31, 2003 and 2002

Series D Preferred Stock, $0.001 par value, liquidation preference $25.00 per share,

4,000 shares issued and outstanding at December 31, 2003 and 2002

Series E Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,600 and

0 shares issued and outstanding at December 31, 2003 and 2002, respectively

Series F Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 and

0 shares issued and outstanding at December 31, 2003 and 2002, respectively

Series G Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 3,200 and

0 shares issued and outstanding at December 31, 2003 and 2002, respectively

High Performance Units
Common Stock, $0.001 par value, 200,000 shares authorized, 107,215 and 98,114 shares issued

and outstanding at December 31, 2003 and 2002, respectively

Warrants and options
Additional paid-in capital
Retained earnings (deficit)
Accumulated other comprehensive income (losses) (See Note 12)
Treasury stock (at cost)

Total shareholders’ equity
Total liabilities and shareholders’ equity

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

61.

2003

2002
(In thousands, except per share data)

$3,702,674
2,535,885
25,019
24,800
80,090
57,665
26,076
51,447
156,934
$6,660,590

$ 126,524
–
4,113,732
4,240,256
–
5,106

$3,050,342
2,291,805
30,611
28,501
15,934
40,211
26,804
36,739
90,750
$5,611,697

$ 117,001
5,225
3,461,590
3,583,816
–
2,581

–

3
5,131

–
1,359

107
20,695
2,678,772
(242,449)
1,008
(48,056)
2,415,228
$6,660,590

98
20,322
2,281,636
(227,769)
(2,301)
(48,056)
2,025,300
$5,611,697

consolidated statements of operations

For the Year Ended December 31,

Revenue:
Interest income
Operating lease income
Other income

Total revenue

Costs and Expenses:
Interest expense
Operating costs – corporate tenant lease assets
Depreciation and amortization
General and administrative
General and administrative – stock-based compensation expense
Provision for loan losses
Loss on early extinguishment of debt

Total costs and expenses

Net income before equity in (loss) earnings from joint ventures and

unconsolidated subsidiaries, minority interest and other items

Equity in (loss) earnings from joint ventures and unconsolidated subsidiaries
Minority interest in consolidated entities
Cumulative effect of change in accounting principle (See Note 3)
Net income from continuing operations
Income from discontinued operations
Gain from discontinued operations
Net income
Preferred dividend requirements
Net income allocable to common shareholders and HPU holders(1)
Basic earnings per common share(2)
Diluted earnings per common share(2)(3)

2003

2002*
(In thousands, except per share data)

2001*

$304,394
265,478
36,677
606,549

194,999
17,371
55,286
38,153
3,633
7,500
–
316,942

289,607
(4,284)
(249)
–
285,074
1,916
5,167
292,157
(36,908)
$255,249
2.52
$
2.43
$

$255,631
236,643
27,993
520,267

185,375
13,202
46,948
30,449
17,998
8,250
12,166
314,388

205,879
1,222
(162)
–
206,939
7,614
717
215,270
(36,908)
$178,362
1.98
$
1.93
$

$254,119
179,279
31,000
464,398

169,974
12,029
34,573
24,151
3,574
7,000
1,620
252,921

211,477
7,361
(218)
(282)
218,338
10,429
1,145
229,912
(36,908)
$193,004
2.24
$
2.19
$

*Reclassified to conform to 2003 presentation. The accompanying notes are an integral part of the financial statements.
Explanatory Notes:
(1) HPU holders are Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program.
(2) For the 12 months ended December 31, 2003, net income used to calculate earnings per basic and diluted common share excludes $2,066 and $1,994 of net income allocable to

HPU holders, respectively.
For the 12 months ended December 31, 2003, net income used to calculate earnings per diluted common share includes joint venture income of $167.

(3)

consolidated statements of cash flows

For the Year Ended December 31,

Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash flows provided by operating activities:

Minority interest in consolidated entities
Non-cash expense for stock-based compensation
Depreciation and amortization
Depreciation and amortization from discontinued operations
Amortization of deferred financing costs
Amortization of discounts/premiums, deferred interest and costs on lending investments
Discounts, loan fees and deferred interest received
Equity in earnings from joint ventures and unconsolidated subsidiaries
Distributions from operations of joint ventures
Loss on early extinguishment of debt
Cumulative effect of change in accounting principle
Deferred operating lease income receivable
Gain from discontinued operations
Provision for loan losses
Change in investments in and advances to joint ventures and unconsolidated subsidiaries
Changes in assets and liabilities:

(Increase) decrease in accrued interest and operating lease income receivable
(Increase) decrease in deferred expenses and other assets
Increase in accounts payable, accrued expenses and other liabilities
Cash flows provided by operating activities

Cash flows from investing activities:

New investment originations
Add-on fundings under existing loan commitments
Net proceeds from sale of corporate tenant lease assets
Net proceeds from discontinued operations
Repayments of and principal collections on loans and other lending investments
Investments in and advances to unconsolidated joint ventures
Distributions from unconsolidated joint ventures
Capital improvements for build-to-suit projects
Capital improvement projects on corporate tenant lease assets
Other capital expenditures on corporate tenant lease assets

Cash flows used in investing activities

Cash flows from financing activities:

Borrowings under secured revolving credit facilities
Repayments under secured revolving credit facilities
Borrowings under unsecured revolving credit facilities
Borrowings under term loans
Repayments under term loans
Borrowings under unsecured bond offerings
Repayments under unsecured notes
Borrowings under secured bond offerings
Repayments under secured bond offerings
Borrowings under other debt obligations
Repayments under other debt obligations
Contribution from minority interest partner
(Increase) decrease in restricted cash held in connection with debt obligations
Prepayment penalty on early extinguishment of debt
Payments for deferred financing costs
Distributions to minority interest in consolidated entities
Net proceeds from preferred offering/exchange
Common dividends paid(1)
Preferred dividends paid
Dividends on HPUs
HPUs issued
Purchase of treasury stock
Proceeds from equity offering
Contribution from significant shareholder
Proceeds from exercise of options and issuance of DRIP/stock purchase shares

Cash flows provided by financing activities

Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:

Cash paid during the period for interest, net of amount capitalized

2003

2002*
(In thousands)

2001*

$ 292,157

$ 215,270

$ 229,912

249
3,781
55,286
793
27,180
(54,799)
36,063
4,284
2,839
–
–
(15,366)
(5,167)
7,500
(2,877)

(647)
(20,690)
7,676
338,262

(2,086,890)
(46,164)
47,569
–
1,119,743
–
–
–
(3,487)
(5,125)
(974,354)

1,643,552
(2,220,715)
130,000
233,000
(107,723)
526,966
–
645,822
(210,876)
25,251
(7,064)
2,522
(17,454)
–
(35,609)
(159)
87,909
(267,785)
(36,713)
(2,144)
3,772
–
190,936
–
116,760
700,248
64,156
15,934
80,090

162
18,059
46,948
1,093
23,460
(33,086)
36,714
(1,222)
5,802
12,166
–
(15,265)
(717)
8,250
(6,598)

3,809
1,763
32,185
348,793

(1,812,993)
(21,619)
3,702
17,500
671,965
(127)
–
(1,064)
(2,277)
(4,157)
(1,149,070)

2,496,200
(2,122,994)
–
115,099
(18,279)
–
–
885,079
(475,679)
1,094
(1,668)
–
(22,359)
(3,950)
(45,702)
(231)
–
(231,257)
(36,578)
–
1,359
(6,981)
202,899
506
63,983
800,541
264
15,670
15,934

218
3,574
34,573
1,069
20,720
(41,067)
28,425
(7,361)
4,802
1,620
282
(10,923)
(1,145)
7,000
(2,568)

5,083
(519)
19,565
293,260

(924,455)
(99,626)
26,306
–
650,970
(1,601)
24,265
(14,266)
(6,629)
(4,489)
(349,525)

2,420,638
(2,285,892)
–
277,664
(120,333)
350,000
(100,000)
–
(125,962)
279
(56,008)
–
2,590
(1,037)
(30,382)
(3,794)
–
(264,527)
(36,578)
–
–
–
–
–
22,525
49,183
(7,082)
22,752
15,670

$ 165,757

$ 157,618

$ 141,271

* Reclassified to conform to 2003 presentation. The accompanying notes are an integral part of the financial statements.
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).

63.

consolidated statements of changes in shareholders’ equity

Series A
Preferred
Stock

Series B
Preferred
Stock

Series C
Preferred
Stock

Series D
Preferred
Stock

(In thousands)

Series E
Preferred
Stock

Series F
Preferred
Stock

Series G
Preferred
Stock

Balance at December 31, 2000
Exercise of options
Dividends declared – preferred
Dividends declared – common
Acquisition of ACRE Partners
Restricted stock units issued to employees in lieu

of cash bonuses

Restricted stock units granted to employees
Options granted to employees
Issuance of stock – DRIP plan
Net income for the period
Cumulative effect of change in accounting principle
Change in accumulated other comprehensive income
Balance at December 31, 2001
Exercise of options
Proceeds from equity offering
Dividends declared – preferred
Dividends declared – common
Restricted stock units granted to employees
Options granted to employees
High performance units sold to employees
Contributions from significant shareholder
Issuance of stock – DRIP plan
Purchase of treasury shares
Net income for the period
Change in accumulated other comprehensive income
Balance at December 31, 2002
Exercise of options
Net proceeds from preferred offering/exchange
Proceeds from equity offering
Dividends declared – preferred
Dividends declared – common
Dividends declared – HPUs
Restricted stock units granted to employees
Options granted to employees
High performance units sold to employees
Issuance of stock – DRIP/stock purchase plan
Net income for the period
Change in accumulated other

comprehensive income (losses)

Balance at December 31, 2003

$ 4
–
–
–
–

–
–
–
–
–
–
–
$ 4
–
–
–
–
–
–
–
–
–
–
–
–
$ 4
–
(4)
–
–
–
–
–
–
–
–
–

–
$ –

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

$2
–
–
–
–

–
–
–
–
–
–
–
$2
–
–
–
–
–
–
–
–
–
–
–
–
$2
–
–
–
–
–
–
–
–
–
–
–

–
$2

$1
–
–
–
–

–
–
–
–
–
–
–
$1
–
–
–
–
–
–
–
–
–
–
–
–
$1
–
–
–
–
–
–
–
–
–
–
–

–
$1

$4
–
–

–

–
–
–
–
–
–
–
$4
–
–
–
–
–
–
–
–
–
–
–
–
$4
–
–
–
–
–
–
–
–
–
–
–

–
$4

$–
–
–
–
–

–
–
–
–
–
–
–
$–
–
–
–
–
–
–
–
–
–
–
–
–
$–
–
6
–
–
–
–
–
–
–
–
–

–
$6

$–
–
–
–
–

–
–
–
–
–
–
–
$–
–
–
–
–
–
–
–
–
–
–
–
–
$–
–
4
–
–
–
–
–
–
–
–
–

–
$4

$–
–
–
–
–

–
–
–
–
–
–
–
$–
–
–
–
–
–
–
–
–
–
–
–
–
$–
–
3
–
–
–
–
–
–
–
–
–

–
$3

High
Performance
Units

Common Stock
at Par

Warrants
and Options

Additional
Paid-In
Capital

Retained
Earnings
(Deficit)

Accumulated
Other
Comprehensive
Income (Losses)

Treasury Stock

Total

(In thousands)

–
–
–
–
–

–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,359
–
–
–
–
–
$ 1,359
–
–
–
–
–
–
–
–
3,772
–
–

–
$5,131

$ 85
2
–
–
–

–
–
–
–
–
–
–
$ 87
2
8
–
–
–
–
–
–
1
–
–
–
$ 98
1
–
5
–
–
–
–
–
–
3
–

–
$107

$ 16,943
(835)
–
–
–

–
–
4,348
–
–
–
–
$ 20,456
(443)
–
–
–
–
309
–
–
–
–
–
–
$ 20,322
373
–
–
–
–
–
–
–
–
–
–

$ 1,966,396
22,550
330
–
1,219

1,478
1,250
–
4,708
–
–
–
$ 1,997,931
16,170
202,891
330
–
19,048
–
–
506
44,426
334
–
–
$ 2,281,636
27,754
87,900
190,931
195
–
–
1,339
82
–
88,935
–

$ (154,789)
–
(36,908)
(213,089)
–

–
–
–
–
229,912
–
–
$ (174,874)
–
–
(36,908)
(231,257)
–
–
–
–
–
–
215,270
–

$ (227,769)

–
–
–
(36,908)
(267,785)
(2,144)
–
–
–
–
292,157

(20)
–
–
–
–

$ (40,741)
–
–
–
–

$ 1,787,885
21,717
(36,578)
(213,089)
1,219

–
–
–
–
–
(9,445)
(5,627)
$(15,092)
–
–
–
–
–
–
–
–
–
–
–
12,791
$ (2,301)
–
–
–
–
–
–
–
–
–
–
–

–
–
–
–
–
–
–
$ (40,741)
–
–
–
–
–
–
–
–
–
(7,315)
–
–
$ (48,056)
–
–
–
–
–
–
–
–
–
–
–

1,478
1,250
4,348
4,708
229,912
(9,445)
(5,627)

$ 1,787,778
15,729
202,899
(36,578)
(231,257)
19,048
309
1,359
506
44,427
(6,981)
215,270
12,791
$ 2,025,300
28,128
87,909
190,936
(36,713)
(267,785)
(2,144)
1,339
82
3,772
88,938
292,157

–
$20,695

–
$2,678,772

–

$(242,449)

3,309
$ 1,008

–

3,309
$(48,056) $2,415,228

65.

