Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are included with respect to, among other things, iStar Financial Inc.'s (the "Company's") current business plan, business strategy, portfolio management and liquidity. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and the uncertainties and risks described in Item 1a-"Risk Factors" in our 2008 Annual Report (as defined below), all of which could affect our future results of operations, financial condition and liquidity. For purposes of Management's Discussion and Analysis of Financial Condition and Results of Operations, the terms "we," "our" and "us" refer to iStar Financial Inc. and its consolidated subsidiaries, unless the context indicates otherwise.

The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on form 10-Q and our annual report on Form 10-K for the year ended December 31, 2008 (the "2008 Annual Report"). These historical financial statements may not be indicative of our future performance. We have reclassified certain items in our consolidated financial statements of prior periods to conform to our current financial statements presentation.

Introduction

iStar Financial Inc. is a publicly traded finance company focused on the commercial real estate industry. We primarily provide custom tailored financing to high-end private and corporate owners of real estate, including senior and mezzanine real estate debt, senior and mezzanine corporate capital, as well as corporate net lease financing and equity. We are taxed as a real estate investment trust, or "REIT" and provide innovative and value added financing solutions to our customers. We deliver customized financial products to sophisticated real estate borrowers and corporate customers who require a high level of flexibility and service. Our two primary lines of business are lending and corporate tenant leasing.

Our primary sources of revenues are interest income, which is the interest that borrowers pay on loans, and operating lease income, which is the rent that corporate customers pay to lease our Corporate Tenant Lease ("CTL") properties. We primarily generate income through the "spread" or "margin," which is the difference between the revenues generated from loans and leases and interest expense and the cost of CTL operations. We generally seek to match-fund our revenue generating assets with either fixed or floating rate debt of a similar maturity so that changes in interest rates or the shape of the yield curve will have a minimal impact on earnings.

Executive Overview

Financial market conditions, including the ongoing credit crisis and economic downturn, have continued to adversely affect our business and operating results through the third quarter of 2009. The market deterioration has led to a decline in commercial real estate values. This decline in value, combined with a lack of available debt financing for commercial and residential real estate assets, have limited borrowers' ability to repay or refinance their loans. The combination of these factors resulted in significant additions to non-performing loans and the related provision for loan losses during the third quarter. These factors and their effect on our operations have also resulted in increases in our financing costs, a

continuing inability to access the unsecured debt markets, depressed prices for our Common Stock and continued suspension of quarterly Common Stock dividends. We expect these trends to continue in the forseeable future.

During the third quarter of 2009, we incurred a net loss of $(247.4) million on $210.2 million of revenue. These financial results primarily resulted from a provision for loan losses of $345.9 million and impairments of other assets of $17.4 million, which were recognized during the quarter. The provision for loan losses was driven by additional non-performing loans resulting in non-performing loans totaling $4.40 billion, or 42.0% of Managed Loan Value (as defined below in "Risk Management"), as of September 30, 2009, compared to $4.61 billion, or 39.6% of Managed Loan Value, at June 30, 2009 and $3.46 billion, or 27.5% of Managed Loan Value, at December 31, 2008. The increase in non-performing loans resulted from the continued deterioration in the commercial and residential real estate markets and weakened economic conditions impacting our borrowers, who continue to have difficulty refinancing or selling their projects in order to repay their loans in a timely manner. In addition, the balance of our Real estate held for investment, net ("REHI") and Other real estate owned ("OREO") assets have increased as we have obtained title to properties through foreclosure or through deed-in-lieu of foreclosure as part of our effort to resolve non-performing loans. The losses were partially offset by the repurchase of $255.5 million face amount of senior unsecured notes resulting in the recognition of $91.7 million in net gains on the early extinguishment of debt.

As liquidity in the capital markets has continued to be severely constrained and our repayments have become more uncertain, we have utilized asset sales, additional secured financing and a secured note exchange transaction to supplement our liquidity. As part of this strategy, we completed a new secured term loan facility and restructuring of our existing unsecured revolving credit facilities with participating members of our bank lending group during the first quarter of 2009. The new and restructured facilities also provide us with additional operating flexibility through the modification of certain financial covenants. In addition, during the second quarter of 2009, we completed a series of private offers through which $1.01 billion aggregate principal amount of our senior unsecured notes of various series were exchanged for $634.8 million aggregate principal amount of new second-lien senior secured notes issued by us and guaranteed by certain of our subsidiaries. Concurrent with the exchange offer, we purchased for cash $12.5 million par value of our outstanding senior floating rate notes due September 2009 pursuant to a cash tender offer. As of September 30, 2009, we had $187.1 million of unrestricted cash.

