UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

Commission File Number: 001-32330

NORTHSTAR REALTY FINANCE CORP.(Exact Name of Registrant as Specified in its Charter)

Maryland(State or Other Jurisdiction of
Incorporation or Organization)

11-3707493(IRS Employer
Identification No.)


399 Park Avenue, 18th Floor New York, NY 10022(Address of Principal Executive Offices, Including Zip Code)

(212) 547-2600(Registrant's Telephone Number, Including Area Code)

Indicate
by the check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

|Large accelerated filer ý |  | Accelerated filer o |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

The
Company has one class of common stock, par value $0.01 per share, with 62,305,191 shares outstanding as of May 8, 2008.



---





NORTHSTAR REALTY FINANCE CORP.        QUARTERLY REPORT        For the Three Months Ended March 31, 2008

TABLE OF CONTENTS

Index



PagePart I.

Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007

3Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and March 31, 2007

4Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2008 and March 31, 2007

5Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and March 31, 2007

6Notes to the Condensed Consolidated Financial Statements (unaudited)

7Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

34Item 3.

Quantitative and Qualitative Disclosures about Market Risk

52Item 4.

Controls and Procedures

56Part II.

Other Information

57Item 6.

Exhibits

57Signatures

61


2

---





NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETS        (Amounts in Thousands)

March 31,
2008

December 31,
2007(unaudited)ASSETS:Cash and cash equivalents

$
139,485

$
153,829Restricted cash


188,702


202,295Operating real estatenet


1,133,284


1,134,136Available for sale securities, at fair value


453,260


549,522Collateral held by broker


13,576


12,746Real estate debt investments, net


2,011,885


2,007,022Corporate loan investments


430,218


457,139Investments in and advances to unconsolidated ventures


32,394


33,143Receivables, net of allowance of $0 and $1 in 2008 and 2007, respectively


24,376


32,141Unbilled rents receivable


6,448


5,684Deferred costs and intangible assets, net


89,029


126,677Other assets


39,561


78,448Total assets


4,562,218


4,792,782LIABILITIES AND STOCKHOLDERS' EQUITY:Liabilities:Mortgage notes and loans payable


911,207


912,365Exchangeable senior notes, measured at fair value as of March 31, 2008


144,546


172,500Bonds payable, measured at fair value as of March 31, 2008


1,121,174


1,654,185Credit facilities


462,045


501,432Secured term loan


423,667


416,934Liability to subsidiary trusts issuing preferred securities, measured at fair value as of March 31, 2008


135,686


286,258Repurchase obligations





1,864Securities sold, not yet purchased, at fair value


13,506


12,856Obligations under capital leases


3,564


3,541Accounts payable and accrued expenses


33,862


34,893Escrow deposits payable


60,342


65,445Derivative liability, at fair value


83,497


49,280Other liabilities


40,040


40,695Total liabilities


3,433,136


4,152,248Minority interest in operating partnership


50,864


7,534Minority interest in joint ventures


14,920


14,961Stockholders' Equity:8.75% Series A preferred stock, $0.01 par value, $25 liquidation preference per share, 2,400,000 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively


57,867


57,8678.25% Series B preferred stock, $0.01 par value, $25 liquidation preference per share, 7,600,000 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively


183,505


183,505Common stock, $0.01 par value, 500,000,000 shares authorized, 62,303,625 and 61,719,469 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively


623


617Additional paid-in capital


602,100


595,418Retained earnings (deficit)


323,668


(40,075
)Accumulated other comprehensive loss


(104,465
)

(179,293
)Total stockholders' equity


1,063,298


618,039Total liabilities and stockholders' equity

$
4,562,218

$
4,792,782


See accompanying notes to condensed consolidated financial statements

3

---





NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (Amounts in Thousands, Except Per Share Data)        (Unaudited)

Three Months
Ended
March 31, 2008

Three Months
Ended
March 31, 2007(unaudited)Revenues and other income:Interest income

$
63,705

$
58,304Interest incomerelated parties


3,761


2,965Rental and escalation income


28,957


19,332Advisory and management fee incomerelated parties


2,330


1,421Other revenue


976


2,232Total revenues


99,729


84,254Expenses:Interest expense


54,947


47,557Real estate propertiesoperating expenses


2,048


1,942Asset management feesrelated parties


2,106


645Provision for loan loss


750


General and administrative:Salaries and equity based compensation(1)


11,730


8,791Auditing and professional fees


2,441


2,705Other general and administrative


3,883


3,203Total general and administrative


18,054


14,699Depreciation and amortization


9,938


6,590Total expenses


87,843


71,433Income from operations


11,886


12,821Equity in (loss)/earnings of unconsolidated ventures


(178
)

16Unrealized gain (loss) on investments and other


212,075


(7,291
)Realized gain (loss) on investments and other


10


2,541Income from continuing operations before minority interest


223,793


8,087Minority interest in operating partnership


(23,044
)

(376
)Minority interest in joint ventures


(245
)

Income from continuing operations


200,504


7,711Income (loss) from discontinued operations, net of minority interest





(48
)Net income


200,504


7,663Preferred stock dividends


(5,231
)

(1,313
)Net income available to common stockholders

$
195,273

$
6,350Net income per share from continuing operations (basic/diluted)

$
3.14

$
0.10Income per share from discontinued operations (basic/diluted)





Gain on sale of discontinued operations and joint venture interest (basic/diluted)





Net income available to common stockholders

$
3.14

$
0.10Weighted average number of shares of common stock:Basic


62,243,736


61,329,675Diluted


69,589,079


64,126,691


---

See accompanying notes to condensed consolidated financial statements

4

---





NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        (Amounts in Thousands, Except Per Share Data)        (Unaudited)

|                                                             |  | Three
Months Ended
March 31,
2008 |         | Three
Months Ended
March 31,
2007 |  
|------------------------------------------------------------ |  | --------------------------------- | ------- | --------------------------------- | -
|Net income                                                   |  | $                                 | 195,273 |                                   | $
|Unrealized gain (loss) on available for sale securities      |  |                                   | (11,544 | )                                 |  
|Change in fair value of derivatives                          |  |                                   | (5,849  | )                                 |  
|Reclassification adjustment for gains included in net income |  |                                   | 1,255   |                                   |  
|                                                             |  |                                   |         |                                   |  
|Comprehensive income                                         |  | $                                 | 179,135 |                                   | $
|                                                             |  |                                   |         |                                   |  

See
accompanying notes to condensed consolidated financial statements

5

---





NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (Amounts in Thousands, Except Per Share Data)        (Unaudited)

|                                                    |                                                                | Three
Months Ended
March 31, 2008 |          | Three
Months Ended
March 31, 2007 |  
|--------------------------------------------------- | -------------------------------------------------------------- | --------------------------------- | -------- | --------------------------------- | -
|
|Net cash provided by operating activities           |                                                                | $                                 | 23,937   |                                   | $
|Cash flows from investing activities:               |                                                                |                                   |          |                                   |  
|                                                    | Acquisition of operating real estate, net                      |                                   |          | (6,476                            | )
|                                                    | Acquisition of available for sale securities                   |                                   |          |                                  |  
|                                                    | Proceeds from disposition of securities available for sale     |                                   |          |                                  |  
|                                                    | Available for sale securities repayments                       |                                   |          | 1,543                             |  
|                                                    | Increase in term debt transaction warehouse deposits           |                                   |          |                                  |  
|                                                    | Acquisitions/originations of real estate debt investments      |                                   |          | (58,931                           | )
|                                                    | Real estate debt investments repayments                        |                                   |          | 98,694                            |  
|                                                    | Intangible asset related to acquisition                        |                                   |          |                                  |  
|                                                    | Restricted cash for investment activities                      |                                   |          | 22,836                            |  
|                                                    | Investing deposits                                             |                                   |          | (3,574                            | )
|                                                    | Corporate debt investment acquisitions                         |                                   |          | (16,148                           | )
|                                                    | Proceeds from sale of corporate debt investment                |                                   |          | 27,420                            |  
|                                                    | Corporate debt investment repayment                            |                                   |          | 15,567                            |  
|                                                    | Distributions from unconsolidated ventures                     |                                   |          | 462                               |  
|                                                    | Other loans repayment                                          |                                   |          | 10,000                            |  
|                                                    |                                                                |                                   |          |                                   |  
|Net cash provided by/(used) in investing activities |                                                                |                                   | 91,393   |                                   |  
|Cash flows from financing activities:               |                                                                |                                   |          |                                   |  
|                                                    | Collateral held by broker                                      |                                   |          | (830                              | )
|                                                    | Securities sold, not yet purchased                             |                                   |          |                                  |  
|                                                    | Settlement of short sale                                       |                                   |          |                                  |  
|                                                    | Collateral held by swap counter party                          |                                   |          | (8,867                            | )
|                                                    | Mortgage notes and loan borrowings                             |                                   |          |                                  |  
|                                                    | Mortgage principal repayments                                  |                                   |          | (1,158                            | )
|                                                    | Borrowings under credit facilities                             |                                   |          | 18,369                            |  
|                                                    | Repayments on credit facilities                                |                                   |          | (57,756                           | )
|                                                    | Repurchase obligation borrowings                               |                                   |          |                                  |  
|                                                    | Repurchase obligation repayments                               |                                   |          | (1,863                            | )
|                                                    | Proceeds from bonds                                            |                                   |          | 33,000                            |  
|                                                    | Bond repayments                                                |                                   |          | (78,300                           | )
|                                                    | Other loans payable                                            |                                   |          |                                  |  
|                                                    | Borrowing under secured loan                                   |                                   |          | 9,748                             |  
|                                                    | Secured term loan repayment                                    |                                   |          | (11,875                           | )
|                                                    | Borrowings from subsidiary trusts issuing preferred securities |                                   |          |                                  |  
|                                                    | Payment of deferred financing costs                            |                                   |          | (3                                | )
|                                                    | Proceeds from preferred stock offering                         |                                   |          |                                  |  
|                                                    | Proceeds from dividend reinvestment and stock purchase plan    |                                   |          | 280                               |  
|                                                    | Dividends (common and preferred) and distributions             |                                   |          | (30,419                           | )
|                                                    | Offering costs                                                 |                                   |          |                                  |  
|                                                    |                                                                |                                   |          |                                   |  
|Net cash (used) in/provided by financing activities |                                                                |                                   | (129,674 | )                                 |  
|Net decrease in cash & cash equivalents             |                                                                |                                   | (14,344  | )                                 |  
|Cash & cash equivalentsbeginning of period         |                                                                |                                   | 153,829  |                                   |  
|                                                    |                                                                |                                   |          |                                   |  
|Cash & cash equivalentsend of period               |                                                                | $                                 | 139,485  |                                   | $
|                                                    |                                                                |                                   |          |                                   |  

See accompanying notes to condensed consolidated financial statements

6

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        Amount in Thousands, Except per Share Data        (Unaudited)