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 custom-tailored financing to
private and corporate owners of real estate nationwide, including
senior and junior mortgage debt, senior, mezzanine and subordinated
corporate 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.
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, 2003, based on
gross carrying values, the Company’s structured finance assets
represented 25.97% 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 aver-
age. 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, 2003, based on gross carrying values, the
Company’s portfolio finance assets represented 15.49% 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 gener-
ally ranging from five to ten years. As of December 31, 2003,
based on gross carrying values, the Company’s corporate finance
assets represented 8.29% of its assets.

• Loan Acquisition. The Company acquires whole loans and loan partic-
ipations 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 mil-
lion to $100 million and are collateralized by all major property
types. The Company’s loan acquisition transactions have maturi-
ties generally ranging from three to ten years. As of December 31,
2003, based on gross carrying values, the Company’s loan acquisi-
tion assets represented 6.34% of its assets.

• Corporate Tenant Leasing. The Company provides capital to corpora-
tions and borrowers who control facilities leased to single credit-
worthy tenants. The Company’s net leased assets are generally
mission-critical headquarters or distribution facilities that are sub-
ject 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 mil-
lion. As of December 31, 2003, based on gross carrying values,
the Company’s CTL assets (including investments in and advances
to joint ventures and unconsolidated subsidiaries and assets held
for sale) represented 41.89% of its assets.

The Company’s investment strategy targets specific sec-
tors 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, corpo-
rate and lease financings where customers require flexible financial
solutions and “one-call” responsiveness post-closing.

• 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 borrow-
ers and corporate customers specific lending expertise, flexibility,
certainty and continuing relationships beyond the closing of a par-
ticular 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 con-
tributed 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 com-
pany, 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 conver-
sion 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.

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 accounted for under the
equity method (see Notes 5 and 6). All significant intercompany bal-
ances 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 loans
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 his-
torical cost. Items classified as available-for-sale are reported at fair
values with unrealized gains and losses included in ‘‘Accumu-
lated other comprehensive income (losses)’’ on the Company’s
Consolidated Balance Sheets and are not included in the Company’s
net income.

Corporate Tenant Lease Assets and Depreciation – CTL 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 remain-
ing life of the facility for facility improvements.

CTL 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 recover-
able. In management’s opinion, CTL assets to be held and used are not
carried at amounts in excess of their estimated recoverable amounts.
In accordance with the recent adoption of Statement of
Financial Accounting Standards No. 141 (‘‘SFAS No. 141’’), ‘‘Business
Combinations’’ regarding the Company’s acquisition of facilities, pur-
chase costs will be allocated to the tangible and intangible assets and
liabilities acquired based on their estimated fair values. The value of
the tangible assets, consisting of land, buildings and tenant improve-
ments, will be determined as if vacant, that is, at replacement cost.
Intangible assets including the above-market or below-market value
of leases, the value of in-place leases and the value of customer rela-
tionships will be recorded at their relative fair values.

Above-market and below-market in-place lease values for
owned CTL assets will be recorded based on the present value (using
a discount rate reflecting the risks associated with the leases
acquired) of the difference between: (1) contractual amounts to be
paid pursuant to the leases negotiated and in-place at the time of
acquisition of the facilities; and (2) management’s estimate of fair
market lease rates for the facility or equivalent facility, measured over
a period equal to the remaining non-cancelable term of the lease. The
capitalized above-market (or below-market) lease value will be
amortized as a reduction of (or, increase to) operating lease income
over the remaining non-cancelable term of each lease plus any
renewal periods with fixed rental terms that are considered to be
below-market.

The total amount of other intangible assets will be allocated
to in-place lease values and customer relationship intangible values
based on management’s evaluation of the specific characteristics of
each customer’s lease and the Company’s overall relationship with
each customer. Characteristics to be considered in allocating these
values include the nature and extent of the existing relationship with
the customer, prospects for developing new business with the cus-
tomer, the customer’s credit quality and the expectation of lease
renewals among other factors. Factors considered by management’s
analysis include the estimated carrying costs of the facility during a
hypothetical expected lease-up period, current market conditions
and costs to execute similar leases. Management will also consider
information obtained about a property in connection with its pre-
acquisition due diligence. Estimated carrying costs will include real
estate taxes, insurance, other property operating costs and estimates
of lost operating lease income at market rates during the hypothetical
expected lease-up periods, based on management’s assessment of
specific market conditions. Management will estimate costs to exe-
cute leases including commissions and legal costs to the extent that
such costs are not already incurred with a new lease that has been
negotiated in connection with the purchase of the facility. Manage-
ment’s estimates will be used to determine these values. These intangible

67.

assets are included in ‘‘Deferred expenses and other assets’’ on the
Company’s Consolidated Balance Sheets.

principal are ultimately collectible, based on the underlying collateral
and operations of the borrower.

The value of above-market or below-market in-place
leases will be amortized to expense over the remaining initial term of
each lease. The value of customer relationship intangibles will be
amortized to expense over the initial and renewal terms of the leases,
but no amortization period for intangible assets will exceed the
remaining depreciable life of the building. In the event that a cus-
tomer terminates its lease, the unamortized portion of each intangi-
ble, including market rate adjustments, lease origination costs,
in-place lease values and customer relationship values, would be
charged to expense.

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 ven-
tures accounted for under the equity method. No interest was capi-
talized during the 12 months ended December 31, 2003 and
approximately $70,000 was capitalized during the 12 months
ended December 31, 2002.

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.

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, acquisi-
tion 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 (losses)’’
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 characteris-
tics of such loans. These premiums or discounts are recognized as
yield adjustments over the lives of the related loans. 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 adjust-
ment. If loans with premiums, discounts, loan origination or exit fees
are prepaid, the Company immediately recognizes the unamortized
portion as a decrease or increase in the prepayment gain or loss.
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

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 poli-
cies 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. Manage-
ment considers a loan to be impaired when, based upon current infor-
mation 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 meas-
ures 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 repay-
ment of the 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 delin-
quent; (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 con-
sidered uncollectible and of such little value that further pursuit of
collection is not warranted. Management also provides a loan portfo-
lio 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 signifi-
cant rental real estate operations (e.g., an unsecured loan to a com-
pany 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 collat-
eral for the Company’s investments in all cases, the Company evalu-
ates 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.

Allowance for Doubtful Accounts – The Company has recently
developed an accounting policy that requires a reserve on the
Company’s accrued operating lease income receivable balances and
on the deferred operating lease income receivable balances. The
reserve covers asset specific problems (e.g., bankruptcy) as they
arise, as well as, a portfolio reserve based on management’s evalua-
tion of the credit risks associated with these receivables.

Accounting for Derivative Instruments and Hedging Activity – In
accordance with Statement of Financial Accounting Standards
No. 133 (‘‘SFAS No. 133’’), ‘‘Accounting for Derivative Instruments
and Hedging Activities’’ as amended by Statement of Financial
Accounting Standards No. 137, ‘‘Accounting for Derivative
Instruments and Hedging Activity – Deferral of the Effective Date of
FASB 133,’’ Statement of Financial Accounting Standards No. 138
‘‘Accounting for Certain Derivative Instruments and Certain Hedging
Activities – an Amendment of FASB Statement 133’’ and Statement
of Financial Accounting Standards No. 149, ‘‘Amendment of
Statement 133 on Derivative Instrument and Hedging Activities,’’ the
Company recognizes all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at
fair value. If certain conditions are met, a derivative may be specifi-
cally designated as: (1) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm com-
mitment; (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.

Upon adoption, on January 1, 2001, the Company recog-
nized a charge to net income of approximately $282,000 and an addi-
tional charge of $9.4 million to ‘‘Accumulated other comprehensive
income (losses),’’ on the Company’s Consolidated Balance Sheets rep-
resenting the cumulative effect of the change in accounting principle.
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 recog-
nized by the Company with respect to its interest in iStar Operating
and TMOC. Accordingly, except for the Company’s taxable sub-
sidiaries, no current or deferred taxes are provided for in the
Consolidated Financial Statements. Prior to December 31, 2003,
TMOC was liquidated. See Note 6 for a detailed discussion on the
ownership structure and operations of iStar Operating and TMOC.

Earnings per Common Share – In accordance with the Statement
of Financial Accounting Standards No. 128 (‘‘SFAS No. 128’’),
‘‘Earnings per Share,’’ 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 allocable 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 2003 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
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.

New Accounting Standards – In December 2003, the SEC
issued Staff Accounting Bulletin No. 104 (‘‘SAB 104’’), ‘‘Revenue
Recognition’’ which supercedes SAB 101, ‘‘Revenue Recognition in
Financial Statements.’’ SAB 104’s primary purpose is to rescind the
accounting guidance contained in SAB 101 related to multiple ele-
ment revenue arrangements, superceded as a result of the issuance
of EITF 00-21. The Company adopted the provisions of this
statement immediately, as required, and it did not have a significant
impact on the Company’s Consolidated Financial Statements.

69.

In May 2003, the FASB issued Statement of Financial
Accounting Standards No. 150 (‘‘SFAS No. 150’’), ‘‘Accounting for
Certain Financial Instruments With Characteristics of Both Liabilities
and Equity.’’ This standard requires issuers to classify as liabilities
the following three types of freestanding financial instruments:
(1) mandatorily redeemable financial instruments, (2) obligations to
repurchase the issuer’s equity shares by transferring assets; and
(3) certain obligations to issue a variable number of shares. The
FASB recently issued FASB Staff Position (‘‘FSP’’) 150-3, which
defers the provisions of paragraphs 9 and 10 of SFAS No. 150
indefinitely as they apply to mandatorily redeemable noncontrolling
interests associated with finite-lived entities. The Company adopted
the provisions of this statement, as required, on July 1, 2003, and
it did not have a significant financial impact 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
took effect immediately and were required for all financial statements
initially issued or modified after January 31, 2003. Immediate
consolidation is required for VIEs entered into or modified after
February 1, 2003 in which the Company is deemed the primary ben-
eficiary. For VIEs in which the Company entered into prior to
February 1, 2003, the FASB recently issued FSP to defer FIN 46 for
those older entities to the reporting period ending after March 15,
2004. The adoption of the additional consolidation provisions of
FIN 46 is not expected to have a material impact on the Company’s
Consolidated Financial Statements.