Results of Operations for the Three Months Ended September 30, 2009 compared to the Three Months Ended September 30, 2008

                                                     2008, As
                                         2009       Adjusted(1)     $ Change     % Change
                                            (in thousands)
Interest income                       $  124,701    $    237,006   $ (112,305 )        (47 )%
Operating lease income                    76,037          77,378       (1,341 )         (2 )%
Other income                               9,454          22,922      (13,468 )        (59 )%

   Total revenue                         210,192         337,306     (127,114 )        (38 )%

Interest expense                         113,938         169,665      (55,727 )        (33 )%
Operating costs-corporate tenant
lease assets                               5,673           5,200          473            9 %
Depreciation and amortization             25,298          23,760        1,538            6 %
General and administrative                27,808          37,694       (9,886 )        (26 )%
Provision for loan losses                345,892         411,142      (65,250 )        (16 )%
Impairment of other assets                17,351          88,075      (70,724 )        (80 )%
Other expense                             13,448            (972 )     14,420        >(100 )%

   Total costs and expenses              549,408         734,564     (185,156 )        (25 )%

Gain on early extinguishment of
debt                                      91,701          68,321       23,380           34 %
Earnings (loss) from equity method
investments                                7,370           1,905        5,465         >100 %
Income (loss) from discontinued
operations                                (8,106 )         3,194      (11,300 )      >(100 )%
Gain from discontinued operations            809          19,955      (19,146 )        (96 )%

Net income (loss)                     $ (247,442 )  $   (303,883 ) $   56,441          (19 )%

Explanatory Notes:

Revenue-The decrease in total revenue was primarily due to lower interest income, which decreased as a result of the increasing level of non-performing loans within the portfolio. In addition, interest income was lower due to a decrease in loans outstanding and a decrease in the average one-month LIBOR to 0.27% in the third quarter of 2009 from 2.62% in the third quarter of 2008.

Costs and expenses-Total costs and expenses decreased primarily due to decreases in our provision for loan losses, impairment of other assets, interest expense and general and administrative expenses which were offset by an increase in other expense.

The decrease in our provision for loan losses was primarily due to fewer loans moving to non-performing status during the third quarter of 2009 as compared to the third quarter of 2008, combined with the decrease in the performing loan asset base utilized in the calculation of our general reserves. However, the continued deterioration in the commercial and residential real estate markets and weakened economic conditions have continued to negatively impact our borrowers' ability to service their debt and refinance their loans at maturity. See "Risk Management" and "Executive Overview."

During the three months ended September 30, 2009, as a result of the continued deterioration in the commercial and residential real estate markets, we recorded impairment charges of $8.0 million to reduce the carrying value of OREO assets to their revised estimated fair values less costs to sell, $7.1 million related to two cost method equity investments in our other investments portfolio and $2.2 million to reduce a held-to-maturity security in our loans and other lending investments portfolio that were other-than-temporarily impaired. During the same period in 2008, we recorded impairment charges of $36.2 million to reduce the carrying value of OREO assets to their revised estimated fair values less costs

to sell, $30.0 million related to one cost method equity method investment in our other investments portfolio and $21.9 million of impairments for certain held-to-maturity and available-for-sale securities in our loans and other lending investments portfolio that were other-than-temporarily impaired.

Interest expense decreased primarily due to the repayment and retirement of debt during the last twelve months as well as the exchange of senior unsecured notes for new second-lien senior secured notes completed in the second quarter of 2009. In addition, a decrease in average borrowing rates to 4.09% from 5.10%, driven by decreases in LIBOR, contributed to the decrease in interest expense.

General and administrative expenses were lower partly due to lower income tax expense related to certain of our investments held in taxable REIT subsidiaries. Additionally, payroll and payroll related costs declined 16% primarily as a result of reductions in headcount.

Other expense increased primarily due to additional holding costs of OREO and REHI assets for the period.

Gain on early extinguishment of debt-During the three months ended September 30, 2009, we retired $255.5 million par value of our senior unsecured notes through open market repurchases which resulted in an aggregate net gain on early extinguishment of debt of $91.7 million. During the same period in 2008, we retired $241.3 million par value of our senior unsecured notes through open market repurchases which resulted in an aggregate net gain on early extinguishment of debt of $68.3 million.

Earnings (loss) from equity method investments-Earnings from equity method investments increased primarily due to stronger market performance that affected our strategic investments.

Income (loss) from discontinued operations-For the three months ended September 30, 2009, income (loss) from discontinued operations includes impairment charges of $8.9 million on CTL assets sold during the period or held for sale at the end of the period. Additionally, the same period in 2008 included higher operating results for CTL assets sold or classified as held for sale in 2009.