1. Formation and Organization

NorthStar Realty Finance Corp., a Maryland corporation (the "Company"), is a self-administered and self-managed real estate investment
trust ("REIT"), which was formed in October 2003 in order to continue and expand the real estate debt, real estate securities and net lease businesses conducted by NorthStar Capital Investment Corp.
("NCIC"). Substantially all of the Company's assets are held by, and it conducts its operations through, NorthStar Realty Finance Limited Partnership, a Delaware limited partnership and the operating
partnership of the Company (the "Operating Partnership"). On October 29, 2004, the Company closed its initial public offering (the "IPO") pursuant to which it issued 20,000,000 shares of common
stock, with proceeds to the Company of approximately $160.1 million, net of issuance costs of $19.9 million. On November 19, 2004, the Company issued an additional 1,160,750
shares of common stock pursuant to the exercise of the overallotment option by the underwriters of the IPO, with proceeds to the Company of $9.7 million, net of issuance costs of
$0.7 million. In connection with the IPO, the Company also issued 50,000 shares of common stock, as partial compensation for underwriting services, to the lead underwriter of the IPO. In
addition, 38,886 shares of restricted common stock were granted to the Company's non-employee directors. Simultaneously with the closing of the IPO on October 29, 2004, three
majority-owned subsidiaries of NCIC (the "NCIC Contributing Subsidiaries") contributed certain controlling and non-controlling interests in entities through which NCIC conducted its
subordinate real estate debt, real estate securities and net lease businesses (collectively the "Initial Investments") to the Operating Partnership in exchange for an aggregate of 4,705,915 units of
limited partnership interest in the Operating Partnership (the "OP Units") and approximately $36.1 million in cash (the "Contribution Transactions") and an agreement to pay certain related
transfer taxes on behalf of NCIC for approximately $1.0 million. From their inception through October 29, 2004, neither the Company nor the Operating Partnership had any operations.

The
combination of the Initial Investments contributed to the Operating Partnership represents the predecessor of the Company (the "Predecessor"). The Company succeeded to the business
of the Predecessor upon the consummation of the IPO and the contribution of the initial investments on October 29, 2004. The ultimate owners of the entities which comprise the Predecessor were
NCIC and certain other persons who held minority ownership interests in such entities.

Joint Ventures

In May 2006, the Company entered into a joint venture with Chain Bridge Capital LLC to invest in senior housing and healthcare-related net leased assets,
called Wakefield. In connection with the
formation of the venture, Chain Bridge contributed substantially all of its assets to Wakefield for its $15.1 million membership interest in the joint venture.

At
March 31, 2008, the Company and Chain Bridge had equity of $197.2 million and $12.7 million, respectively. The Company controls all major decisions; accordingly,
the joint venture's financial statements are consolidated into the Company's consolidated financial statements and Chain Bridge's capital is treated as minority interest.

In
March 2007, the Company entered into a joint venture with Monroe Capital Holdco, LLC, or "Monroe," which serves as a platform for originating middle-market loans. The joint
venture originates, structures, and syndicates middle-market corporate loans, including middle-market loans to highly

7

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization (Continued)

leveraged
borrowers. As of March 31, 2008, the Company owned a 95% controlling interest in the joint venture, which is consolidated in the consolidated financial statements and Monroe's capital
is treated as minority interest. As of March 31, 2008, the Company and Monroe had equity capital of $54.0 million and $2.2 million, respectively.

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying condensed consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States have been condensed or
omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial
position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the
results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the Company's consolidated financial statements and
notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission.
Capitalized terms used herein, and not otherwise defined, are defined in the Company's December 31, 2007 consolidated financial statements.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries which are either majority-owned or controlled by the
Company or variable interest entities ("VIE") where the Company is the primary beneficiary in accordance with the provisions of FIN 46(R)-6. All significant intercompany balances
have been eliminated in consolidation.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that could affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

Reclassifications

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

8

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Financial Instruments



Fair value is used to measure many of the Company's financial instruments. In accordance with provisions of SFAS No. 157 "Fair Value Measurements"
("SFAS 157") the fair value of these financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (i.e., the exit price).



In accordance with SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"), the Company has the
one-time option to elect fair value for its financial assets and liabilities. The changes in the fair value of these instruments are recorded in unrealized gain (loss) on investments and
other in the condensed consolidated statements of operations.

Available for Sale Securities

The Company determines the appropriate classification of its investment in securities at the time of purchase and reevaluates such determination at each balance
sheet date. Securities for which the Company does not have the intent or the ability to hold to maturity are classified as available for sale securities. The Company has designated its investments in
the equity notes of unconsolidated securitizations ("equity notes") as available for sale securities as they meet the definition of a debt instrument due to their redemption provisions in accordance
with the provisions of EITF 99-20. The Company's investments in the equity notes are relatively illiquid and their value must be estimated by management.

The
Company carries its available for sale securities at fair market value with the net unrealized gains or losses reported as a component of other comprehensive income; however
available for sale securities for which the Company has elected the fair value option under SFAS 159 are carried at fair value with the net unrealized gains or losses reported in the condensed
consolidated statements of operations.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS 141(R), "Business Combinations" (SFAS 141(R)). This Statement replaces SFAS 141, "Business
Combinations", and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any
noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the
acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the
acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure the noncontrolling
interest in the acquiree at fair value will result in recognizing the goodwill attributable

9

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

to
the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, "Accounting for Income Taxes", to require the acquirer to recognize
changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in
contributed capital, depending on the circumstances. It also amends SFAS 142, "Goodwill and Other Intangible Assets", to, among other things, provide guidance on the impairment testing of
acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the potential impact that the adoption of
SFAS 141(R) could have on its financial statements.

In
December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 amends Accounting Research
Bulletin 51, "Consolidated Financial Statements", to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also
clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160
also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for
fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the potential impact that the adoption of
SFAS 160 could have on its financial statements.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging ActivitiesAn Amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 specifically requires entities to provide enhanced
disclosures addressing the following: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and its related interpretations; and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008.
SFAS 161 will be effective for the Company on January 1, 2009. The Company is currently evaluating the potential impact that the adoption of SFAS 161 will have on its financial
condition, results of operations and disclosures.

10

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments

The Company adopted the provisions of SFAS 157 and 159 effective as of January 1, 2008 and elected to apply the fair value option to the following
financial assets and liabilities existing at the time of adoption:



The
Company has elected the fair value option for these financial instruments for the purpose of enhancing the transparency of its financial condition.

Fair Value Measurements

SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to
measure fair value and enhances disclosure requirements for fair value measurements. In addition, SFAS 157 requires an issuer to incorporate changes in its own credit spreads when determining
the fair value of its liabilities.



In accordance with SFAS 157, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a
three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that
is significant to the fair value measurement of the instrument.

Financial
assets and liabilities recorded on the condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1.

Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives,
most U.S. government and agency securities, and certain other sovereign government obligations).Level 2.

Financial assets and liabilities whose values are based on the following:a)

Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);b)

Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);


11

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

c)

Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); andd)

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain mortgage loans).Level 3.

Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about
the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, certain commercial mortgage whole loans and long-dated or complex derivatives, including certain foreign exchange options
and long-dated options on gas and power).


As
required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2008 by level within the fair value
hierarchy (in thousands):

Assets and Liabilities at Fair ValueLevel 1

Level 2

Level 3

TotalAssets:Available for sale securities:CMBS

$


$
277,821

$


$
277,821Real estate term debt





25,827





25,827REIT debt





73,808





73,808Term debt equity








40,881


40,881Corporate CLO








26,215


26,215Trust preferred securities








8,708


8,708Total assets

$


$
377,456

$
75,804

$
453,260Liabilities:Exchangeable senior notes

$


$
144,546

$


$
144,546N-Star IV, VI, VII and VIII bonds payable





1,121,174





1,121,174Liability to subsidiary trusts issuing preferred securities








135,686


135,686Securities sold, not yet purchased


13,506








13,506Derivative liability





83,497





83,497Total liabilities

$
13,506

$
1,349,217

$
135,686

$
1,498,409


As
of March 31, 2008, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis.

12

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

The
following table presents additional information about available for sale securities and liabilities to subsidiary trusts issuing preferred securities which are measured at fair value
on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value (in thousands):

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):

Available for
sale securities

Liability to
subsidiary trusts
issuing preferred
securitiesBeginning balance:

$
90,577

$
168,454Total losses (realized or unrealized):Included in earnings


3,557


Included in other comprehensive loss


11,216


Total gains (realized or unrealized):Included in earnings





32,768Included in other comprehensive loss





Ending balance

$
75,804

$
135,686The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at the reporting date

$
3,557

$
32,768


Fair Value Option

SFAS 159 provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute
for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. SFAS 159 permits the
fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.

13

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

The following table sets forth the Company's financial instruments for which the fair value option was elected:

Financial Instruments, at Fair Value

March 31,
2008

December 31,
2007Assets:Available for sale securities:CMBS

$
277,821

$
342,353Real estate term debt


22,567


30,666REIT debt


73,808


80,292Trust preferred securities


8,708


12,264Total assets

$
382,904

$
465,575Liabilities:(1)Exchangeable senior notes


144,546


172,500N-Star IV, VI, VII and VIII bonds payable


1,121,174


1,654,185Liability to subsidiary trusts issuing preferred securities


135,686


286,258Total liabilities

$
1,401,406

$
2,112,943




The
following table presents a summary of existing eligible financial assets and financial liabilities for which the fair value option was elected on January 1,
2008 and the cumulative-effect adjustment to retained earnings recorded in connection with the initial adoption of SFAS No. 159.

|                                                            |  | Carrying Value at
January 1, 2008 |           | Transition
Adjustment to
Retained Earnings
(Gain)/Loss |   | Carrying Value at
January 1, 2008
(After adoption
of SFAS 159)
|----------------------------------------------------------- |  | --------------------------------- | --------- | ------------------------------------------------------ | - | --------------------------------------------------------------
|Assets:                                                     |  |                                   |           |                                                        |   |                                                               
|Available for sale securities(1)                            |  | $                                 | 465,575   |                                                        | $ | 90,966                                                        
|Liabilities:                                                |  |                                   |           |                                                        |   |                                                               
|Exchangeable senior notes                                   |  |                                   | 172,500   |                                                        |   | (26,824                                                       
|N-Star IV, VI, VII and VIII bonds payable                   |  |                                   | 1,654,185 |                                                        |   | (196,209                                                      
|Liability to subsidiary trusts issuing preferred securities |  |                                   | 286,258   |                                                        |   | (117,804                                                      
|                                                            |  |                                   |           |                                                        |   |                                                               
|Cumulative gain upon the adoption of SFAS 159(2)            |  |                                   |           |                                                        | $ | (249,871                                                      
|                                                            |  |                                   |           |                                                        |   |                                                               

---

14

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

The
following table presents the difference between fair values and the aggregate contractual principal amounts of assets and liabilities, for which the fair value option
has been elected:

Fair Value at
March 31, 2008

Principal
Amount Due
Upon Maturity

DifferenceAssets:Available for sale securities:CMBS

$
277,821

$
425,748

$
(147,927
)Real estate term debt


22,567


55,030


(32,463
)REIT debt


73,808


84,183


(10,375
)Trust preferred securities


8,708


15,000


(6,292
)Total assets

$
382,904

$
579,961

$
(197,057
)Liabilities:Exchangeable Senior Notes


144,546


172,500


(27,954
)N-Star IV, VI, VII and VIII bonds payable


1,121,174


1,608,885


(487,711
)Liability to subsidiary trusts issuing preferred securities


135,686


286,258


(150,572
)Total Liabilities

$
1,401,406

$
2,067,643

$
(666,237
)


For
the three months ended March 31, 2008, the Company recognized a net gain, which is recorded as unrealized gain (loss) on investments and other in the Company's
condensed consolidated statement of operations, of $244.3 million as the result of the change in fair market value of financial assets and liabilities for which the fair value option was
elected.