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 amend-
ment 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 account-
ing for stock-based employee compensation, description of transition
method utilized and the effect of the method used on reported results.
The Company adopted SFAS No. 148 with retroactive application to
grants made subsequent 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):

For the Years Ended December 31,

Net income allocable to common

shareholders and HPU
holders, as reported(1)

Total stock-based compensation
expense determined under
fair value-based method for
all awards, net of related
tax effects

Pro forma net income allocable
to common shareholders
and HPU holders

Earnings per share:
Basic – as reported(2)
Basic – pro forma(2)
Diluted – as reported(2)(3)
Diluted – pro forma(2)(3)

2003
Basic EPS

2002
Basic EPS

2001
Basic EPS

$255,249 $178,362 $193,004

(289)

(565)

(705)

$254,960 $177,797 $192,299

2.52 $
2.52
2.43 $
2.43

1.98 $
1.98
1.93 $
1.92

2.24
2.23
2.19
2.18

Explanatory Notes:
(1) HPU holders are Company employees who purchased high performance common

(2)

stock units under the Company’s High Performance Unit Program.
For the 12 months ended December 31, 2003, net income used to calculate earnings
per basic and diluted common share excludes $2,066 and $1,994 of net income
allocable to HPU holders, respectively.

(3) For the 12 months ended December 31, 2003, net income used to calculate earnings

per diluted common share includes joint venture income of $167.

In November 2002, the FASB issued FASB Interpretation
No. 45 (‘‘FIN 45’’), ‘‘Guarantor’s Accounting and Disclosure Require-
ments for Guarantees, Including Indirect Guarantees of Indebtedness
of Others,’’ an interpretation of 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 guar-
antee regardless if the Company receives separately identifiable con-
sideration (e.g., a premium). The disclosure requirements became
effective December 31, 2002. The adoption of FIN 45 did not have a
material impac t on the Company ’s Consolidated Financial
Statements, nor is it expected to have a material impact in the future.
In September 2002, the FASB issued Statement of
Financial Accounting Standards No. 147 (‘‘SFAS No. 147’’), ‘‘Acquisi-
tions 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 intan-
gible 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 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 cap-
ital lease; and (2) termination benefits received by employees invol-
untarily terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an indi-
vidual deferred-compensation contract. The Company adopted the
provisions of SFAS 146 on December 31, 2002, as required, and it
did not have a material effect on the Company’s Consolidated
Financial Statements.

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 classi-
fying 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 opera-
tions, 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 adopted the pro-
visions of this statement, as required, on January 1, 2003. For the
years ended December 31, 2002 and 2001, the Company reclassi-
fied $12.2 million and $1.6 million, respectively from ‘‘Extraordinary
loss from early extinguishment of debt’’ into ‘‘Loss on early extin-
guishment of debt’’ in income from continuing operations on the
Company’s Consolidated Statements of Operations.

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 pro-
vides 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 CTL assets and prior period results of such operations be pre-
sented in discontinued operations in the Company’s Consolidated
Statements of Operations. The provisions of SFAS No. 144 are effec-
tive 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 July 2001, the FASB issued SFAS No. 141 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 combina-
tions 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 provi-
sions of both statements for transactions initiated after June 30,
2001, as required, and the adoption 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 Documen-
tation 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.

71.

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 trans-
fers of assets and extinguishments of liabilities occurring after

June 30, 2001. The Company adopted the provisions of this state-
ment 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.

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):

Number
Principal
of Bor-
Balances
rowers
Property Type In Class Outstanding

Underlying

2002
41 $2,143,326 $2,106,791 $1,675,797

Carrying Value as of

Effective
December 31, December 31, Maturity
Dates
2004 Fixed: 7.03%
to 12.00%

to 2022

2003

Contractual
Interest
Payment

Rates(2)

Contractual
Interest
Accrual

Prin- Partici-
pation
cipal
Fea-
Amor-
Rates(2) tization
tures
Yes(4)
No

Type of
Investment
Senior
Office/Residential/
Mortgages(3) Retail/Industrial, R&D/
Conference Center/
Mixed Use/Hotel/
Entertainment,
Leisure/Other
Office/Residential/
Retail/Mixed Use/
Hotel

Subordinate
Mortgages

Corporate/
Partnership
Loans

Office/Residential/
Retail/Industrial, R&D/
Mixed Use/Hotel/
Entertainment,
Leisure/Other

Other Lending
Investments –
Loans

Office/Mixed Use/
Hotel/Other

Other Lending Residential/Industrial,
R&D/Hotel/
Investments –
Securities(6)
Entertainment,
Leisure/Other

551,634

550,572

629,486

740,529

710,469

441,028

26,096

23,767

23,167

364,050

344,511

310,114

+ 1.50%
to LIBOR
+ 6.50%
2004 Fixed: 7.00%
to 18.00%

to 2013

Fixed: 7.03%
to 12.00%
Variable: LIBOR Variable: LIBOR
+ 1.50%
to LIBOR
+ 6.50%
Fixed: 7.32%
to 18.00%
Variable: LIBOR Variable: LIBOR
+ 1.79%
to LIBOR
+ 7.47%
Fixed: 7.33%
to 17.50%
Variable: LIBOR Variable: LIBOR
+ 3.50%
to LIBOR
+ 12.77%
Fixed: 15.00%
to 17.50%
Variable: LIBOR Variable: LIBOR
+ 4.75%
Fixed: 6.75%
to 10.00%
Variable: LIBOR Variable: LIBOR
+ 2.82%
to LIBOR
+ 5.00%

+ 2.82%
to LIBOR
+ 5.00%

+ 1.79%
to LIBOR
+ 7.47%
2004 Fixed: 6.00%
to 15.00%

to 2013

+ 3.50%
to LIBOR
+ 12.77%
2004 Fixed: 10.00%
to 15.00%

to 2008

+ 4.75%
2005 Fixed: 6.75%
to 10.00%

to 2030

Yes(4)

Yes(5)

Yes(4)

Gross Carrying Value
Provision for Loan Losses
Total, Net

$3,736,110 $3,079,592
(29,250)
$3,702,674 $3,050,342

(33,436)

Explanatory Notes:
(1) Details are for loans outstanding as of December 31, 2003.
(2) Substantially all variable-rate loans are based on 30-day LIBOR and reprice monthly. The 30-day LIBOR on December 31, 2003 was 1.12%. As of December 31, 2003, five loans
with a combined carrying value of $95.9 million have a stated accrual rate that exceeds the stated pay rate, however, one of these loans, with a carrying value of $27.1 million,
has been placed on non-accrual status and the Company is only recognizing income based on cash received for interest.

(3) Includes a participation interest in a first mortgage.
(4) 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.
(5) Under some of the loans, the lender receives additional payments representing additional interest from participation in available cash flow from operations of the property.
(6) Generally consists of term preferred stock or debt interests that are specifically originated or structured to meet customer financing requirements and the Company’s invest-

ment criteria. These investments do not typically consist of securities purchased in the open market or as part of broadly-distributed offerings.

During the 12 months ended December 31, 2003 and
2002, respectively, the Company and its affiliated ventures originated
or acquired an aggregate of approximately $1,735.4 million and
$1,403.8 million in loans and other lending investments, funded
$46.1 million and $21.6 million under existing loan commitments, and
received principal repayments of $1,120.0 million and $672.0 million.
As of December 31, 2003, the Company had 18 loans
with unfunded commitments. The total unfunded commitment
amount was approximately $208.6 million, of which $80.2 million
was discretionary and $128.4 million was non-discretionary.

A portion of the Company’s loans and other lending invest-
ments are pledged as collateral under either the iStar Asset
Receivables secured notes, the secured revolving credit facilities or
secured term loans (see Note 7 for a description of the Company’s
secured and unsecured debt).

The Company has reflected provisions for loan losses of
approximately $7.5 million, $8.3 million and $7.0 million in its results
of operations during the years ended December 31, 2003, 2002 and
2001, respectively. These provisions represent loan portfolio
reserves based on management’s evaluation of general market con-
ditions, the Company’s internal risk management policies and credit
risk ratings system, industry loss experience, the likelihood of delin-
quencies or defaults and the credit quality of the underlying collateral.
During the 12 months ended December 31, 2003, the Company
took a $3.3 million direct impairment on a $30.4 million partnership
loan on a class A building located in Pittsburgh, Pennsylvania. In
August 2003 the borrower stopped making its debt service pay-
ments due to insufficient cash flow caused by vacancies at the prop-
erty. After taking the impairment charge and lowering the book value
of the asset to $27.1 million, management believes there is adequate
collateral to support the book value of the asset.

Changes in the Company’s provision for loan losses were

as follows:

Provision for loan losses, December 31, 2000
Additional provision for loan losses
Provision for loan losses, December 31, 2001
Additional provision for loan losses
Provision for loan losses, December 31, 2002
Additional provision for loan losses
Impairment on loans
Provision for loan losses, December 31, 2003

$14,000
7,000
21,000
8,250
29,250
7,500
(3,314)
$33,436

Note 5 – Corporate Tenant Lease Assets

During the 12 months ended December 31, 2003 and
2002, respectively, the Company acquired an aggregate of approxi-
mately $351.4 million and $409.1 million in CTL assets and disposed
of CTL assets for net proceeds of approximately $47.6 million and
$3.7 million.

The Company’s investments in CTL assets, at cost, were as

follows (in thousands):

Facilities and improvements
Land and land improvements
Direct financing lease
Less: accumulated depreciation

Corporate tenant lease assets, net

2003

December 31, December 31,
2002
$2,210,592 $1,959,309
428,365
32,640
(128,509)
$2,535,885 $2,291,805

468,708
35,472
(178,887)

The Company’s CTL assets are leased to customers with
initial term expiration dates from 2004 to 2023. Future operating
lease payments under non-cancelable leases, excluding customer
reimbursements of expenses, in effect at December 31, 2003, are
approximately as follows (in thousands):

Year

2004
2005
2006
2007
2008
Thereafter

Amount
$ 261,913
253,886
241,324
219,331
203,201
1,742,962

Under certain leases, the Company is entitled to receive
additional participating lease payments to the extent gross revenues
of the corporate tenant exceed a base amount. The Company earned
$0, $0 and $0.4 million of such additional participating lease pay-
ments on these leases in the 12 months ended December 31, 2003,
2002 and 2001, 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, 2003, 2002 and 2001 were approximately
$31.9 million, $29.7 million and $25.2 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 adja-
cent 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.

During the 12 months ended December 31, 2003, the
Company sold nine CTL assets for net proceeds of approximately
$47.6 million, and realized a gain of approximately $5.2 million.

As of December 31, 2003, there was one CTL asset with a
book value of $24.8 million classified as ‘‘Assets held for sale’’ on the
Company’s Consolidated Balance Sheets.

73.

The results of operations from CTL assets sold or held for
sale in the current and prior periods are classified in ‘‘Income from dis-
continued operations’’ on the Company’s Consolidated Statements of
Operations even though such income was actually recognized by the
Company prior to the asset sale. Gains from the sale of CTL assets are
classified as ‘‘Gain from discontinued operations’’ on the Company’s
Consolidated Statements of Operations.

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 a 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.

On May 30, 2002, the Company sold one CTL asset for
net proceeds of $3.7 million, and realized a gain of approximately
$595,000. As of December 31, 2002, there were two CTL assets
with a combined book value of $28.5 million classified as ‘‘Assets held
for sale’’ on the Company’s Consolidated Balance Sheets.

Note 6 – Joint Ventures, Unconsolidated Subsidiaries and
Minority Interest

Income or loss generated from the Company’s joint venture
investments and unconsolidated subsidiaries is included in ‘‘Equity in
(loss) earnings from joint ventures and unconsolidated subsidiaries’’
on the Company’s Consolidated Statements of Operations.