Gain from discontinued operations-We sold two CTL assets during the three months ended September 30, 2009 and recognized $0.8 million of gains on the sale. During the three months ended September 30, 2008, we sold four CTL assets for gains of $20.1 million.

Results of Operations for the Nine Months Ended September 30, 2009 compared to the Nine Months Ended September 30, 2008

                                                      2008, As
                                         2009       Adjusted(1)     $ Change     % Change
                                            (in thousands)
Interest income                       $   444,109    $   748,460   $ (304,351 )        (41 )%
Operating lease income                    229,246        229,952         (706 )          - %
Other income                               20,408         88,707      (68,299 )        (77 )%

   Total revenue                          693,763      1,067,119     (373,356 )        (35 )%

Interest expense                          372,288        503,915     (131,627 )        (26 )%
Operating costs-corporate tenant
lease assets                               17,655         14,802        2,853           19 %
Depreciation and amortization              73,004         70,876        2,128            3 %
General and administrative                105,617        124,474      (18,857 )        (15 )%
Provision for loan losses               1,039,004        777,302      261,702           34 %
Impairment of other assets                 60,729        145,766      (85,037 )        (58 )%
Impairment of goodwill                      4,186         39,092      (34,906 )        (89 )%
Other expense                              76,636          6,127       70,509         >100 %

   Total costs and expenses             1,749,119      1,682,354       66,765            4 %

Gain on early extinguishment of
debt                                      446,957         69,916      377,041         >100 %
Gain on sale of joint venture
interest                                        -        280,219     (280,219 )       (100 )%
Earnings (loss) from equity method
investments                               (11,266 )        5,377      (16,643 )      >(100 )%
Income (loss) from discontinued
operations                                 (9,248 )       19,358      (28,606 )      >(100 )%
Gain from discontinued operations          12,426         72,487      (60,061 )        (83 )%

Net income (loss)                     $  (616,487 )  $  (167,878 ) $ (448,609 )       >100 %

Explanatory Note:

Revenue-The decrease in total revenue was primarily due to lower interest income and other income. Interest income decreased primarily due to the increasing level of non-performing loans within the portfolio. In addition, interest income was lower due to a decrease in total loans outstanding and a decrease in the average one-month LIBOR to 0.37% during the nine months ended September 30, 2009, from 2.83% during the nine months ended September 30, 2008.

Other income during the nine months ended September 30, 2008 included a $44.2 million gain recognized from the redemption of a participation interest in a lending investment and a $12.0 million gain recorded when we exchanged a cost method equity investment for a loan receivable. Other income also decreased as a result of fewer prepayment penalties received during the nine months ended September 30, 2009 as compared to the same period in 2008.

Costs and expenses-Total costs and expenses increased primarily due to the increase in our provision for loan losses and other expenses and was offset by decreases in interest expense, impairments of other assets and goodwill and general and administrative expenses.

The increase in our provision for loan losses was primarily due to additional asset-specific reserves that were required due to the increasing level of non-performing loans within the portfolio, resulting from the continued deterioration in the commercial and residential real estate markets and weakened economic conditions that have negatively impacted our borrowers' ability to service their debt and refinance their loans at maturity. See "Risk Management" and "Executive Overview."

Other expense was higher primarily due to a $42.4 million charge incurred during the second quarter of 2009 pursuant to a settlement agreement under which we terminated a long-term lease for new headquarters space and settled all disputes with the landlord. The remaining increase in other expense primarily relates to additional holding costs associated with the increasing balance of OREO and REHI properties held during the period.

Interest expense decreased primarily due to the repayment and retirement of debt as well as the exchange of senior unsecured notes for new second-lien senior secured notes completed in the second quarter of 2009. In addition, a decrease in average borrowing rates to 3.92% from 4.96%, driven by decreases in LIBOR, contributed to the decrease in interest expense.

During the nine months ended September 30, 2009, as a result of the continued deterioration in the commercial and residential real estate markets, we recorded impairment charges of $36.9 million to reduce the carrying value of OREO assets to their revised estimated fair values less costs to sell, $12.2 million related to investments in our other investments portfolio and $11.7 million for certain held-to-maturity and available-for-sale securities in our loans and other lending investments portfolio that were other-than-temporarily impaired. During the same period in 2008, we recorded impairment charges of $61.9 million for certain held-to-maturity and available-for-sale securities in our loans and other lending investments portfolio that were other-than-temporarily impaired, $36.2 million to reduce the carrying value of OREO assets to their revised estimated fair values less costs to sell, $35.2 million for a cost method equity investment in our other investments portfolio and $12.5 million to reduce the Fremont CRE intangible carrying value to its revised estimated fair value.