4. Operating Real Estate

The Company made the following acquisitions from January 1, 2008 through March 31, 2008:

A
$4.0 million acquisition of four skilled nursing facilities totaling 40,369 square feet located in Ohio and Wisconsin, in January 2008. The properties are net leased to a single
tenant under a lease that expires in December 2017. The acquisition was purchased with cash.

Discontinued Operations

The condensed consolidated statement of operations for the three months ended March 31, 2007, includes results of operations of real estate assets sold or
held for sale. These assets include two assisted care living facilities which were held for sale on March 31, 2007. There were no discontinued operations for the three months ended
March 31, 2008.

15

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Operating Real Estate (Continued)

The
following table summarizes income from discontinued operations and related gain on sale of discontinued operations, each net of minority interest, for the three months ended
March 31, 2007 (in thousands):

Three
months Ended
March 31, 2007Revenue:Rental and escalation income

$
38Interest and other


Total revenue


38Expenses:Real estate property operating expenses


General and administrative expenses


1Interest expense


15Depreciation and amortization


27Total expenses


43Income (loss) from discontinued operations


(5
)Gain (loss) on disposition of discontinued operations


(45
)Income (loss) from discontinued operations, before minority interest


(50
)Minority interest


2Income (loss) from discontinued operations, net of minority interest

$
(48
)


5. Available for Sale Securities

The following is a summary of the Company's available for sale securities at March 31, 2008 and December 31, 2007 (in thousands):

|March 31, 2008             |  | Carrying
Value |         | SFAS 159
Transition Adjustment |   | Losses in
Accumulated
OCI |   | Unrealized
Gain on
Investments |         | Unrealized
Loss on
Investments |   | Estimated
Fair Value(1)
|-------------------------- |  | -------------- | ------- | ------------------------------ | - | ------------------------- | - | ------------------------------ | ------- | ------------------------------ | - | -----------------------
|CMBS                       |  | $              | 405,254 |                                | $ | (64,442                   | ) | $                              |        |                                | $ | 194                    
|Real estate term debt      |  |                | 65,214  |                                |   | (21,512                   | ) |                                | (9,780  | )                              |   | 688                    
|REIT debt                  |  |                | 82,568  |                                |   | (2,276                    | ) |                                |        |                                |   |                       
|Term debt equity           |  |                | 68,315  |                                |   |                          |   |                                | (27,434 | )                              |   |                       
|Corporate CLO              |  |                | 49,788  |                                |   |                          |   |                                | (23,573 | )                              |   |                       
|Trust preferred securities |  |                | 15,000  |                                |   | (2,736                    | ) |                                |        |                                |   |                       
|                           |  |                |         |                                |   |                           |   |                                |         |                                |   |                        
|Total                      |  | $              | 686,139 |                                | $ | (90,966                   | ) | $                              | (60,787 | )                              | $ | 882                    
|                           |  |                |         |                                |   |                           |   |                                |         |                                |   |                        

---

16

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

5. Available for Sale Securities (Continued)

At
March 31, 2008, the maturities of the available for sale securities ranged from three to 45 years.

|December 31, 2007          |  | Carrying
Value |         | Gains in
Accumulated
OCI |   | Losses in
Accumulated
OCI |  | Estimated
Fair Value(1)
|-------------------------- |  | -------------- | ------- | ------------------------ | - | ------------------------- |  | -----------------------
|CMBS                       |  | $              | 419,835 |                          | $ | 987                       |  | $                      
|Real estate term debt      |  |                | 52,178  |                          |   |                          |  |                        
|REIT debt                  |  |                | 82,568  |                          |   |                          |  |                        
|Term debt equity           |  |                | 67,825  |                          |   |                          |  |                        
|Corporate CLO              |  |                | 50,697  |                          |   |                          |  |                        
|Trust preferred securities |  |                | 15,000  |                          |   |                          |  |                        
|                           |  |                |         |                          |   |                           |  |                        
|Total                      |  | $              | 688,103 |                          | $ | 987                       |  | $                      
|                           |  |                |         |                          |   |                           |  |                        

---

6. Real Estate Debt Investments

At March 31, 2008 and December 31, 2007, the Company held the following real estate debt investments (in thousands):

|March 31, 2008                                |                        | Carrying
Value(1) |           | Allocation by
Investment Type |      | Average
Fixed Rate |       | Average Spread
Over LIBOR |      | Number of
Investments
|--------------------------------------------- | ---------------------- | ----------------- | --------- | ----------------------------- | ---- | ------------------ | ----- | ------------------------- | ---- | ---------------------
|Whole loans, floating rate                    |                        | $                 | 1,109,842 |                               | 55.2 | %                  |      | %                         | 3.08 | %                    
|Whole loans, fixed rate                       |                        |                   | 64,538    |                               | 3.2  |                    | 9.74  |                           |     |                      
|Subordinate mortgage interests, floating rate |                        |                   | 159,445   |                               | 7.9  |                    |      |                           | 3.48 |                      
|Mezzanine loans, floating rate                |                        |                   | 491,613   |                               | 24.4 |                    |      |                           | 4.66 |                      
|Mezzanine loan, fixed rate                    |                        |                   | 163,057   |                               | 8.1  |                    | 11.19 |                           |     |                      
|Other loansfloating                          |                        |                   | 16,624    |                               | 0.8  |                    |      |                           | 1.60 |                      
|Other loansfixed                             |                        |                   | 6,766     |                               | 0.4  |                    | 5.53  |                           |     |                      
|                                              |                        |                   |           |                               |      |                    |       |                           |      |                      
|                                              | Total/Weighted average |                   | $         | 2,011,885                     |      | 100.0              | %     | 10.63                     | %    | 3.54                 
|                                              |                        |                   |           |                               |      |                    |       |                           |      |                      

---

17

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

6. Real Estate Debt Investments (Continued)



|December 31, 2007                             |                        | Carrying
Value(1) |           | Allocation by
Investment Type |      | Average
Fixed Rate |       | Average Spread
Over LIBOR |      | Number of
Investments
|--------------------------------------------- | ---------------------- | ----------------- | --------- | ----------------------------- | ---- | ------------------ | ----- | ------------------------- | ---- | ---------------------
|Whole loans, floating rate                    |                        | $                 | 1,082,399 |                               | 53.9 | %                  |      | %                         | 3.09 | %                    
|Whole loans, fixed rate                       |                        |                   | 80,371    |                               | 4.0  |                    | 10.17 |                           |     |                      
|Subordinate mortgage interests, floating rate |                        |                   | 158,347   |                               | 7.9  |                    |      |                           | 3.72 |                      
|Mezzanine loans, floating rate                |                        |                   | 505,227   |                               | 25.3 |                    |      |                           | 4.59 |                      
|Mezzanine loan, fixed rate                    |                        |                   | 157,092   |                               | 7.8  |                    | 11.16 |                           |     |                      
|Other loansfloating                          |                        |                   | 16,653    |                               | 0.8  |                    |      |                           | 1.60 |                      
|Other loansfixed                             |                        |                   | 6,933     |                               | 0.3  |                    | 5.53  |                           |     |                      
|                                              |                        |                   |           |                               |      |                    |       |                           |      |                      
|                                              | Total/Weighted average |                   | $         | 2,007,022                     |      | 100.0              | %     | 10.67                     | %    | 3.56                 
|                                              |                        |                   |           |                               |      |                    |       |                           |      |                      

---

The
Company has identified one real estate debt investment as a variable interest in a VIE and has determined that the Company is not the primary beneficiary of this VIE and as such the
VIE should not be consolidated in the Company's consolidated financial statements. The Company's maximum exposure to loss would not exceed the carrying amount of its investment of
$34.9 million. For all other investments, the Company has determined that these investments are not VIEs and, as such, the Company has continued to account for all real estate debt investments
as loans.

As
of March 31, 2008 and December 31, 2007, all loans were current on principal and interest payments in accordance with the terms of the loan agreement.

18

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

6. Real Estate Debt Investments (Continued)

Contractual
maturities of real estate debt investments at March 31, 2008 are as follows:

Years Ending December 31:

Initial
Maturity

Maturity
Including
Extensions2008 (remainder)

$
389,048

$
6112009


567,403


103,7892010


491,303


287,0632011


216,071


661,6852012


174,024


641,452Thereafter


187,300


330,549Total

$
2,025,149

$
2,025,149


Actual
maturities may differ from contractual maturities because certain borrowers have the right to prepay with or without prepayment penalties. The contractual amounts differ from the
carrying amounts due to unamortized origination fees and costs and unamortized premiums and discounts being reported as part of the carrying amount of the investment. Maturity Including Extensions
assumes that all loans with extension options will qualify for extension at initial maturity according to the conditions stipulated in the related loan agreements.

7. Corporate Loan Investments

At March 31, 2008, the Company held the following corporate debt investments (dollars in thousands):

|March 31, 2008   |                        | Carrying
Value(1) |         | Allocation by
Investment Type |      | Average
Spread Over
LIBOR/Prime |      | Number of
Investments
|---------------- | ---------------------- | ----------------- | ------- | ----------------------------- | ---- | ------------------------------- | ---- | ---------------------
|First Lien note  |                        | $                 | 405,988 |                               | 94.4 | %                               | 3.08 | %                    
|Second Lien note |                        |                   | 24,230  |                               | 5.6  |                                 | 5.97 |                      
|                 |                        |                   |         |                               |      |                                 |      |                      
|                 | Total/Weighted average |                   | $       | 430,218                       |      | 100.0                           | %    | 3.24                 
|                 |                        |                   |         |                               |      |                                 |      |                      

---

8. Investment in and Advances to Unconsolidated Ventures

The Company has non-controlling, unconsolidated/uncombined ownership interests in entities that are accounted for using the equity method. Capital
contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such
allocations may differ from the stated percentage interests, if any, in such entities as a result of preferred returns and allocation formulas as described in such agreements.