The Company’s ownership percentages, its investments in and advances to unconsolidated joint ventures and subsidiaries, the
Company’s pro rata share of its ventures’ third-party, non-recourse debt as of December 31, 2003 and its respective income (loss) for the year
ended December 31, 2003 are presented below (in thousands):

Ownership %

Equity
Investment

JV Income
(Loss) for the
Year Ended
December 31,
2003

Pro Rata
Share of
Third-Party
Non-Recourse

Debt(1)

44.70%
50.00%
20.00%

95.00%
95.00%

$11,815
8,178
5,026

N/A
N/A
$25,019

$ 1,740
(3,903)
144

(2,252)
(13)
$(4,284)

$10,728
59,578
6,438

N/A
N/A
$76,744

Third-Party Debt

Interest
Rate

Scheduled
Maturity Date

LIBOR+1.25%
7.66%–7.87% Various through 2011
7.61%–8.43% Various through 2011

November 2004(2)

N/A
N/A

Unconsolidated Joint Ventures:
Sunnyvale
CTC I
ACRE Simon
Unconsolidated Subsidiaries:
iStar Operating
TMOC

Total

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) On October 13, 2003, the venture extended the final maturity of the loan to November 2004.

Investments In and Advances To Unconsolidated Joint Ventures – At
December 31, 2003, the Company had investments in three uncon-
solidated 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 Partners, L.P. These ventures were formed for the purpose of
operating, acquiring and, in certain cases, developing CTL facilities.

At December 31, 2003, the ventures comprised 12 net
leased facilities. The Company’s combined investment in these joint
ventures at December 31, 2003 was $25.0 million. The joint ven-
tures’ carrying value for the 12 facilities owned at December 31,
2003 was $193.1 million. In aggregate, the joint ventures had total
assets of $221.2 million and total liabilities of $180.6 million as of
December 31, 2003, and a net loss of approximately $4.4 million for
the 12 months ended December 31, 2003, respectively. The
Company accounts for these investments under the equity method
because the Company’s joint venture partners have certain partici-
pating rights giving them shared control over the ventures.

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 agree-
ment, the former external member had the right to convert its inter-
est 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.

On April 1, 2002, the former Sierra Land Ventures
(‘‘Sierra’’) joint venture partner assigned its 50.00% ownership inter-
est 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 CTL asset previously held by
Sierra and therefore consolidates this asset for accounting purposes.
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 move-
ments on its $24.0 million LIBOR-based mortgage loan to an interest
rate of 9.00% through November 9, 2003. On September 29, 2003,
in connection with the extension of the ventures’ debt, the venture
extended the cap through November 9, 2004. 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.

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. The common shareholder, an entity con-
trolled by a former director of the Company, is the owner of all the
voting common stock and a 5.00% economic interest in iStar
Operating. As of December 31, 2003, there have never been any dis-
tributions 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.

iStar Operating has elected to be treated as a taxable REIT
subsidiary for purposes of maintaining compliance with the REIT pro-
visions of the Code and prior to July 1, 2003 was accounted for
under the equity method for financial statement reporting purposes
and was presented in ‘‘Investments in and advances to joint ventures
and unconsolidated subsidiaries’’ on the Company’s Consolidated
Balance Sheets. As of July 1, 2003, the Company consolidates this
entity as a VIE (see Note 3) with no material impact. Prior to its con-
solidation, the Company charged an allocated 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. These general overhead expenses were in addition to the
direct general and administrative costs of iStar Operating. As of
December 31, 2003, iStar Operating had no debt obligations.

In addition, the Company had an investment in TMOC, an
entity originally formed to make a $2.0 million investment in the con-
vertible 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. Prior to March 29, 2003,
the Company owned 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 owners of the
remaining TMOC stock were two executives of the Company. On
March 29, 2003, the Company purchased the remaining 5.00%
interest from the executives for approximately $2,000, an amount
that was equal to the carrying value, which was less than their original
investment. Following this purchase, the Company owned 100.00%
of TMOC and therefore consolidated the entity for accounting pur-
poses. On June 30, 2003, the $2.0 million investment was fully
repaid and prior to December 31, 2003, the entity was liquidated.

Minority Interest – On September 29, 2003 the Company
acquired a 96.00% interest in iStar Harborside LLC, an infinite life
partnership, with the external partner holding the remaining 4.00%
interest. The Company consolidates this partnership for financial
statement purposes and records the minority interest of the external
partner in ‘‘Minority interest in consolidated entities’’ on the
Company’s Consolidated Balance Sheets.

The Company also holds a 98.00% interest in TriNet
Property Partners, L.P. with the external partners holding the remain-
ing 2.00% interest. As of August 1999, the external partners have
the option to convert their partnership interest into cash; however,
the Company may elect to deliver 72,819 shares of Common Stock
in lieu of cash. The Company consolidates this partnership for finan-
cial statement purposes and records the minority interest of the
external partner in ‘‘Minority interest in consolidated entities’’ on
the Company’s Consolidated Balance Sheets.

75.

Note 7 – Debt Obligations

As of December 31, 2003 and 2002, the Company has debt obligations under various arrangements with financial institutions as

follows (in thousands):

Maximum
Amount
Available

Carrying Value as of

December 31, December 31,
2002

2003

Stated Interest Rates(1)

Scheduled
Maturity Date

$ 700,000 $
700,000
500,000
500,000

88,640 $ 412,550
462,920
283,884
114,400

310,364
117,211
180,376

LIBOR+1.75% – 2.25%
LIBOR+1.40% – 2.15%
LIBOR+1.75% – 2.25%
LIBOR+1.50% – 2.25%

March 2005(2)
January 2007(2)
August 2005(2)(3)

September 2005

Secured revolving credit facilities:
Line of credit
Line of credit
Line of credit
Line of credit

Unsecured revolving credit facilities:

Line of credit

Total revolving credit facilities

Secured term loans:

300,000

–
$2,700,000 $ 826,591 $1,273,754

130,000

Secured by corporate tenant lease assets
Secured by corporate tenant lease assets
Secured by corporate tenant lease assets
Secured by corporate tenant lease assets
Secured by corporate lending investments
Secured by corporate lending investments
Secured by corporate lending investments
Secured by corporate lending investments
Secured by corporate lending investments

Total term loans
Less: debt discount

Total secured term loans
iStar Asset Receivables secured notes:

STARs Series 2002-1:

$ 193,000 $ 193,000
144,114
–
95,074
79,126
61,537
60,000
50,000
–
$ 808,128 $ 682,851

140,440
135,000
92,876
77,938
60,874
60,000
–
48,000

(128)

(236)

$ 808,000 $ 682,615

Class A1
Class A2
Class B
Class C
Class D
Class E
Class F
Class G
Class H
Class J
Class K

Total STARs Series 2002-1
Less: debt discount

STARs Series 2003-1:

Class A1
Class A2
Class B
Class C
Class D
Class E
Class F
Class G
Class H
Class J
Class K

Total STARs Series 2003-1
Total iStar Asset Receivables secured notes

40,011 $ 236,694
381,296
39,955
26,637
21,310
42,619
26,637
21,309
26,637
26,637
26,637
$ 679,685 $ 876,368

381,296
39,955
26,637
21,310
42,619
26,637
21,309
26,637
26,637
26,637

(4,090)

(4,425)

$ 235,808 $
–
248,206
–
18,452
–
20,297
–
12,916
–
14,762
–
14,762
–
12,916
–
12,916
–
14,761
–
25,833
–
$ 631,629 $
–
$1,307,224 $ 871,943

LIBOR+2.125%

July 2004(4)

LIBOR+1.85%
7.44%
LIBOR+1.75%

July 2006(5)

March 2009
October 2008(6)

6.00% – 11.38% Various through 2022
November 2005
January 2013

6.55%
6.41%
LIBOR+2.50%
LIBOR+0.60%
LIBOR+2.125%

June 2004(7)
October 2003(8)
July 2008(9)

LIBOR+0.26%
LIBOR+0.38%
LIBOR+0.65%
LIBOR+0.75%
LIBOR+0.85%
LIBOR+1.235%
LIBOR+1.335%
LIBOR+1.435%
6.35%
6.35%
6.35%

June 2004(10)
December 2009(10)
April 2011(10)
May 2011(10)
January 2012(10)
January 2012(10)
January 2012(10)
January 2012(10)
January 2012(10)
May 2012(10)
May 2012(10)

LIBOR+0.25%
LIBOR+0.35%
LIBOR+0.55%
LIBOR+0.65%
LIBOR+0.75%
LIBOR+1.05%
LIBOR+1.10%
LIBOR+1.25%
4.97%
5.07%
5.56%

October 28, 2005(11)
August 28, 2010(11)
July 28, 2011(11)
April 28, 2012(11)
October 28, 2012(11)
May 28, 2013(11)
June 28, 2013(11)
June 28, 2013(11)
June 28, 2013(11)
June 28, 2013(11)
June 28, 2013(11)

Maximum
Amount
Available

Carrying Value as of

December 31, December 31,
2002

2003

Stated Interest Rates(1)

Scheduled
Maturity Date

Unsecured notes:

6.00% Senior Notes(12)
6.50% Senior Notes(12)
6.75% Dealer Remarketable Securities(13)(14)(15)
7.00% Senior Notes(14)
7.70% Notes (13)(15)
7.95% Notes (13)(15)
8.75% Notes
Total unsecured notes
Less: debt discount
Plus: impact of pay-floating swap agreements(16)

Total unsecured notes

Other debt obligations
Total debt obligations

$ 350,000 $
150,000
–
185,000
100,000
50,000
350,000

–
–
125,000
–
100,000
50,000
350,000
$1,185,000 $ 625,000

(47,921)
690

(11,603)
3,920
$1,137,769 $ 617,317
15,961
$4,113,732 $3,461,590

34,148

6.10%
6.60%
6.75%
7.00%
7.70%
7.95%
8.75%

December 2010
December 2013
March 2013
March 2008
July 2017
May 2006
August 2008

Various

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, 2003 was 1.12% per annum.
(2) Maturity date reflects a one-year ‘‘term-out’’ extension at the Company’s option.
(3) On November 4, 2003, this secured facility was amended to include subordinate and mezzanine lending investments as collateral at stated interest rates of LIBOR+2.15% –

2.25%. First mortgages remained at a stated interest rate of LIBOR+1.75%.

(4) On May 14, 2003, the Company extended the final maturity on this facility to July 2004.
(5) Maturity date reflects two one-year extensions at the Company’s option.
(6) On September 29, 2003, the Company closed a $135.0 million term loan secured by a CTL asset it acquired the same day. The loan has a five-year term and bears interest at

LIBOR+1.75%.

(7) On May 8, 2003, the Company extended the final maturity on this facility to June 2004.
(8)

\On April 9, 2003, the Company repaid the existing term loan financing a $75.0 million term preferred investment in a publicly-traded real estate company and simultaneously
entered into another $50.0 million term loan with a leading financial institution. The new term loan bore interest at LIBOR+0.60% and matured in October 2003.

(9) On July 24, 2003, the Company closed a $48.0 million term loan secured by a corporate lending investment it originated in the third quarter of 2003. The loan has a three-year

primary term and two one-year extension options, and bears interest at LIBOR+2.125%.

(10) Principal payments on these bonds are a function of the principal repayments on loan or CTL 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 pre-
paid, 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.

(11) Principal payments on these bonds are a function of the principal repayments on loan or CTL 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 pre-
paid, 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 is August 28, 2022.

(12) On December 5, 2003, the Company issued $350.0 million of 6.00% Senior Notes due in 2010 and $150.0 million of 6.50% Senior Notes due in 2013. The Notes due 2010 were sold

at 99.44% of their principal amount and the Notes due 2013 were sold at 99.23% of their principal amount.