At the end of the first quarter of 2009, due to the overall deterioration in the commercial real estate market, we determined our goodwill was impaired and recorded an impairment charge of $4.2 million, eliminating goodwill in our corporate tenant leasing reporting unit. At the end of the second quarter of 2008, due to the overall deterioration in the commercial real estate market, we determined our goodwill was impaired and recorded a non-cash impairment charge of $39.1 million, eliminating goodwill in our corporate real estate lending reporting unit.

General and administrative expenses were reduced primarily due to lower payroll and payroll related costs, which declined 21% as a result of reductions in headcount. Additionally, we had lower income tax expense related to certain of our investments held in taxable REIT subsidiaries.

Gain on early extinguishment of debt-During the nine months ended September 30, 2009, we retired $913.7 million par value of our senior unsecured notes through open market repurchases, completed our secured note exchange transactions and tendered $12.5 million of our outstanding senior floating rate notes which resulted in an aggregate net gain on early extinguishment of debt of $447.0 million. During the same period in 2008, we retired $264.9 million par value of our senior unsecured notes through open market repurchases which resulted in an aggregate net gain on early extinguishment of debt of $69.9 million.

Gain on sale of joint venture interest-In April 2008, we closed on the sale of our TimberStar Southwest joint venture for a gross sales price of $1.71 billion, including the assumption of debt. We received net proceeds of $417.0 million for our interest in the venture and recorded a gain of $280.2 million.

Earnings (loss) from equity method investments-Earnings (loss) from equity method investments decreased primarily due to a $9.4 million non-cash out of period charge to recognize additional losses from an equity method investment as a result of additional depreciation expense that should have been recorded at the equity method entity in prior periods (see Note 7 of the Notes to the Consolidated Financial Statements). The decrease was also attributable to weaker market performance that affected our strategic investments during the first nine months of 2009 as compared to the same period in 2008.

Income (loss) from discontinued operations-For the nine months ended September 30, 2009, income (loss) from discontinued operations includes impairment charges of $11.5 million on CTL assets sold

during the period or held for sale at the end of the period. Additionally, the same period in 2008 included higher operating results for CTL and TimberStar assets sold or classified as held for sale in 2008 and 2009.

Gain from discontinued operations-We sold six CTL assets during the nine months ended September 30, 2009 and recognized gains of $12.4 million. During the nine months ended September 30, 2008, we sold several CTL assets and our Maine timber property for gains of $72.5 million.

Adjusted Earnings

We measure our performance using adjusted earnings in addition to net income. Adjusted earnings represent net income attributable to iStar Financial Inc. and allocable to common shareholders, HPU holders and Participating Security holders computed in accordance with GAAP, before depreciation, depletion, amortization, gain from discontinued operations, ineffectiveness on interest rate hedges, impairments of goodwill and intangible assets, extraordinary items and cumulative effect of change in accounting principle. Adjustments for joint ventures reflect our share of adjusted earnings calculated on the same basis.

We believe that adjusted earnings is a helpful measure to consider, in addition to net income, because this measure helps us to evaluate how our commercial real estate finance business is performing compared to other commercial finance companies, without the effects of certain GAAP adjustments that are not necessarily indicative of current operating performance. The most significant GAAP adjustments that we exclude in determining adjusted earnings are depreciation, depletion, amortization and impairments of goodwill and intangible assets, which are typically non-cash charges. We do not exclude non-cash impairment charges on tangible assets or provisions for loan loss reserves. As a commercial finance company that focuses on real estate lending and corporate tenant leasing, we record significant depreciation on our real estate assets, depletion on our timber assets, and amortization of deferred financing costs associated with our borrowings. Depreciation, depletion and amortization do not affect our daily operations, but they do impact financial results under GAAP. By measuring our performance using adjusted earnings and net income (loss), we are able to evaluate how our business is performing both before and after giving effect to recurring GAAP adjustments such as depreciation, depletion and amortization (including earnings from joint venture interests on the same basis) and excluding impairments of goodwill and intangible assets and gains or losses from the sale of assets that will no longer be part of continuing operations.

Adjusted earnings is not an alternative or substitute for net income in accordance with GAAP as a measure of our performance. Rather, we believe that adjusted earnings is an additional measure that helps us analyze how our business is performing. Adjusted earnings should not be viewed as an alternative measure of either our operating liquidity or funds available for our cash needs or for distribution to our

shareholders. In addition, we may not calculate adjusted earnings in the same manner as other companies that use a similarly titled measure.

                                              For the                      For the
                                         Three Months Ended           Nine Months Ended
                                           September 30,                September 30,
                                                    2008, As                     2008, As
                                        2009       Adjusted(1)       2009       Adjusted(1)
                                                         (in thousands)
. . .