19

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Investment in and Advances to Unconsolidated Ventures (Continued)

CS/Federal Venture

In February 2006, the Company, through a joint venture with an institutional investor, acquired a portfolio of three adjacent class A office/flex buildings
located in Colorado Springs, Colorado for $54.3 million. The joint venture financed the transaction with two non-recourse, first mortgage loans totaling $40.0 million and the
balance in cash. The loans mature on February 11, 2016 and bear fixed interest rates of 5.51% and 5.46%. The Company contributed $8.4 million for a 50% interest in the joint venture and
incurred $0.3 million in costs related to its acquisition, which are capitalized to the investment account. These costs will be amortized over the useful lives of the assets held by the joint
venture. The Company accounts for its investment under the equity method of accounting. At March 31, 2008 and December 31, 2007, the Company had an investment in CS/Federal of
approximately $7.6 million and $7.8 million, respectively.

Monroe Capital Management Advisors, LLC

In March 2007, the Company entered into a joint venture with Monroe Management, a Chicago-based firm, and acquired a 49.9% non-controlling interest in
Monroe Management. Monroe
Management originates, structures and syndicates middle-market corporate loans for Monroe Capital and provides asset management services. The Company accounts for its investment in the management
company under the equity method of accounting. At March 31, 2008 the Company's carrying value of its investment was zero.

NorthStar Realty Finance Trusts

The Company owns all of the common stock of NorthStar Realty Finance Trusts I through VIII (collectively, the "Trusts"). The Trusts were formed to issue preferred
securities. Under the provisions of FIN 46(R)-6, the Company determined that the holders of the trust preferred securities were the primary beneficiaries of the Trusts. As a result,
the Company did not consolidate the Trusts and has accounted for the investment in the common stock of the Trusts under the equity method of accounting. At March 31, 2008 and
December 31, 2007, the Company had an investment in the Trusts of approximately $3.8 million.

NorthStar Real Estate Securities Opportunity Fund

In July 2007, the Company closed on $109.0 million of equity capital for its Securities Fund, an investment vehicle in which the Company conducts most of
its real estate securities investment business.

The
Company is the manager and general partner of the Securities Fund. The Company receives base management fees ranging from 1.0% to 2.0% per annum on third-party capital and is
entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary
depending on the investor capital lockup periods.

20

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Investment in and Advances to Unconsolidated Ventures (Continued)

During
the first quarter 2008, the Securities Fund made all cash deposits that it was obligated to make under its $250 million warehouse agreement maturing May 1, 2008.
Subsequently during the quarter, the lender made additional margin calls as a result of declining values of the securities financed under the warehouse. The Securities Fund was under no obligation to
make further collateral deposits and determined not to do so, which triggered the lender's right to take control of the collateral. As of March 31, 2008, the lender had not liquidated the
collateral and the Securities Fund estimated that it could recover $1.0 million of its deposits based on the market values of the underlying securities. During
the first quarter 2008, the Securities Fund also monetized investment positions which were established to hedge its exposure to declining values in the warehouse securities, thereby offsetting the
recognized loss from the warehouse. The net realized gain, as of March 31, 2008, resulting from the two transactions was $11.3 million, of which $3.3 million represents the
Company's share of the realized gain. The actual amount of cash deposits recovered from the lender upon liquidation of the collateral, if any, will be based on proceeds received on sale of the
securities, which are controlled by the lender.

At
March 31, 2008, the Company had invested a total of $32.4 million in the Securities Fund and the carrying value of its investment was $22.2 million, representing
a 30% interest. The Company also had advanced $10.0 million to the Securities Fund under a revolving credit agreement, which was paid in full as of March 31, 2008. For the three months
ended March 31, 2008, the Company recognized equity in loss of $0.6 million, of which $4.4 million represented an unrealized loss on the mark-to-market
adjustment of the securities in the Securities Fund. The Company also earned $0.1 million of management fees from the Securities Fund for the three months ended March 31, 2008.

The
Company accounts for its investment under the equity method of accounting. The Company retains the investment company accounting of the Securities Fund when recording its share of
the earnings or loss of the Securities Fund.

LandCap Investment

On October 5, 2007, the Company entered into a 50-50 joint venture with Whitehall Street Global Real Estate Limited Partnership 2007, to form LandCap
Partners, which is referred to as LandCap. LandCap seeks to opportunistically invest in single family residential land through land loans, lot option agreements and select land purchases. The venture
is managed by professionals who have extensive experience in the single family housing sector. The Company has sole discretion with respect to funding its portion of any investment decisions relating
to LandCap, has made no investments to date and accounts for its investment under the equity method of accounting. At March 31, 2008 the Company's investment in LandCap is carried at a
$1.3 million loss, which represents the Company's share of LandCap's cumulative general and administrative expenses since inception. In addition, the Company advanced approximately
$1.3 million under a $2.5 million loan agreement to LandCap, which bears interest at a fixed rate of 12% and was included in other assets in the condensed consolidated balance sheets.

21

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings

The following is a table of the Company's outstanding borrowings as of March 31, 2008 and December 31, 2007 (in thousands):

|                                      |                             | Initial
Stated
Maturity          |            | Maximum
Maturity
Including
Extensions |           | Interest Rate |                               | Maximum
Amount
Available |           | Contractual
Balance at
March 31,
2008 |  | Balance at
December 31,
2007
|------------------------------------- | --------------------------- | -------------------------------- | ---------- | ------------------------------------- | --------- | ------------- | ----------------------------- | ------------------------ | --------- | ------------------------------------- |  | ----------------------------
|Credit Facilities                     |                             |                                  |            |                                       |           |               |                               |                          |           |                                       |  |                             
|                                      | Unsecured Facility          |                                  | 11/3/2009  |                                       | 11/3/2009 |               | LIBOR + 2.00% to 2.50%        |                          | $         | 100,000                               |  | $                           
|                                      | MC Facility(1)              |                                  | 3/31/2008  |                                       | 3/31/2008 |               | LIBOR + 0.75%                 |                          |           | 400,000                               |  |                             
|                                      | MC VFCC Facility(1)         |                                  | 7/29/2008  |                                       | 7/29/2010 |               | Commercial Paper Rate + 0.75% |                          |           | 400,000                               |  |                             
|                                      | JP Facility                 |                                  | 8/7/2008   |                                       | 8/7/2010  |               | LIBOR + 0.05% to 1.75%        |                          |           | 350,000                               |  |                             
|                                      |                             |                                  |            |                                       |           |               |                               |                          |           |                                       |  |                             
|Total Credit Facilities               |                             |                                  |            |                                       |           |               |                               |                          | 1,250,000 |                                       |  | 462,046                     
|Term Loans                            |                             |                                  |            |                                       |           |               |                               |                          |           |                                       |  |                             
|                                      | WA Term Loan                |                                  | 11/6/2009  |                                       | 11/6/2010 |               | LIBOR + 2.00%                 |                          |           | 463,669                               |  |                             
|                                      | Euronote                   |                                  | 11/6/2009  |                                       | 11/6/2010 |               | 3 month Euribor + 2.0%        |                          |           | 116,935                               |  |                             
|                                      |                             |                                  |            |                                       |           |               |                               |                          |           |                                       |  |                             
|Total Credit Facilities & Term Loans  |                             |                                  |            |                                       |           |               |                               | $                        | 1,830,604 |                                       |  | 885,712                     
|                                      |                             |                                  |            |                                       |           |               |                               |                          |           |                                       |  |                             
|Mortgage notes payable (non-recourse) |                             |                                  |            |                                       |           |               |                               |                          |           |                                       |  |                             
|                                      | Chatsworth                  |                                  | 5/1/2015   |                                       |           |               | 5.65%                         |                          |           |                                       |  |                             
|                                      | Salt Lake City              |                                  | 9/1/2012   |                                       |           |               | 5.16%                         |                          |           |                                       |  |                             
|                                      | EDS                         |                                  | 10/8/2015  |                                       |           |               | 5.37%                         |                          |           |                                       |  |                             
|                                      | Executive Center            |                                  | 1/1/2016   |                                       |           |               | 5.85%                         |                          |           |                                       |  |                             
|                                      | Green Pond                  |                                  | 4/11/2016  |                                       |           |               | 5.68%                         |                          |           |                                       |  |                             
|                                      | Indianapolis                |                                  | 2/1/2017   |                                       |           |               | 6.06%                         |                          |           |                                       |  |                             
|                                      | Wakefield GE                |                                  | 8/30/2010  |                                       |           |               | 6.93%                         |                          |           |                                       |  |                             
|                                      | WakefieldPark National     |                                  | 1/11/2014  |                                       |           |               | 5.94%                         |                          |           |                                       |  |                             
|                                      | WakefieldGEWLK            |                                  | 1/11/2017  |                                       |           |               | 6.49%                         |                          |           |                                       |  |                             
|                                      | WakefieldGETusc & Harmony |                                  | 1/11/2017  |                                       |           |               | 6.59%                         |                          |           |                                       |  |                             
|                                      | WakefieldHarmony FNMA      |                                  | 2/1/2017   |                                       |           |               | 6.39%                         |                          |           |                                       |  |                             
|                                      | WakefieldGrove City        |                                  | 2/1/2038   |                                       |           |               | 5.45%                         |                          |           |                                       |  |                             
|                                      | WakefieldLancaster         |                                  | 6/1/2037   |                                       |           |               | 6.40%                         |                          |           |                                       |  |                             
|                                      | WakefieldMarysville        |                                  | 6/1/2037   |                                       |           |               | 6.40%                         |                          |           |                                       |  |                             
|                                      | WakefieldWashington        |                                  | 10/1/2038  |                                       |           |               | 6.65%                         |                          |           |                                       |  |                             
|                                      | WakefieldMiller Merril     |                                  | 6/30/2012  |                                       |           |               | 7.07%                         |                          |           |                                       |  |                             
|                                      | WakefieldARL Mob Wachovia  |                                  | 5/11/2017  |                                       |           |               | 5.89%                         |                          |           |                                       |  |                             
|                                      | WakefieldAscend Colonial   |                                  | 5/31/2012  |                                       |           |               | 7.52%                         |                          |           |                                       |  |                             
|                                      | WakefieldColonial Dova     |                                  | 8/31/2012  |                                       |           |               | 7.32%                         |                          |           |                                       |  |                             
|                                      | WakefieldColonial 6 Alfs   |                                  | 11/1/2012  |                                       |           |               | 6.98%                         |                          |           |                                       |  |                             
|                                      | WakefieldSt Francis        |                                  | 9/31/2010  |                                       |           |               | LIBOR + 2.00%                 |                          |           |                                       |  |                             
|                                      | Aurora                      |                                  | 7/11/2016  |                                       |           |               | 6.22%                         |                          |           |                                       |  |                             
|                                      | DSG                         |                                  | 10/11/2016 |                                       |           |               | 6.17%                         |                          |           |                                       |  |                             
|                                      | Keene                       |                                  | 2/1/2016   |                                       |           |               | 5.85%                         |                          |           |                                       |  |                             
|                                      | Fort Wayne                  |                                  | 1/1/2015   |                                       |           |               | 6.41%                         |                          |           |                                       |  |                             
|                                      | Portland                    |                                  | 6/17/2014  |                                       |           |               | 7.34%                         |                          |           |                                       |  |                             
|                                      | Milpitas                    |                                  | 3/6/2017   |                                       |           |               | 5.95%                         |                          |           |                                       |  |                             
|                                      | Fort Mill                   |                                  | 4/6/2017   |                                       |           |               | 5.63%                         |                          |           |                                       |  |                             
|                                      | Reading                     |                                  | 1/1/2015   |                                       |           |               | 5.58%                         |                          |           |                                       |  |                             
|                                      | Reading                     |                                  | 1/1/2015   |                                       |           |               | 6.00%                         |                          |           |                                       |  |                             
|                                      | Alliance                    |                                  | 12/6/2017  |                                       |           |               | 6.48%                         |                          |           |                                       |  |                             
|Mezzanine loan payable (non-recourse) |                             |                                  |            |                                       |           |               |                               |                          |           |                                       |  |                             
|                                      | Chatsworth                  |                                  | 5/1/2014   |                                       |           |               | 6.64%                         |                          |           |                                       |  |                             
|                                      | Aurora                      |                                  | 5/11/2012  |                                       |           |               | 7.37%                         |                          |           |                                       |  |                             
|                                      | Fort Mill                   |                                  | 4/6/2017   |                                       |           |               | 6.21%                         |                          |           |                                       |  |                             
|Exchangeable Senior Notes(2)          |                             | 6/15/2027                        |            |                                       |           | 7.25%         |                               |                          |           |                                       |  | 172,500                     
|Repurchase obligations                |                             | See Repurchase
Obligations below |            |                                       |           | LIBOR varies  |                               |                          |           |                                       |  |                            