(13) 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.
(14) On March 14, 2003, the Company retired the 6.75% Dealer Remarketable Securities of its Leasing Subsidiary by exchanging those securities for newly issued $150.0 million 7.00%
Senior Notes due March 2008. The covenants in the Senior Notes due 2008 are substantially identical to the covenants contained in the Company’s 8.75% Notes. On April 8, 2003,
the Company issued an additional $35.0 million of Senior Notes bringing the aggregate principal of the Senior Notes to $185.0 million. The additional $35.0 million of Senior Notes
has identical terms to the Senior Notes issued on March 14, 2003, but were issued at 102.75% of their principal amount to yield 6.34% per annum.

(15) 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.

(16) On December 19, 2003, the Company entered into three pay-floating interest rate swaps struck at 4.381%, 4.345% and 4.29% in the notional amounts of $200.0 million,
$100.0 million and $50.0 million, respectively. On November 27, 2002, the Company entered into two pay-floating interest rate swaps struck at 3.8775% and 3.81% in the
notional amounts of $100.0 million and $50.0 million, respectively. These swaps are intended to mitigate the risk of changes in the fair value of $350.0 million of 7-year Senior
Notes and $150.0 million of 10-year Senior 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.

77.

Availability of amounts under the secured revolving credit
facilities are based on percentage borrowing base calculations. In addi-
tion, 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, 2003, the Company believes it is in compliance with all
financial and non-financial covenants on its debt obligations.

Subsequent to December 31, 2003, the Company issued
$175.0 million of Senior Floating Rate Notes due 2007 which bear
interest at three-month LIBOR+1.25% and $250.0 million of 5.70%
Senior Notes due 2014 (see Note 17).

In addition, on January 23, 2004, the Company issued
$350.0 million of 4.875% Senior Notes due in 2009. The Notes were
sold at 99.89% of their principal amount to yield 4.90%. The Notes
are unsecured senior obligations of the Company. The Company used
the proceeds to repay outstanding secured borrowings.

Further, on January 13, 2004, the Company closed
$200.0 million of term financing with a leading financial institution that
is secured by certain corporate bond investments and other lending
securities. A number of these investments were previously financed
under existing credit facilities. The new facility bears interest at
LIBOR+1.05% – 1.50% and has a final maturity date of January 2006.
On December 5, 2003, the Company issued $350.0 million
of 6.00% Senior Notes due in 2010 and $150.0 million of 6.50%
Senior Notes due in 2013. The Notes due 2010 were sold at 99.44%
of their principal amount and the Notes due 2013 were sold at 99.23%
of their principal amount. 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 October 31, 2003, the Company’s $50.0 million term

loan bearing interest at LIBOR+0.60% matured and was repaid.

On September 29, 2003, the Company closed a
$135.0 million term loan secured by a CTL asset it acquired the
same day. The loan has a five-year term and bears interest at
LIBOR+1.75%.

On July 24, 2003, the Company closed a $48.0 million
term loan secured by a corporate lending investment it originated
in the third quarter of 2003. The loan has a three-year primary term
and two one-year extension options, and bears interest at
LIBOR+2.125%.

On May 21, 2003, a wholly-owned subsidiary of the
Company issued iStar Asset Receivables (‘‘STARs’’), Series 2003-1,

the Company’s proprietary match funding program, consisting of
$645.8 million of investment-grade bonds secured by the
subsidiary’s structured finance and CTL assets, which had an aggre-
gate outstanding carrying value of approximately $738.1 million 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+0.47% 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 May 14, 2003, the Company extended the maturity on

its $300.0 million unsecured facility to July 2004.

On May 8, 2003, the Company extended the maturity on

its $60.0 million term loan to June 2004.

On April 8, 2003, the Company issued an additional
$35.0 million of 7.00% Senior Notes due March 2008, bringing the
aggregate principal amount of the Senior Notes to $185.0 million.
The add-on Notes have identical terms to the Senior Notes issued in
March 2003, although they were issued at 102.75% of their princi-
pal amount, to yield 6.34% per annum.

On March 14, 2003, the Company retired the 6.75%
Dealer Remarketable Securities of its Leasing Subsidiary by exchang-
ing those securities for newly issued $150.0 million 7.00% Senior
Notes due March 2008.

On January 27, 2003, the Company extended the maturity
on one of its $700.0 million secured facilities to January 2007, which
includes a one-year ‘‘term-out’’ at the Company’s option.

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 May 28, 2002, the Company fully repaid the remaining
$446.2 million of bonds outstanding under STARs, Series 2000-1.
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 CTL
assets, which had an aggregate outstanding carrying value of approx-
imately $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 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 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 July 27, 2001, the Company completed a $300.0 mil-
lion unsecured revolving credit facility with a group of leading financial
institutions. The 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 facility replaces two prior
credit facilities maturing in 2002 and 2003, and bears interest at
LIBOR+2.125%. On May 14, 2003, the Company extended the
maturity of this facility to July 2004.

On January 11, 2001, the Company closed a $700.0 million
secured revolving credit facility which is led by a major commercial
bank. The 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
facility accepts a broad range of structured finance assets and has a
final maturity of January 2005. On January 27, 2003, the Company
extended the final maturity on this facility to January 2007.

During the years ended December 31, 2003, 2002 and
2001, the Company incurred an extraordinary loss of approximately
$0, $12.2 million and $1.6 million, respectively, as a result of the
early retirement of certain debt obligations. On January 1, 2003, in
accordance with SFAS No. 145, these costs were reclassified from
‘‘Extraordinary loss on early extinguishments of debt’’ into income
from continuing operations.

As of December 31, 2003, future expected/scheduled
maturities of outstanding long-term debt obligations are as follows
(in thousands)(1):

2004
2005
2006
2007
2008
Thereafter
Total principal maturities
Net unamortized debt discounts
Impact of pay-floating swap agreement

Total debt obligations

$ 264,158
702,840
243,000
313,216
718,000
1,923,967
$4,165,181
(52,139)
690
$4,113,732

Explanatory Note:
(1) Assumes exercise of extensions to the extent such extensions are at the

Company’s option.

79.

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 2.3 mil-
lion shares of 9.375% Series B Cumulative Redeemable Preferred
Stock, 1.5 million shares of 9.20% Series C Cumulative Redeemable
Preferred Stock, 4.6 million shares of 8.00% Series D Cumulative
Redeemable Preferred Stock, 5.6 million shares of 7.875% Series E
Cumulative Redeemable Preferred Stock, 4.0 million shares of 7.80%
Series F Cumulative Redeemable Preferred Stock and 3.2 million
shares of 7.65% Series G Cumulative Redeemable Preferred Stock. The
Series B, C, D, E, F and G Cumulative Redeemable Preferred Stock are
redeemable without premium at the option of the Company at their
respective liquidation preferences beginning on June 15, 2001,
August 15, 2001, October 8, 2002, July 18, 2008, September 29,
2008 and December 19, 2008, respectively.

In December 2003, the Company completed an under-
written public offering of 5.0 million primary shares of the Company’s
Common Stock. The Company received approximately $191.1 mil-
lion from the offering and used these proceeds to repay a portion of
its secured debt.

In December 2003, the Company redeemed 1.6 million
shares of the Company’s 9.50% Series A Cumulative Redeemable
Preferred Stock, having a liquidation preference of $50.00 per share by
exchanging those securities for newly issued 3.2 million shares of
7.65% Series G Cumulative Redeemable Preferred Stock, having a liqui-
dation preference of $25.00 per share and a redemption date begin-
ning on December 19, 2008. Immediately following this transaction
the Company no longer had any Series A Preferred Stock outstanding.
The Company did not receive any cash proceeds from the offering.

In September 2003, the Company completed an under-
written public offering of 4.0 million shares of its 7.80% Series F
Cumulative Redeemable Preferred Stock, having a liquidation prefer-
ence of $25.00 per share and a redemption date beginning on
September 29, 2008. The Company used the proceeds from the
offering to repay a portion of its secured debt.

In July 2003, the Company redeemed 2.8 million shares of
the Company’s 9.50% Series A Cumulative Redeemable Preferred
Stock, having a liquidation preference of $50.00 per share by
exchanging those securities for newly issued 5.6 million shares of
7.875% Series E Cumulative Redeemable Preferred Stock, having a
liquidation preference of $25.00 per share and a redemption date
beginning on July 18, 2008. The Company did not receive any cash
proceeds from the offering.

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, SOFI IV SMT Holdings, L.P. (‘‘SOFI IV’’) and certain of its affili-
ates 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, SOFI 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, SOFI 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).
Lastly, on May 13, 2003, SOFI IV distributed approximately 15.9 mil-
lion shares to its limited and general partners. Some of the partners
then elected to sell 6.9 million of the shares distributed to them.
Immediately following the secondary offerings and the distribution,
SOFI IV owned approximately 3.88% of the Company’s Common
Stock (based on the diluted sharecount as of December 31, 2003).
The Company did not sell any shares in the offerings, other than the
November 2002 offering, in which the Company sold 8.0 million pri-
mary shares and received net proceeds of approximately $202.9 million.
DRIP/Stock Purchase Plan – 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 rein-
vesting 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 months
ended December 31, 2003 and 2002, the Company issued a total of
approximately 2.6 million and 1.6 million shares of its Common Stock,
respectively, through the direct stock purchase component of the
plan. Net proceeds during the 12 months ended December 31, 2003
and 2002 were approximately $89.1 million and $44.4 million,
respectively. There are approximately 3.6 million shares available for
issuance under the plan as of December 31, 2003.

do so. As of December 31, 2003, the Company had repurchased a
total of approximately 2.3 million shares at an aggregate cost of
approximately $40.7 million. The Company has not repurchased any
shares under the stock repurchase program since November 2000.

Note 9–Risk Management and Use of Financial Instruments

Risk Management – In the normal course of its ongoing
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 dif-
ferent 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 inabil-
ity 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 valu-
ation of CTL facilities held by the Company.

Use of Derivative Financial Instruments – The Company’s use
of derivative financial instruments is primarily limited to the utiliza-
tion of interest rate agreements or other instruments to manage
interest rate risk exposure. The principal objective of such arrange-
ments is to minimize the risks and/or costs associated with the
Company’s operating and financial structure as well as to hedge spe-
cific anticipated transactions. The counterparties to these contrac-
tual arrangements are major financial institutions with which the
Company and its affiliates may also have other financial relation-
ships. 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
does not use derivative instruments to hedge credit/market risk or
for speculative purposes.

The Company has entered into the following cash flow and fair value hedges that are outstanding as of December 31, 2003. The net

value (liability) associated with these hedges is reflected on the Company’s Consolidated Balance Sheets (in thousands):

Type of Hedge

Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
LIBOR Cap
LIBOR Cap
LIBOR Cap
LIBOR Cap

Total Estimated Value

Explanatory Note:
(1) Acquired in connection with the TriNet Acquisition (see Note 1).

Notional
Amount
$125,000
125,000
75,000
200,000
100,000
100,000
50,000
50,000
345,000
135,000
75,000
35,000

Strike
Price or
Swap Rate
2.885%
2.838%
5.580%
4.381%
4.345%
3.878%
3.810%
4.290%
8.000%
6.000%
7.750%
7.750%

Trade
Date
1/23/03
2/11/03
11/4/99(1)
12/17/03
12/17/03
11/27/02
11/27/02
12/17/03
5/22/02
9/29/03
11/4/99(1)
11/4/99(1)

Maturity
Date
6/25/06
6/25/06
12/1/04
12/15/10
12/15/10
8/15/08
8/15/08
12/15/10
5/28/14
10/15/06
12/1/04
12/1/04

Estimated
Value at

December 31,

2003
$(1,632)
(1,486)
(3,227)
(1,472)
(958)
2,681
1,183
(649)
11,648
418
–
–
$ 6,506

Between January 1, 2002 and December 31, 2003, the Company also had outstanding the following cash flow hedges that have

expired or been settled (in thousands):

Type of Hedge

Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap

Notional
Amount
$125,000
125,000
100,000
100,000

Strike
Price or
Swap Rate
7.058%
7.055%
4.139%
4.643%

Trade
Date
6/15/00
6/15/00
9/29/03
9/29/03

Maturity
Date
6/25/03
6/25/03
1/2/11
1/2/14

81.

During 2003, the Company entered into two 90-day for-
ward starting swaps each having a $100.0 million notional amount.
These pay-fixed swaps, which were effective in September 2003,
had rates of 4.139% and 4.643%, had seven-year and 10-year
terms, respectively, and were being used to lock-in swap rates
related to a portion of planned future corporate unsecured fixed-rate
bond issuances. These two swaps were settled in connection with the
Company’s issuance of $350.0 million of seven-year Senior Notes
and $150.0 million of 10-year Senior Notes. In addition, effective in
September 2003, the Company entered into a $135.0 million cap
with a rate of 6.00% to hedge the Company’s current outstanding
floating-rate debt. This cap has a three-year term. Further, the
Company entered into two $125.0 million forward starting swaps.
These pay-fixed swaps were effective in June 2003 and replaced the
two $125.0 million pay-fixed swaps mentioned above. The two new
pay-fixed swaps have a three-year term and expire on June 25, 2006.
In addition, in connection with a portion of the Company’s
fixed-rate corporate bonds, the Company entered into three pay-
floating interest rate swaps in December 2003 struck at 4.381%,
4.345% and 4.29% with notional amounts of $200.0 million,
$100.0 million and $50.0 million, respectively, and maturing on
December 15, 2010 and also entered into two pay-floating interest
rate swaps in November 2002 struck at 3.8775% and 3.81% with
notional amounts of $100.0 million and $50.0 million, respectively,
and maturing on August 15, 2008. The Company pays six-month
LIBOR on the swaps entered into in December 2003 and one-month
LIBOR on the swaps entered into in November 2002 and receives the
stated fixed rate in return. These swaps mitigate the risk of changes
in the fair value of $350.0 million of seven-year Senior Notes and
$150.0 million of 10-year Senior Notes 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’’ on 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 quar-
terly basis.

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 this interest rate cap. Using the ‘‘caplet’’ methodol-
ogy discussed above, amortization of the cap premium is dependent
upon the actual value of the caplets at inception.

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 term
loan bears interest at 7.44% per annum, payable monthly, and amor-
tizes over an approximately 22-year schedule. The term loan repre-
sented 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 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 obliga-
tions, 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 con-
centration of credit risks.

All of the Company’s CTL 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, 2003 in California
(19.39%) and New York (11.99%). As of December 31, 2003, the
Company’s investments also contain greater than 10.00% concentra-
tions in the following asset types: office-CTL (27.48%), office-lending
(17.16%), industrial (13.99%) and hotel-lending (12.06%).

The Company underwrites the credit of prospective bor-
rowers 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, 2003, the Company’s five largest borrowers or
corporate tenants collectively accounted for approximately 15.51%
of the Company’s aggregate annualized interest and operating lease
revenue of which no single customer accounts for more than 3.84%.

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 pro-
vides 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 incen-
tive stock options is 5.0 million, subject to certain antidilution provi-
sions 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, 2003, a total of
approximately 10.1 million shares of Common Stock were available for
awards under the Plan, of which options to purchase approximately

2.9 million shares of Common Stock were outstanding and approxi-
mately 422,000 shares of restricted stock were outstanding. A total
of 1.9 million shares remain available for awards under the Plan as of
December 31, 2003.

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 prede-
fined service period of three to five years and, under certain con-
ditions, provide for accelerated vesting. These options expire on
March 15, 2008.

Changes in options outstanding during each of fiscal 2001, 2002 and 2003 are as follows:

Options outstanding, December 31, 2000

Granted in 2001
Exercised in 2001
Forfeited in 2001

Options outstanding, December 31, 2001

Granted in 2002
Exercised in 2002
Forfeited in 2002

Options outstanding, December 31, 2002

Granted in 2003
Exercised in 2003
Forfeited in 2003
Transferred in 2003(1)
Options outstanding, December 31, 2003

Explanatory Note:
(1) Transfer of shares due to the downsized Board of Directors on June 2, 2003.

Number of Shares

Non-Employee
Directors
520,432
90,000
(26,900)
–
583,532
80,000
(190,650)
(4,600)

468,282
–
(235,746)
(13,850)
(63,692)
154,994

Employees
3,259,761
1,617,401
(1,131,595)
(100,509)
3,645,058
–
(488,674)
(16,907)
3,139,477
15,500
(843,624)
(2,300)
–
2,309,053

Other
946,168
100,000
(149,492)
–
896,676
–
(164,683)
–
731,993
–
(389,594)
–
63,692
406,091

Weighted
Average
Strike Price
$18.97
$20.31
$16.48
$27.27
$18.98
$27.83
$18.63
$24.87
$18.77
$14.72
$18.99
$26.14
$27.15
$18.59

83.

The following table summarizes information concerning outstanding and exercisable options as of December 31, 2003:

Options Outstanding

Options Exercisable

Exercise Price Range
$14.72–$15.00(1)
$16.69–$16.88
$17.38–$17.56
$19.63–$19.69
$20.00–$21.44
$23.32–$23.64
$24.13–$24.94
$25.10–$26.09
$26.30–$26.97
$27.00
$28.54–$29.82
$55.39

Weighted
Average
Remaining
Contractual Life
4.93
6.01
6.21
7.10
6.68
0.36
6.77
2.41
2.02
7.48
8.05
5.42
6.28

Options
Outstanding
657,493
477,071
151,068
1,308,522
50,333
28,499
67,566
13,800
8,900
25,000
76,792
5,094
2,870,138

Weighted
Average
Exercise
Price
$14.72
$16.88
$17.38
$19.69
$20.94
$23.53
$24.86
$26.09
$26.45
$27.00
$29.71
$55.39
$18.59

Currently
Exercisable
641,993
477,071
151,068
754,929
50,333
28,499
67,233
13,800
8,234
16,667
76,792
5,094
2,291,713

Weighted
Average
Exercise
Price
$14.72
$16.88
$17.38
$19.69
$20.94
$23.53
$24.86
$26.09
$26.41
$27.00
$29.71
$55.39
$18.32

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 SOFI 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 SOFI IV, which may regrant them at its discretion. As of December 31, 2003, approximately 727,000 of these options were exercisable
by the beneficial owners and approximately 539,000 have been exercised.

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. There were 15,500 options issued during the
12 months ended December 31, 2003 with a strike price of $14.72.
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, accord-
ingly, 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 acquisi-
tion of the Company’s former external advisor, the Company recog-
nized 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 administra-
tive – 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, 2003, 2002 and 2001, would have been
reduced on a pro forma basis by approximately $289,000,
$565,000 and $705,000, respectively. This would not have signifi-
cantly impacted the Company’s earnings per share.

The fair value of each significant option grant is estimated
on the date of grant (January 10, 2003 for the 2003 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:

Expected life (in years)
Risk-free interest rate
Volatility
Dividend yield
Weighted average grant date fair value

2003
5
3.13%

2001
2002
5
5
4.96%
4.38%
17.64% 16.23% 20.83%
8.45% 12.00%
$0.76
$1.38

9.57%
$5.26

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, 2003, the
Company granted 40,050 restricted shares to employees that vest
proportionately over three years on the anniversary date of the initial
grant of which 35,675 remain outstanding.

During the year ended December 31, 2002, the Company
granted 199,350 restricted shares to employees. Of these shares,
44,350 will vest proportionately over three years on the anniversary
date of the initial grant. Of the 44,350 shares granted, 22,382
remain outstanding as of December 31, 2003. The balance of
155,000 restricted shares granted to several employees 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 on March 31, 2004 and the market price of the
stock is $38.90 (which was the market price of the Common Stock
on December 31, 2003), the Company would incur a one-time
charge to both net income and earnings at that time of approximately
$6.0 million (the fair market value of the 155,000 shares at
$38.90 per share). During the year 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 fol-
lowing vesting.

For accounting purposes, the Company measures com-
pensation 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/service 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. These dividends are accounted for in a manner consistent with
the Company’s Common Stock dividends, as a reduction to retained

earnings. 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 certain total rates of return (divi-
dends since November 6, 2002 plus share price appreciation since
January 2, 2003), as of January 31, 2004. Vested shares would be
subject to forfeiture if the executive’s employment with the
Company terminated under certain circumstances. The shares
became fully vested on January 31, 2004 and the market price of the
stock was $40.02, therefore; the Company will incur a one-
time charge to earnings during the first quarter 2004 of approxi-
mately $4.0 million (the fair market value of the 100,000 shares at
$40.02 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 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 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 phan-
tom shares (described below) which are awarded to him and have
contingently vested. The Chief Executive Officer received approxi-
mately $2.1 million in such dividends in 2002 and $4.4 million in
2003. As such, no additional bonus was paid in either year. 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 account-
ing purposes until such approvals were made, at which point the mar-
ket price of the Company’s Common Stock was $24.90. Accordingly,
an aggregate charge of approximately $3.9 million is being recog-
nized with respect to these options over the term of this agree-
ment 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 annual install-
ments of 250,000 shares in each successive 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

85.

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 average closing price of
the Company’s Common Stock for a 60 calendar day period achieves
thresholds of $25.00, $30.00, $34.00 and $37.00, respectively. As
of December 31, 2003 all thresholds have been attained, and a total
of 2.0 million of these shares have contingently vested. Assuming that
the market price of the Common Stock on March 30, 2004 is $38.90
(which was the market price of the Common Stock on December 31,
2003), the Company would incur a one-time charge to both net
income and earnings in March 2004 of approximately $77.8 million
(the fair market value of the 2.0 million shares at $38.90 per share).
Shares that have contingently vested generally will not become fully
vested until March 2004, except upon certain termination or change
of control events. Further, if the average stock price drops below cer-
tain specified levels for a 60-day period prior to such date, such phan-
tom 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 divi-
dends 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 irrevo-
cably vested, whereupon the Company will reflect a charge equal to
the then fair value of the 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’’, at a cost of approxi-
mately $7.4 million, on the Company’s Consolidated Statements of
Changes in Shareholders’ Equity. For accounting purposes, the
employment arrangement described above was treated as a contin-
gent, variable plan until the April 29, 2002 contingent vesting date.
The Company incurred a total 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. The exec-
utive 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 nor-
mal Common Stock dividends, as a reduction to retained earnings.

Certain affiliates of SOFI IV and the Company’s Chief
Executive Officer have agreed to reimburse the Company for the
value of restricted shares awarded to the former 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. The Company’s Chief
Executive Officer fulfilled his reimbursement obligation through the
delivery of shares of the Company’s Common Stock owned by him. In
the case of the SOFI 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, 2003, the
SOFI IV affiliates have paid approximately $506,000 in cash. The
approximately $1.9 million remaining balance of the SOFI IV affiliates’
reimbursement obligation is due on or before March 31, 2004. These
reimbursement payments are reflected as ‘‘Additional paid-in capital’’
on the Company’s Consolidated Balance Sheets, and not as an offset
to the 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. As of December 31, 2003, iStar
Venture Direct Holdings, LLC had written off all of its investments.
The profits interests have three-year vesting schedules, and are sub-
ject to forfeiture in the event of termination of employment for cause
or a voluntary resignation. The Company currently estimates that the
profits interests have no value.

High Performance Unit Program

In May 2002, the Company’s shareholders approved the
iStar Financial High Performance Unit (‘‘HPU’’) Program. The program,
as more fully described in the Company’s annual proxy statement
dated April 8, 2002, is a performance-based employee compensa-
tion plan that only has material value to the participants if the
Company provides superior returns to its shareholders. The program
entitles the employee participants (‘‘HPU holders’’) 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 meas-
ured 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 rele-
vant 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; 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 per-
formance levels) multiplied by the weighted average market value of
the Company’s common equity capitalization during the measure-
ment 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 div-
idend 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 the equivalent of
1.00% of the average monthly number of fully diluted shares of the
Company’s Common Stock outstanding during the valuation period.