22

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

|Bonds payable(2)                                                  |             |  |            |  |  |  |                                        |  |  |  |   |           |         |   |          
|----------------------------------------------------------------- | ----------- |  | ---------- |  |  |  | -------------------------------------- |  |  |  | - | --------- | ------- | - | ---------
|                                                                  | N-Star IV   |  | 7/1/2040   |  |  |  | LIBOR + 0.62%
(average spread)         |  |  |  |   |           | 300,000 |   |          
|                                                                  | N-Star VI   |  | 6/1/2041   |  |  |  | 3 month LIBOR + 0.56%
(average spread) |  |  |  |   |           | 283,200 |   |          
|                                                                  | N-Star VII  |  | 6/22/2051  |  |  |  | LIBOR + 0.34%
(average spread)         |  |  |  |   |           | 510,800 |   |          
|                                                                  | N-Star VIII |  | 2/1/2041   |  |  |  | LIBOR + 0.58%
(average spread)         |  |  |  |   |           | 514,885 |   |          
|                                                                  | Abacus NS2  |  | 8/28/2046  |  |  |  | LIBOR + 4.41%
(average spread)         |  |  |  |   |           |        |   |          
|Liability to subsidiary trusts issuing preferred securities(2)(3) |             |  |            |  |  |  |                                        |  |  |  |   |           |         |   |          
|                                                                  | Trust I     |  | 3/30/2035  |  |  |  | 8.15%                                  |  |  |  |   |           | 41,240  |   |          
|                                                                  | Trust II    |  | 6/30/2035  |  |  |  | 7.74%                                  |  |  |  |   |           | 25,780  |   |          
|                                                                  | Trust III   |  | 1/30/2036  |  |  |  | 7.81%                                  |  |  |  |   |           | 41,238  |   |          
|                                                                  | Trust IV    |  | 6/30/2036  |  |  |  | 7.95%                                  |  |  |  |   |           | 50,100  |   |          
|                                                                  | Trust V     |  | 9/30/2036  |  |  |  | 3 month LIBOR
2.70%                    |  |  |  |   |           | 30,100  |   |          
|                                                                  | Trust VI    |  | 12/30/2036 |  |  |  | 3 month LIBOR
2.90%                    |  |  |  |   |           | 25,100  |   |          
|                                                                  | Trust VII   |  | 4/30/2037  |  |  |  | 3 month LIBOR
2.50%                    |  |  |  |   |           | 37,600  |   |          
|                                                                  | Trust VIII  |  | 7/30/2037  |  |  |  | 3 month LIBOR
2.70%                    |  |  |  |   |           | 35,100  |   |          
|                                                                  |             |  |            |  |  |  |                                        |  |  |  |   |           |        
|                                                                  |             |  |            |  |  |  |                                        |  |  |  | $ | 3,864,562 |         | $ | 3,945,538
|                                                                  |             |  |            |  |  |  |                                        |  |  |  |   |           |        

---

Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of March 31, 2008
(in thousands):

|           |  | Total |           | Mortgage and
Mezzanine Loans |   | Credit
Facilities |  | Secured
Term Loan |         | Liability to Subsidiary Trusts Issuing Preferred Securities(1) |   | Exchangeable
Senior Notes(1) |  | Bonds
Payable(1)
|---------- |  | ----- | --------- | ---------------------------- | - | ----------------- |  | ----------------- | ------- | -------------------------------------------------------------- | - | ---------------------------- |  | ----------------
|2008       |  | $     | 466,175   |                              | $ | 4,130             |  | $                 | 462,045 |                                                                | $ |                             |  | $               
|2009       |  |       | 434,472   |                              |   | 10,805            |  |                   |        |                                                                |   | 423,667                      |  |                 
|2010       |  |       | 96,765    |                              |   | 96,765            |  |                   |        |                                                                |   |                             |  |                 
|2011       |  |       | 14,330    |                              |   | 14,330            |  |                   |        |                                                                |   |                             |  |                 
|2012       |  |       | 164,036   |                              |   | 164,036           |  |                   |        |                                                                |   |                             |  |                 
|Thereafter |  |       | 2,688,784 |                              |   | 621,141           |  |                   |        |                                                                |   |                             |  |                 
|           |  |       |           |                              |   |                   |  |                   |         |                                                                |   |                              |  |                 
|Total      |  | $     | 3,864,562 |                              | $ | 911,207           |  | $                 | 462,045 |                                                                | $ | 423,667                      |  | $               
|           |  |       |           |                              |   |                   |  |                   |         |                                                                |   |                              |  |                 

---

At March 31, 2008, the Company was in compliance with all covenants under its borrowings.

23

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

10. Related Party Transactions

Advisory Fees

The Company has agreements with each of N-Star I, N-Star II, N-Star III, N-Star V and
N-Star IX to perform certain advisory services. The Company earned total fees of approximately $2.2 million and $1.4 million for the three months ended
March 31, 2008 and 2007, respectively.

The
Company has an agreement with the Securities Fund to receive base management fees ranging from 1.0% to 2.0% per year on third-party capital. For the three months ended
March 31, 2008, the Company earned $0.1 million in management fees.

Asset Management Fees

The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc. to perform certain management services. Wakefield
Capital Management Inc. is owned by the partners who own Chain Bridge. The Company incurred $0.9 million and $0.6 million in management fees for the three months ended
March 31, 2008 and 2007, respectively, which are recorded in asset management fees-related parties in the condensed consolidated statement of operations.

The
Company entered into a management agreement in March 2007 with Monroe Management to perform certain management services, as described in Note 8. The Company has incurred
$1.2 million in management fees for the three months ended March 31, 2008, which is recorded in asset management fees-related parties in the condensed consolidated statement
of operations.

11. Equity Based Compensation



On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (the "Stock
Incentive Plan"). The Stock Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation
rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests ("LTIP Units") or any
combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company and, prior to October 29, 2005, employees pursuant
to the shared facilities and services agreement. An aggregate of 8,933,038 shares of common stock of the Company are currently reserved and authorized for issuance under the Stock Incentive Plan,
subject to equitable adjustment upon the occurrence of certain corporate events. As of March 31, 2008, the Company has issued an aggregate of 7,307,156 LTIP Units, net of forfeitures, and
325,459 shares of common stock pursuant to the Stock Incentive Plan. Of the 7,307,156 LTIP Units, 5,009,706 vest to the individual recipient at a rate of one-twelfth of the total amount
granted as of the end of each quarter, beginning with the first quarter after the date of grant ended either January 29, April 29, July 29, or October 29 for the
three-year vesting period so long as the recipient continues to be an eligible recipient, and 2,297,450 vest over 16 consecutive quarters with the first quarter being January 29,
2008. In addition, the LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of the grant.

The
Company has recognized compensation expense of $4.9 million and $2.1 million related to the amortization of awards granted under this plan for the three months ended
March 31, 2008 and 2007, respectively. As of March 31, 2008, there were approximately 5,491,515 unvested LTIP Units and 7,007 LTIP Units were forfeited during the period. The related
compensation expense to be recognized over

24

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

11. Equity Based Compensation (Continued)

the
remaining vesting period of all of the Company's LTIP grants is $52.4 million, provided there are no forfeitures.



On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan
(the "Incentive Bonus Plan"), in order to retain and provide incentive to officers and certain key employees of the Company, co-employees of the Company and NCIC and employees of NCIC who
will provide services to the Company pursuant to the shared facilities and services agreement. Up to 2.5% of the Company's total capitalization as of consummation of the IPO is available to be paid
under the Incentive Bonus Plan in cash, shares of common stock of the Company or other share-based form at the discretion of the compensation committee of the Company's Board of Directors, if certain
return hurdles are met.

An
aggregate of 698,142 shares of common stock of the Company were reserved and authorized for issuance under the Incentive Bonus Plan, subject to equitable adjustment upon the
occurrence of certain corporate events. All units under the plan were allocated to employees of the Company. The Company's compensation committee has established the return hurdle for these
performance periods as an annual return on paid in capital as defined in the plan, equal to or greater than 12.5%. If the Company achieves these return hurdles, the vested awards may be paid in cash,
shares of common stock, LTIP Units or other share based form.

The
Company achieved the performance hurdles for both performance periods in 2006 and 2007 and all units reserved under this plan were granted to each of the participants that was an
employee at the conclusion of the last performance period in November 2007. The Company has recognized zero and $0.7 million of compensation expense in the condensed consolidated financial
statements for the three months ended March 31, 2008 and 2007, respectively.