The employee participants have purchased their interests
in High Performance Common Stock through a limited liability com-
pany 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 approxi-
mately $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 perform-
ance 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 began with the first quarter 2003 dividend.
The Company will pay dividends on the 2002 plan shares in the same
amount per equivalent 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 confidential-
ity covenants through January 1, 2005.

The total shareholder return for the valuation period under
the 2003 plan was 78.29%, which exceeded the fixed performance
threshold of 20.00% and the industry index return of 24.66%. The
plan was fully funded and was limited to 1.00% of the average
monthly number of fully diluted shares of the Company’s Common
Stock during the valuation period. As a result of the Company’s supe-
rior performance, the participants in the 2003 plan are entitled to
receive cash distributions equivalent to the amount of cash dividends
payable on 987,149 shares of the Company’s Common Stock, as and
when such dividends are paid. Such dividend payments will begin with
the first quarter 2004 dividend. The Company will pay dividends on
the 2003 plan shares in the same amount per equivalent share and
on the same distribution dates that shares of the Company’s
Common Stock are paid.

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 purchase price of the High
Performance Common Stock was established by the Company’s
Board based upon, among other things, an independent valuation
from a major securities firm. The provisions of the 2005 plan are sub-
stantially the same as the prior plans.

A new 2006 plan has been established with a three-year
valuation period ending December 31, 2006. Awards under the
2006 plan were approved on January 23, 2004. The 2006 plan had
5,000 shares of High Performance Common Stock with an aggregate
initial purchase price of $714,700. The purchase price of the High
Performance Common Stock was established by the Company’s
Board based upon, among other things, an independent valuation
from a major securities firm. The provisions of the 2006 plan are sub-
stantially 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 on the Company’s
Consolidated Balance Sheets. Net income allocable to common
shareholders will be reduced by the HPU holders’ share of dividends
paid and undistributed earnings, if any.

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 pre-
tax basis up to the maximum percentage of compensation and dollar
amount permissible under Section 402(g) of the Internal Revenue
Code not to exceed the limits of Code Sections 401(k), 404 and
415. At the discretion of the Board of Directors, the Company may

87.

make matching contributions on the participant’s behalf of up to
50.00% of the first 10.00% of the participant’s annual compensa-
tion. The Company made gross contributions of approximately
$424,000, $356,000, and $320,000 to the 401(k) Plan for the
years ended December 31, 2003, 2002 and 2001, respectively.

Note 11 – Earnings Per Share

The following table presents a reconciliation of the numer-
ators and denominators of the basic and diluted EPS calculations for
the years ended December 31, 2003, 2002 and 2001, respectively
(in thousands, except per share data):

2003

2002

2001

Numerator:
Net income from

continuing operations

Preferred dividend requirements
Net income allocable to

common shareholders and
HPU holders before income
from discontinued
operations and gain from
discontinued operations(1)

Income from discontinued

operations

Gain from discontinued

$285,074 $206,939 $218,338
(36,908)

(36,908)

248,166

170,031

181,430

1,916

7,614

10,429

operations

5,167

717

1,145

Net income allocable to common

shareholders and
HPU holders(1)

Denominator:
Weighted average common
shares outstanding for
basic earnings per
common share

Add: effect of assumed shares
issued under treasury stock
method for stock options,
restricted shares
and warrants

Add: effect of contingent shares
Add: effect of joint
venture shares

Weighted average common
shares outstanding for
diluted earnings per
common share

$255,249 $178,362 $193,004

100,314

89,886

86,349

1,897
1,667

1,645
1,118

1,680
205

223

–

104,101

92,649

88,234

Basic earnings per common share:
Net income allocable to common
shareholders before income
from discontinued operations
and gain from discontinued
operations(2)

Income from discontinued operations
Gain from discontinued operations
Net income allocable to

common shareholders(2)
Diluted earnings per common share:
Net income allocable to common
shareholders before income
from discontinued operations
and gain from discontinued
operations(2)(3)

Income from discontinued

operations

Gain from discontinued

operations

Net income allocable to

2003

2002

2001

$ 2.45
0.02
0.05

$ 1.89
0.08
0.01

$ 2.10
0.13
0.01

$ 2.52

$ 1.98

$ 2.24

$ 2.36

$ 1.84

$ 2.06

0.02

0.08

0.12

0.05

0.01

common shareholders(2)(3)

$ 2.43

$ 1.93

$ 2.19

Explanatory Notes:
(1) HPU holders are Company employees who purchased high performance common

stock units under the Company’s High Performance Unit Program.

(2) For the 12 months ended December 31, 2003, net income used to calculate earnings
per basic and diluted common share excludes $2,066 and $1,994 of net income
allocable to HPU holders, respectively.

(3) For the year ended December 31, 2003, net income used to calculate earnings per

diluted common share includes joint venture income of $167.

There were approximately 5,000, 167,000 and
261,000 stock options, 0, 6.1 million and 6.1 million warrants and 0,
371,000 and 373,000 joint venture shares that were antidilutive for the
12 months ended December 31, 2003, 2002 and 2001, 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 finan-
cial statements. The Company has adopted this standard effective
January 1, 1998. Total comprehensive income was $295.5 million,
$228.1 million and $214.8 million for the years ended December 31,
2003, 2002 and 2001, 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 and fair value hedges and changes in the
fair value of the Company’s available-for-sale investments.

For the years ended December 31, 2003, 2002 and
2001, the change in fair market value of the Company’s unrealized
gains (losses) on available-for-sale investments and cash flow and
fair value hedges was an increase of $3.3 million, an increase of
$12.8 million and a decrease of $15.1 million, respectively, and was
recorded as an adjustment to other comprehensive income. The rec-
onciliation to other comprehensive income is as follows (in thousands):

For the Years Ended December 31,

Net income
Other comprehensive income:
Reclassification of gains on
securities into earnings
upon realization

Unrealized gains on available-
for-sale investments

Cumulative effect of change in
accounting principle (SFAS
No. 133) on other
comprehensive income
Unrealized gains (losses) on

cash flow and fair
value hedges
Comprehensive income

2003

2001
$292,157 $215,270 $229,912

2002

(12,031)

–

8,103

7,601

5,709

–

(9,445)

7,237

5,190

(11,336)

$295,466 $228,061 $214,840

Unrealized gains (losses) on available-for-sale investments
and cash flow and fair value hedges are recorded as adjustments to
shareholders’ equity through ‘‘Accumulated other comprehensive
income (losses)’’ on the Company’s Consolidated Balance Sheets and
are not included in adjusted earnings or net income unless realized.

As of December 31, 2003 and 2002, accumulated other
comprehensive income reflected in the Company’s shareholders’
equity is comprised of the following (in thousands):

As of December 31,

2003

2002

Unrealized gains on available-
for-sale investments

Unrealized losses on cash flow and

$9,362

$13,290

fair value hedges

(8,354)

(15,591)

Accumulated other comprehensive

income (losses)

$1,008

$ (2,301)

Over time, the unrealized gains and losses held in other
comprehensive income will be reclassified to earnings in the same
period(s) in which the hedged items are recognized in earnings. The
current balance held in other comprehensive income is expected to
be reclassified to earnings over the lives of the current hedging
instruments, or for the realized losses on forecasted debt trans-
actions, over the related term of the debt obligation, as applicable.
The Company expects that $6.6 million will be reclassified into earn-
ings as an increase in interest expense over the next 12 months.

Note 13 – Dividends

For the year ended December 31, 2003, total dividends
declared by the Company aggregated $267.8 million, or $2.65 per
share on Common Stock consisting of quarterly dividends of
$0.6625 per share which were declared on April 1, 2003, July 1,
2003, October 1, 2003 and December 1, 2003. The Company also
declared dividends aggregating $14.3 million, $4.7 million, $3.0 mil-
lion, $8.0 million, $4.9 million, $1.7 million and $170,000, respec-
tively, on its Series A, B, C, D, E, F and G preferred stock, respectively,
for the year ended December 31, 2003. There are no divided arrear-
ages 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. As of December 31, 2003, all Series A preferred shares
have been exchanged for either Series E preferred stock or Series G
preferred stock and therefore the Company will no longer pay divi-
dends on the Series A preferred stock.

Holders of shares of the Series B preferred stock are enti-
tled 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 busi-
ness 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 pay-
ment date.

89.

Holders of shares of the Series C preferred stock are enti-
tled 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 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 enti-
tled 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.

Holders of shares of the Series E preferred stock are enti-
tled 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 7.875% per annum of the
$25.00 liquidation preference, equivalent to a fixed annual rate of
$1.97 per share. The remaining terms relating to dividends of the
Series E preferred stock are substantially identical to the terms of the
Series B preferred stock described above.

Holders of shares of the Series F preferred stock are enti-
tled 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 7.80% per annum of the
$25.00 liquidation preference, equivalent to a fixed annual rate of
$1.95 per share. The remaining terms relating to dividends of the
Series F preferred stock are substantially identical to the terms of the
Series B preferred stock described above.

Holders of shares of the Series G preferred stock are enti-
tled 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 7.65% per annum of the
$25.00 liquidation preference, equivalent to a fixed annual rate of
$1.91 per share. The remaining terms relating to dividends of the
Series G preferred stock are substantially identical to the terms of the
Series B preferred stock described above.

The 2002 and 2003 High Performance Unit Program
reached their valuation dates on December 31, 2002 and 2003,
respectively. Based on the Company’s 2002 and 2003 total rate of
return, the participants are entitled to receive cash dividends on
819,254 shares and 987,149 shares, respectively, of the Company’s
Common Stock. The Company will pay dividends on these units in the
same amount per equivalent share and on the same distribution dates
as shares of the Company’s Common Stock. Such dividend payments

for the 2002 plan began with the first quarter 2003 dividend and
such dividends for the 2003 plan will begin with the first quarter
2004 dividend. All dividends to HPU holders will reduce net income
allocable to common shareholders when paid. Additionally, net
income allocable to common shareholders will be reduced by the HPU
holders’ share of undistributed earnings, if any.

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 esti-
mated 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 instru-
ments 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 CTL assets.

In addition, the estimates are only indicative of the value of
individual financial instruments and should not be considered an indi-
cation 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 (exclud-
ing 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.

Marketable Securities – Securities held for investment, secu-
rities 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 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 cur-
rently 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, 2003 and 2002 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 agree-
ments 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, 2003 and 2002 were (in thousands):

Financial assets:
Loans and other lending investments
Marketable securities
Provision for loan losses
Financial liabilities:
Debt obligations
Interest rate protection agreements

2003

2002

Book
Value

Fair
Value

Book
Value

Fair
Value

$3,736,110
20,265
(33,436)

$3,978,715
20,265
(33,436)

$3,079,592
35
(29,250)

$3,301,452
35
(29,250)

$4,113,732
6,506

$4,253,279
6,506

$3,461,590
3,145

$3,500,927
3,145

Note 15 – Segment Reporting

Statement of Financial Accounting Standard No. 131
(‘‘SFAS No. 131’’) establishes standards for the way that public busi-
ness 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
any 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 3.51% of revenues (see
Note 9 for other information regarding concentrations of credit risk).

91.