In connection with the employment agreement of the Company's head of its real estate securities business, he was eligible to receive incentive compensation equal
to 15% of the annual net profits from the Company's real estate securities business in excess of a 12% return on invested capital (the annual bonus participation amount). During the term of the
employment agreement, the Company had the option of terminating this incentive compensation arrangement by paying an amount based on a multiple of the estimated annual bonus participation amount. If
the Company exercised this buyout option, the fixed amount due for terminating this arrangement would vest ratably and be paid in four installments over a three-year period with 25% paid
on termination. If the Company's head of its real estate securities business voluntarily terminated his employment with the Company prior to any exercise of the Company's buyout option, he would be
eligible to receive future annual payments based on the future real estate securities annual net profits in excess of the 12% return hurdle on invested capital. The Company has recorded compensation
expense under this plan of zero and $0.6 million for the three months ended March 31, 2008 and 2007, respectively. See Note 18 for additional information related to the Company's
head of its real estate securities business' terminated employment agreement.

25

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

11. Equity Based Compensation (Continued)



In January 2006, the Compensation Committee of the Board of Directors approved the NorthStar Realty Finance Corp. 2006 Outperformance Plan (the "2006
Outperformance Plan"), a long-term compensation program to further align the interests of the Company's stockholders and management. Under the 2006 Outperformance Plan, award recipients
will share in a "performance pool" if the Company's total return to stockholders for the period from January 1, 2006 (measured based on the average closing price of the Company's common stock
for the 20 trading days prior to January 1, 2006) to December 31, 2008 exceeds a cumulative total return to stockholders of 30%, including both share price appreciation and dividends
paid. The size of the pool will be 10% of the outperformance amount in excess of the 30% benchmark, subject to a maximum dilution cap equal to $40 million, exclusive of accrued dividends. Each
employee's award under the 2006 Outperformance Plan will be designated as a specified percentage of the aggregate performance pool. Assuming the 30% benchmark is achieved, the performance pool that is
established under the 2006 Outperformance Plan will be allocated among the Company's employees in accordance with the percentage specified in each employee's award agreement. Although the amount of
the awards earned under the 2006 Outperformance Plan will be determined when the performance pool is established, not all of the awards vest at that time. Instead, 50% of the awards vest on
December 31, 2008 and 25% of the awards vest on each of the first two anniversaries thereafter based on continued employment. The Company recorded the compensation expense for the 2006
Outperformance Plan in accordance with SFAS 123
(R) "Stock Based Compensation." The fair value of the 2006 Outperformance Plan on the date of adoption was determined by the Company to be $4.1 million. In connection with its
determination, the Company retained a firm that had experience in appraising similar plans and considered such appraisal in its determination of the fair value of the 2006 Outperformance Plan. The
Company will amortize 50% of the value into compensation expense over the first three years of the plan, 25% will be amortized over four years and the remaining 25% over five years. The Company
recorded compensation expense of $0.3 million for each of the three months ended March 31, 2008 and 2007.

The
status of our LTIP grants as of March 31, 2008 and December 31, 2007 is as follows (Units in thousands):

|                                |  | March 31, 2008 |   | December 31, 2007
|------------------------------- |  | -------------- | - | -----------------
|
|Balance at beginning of year(1) |  | 5,484          |   | $                
|Granted                         |  | 2,508          |   |                  
|Converted to common stock       |  | (325           | ) |                  
|Forfeited                       |  | (7             | ) |                  
|                                |  |                |   |                  
|Ending balance(2)               |  | 7,660          |   | $                
|                                |  |                |   |                  

---

12. Stockholders' Equity

Common Stock

For the three months ended March 31, 2008, the Company issued a total of 224,434 shares of common stock related to employee compensation arrangements and
employee separation agreements.

26

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

12. Stockholders' Equity (Continued)

Dividends

On January 22, 2008, the Company declared a dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563
per share of Series B preferred stock to stockholders of record as of February 5, 2008. The dividends were paid on February 15, 2008.

Earnings Per Share

Earnings per share for the three months ended March 31, 2008 and 2007 is computed as follows (in thousands):

For the Three Months
Ended March 31,2008

2007Numerator (Income)Basic EarningsNet income available to common stockholders

$
195,273

$
6,350Effect of dilutive securitiesIncome allocated to minority interest


23,044


376Dilutive net income available to stockholders

$
218,317

$
6,726Denominator (Weighted Average Shares)Basic Earnings:Shares available to common stockholders


62,244


61,329Effect of dilutive securities:OP/LTIP units


7,345


2,797Dilutive Shares


69,589


64,126


13. Minority Interest

Operating Partnership

Minority interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership held by limited partners (the "Unit Holders").
Income allocated to the minority interest is based on the Unit Holders ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the numbers of OP Units
held by the Unit Holders by the total OP Units outstanding. The issuance of additional shares of beneficial interest (the "Common Shares" or "Share") or OP Units changes the percentage ownership of
both the Unit Holders and the Company. Since a unit is generally redeemable for cash or Shares at the option of the Company, it is deemed to be equivalent to a Share. Therefore, such transactions are
treated as capital transactions and result in an allocation between shareholders' equity and minority interest in the accompanying condensed consolidated balance sheet to account for the change in the
ownership of the underlying equity in the Operating Partnership. As of March 31, 2008 and December 31, 2007, minority interest related to the aggregate limited partnership units of
7,858,964 and 5,683,118, represented an 11.20% and 8.43% interest in the Operating Partnership, respectively.

Joint Ventures

In May 2006, the Company formed the Wakefield joint venture with Chain Bridge. The joint venture is consolidated in the condensed consolidated financial
statements and Chain Bridge's capital is

27

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

13. Minority Interest (Continued)

treated
as minority interest. Income allocated to minority interest for the three months ended March 31, 2008 was $0.1 million.

In
March 2007, the Company formed a joint venture with Monroe. The joint venture is consolidated in the consolidated financial statements and Monroe's capital is treated as minority
interest. Income allocated to minority interest for the three months ended March 31, 2008 was $0.2 million.

14. Risk Management and Derivative Activities

Derivatives

The Company uses derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap agreements and the
primary objective is to minimize interest rate risks associated with the Company's investment and financing activities. The counterparties of these arrangements are major financial institutions with
which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these counterparties; however, the Company does not
anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings. The objective in using interest rate derivatives is to add stability to interest
expense and to manage exposure to interest rate movements.

In
January 2008, the Company adopted SFAS 159 and elected the fair value option for its bonds payable and its liability to subsidiary trusts issuing preferred securities. Under
SFAS 159, the changes in fair value of these financial instruments are now recorded in earnings. As a result of this election, the interest rate swap agreements associated with these debt
instruments no longer qualify for hedge accounting, in accordance with SFAS 133 "Derivatives and Hedging Activity", since the underlying debt is remeasured with changes in the fair value
recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earning over the shorter of either the
life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings. For the three months ended March 31, 2008, the Company recorded, in
earnings, a mark-to-market unrealized loss of $30.3 million and a $1.2 million reclassification from accumulated other comprehensive income for the non-qualifying interest
rate swaps.

The
following tables summarize the Company's derivative financial instruments as of March 31, 2008 and December 31, 2007 (in thousands):

|                                    |  | Notional
Amount |         | Fair Value
Net Asset/
(Liability) |   | Range of
Fixed LIBOR |   | Range of Maturity
|----------------------------------- |  | --------------- | ------- | --------------------------------- | - | -------------------- | - | -----------------
|Interest rate swaps and basis swaps |  |                 |         |                                   |   |                      |   |                  
|As of March 31, 2008                |  | $               | 793,957 |                                   | $ | (83,497              | ) | 4.18%5.63%      
|As of December 31, 2007             |  |                 | 856,306 |                                   |   | (49,280              | ) | 4.18%6.61%      

Credit Risk Concentrations

Concentration of credit risk arise when a number of borrowers, tenants or issuers related to the Company's investments are engaged in similar business activities
or located in the same geographic location to be similarly affected by changes in economic conditions. The Company monitors its portfolio to identify potential concentrations of credit risks.
Approximately 18.7% of the Company's rental and escalation revenue for the three months ended March 31, 2008 is generated from one tenant

28

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

14. Risk Management and Derivative Activities (Continued)

in
the Company's healthcare net lease portfolio. The Company believes the remainder of its net lease portfolio is reasonably well diversified and does not contain any unusual concentration of credit
risks.

15. Off Balance Sheet Arrangements

Term Debt Transactions

The Company has interests in four term debt transactions, N-Star I, N-Star II, N-Star III and N-Star V, which are
structured as collateralized debt obligations and whose term notes are primarily collateralized by investment grade real estate securities. The Company generally purchases the preferred equity or the
income notes of each term debt transaction, which are the equity securities of the term debt issuances, and, with the exception of N-Star I, all of the below investment grade term debt
notes of each term debt transaction. In addition, the Company earns a fee of 0.35% of the outstanding principal balance of the assets backing each of these term debt issuances as an annual collateral
management fee. The Company's interest in each of the four term debt transactions is accounted for as a single debt security available for sale pursuant to EITF 99-20.

The
following tables describe certain terms of the collateral for and the notes issued by N-Star I, N-Star II, N-Star III and
N-Star V at March 31, 2008 and December 31, 2007 (in thousands):

|            |       | CollateralMarch 31, 2008 |  | Term NotesMarch 31, 2008
|----------- | ----- | ------------------------- |  | -------------------------
|
|N-Star I(2) |       | 8/21/03                   |  | $                        
|N-Star II   |       | 7/01/04                   |  |                          
|N-Star III  |       | 3/10/05                   |  |                          
|N-Star V    |       | 9/22/05                   |  |                          
|            |       |                           |  |                          
|            | Total |                           |  |                          
|            |       |                           |  |                          

---

|            |       | CollateralDecember 31, 2007 |  | Term NotesDecember 31, 2007
|----------- | ----- | ---------------------------- |  | ----------------------------
|
|N-Star I(2) |       | 8/21/03                      |  | $                           
|N-Star II   |       | 7/01/04                      |  |                             
|N-Star III  |       | 3/10/05                      |  |                             
|N-Star V    |       | 9/22/05                      |  |                             
|            |       |                              |  |                             
|            | Total |                              |  |                             
|            |       |                              |  |                             

---

29

---



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

15. Off Balance Sheet Arrangements (Continued)

Equity Notes of Collateralized Loan Obligations

In December 2006, the Company acquired 40% of the residual equity interests in a Collateralized Loan Obligation ("CLO") originated by Monroe Capital, LLC,
a specialty finance company, for $16.7 million. The CLO includes collateral of approximately $400 million backed primarily by first lien senior secured loans. The Company also acquired a
12.5% and 33.5% residual equity interest in two third party CLO's. The equity interests are currently yielding an internal rate of return ranging from approximately 15% to 18%. The CLOs were
determined to be variable interest entities under Fin 46(R)-6 and the Company was determined not to be the primary beneficiary; therefore, the financial statements of the CLOs are not
consolidated into the condensed consolidated financial statements of the Company. The Company's residual combined equity interests are accounted for as debt securities available for sale pursuant to
EITF 99-20. The combined fair market value was $21.8 million and $28.6 million at March 31, 2008 and December 31, 2007, respectively.

The
Company's potential loss in its off balance sheet investments is limited to the carrying value of its investment, which was $87.4 million, and $102.5 million, at
March 31, 2008 and December 31, 2007, respectively.

16. Segment Reporting

The Company's real estate debt segment is focused on originating, structuring and acquiring senior and subordinate debt investments secured primarily by
commercial real estate properties. The Company generates revenues from this segment by earning interest income from its debt investments and its operating expenses consist primarily of interest costs
from financing the assets. This segment generates income from operations by earning a positive spread between the yield on its assets and the interest cost of its debt. The Company evaluates
performance and allocates resources to this segment based upon its contribution to income from continuing operations.

The
Company's operating real estate segment is focused on acquiring commercial real estate facilities located throughout the U.S. that are primarily leased under long-term
triple-net leases to corporate tenants. Triple-net leases generally require the lessee to pay all costs of operating the facility, including taxes and insurance and maintenance
of the facility. The Company's net-leased facilities are currently located in New York, Ohio, California, Utah, Pennsylvania, New Jersey, Indiana, Illinois, New Hampshire, Massachusetts,
Kansas, Maine, South Carolina, Michigan, Colorado, North Carolina, Florida, Washington, Oregon, Wisconsin, Georgia, Oklahoma, Nebraska, Tennessee, Texas and Kentucky. Revenues from these assets are
generated from rental income received from lessees of the facilities, and operating expenses, which include interest costs related to financing the assets, operating expenses, real estate taxes,
insurance, ground rent and repairs and maintenance. The segment generates income from operations by leasing these facilities at a higher rate than the costs of owning and financing the assets.

The
Company's real estate securities segment is focused on investing in a wide range of commercial real estate debt securities, including commercial mortgage-backed securities ("CMBS"),
REIT unsecured debt, credit tenant loans and unsecured subordinate securities of commercial real estate companies. The Company generates revenues from this segment by earning interest income and
advisory fees from owning and managing these investments. Its operating expenses consist primarily of interest costs from financing its securities. The segment generates income from operations by
earning advisory fees and a positive spread between the yield on its assets and the interest cost of its debt.

30

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

16. Segment Reporting (Continued)

The
Company's corporate loan segment is focused on originating, structuring and acquiring secured first and second lien loans to middle-market companies. The Company generates revenues
from this segment by earning interest income from its debt investments and its operating expenses consist primarily of interest costs from financing the assets. This segment generates income from
operations by earning a positive spread between the yield on its assets and the interest cost of its debt. The Company evaluates performance and allocates resources to this segment based upon its
contribution to income from continuing operations.

The
following table summarizes segment reporting for the three months ended March 31, 2008 and 2007 (in thousands):

|                                                                                             |                | Real
Estate
Debt |   | Operating
Real
Estate |  | Real
Estate
Securities |           | Corporate
Loans |   | Unallocated(1) |   | Consolidated
Total
|-------------------------------------------------------------------------------------------- | -------------- | ---------------- | - | --------------------- |  | ---------------------- | --------- | --------------- | - | -------------- | - | ------------------
|Total revenues for the three months ended                                                    |                |                  |   |                       |  |                        |           |                 |   |                |   |                   
|                                                                                             | March 31, 2008 |                  | $ | 44,628                |  | $                      | 29,111    |                 | $ | 14,849         |   | $                 
|                                                                                             | March 31, 2007 |                  |   | 41,230                |  |                        | 20,313    |                 |   | 20,161         |   |                   
|Income (loss) from continuing operations before minority interest for the three months ended |                |                  |   |                       |  |                        |           |                 |   |                |   |                   
|                                                                                             | March 31, 2008 |                  |   | 234,366               |  |                        | (1,886    | )               |   | (27,252        | ) |                   
|                                                                                             | March 31, 2007 |                  |   | 15,983                |  |                        | (514      | )               |   | 2,247          |   |                   
|Net income (loss) for the three months ended                                                 |                |                  |   |                       |  |                        |           |                 |   |                |   |                   
|                                                                                             | March 31, 2008 |                  |   | 209,628               |  |                        | (1,687    | )               |   | (24,375        | ) |                   
|                                                                                             | March 31, 2007 |                  |   | 15,983                |  |                        | (561      | )               |   | 2,247          |   |                   
|Total assets as of                                                                           |                |                  |   |                       |  |                        |           |                 |   |                |   |                   
|                                                                                             | March 31, 2008 |                  | $ | 2,259,695             |  | $                      | 1,260,214 |                 | $ | 482,696        |   | $                 

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

17. Supplemental Disclosure of Non-Cash Investing and Financing Activities

A summary of non-cash investing and financing activities for the three months ended March 31, 2008 and 2007 is presented below (in thousands):

March 31,2008

2007The acquisition of available for sale securities with warehouse deposit

$


$
24,203Real estate debt investment pay-down due from servicer


(1,525
)

(37,820
)Write-off of deferred financing cost in connection with FAS 159 implementation


34,605


Initial mark-to-market adjustment in connection with FAS 159 implementation


(340,835
)

Elimination of available for sale securities due to acquisition of consolidated liabilities





(5,317
)Reduction of mortgage notes and loans payable due to acquisition of consolidated asset and release of mortgage escrow





1,066Elimination of bonds payable due to acquisition of consolidated assets





(23,750
)Allocation of purchase price of operating real estate to deferred cost





(15,703
)


18. Subsequent Events

Securities Fund

On April 10, 2008, the Company contributed an additional $16.0 million to the Securities Fund and increased its ownership interest to approximately
45%.

Jean-Michel Wasterlain

Jean-Michel Wasterlain, an Executive Vice President, left the Company as of April 11, 2008. As a result, Mr. Wasterlain's employment agreement with
the Company was terminated effective April 11, 2008. Mr. Wasterlain was not entitled to any severance, bonus or other payments or awards as a result of his departure. However, pursuant
to Mr. Wasterlain's Outperformance Bonus Plan, Mr. Wasterlain is deemed to have a vested interest in, and may continue to receive the following: (i) 20% of the bonus participation
amount relating to fee streams and securities investments that were made in the 12 months prior to April 11, 2008; (ii) 40% of the bonus participation amount relating to fee
streams and securities investments that were made more than 12 months and less than 24 months prior to April 11, 2008; (iii) 60% of the bonus participation amount relating
to fee streams and securities investments that were made more than 24 months and less than 36 months prior to April 11, 2008; (iv) 80% of the bonus participation amount
relating to fee streams and securities investments that were made more than 36 months and less than 48 months prior to April 11, 2008; and (v) 100% of the bonus
participation amount relating to fee streams and securities investments that were made more than 48 months prior to April 11, 2008.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amount in Thousands, Except per Share Data
(Unaudited)

18. Subsequent Events (Continued)

Dividends

On April 22, 2008, the Company declared a cash dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and
$0.51563 per share of Series B preferred stock. The dividends were paid on May 15, 2008 to the stockholders of record as of the close of business on May 5, 2008.

Monroe Capital

On May 7, 2008, the Company completed a recapitalization of its middle market corporate lending venture known as Monroe Capital. As part of the
recapitalization, a money-manager invested approximately $87.2 million of cash equity capital into the business, the Company contributed $6.8 million and the lender, under two
consolidated revolving credit facilities totaling $800 million of capacity and having $423 million of outstanding at March 31, 2008, which we refer to as the MC Facility and the
MC VFCC Facility, extinguished a portion of the outstanding debt balance and refinanced the remaining indebtedness in the form of a private CLO match funding the underlying assets. The Company also
contributed its CLO equity interests into the recapitalized entity. Upon completion of the recapitalization transaction, the new investor became the manager of the assets and the Company
deconsolidated the venture and prospectively will use the equity method of accounting for the investment. As part of this recapitalization, the Company terminated its joint venture with Monroe
Management.

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

The following discussion should be read in conjunction with our financial statements and notes thereto included in this report.

Forward-Looking Statements

This report contains information that may constitute "forward-looking statements." Such forward-looking statements relate to, among other
things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should,"
"potential," "intend," "expect," "seek," "anticipate," "estimate," "believe," "could," "project," "predict," "continue" or other similar words or expressions. Forward-looking statements are not
guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or
state other forward-looking information. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking
statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward looking statements. We are under no duty to update
any of the forward-looking statements after the date of this report to conform these statements to actual results.

Factors that could have a material adverse effect on our operations and future prospects are set forth in "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2007, and those described from time to time in our future reports filed with the Securities and Exchange Commission. The factors set
forth in the Risk Factors section could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.

Introduction

We primarily derive revenues from interest income on the real estate debt investments that we originate with borrowers or acquire from third parties, our
corporate loan investments and our real estate securities in which we invest. We generate rental income from our net lease investments. We also generate interest revenues from our ownership interest
in non-consolidated securities term debt transaction issuances and advisory fee income and income from our unconsolidated ventures. Other income comprises a much smaller and more variable
source of revenues and is generated principally from fees associated with early loan repayments and gains/losses from sales of securities.

We
primarily derive income through the difference between the interest and rental income we are able to generate from our investments and the cost at which we are able to obtain
financing for our investments. In order to protect this difference, or "spread", we seek to match-fund our investments using secured sources of long-term financing such as term
debt transaction financings, mortgage financings and long-term unsecured subordinate debt. Match-funding means that we try to obtain debt with maturities equal to our asset maturities and
borrow funds at interest rate benchmarks similar to our assets. Match-funding results in minimal impact to spread when interest rates are rising and falling and minimizes refinancing risk since our
asset maturities match those of our debt.

Profitability and Performance Metrics

We calculate several metrics to evaluate the profitability and performance of our business.



34

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Credit
Risk Management is our ability to manage our assets in a manner that preserves principal and income and minimizes credit losses that would decrease income.

Corporate
Expense Management influences the profitability of our business. We must balance making appropriate investments in our infrastructure and employees with a recognition that our
accounting, finance, legal and risk management infrastructure does not directly generate quantifiable revenues for us. We frequently refer to general and administrative expenses, excluding stock-based
compensation expense, divided by total revenues as a measure of our efficiency in managing expenses.

Availability
and cost of capital will impact our profitability and earnings since we must raise new capital to fund a majority of our AUM growth.

Outlook and Recent Trends

In early 2007, the subprime residential lending and single family housing markets began to experience significant default rates, declining real estate values and
increasing backlog of housing supply, and other lending markets experienced higher volatility and decreased liquidity resulting from the poor credit performance in the residential lending markets. The
residential sector capital markets issues quickly spread more broadly into the asset-backed commercial real estate, corporate and other credit and equity markets even though underlying fundamentals
outside of the residential real estate sector continued to show strong performance and credit metrics. Although we do not have any direct subprime exposure or direct exposure to the single family
mortgage market, the factors described above have resulted in substantially reduced mortgage loan originations and securitizations, and caused more generalized credit market dislocations and a
significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and investors, continue to find it difficult to obtain
cost-effective debt capital to finance new investment activity or to refinance maturing debt. The U.S. Federal Reserve, or the "Federal Reserve," has responded to these conditions by
lowering the federal funds rate from a high of 5.25% in September 2007 to as low as 2.00% as of May 8, 2008; however, many economists believe that the U.S. economy is either near or in a
recession.