The Company evaluates performance based on the following financial measures for each segment:

2003:
Total revenues(2):
Equity in (loss) earnings from joint ventures and unconsolidated subsidiaries:
Total operating and interest expense(3):
Net operating income(4):
Total long-lived assets(5):
Total assets:
2002:
Total revenues(2):
Equity in (loss) earnings from joint ventures and unconsolidated subsidiaries:
Total operating and interest expense(3):
Net operating income(4):
Total long-lived assets(5):
Total assets:
2001:
Total revenues(2):
Equity in (loss) earnings from joint ventures and unconsolidated subsidiaries:
Total operating and interest expense(3):
Net operating income(4):
Total long-lived assets(5):
Total assets:

Real Estate
Lending

Corporate
Tenant Leasing

Corporate/
Other(1)

Company
Total

(In thousands)

$ 338,946
–
90,648
248,298
3,702,674
3,810,679

279,159
–
94,273
184,886
3,050,342
3,126,219

282,802
–
109,569
173,233
2,377,763
2,448,493

$ 267,740
(2,019)
127,568
138,153
2,535,885
2,729,716

(137)
(2,265)
98,726
(101,128)
N/A
120,195

$ 606,549
(4,284)
316,942
285,323
6,238,559
6,660,590

241,432
5,081
104,182
142,331
2,291,805
2,442,087

181,967
9,617
75,889
115,695
1,781,565
1,889,879

(324)
(3,859)
115,933
(120,116)
N/A
43,391

(371)
(2,256)
67,463
(70,090)
N/A
42,268

520,267
1,222
314,388
207,101
5,342,147
5,611,697

464,398
7,361
252,921
218,838
4,159,328
4,380,640

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 con-

solidated 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, loss on early extinguishment of debt for the Real Estate Lending business and operating costs on CTL
assets for the Corporate Tenant Leasing business, as well as interest expense specifically related to each segment. Interest expense on unsecured notes, general and administra-
tive expense and general and administrative-stock-based compensation is included in Corporate and Other for all periods. Depreciation and amortization of $55.3 million,
$46.9 million and $34.6 million for the years ended December 31, 2003, 2002 and 2001, respectively, are included in the amounts presented above.
(4) Net operating income represents net income before minority interest, income from discontinued operations and gain from discontinued operations.
(5) Total long-lived assets is comprised of Loans and Other Lending Investments, net and Corporate Tenant Lease Assets, net, for each respective segment.

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):

2003:
Revenue
Net income
Net income allocable to common shares
Net income per common share – basic
Weighted average common shares outstanding – basic
2002:
Revenue
Net income
Net income allocable to common shares
Net income per common share – basic
Weighted average common shares outstanding – basic

December 31,

September 30,

June 30,

March 31,

Quarter Ended

$164,268
79,580
68,835
0.67
102,603

$ 139,908
62,976
53,749
0.57
93,671

$152,057
74,878
66,082
0.66
100,687

$ 132,943
52,670
43,443
0.49
89,431

$148,203
69,746
60,025
0.60
99,445

$ 129,651
42,513
33,286
0.38
88,656

$142,021
67,953
58,241
0.59
98,472

$ 117,765
57,111
47,884
0.55
87,724

Note 17 – Subsequent Events

Financing Transactions – On January 13, 2004, the Company
closed $200.0 million of term financing with a leading financial insti-
tution that is secured by certain corporate bond investments and
other lending securities. A number of these investments were previ-
ously financed under existing credit facilities. The new facility bears
interest at LIBOR+1.05% – 1.50% and has a final maturity date of
January 2006.

Hedging Transactions – On March 11, 2004, the Company
entered into $635.0 million of pay-fixed interest rate swaps at a
weighted average fixed rate of 1.14% and maturing September 2004.
On January 23, 2004, in connection with the Company’s
fixed-rate corporate bonds, the Company entered into four pay-
floating interest rate swaps struck at 3.678%, 3.713%, 3.686% and
3.684% with notional amounts of $105.0 million, $100.0 million,
$100.0 million and $45.0 million, respectively, and maturing on
January 15, 2009. The Company pays six-month LIBOR and receives
the stated fixed rate in return. These swaps mitigate the risk of
changes in the fair value of $350.0 million of five-year Senior Notes
attributable to changes in LIBOR.

In addition, on January 15, 2004, the Company entered
into three forward starting swaps all with 10-year terms and rates of
4.484%, 4.502% and 4.500% and notional amounts of $100.0 mil-
lion, $50.0 million and $50.0 million, respectively, and were used to
lock-in swap rates related to a portion of planned future corporate
unsecured fixed-rate bond issuances. These three swaps were set-
tled in connection with the Company’s issuance of $250.0 million of
10-year Senior Notes in March 2004 (see discussion below).

Capital Market Transactions – On March 12, 2004, the
Company issued $175.0 million of Senior Floating Rate Notes due
2007. The Notes will bear interest at three-month LIBOR+1.25%.
The Company used the net proceeds to repay secured indebtedness.
On March 2, 2004, the Company issued $250.0 million of
5.70% Senior Notes due 2014. The Notes were sold at 99.66% of
their principal amount to yield 5.75%. The Notes are unsecured senior
obligations of the Company. The Company used the proceeds for
general corporate purposes, including to repay secured indebtedness
and to fund investment activity.

On February 25, 2004, the Company completed an under-
written public offering of 5.0 million shares of its 7.50% Series I
Cumulative Redeemable Preferred Stock, having a liquidation prefer-
ence of $25.00 per share and a redemption date beginning March 1,
2009. The Company will use the net proceeds from the offering of
$121.0 million to redeem approximately $110.0 million aggregate
principal amount of its outstanding 8.75% Senior Notes due 2008 at
a price of 108.75% of their principal amount plus accrued interest to
the redemption date.

On January 23, 2004, the Company issued $350.0 million
of 4.875% Senior Notes due in 2009. The Notes were sold at

99.89% of their principal amount to yield 4.90%. The Notes are
unsecured senior obligations of the Company. The Company used the
proceeds to repay outstanding secured borrowings.

On January 22, 2004, the Company completed a private
placement of 3.3 million shares of its Series H Variable Rate
Cumulative Redeemable Preferred Stock, having a liquidation prefer-
ence of $25.00 per share and redeemable at par at any time from the
purchase date through the first four months. The dividends on the
Series H Preferred Stock will accrue at 7.65%, 8.15%, 8.65%, 9.15%
and 9.65% for month one, two, three, four, five and thereafter,
respectively. The Company specifically used the proceeds from this
offering to redeem the Series B and C Cumulative Redeemable
Preferred Stock on February 23, 2004. On January 27, 2004, the
Company redeemed all Series H Preferred Stock using excess liquidity
from its secured credit facilities.

In addition, the Chief Executive Officer will purchase an
80.00% interest in the Company’s 2006 high performance unit pro-
gram for directors and executive officers. This performance program
was approved by the Company’s shareholders in 2003 and is
described in detail in the Company’s 2003 annual proxy statement.
The purchase price to be paid by the Chief Executive Officer will be
based upon a valuation prepared by an independent investment-
banking firm. The interests purchased by the Chief Executive Officer
will have no value to him unless the Company achieves total share-
holder returns in excess of those achieved by peer group indices, all as
more fully described in the Company’s 2003 annual proxy statement.

93.

common stock price and dividends (unaudited)

The high and low sales prices per share of Common Stock

The following table sets forth the dividends paid or

are set forth below for the periods indicated.

declared by the Company on its Common Stock:

Quarter Ended

2002
March 31, 2002
June 30, 2002
September 30, 2002
December 31, 2002
2003
March 31, 2003
June 30, 2003
September 30, 2003
December 31, 2003

High

Low

Quarter Ended

Shareholder Record Date

Dividend/Share

$28.90
$31.45
$29.55
$28.40

$24.59
$28.50
$25.30
$25.90

$29.90 $27.05
$36.60 $29.68
$38.95 $35.00
$40.00 $37.25

2002(1)
March 31, 2002
June 30, 2002
September 30, 2002
December 31, 2002
2003(2)
March 31, 2003
June 30, 2003
September 30, 2003
December 31, 2003

April 15, 2002
July 15, 2002
October 15, 2002
December 16, 2002

April 15, 2003
July 15, 2003
October 15, 2003
December 15, 2003

$0.6300
$0.6300
$0.6300
$0.6300

$0.6625
$0.6625
$0.6625
$0.6625

On March 1, 2004, the closing sale price of the Common
Stock as reported by the NYSE was $42.50. The Company had
approximately 2,980 holders of record of Common Stock as of
March 1, 2004.

(2)

Explanatory Notes:
(1)

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.
For tax reporting purposes, the 2003 dividends were classified as 68.90% ($1.8258)
ordinary income, 2.46% ($0.0651) 20.00% capital gain, 1.90% ($0.0503) 15.00% cap-
ital gain (post May 5, 2003), 2.67% ($0.0709) 25.00% Section 1250 capital gain and
24.08% ($0.6380) return of capital for those shareholders who held shares of the
Company for the entire year.

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Directors

Officers

Regional Offices

Jay Sugarman (3)
Chairman and
Chief Executive Officer,
iStar Financial Inc.

Willis Andersen, Jr. (1)
Principal,
REIT Consulting Services

Robert W. Holman, Jr. (4)
Chairman and
Chief Executive Officer,
National Warehouse
Investment Company

Robin Josephs (1) (2)
President, Ropasada, LLC

Matthew J. Lustig (1) (2)
Managing Director,
Lazard Frères
Real Estate Investors, LLC

John G. McDonald (2) (4)
Professor of Finance,
Stanford University
Graduate School of Business

George R. Puskar (3) (4)
Former Chairman,
Lend Lease
Real Estate Investments

Jeffrey A. Weber (3)
President and
Chief Executive Officer,
William A.M. Burden & Co., LP

(1) Audit Committee
(2) Compensation Committee
Investment Committee
(3)

(4) Nominating and

Governance Committee

Jay Sugarman
Chairman and
Chief Executive Officer

Catherine D. Rice
Chief Financial Officer

Timothy J. O’Connor
Executive Vice President and
Chief Operating Officer

Nina B. Matis
Executive Vice President and
General Counsel

Barbara Rubin
President – iStar Asset Services

175 Federal Street, 8th Floor
Boston, MA 02110
tel: (617) 292-3333
fax: (617) 423-3322

1250 Poydras Street,
Suite 200
New Orleans, LA 70113
tel: (504) 529-8172
fax: (504) 523-9474

6565 North MacArthur Blvd.
Suite 410
Irving, TX 75039
tel: (972) 506-3131
fax: (972) 501-0078

Executive Vice Presidents

Employees

Daniel S. Abrams
Steven R. Blomquist
Roger M. Cozzi
Jeffrey R. Digel
R. Michael Dorsch III
Barclay G. Jones III
H. Cabot Lodge III
Michelle M. MacKay
Diane Olmstead
Andrew C. Richardson

Senior Vice Presidents

Jeffrey N. Brown
Philip S. Burke
James D. Burns
Chase S. Curtis, Jr.
Geoffrey M. Dugan
John F. Kubicko
Elizabeth B. Smith
Colette J. Tretola

Headquarters

iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9494

Super-Regional Offices

One Embarcadero Center,
33rd Floor
San Francisco, CA 94111
tel: (415) 391-4300
fax: (415) 391-6259

3480 Preston Ridge Road,
Suite 575
Alpharetta, GA 30005
tel: (678) 297-0100
fax: (678) 297-0101

180 Glastonbury Blvd.,
Suite 201
Glastonbury, CT 06033
tel: (860) 815-5900
fax: (860) 815-5901

At March 14, 2004,
the Company had
155 employees.

Independent Auditors

PricewaterhouseCoopers LLP
New York, NY

Registrar and
Transfer Agent

EquiServe Trust
Company, N.A.
P.O. Box 43069
Providence, RI 02940-3069
tel: (800) 756-8200
http://www.equiserve.com

Dividend
Reinvestment Plan

Registered shareholders may
reinvest dividends through
the Company’s dividend reinvest-
ment plan. For more information,
please call the Transfer Agent or
the Company’s headquarters.

Annual Meeting of
Shareholders

May 25, 2004, 9:00 a.m. ET
Sofitel Hotel
45 West 44th Street,
New York, NY 10036

Investor Information Services

For help with questions about the
Company, and to receive
additional corporate information,
please contact:

Investor Relations Department
iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9455
e-mail:
investors@istarfinancial.com

iStar Financial Website

http://www.istarfinancial.com

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