Low
interest rates are generally good for commercial real estate values because the discount rate applied to underlying cash flows should be lower, and low rates are also good for loan
credit because debt service costs are lower while underlying values are supported. Notwithstanding liquidity infusion by the Federal Reserve, capital markets conditions remain challenging.

Weaker
macroeconomic conditions combined with the continued lack of liquidity in the U.S. commercial real estate market continue to pressure underlying real estate values. Property types
most directly and immediately impacted by these weaker conditions include residential condominium projects in markets which experienced a high level of development during the residential market boom,
such as in South Florida, Las Vegas and areas of California. Multi-family properties located in nearby areas have generally been impacted by the oversupply of condominiums because many of these
projects are being converted into competing rental properties. Two of our assets, which are first mortgages totaling $35.1 million, have multi-family rental collateral properties located in
South Florida and are experiencing weak operating performance due to conversions of condominiums to rental properties. Also, hotels are generally most immediately impacted by changing economic
conditions because revenues are generated on a nightly basis, based on room rates and occupancy. The next most sensitive real estate class to changing economic conditions is retail, followed by office
and industrial properties. Office, industrial and retail property types have longer-term, multi-year leases and therefore reset to market on a lagging basis. The degree to
which commercial real estate values are impacted by weaker

35

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economic
conditions will be determined primarily by the length that such conditions exist and the severity of contraction.

Credit
spreads on commercial mortgages (i.e., the interest rate spread over given benchmarks such as LIBOR or U.S. Treasury securities) are significantly influenced by:
(a) supply and demand for such mortgage loans; (b) perceived risk of the underlying real estate collateral cash flow; and (c) capital markets execution for the sale or financing
of such commercial mortgage assets. In the case of (a), the number of potential lenders in the market place and the amount of funds they are willing to devote to commercial mortgage assets will impact
credit spreads. As liquidity increases, spreads on equivalent commercial mortgage loans will decrease. Conversely, a lack of liquidity will result in credit spreads increasing. During periods of
volatility, the number of lenders participating in the market may change at an accelerated pace. Further, many lenders depend on the capital markets in order to finance their portfolio of commercial
loans. Lenders are forced to increase the credit spread at which they are willing to lend as liquidity in the capital market decreases. As the market tightens, many warehouse lenders have requested
additional collateral or repayments with respect to their loans in order to maintain margins that are acceptable to them.

For
existing loans, when credit spreads widen, the fair value of these existing loans decreases. If a lender were to originate a similar loan today, such loan would carry a greater
credit spread than the existing loan. Even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed, the fair value of the loan may be
negatively impacted by the incremental interest foregone from the widened credit spread. Accordingly, when a lender wishes to sell or finance the loan, the reduced value of the loan will impact the
total proceeds that the lender will receive.

We
responded to these difficult conditions by decreasing investment activity when we observed deteriorating residential market conditions. We expect credit to continue to be challenging
well into
2008 and believe we have the resources to quickly identify potential issues and to act aggressively to protect our invested capital.

Approximately
$4.0 billion of our term debt transaction liabilities (including the off-balance sheet and on-balance sheet financings) are in their
reinvestment periods which means when the underlying assets repay we are able to reinvest the proceeds in new assets without having to repay the liabilities. Because credit spreads are currently much
wider than when we issued these liabilities, we currently expect to earn a higher return on equity on capital which is repaid and reinvested in this market. Approximately $389.0 million of our
funded loan commitments have their initial maturity date in 2008; however, all of the loans contain extension options of at least six months (many subject to performance criteria) so it is difficult
to estimate how much capital from initial maturities or prepayments may be recycled into higher earning investments in 2008.

Although
lower overall interest rates should cushion declines in real estate values and mitigate credit pressures, lower floating interest rates result in lower overall earnings for us.
This holds true even when the underlying asset is perfectly match funded with similar debt because we do not finance 100% of the asset. Because portions of all of our assets, which are predominantly
floating rate, are funded with equity, lower interest rates result in lower earnings. Furthermore, lower market liquidity levels tend to decrease prepayment activity which may result in lower other
income and early recognition of loan discounts and fees compared to prior periods, as well as defer our ability to reinvest proceeds in new, higher yielding assets without having to repay the
liabilities. Additionally, decreasing real estate values and weaker collateral operating performance due to economic conditions may result in our recognizing higher credit loss reserve levels than in
the past.

Our
near-term business plan assumes that we are able to recycle equity capital from lower return-generating assets, such as our net leased healthcare portfolio, and that we
are able to reinvest these proceeds in a current market that we believe can provide a greater level of returns due to a lack of

36

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liquidity
and competition. Our plan also assumes that we can successfully continue to generate other income levels consistent with or greater than in the past, given our larger asset base, and can
manage credit so that future credit losses, while higher than prior periods, will not be significantly greater than in the past. Our future level of earnings and dividends in this low interest rate
and liquidity environment is dependent upon our ability to successfully execute these plans.

We
believe that in the longer term, liquidity and attractive pricing could return to the commercial real estate finance markets but that in the near term, new financing sources must be
developed in order to attractively finance new investment activity. We believe these sources will include term loans from financial institutions and life companies, more restrictive commercial real
estate finance structures, which may not permit reinvestment from asset repayments, and financing provided by motivated sellers of assets.

Investors
are encouraged to read the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2007.

Risk Management

We conduct a quarterly comprehensive credit review, resulting in an individual risk rating being assigned to each asset. This review is designed to enable
management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis as an "early warning system." Based on the quarterly
reviews, assets are put on an internal "Watch List" if we believe there is greater near-term risk that we could lose invested capital and/or there is a situation at the underlying
collateral which requires intensive risk management and portfolio management resources. A Watch List asset does not necessarily mean it is non-performing or that there has been an
impairment to our loan basis, but indicates our view that the risk of the asset becoming non-performing or impaired is much greater than in the overall portfolio. As of March 31,
2008, we had six assets on our Watch List totaling $96.6 million, which represents approximately 2.1% of total assets.

As
of March 31, 2008, no assets were delinquent on required principal or interest payments according to the underlying loan terms and no assets were considered
non-performing. During the first quarter we took a $750,000 credit loss provision for a $19.5 million first mortgage loan secured by two multi-family properties located in San
Antonio, Texas. The loan is paying current; however, in our opinion the borrower does not have adequate financial resources to continue to invest in the asset to maintain its value and we are working
with the borrower on a plan to potentially foreclose on and to sell the collateral to a more financially capable owner/operator.

Critical Accounting Policies

The following is a summary of our critical accounting policies. Refer to the section of our Annual Report on Form 10-K for the year ended
December 31, 2007 entitled "Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting policies" for a full discussion of our critical
accounting policies.



Proper valuation of financial instruments is a critical component of our financial statement preparation. We adopted the provisions of SFAS No. 157 "Fair
Value Measurements" ("SFAS 157") effective January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based
on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between marketplace participants at the measurement date (i.e., the exit price).

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We
have categorized our financial instruments, based on the priority of the inputs to the valuation technique, into a three level fair value hierarchy. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure
the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial
assets and liabilities recorded on the Condensed Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1.

Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives,
most U.S. Government and agency securities, and certain other sovereign government obligations).Level 2.

Financial assets and liabilities whose values are based on the following:a)

Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);b)

Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);c)

Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); andd)

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain mortgage loans).Level 3.

Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about
the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, certain commercial mortgage whole loans, and long-dated or complex derivatives including certain foreign exchange options
and long dated options on gas and power).


The
fair value of our financial instruments are based on observable market prices when available. Such prices are based on the last sales price on the date of determination, or, if no
sales occurred on such day, at the "bid" price at the close of business on such day and if sold short at the "asked" price at the close of business on such day. Interest rate swap contracts are valued
based on market rates or prices obtained from recognized financial data service providers. Generally these prices are provided by a recognized financial data service provider.

We
have valued our financial instruments, in the absence of observable market prices, using the valuation methodologies described below applied on a consistent basis. For some financial
instruments little market activity may exist; management's determination of fair value is then based on the best information available in the circumstances, and may incorporate management's own
assumptions and involves a significant degree of management's judgment.

Investments
for which market prices are not observable are generally investments in equity or income notes of term debt transactions, equity interests in collateralized loan obligations
and trust preferred securities. Fair values of these investments are determined by reference to market rates or prices provided by the underwriters of the structured securities or cash flow models
utilizing an internal rate of return provided by the underwriters of the term debt or CLO transaction. An analysis is applied

38

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to
the estimated future cash flows using various factors depending on the investments, including various reinvestment parameters.

Liabilities
for which market prices are not generally observable include our liability to subsidiary trusts issuing preferred securities. The fair value of these debt instruments are
based upon an analysis of other instruments issued by us that are currently actively traded including our preferred stock and exchangeable senior notes. An analysis is performed on the implied credit
spreads that could be observed for these instruments. We believe that the credit spreads for our preferred stock and exchangeable senior notes are valid proxies for those of the liability to
subsidiary trusts issuing preferred securities because they share many of the same structural and credit features. However, in deriving appropriate credit spreads for the liability to subsidiary
trusts issuing preferred securities on the basis of observed credit spreads for preferred stock and exchangeable senior notes, several adjustments are made to reflect the differences between these
instruments and the liability to subsidiary trusts issuing preferred securities.

We
also adopted SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159") effective January 1, 2008 and we have elected to
fair value certain financial instruments. The change in fair value of these instruments is recorded in unrealized gain (loss) on investments and other in the condensed consolidated statement of
operations. See Note 3 to the condensed consolidated financial statements for further information.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS 141(R), "Business Combinations" ("SFAS 141(R)"). This Statement replaces SFAS 141, "Business
Combinations", and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any
noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the
acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the
acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure the noncontrolling
interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R) amends
SFAS No. 109, "Accounting for Income Taxes", to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination
either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS 142, "Goodwill and Other
Intangible Assets", to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use.
SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We are currently assessing the potential impact that the adoption of SFAS 141(R) could have on our financial statements.

In
December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 amends Accounting Research
Bulletin 51, "Consolidated Financial Statements", to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also
clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160
also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of

39

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consolidated
net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated
and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling
owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently assessing the
potential impact that the adoption of SFAS 160 could have on our financial statements.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging ActivitiesAn Amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 specifically requires entities to provide enhanced
disclosures addressing the following: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and its related interpretations; and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008.
SFAS 161 is effective for us on January 1, 2009. We are currently evaluating the impact that the adoption of SFAS 161 will have on our financial condition, results of operations,
and disclosures.

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2008 to Three Months Ended March 31, 2007

Revenues



Interest income for the three months ended March 31, 2008 totaled $63.7 million, representing an increase of $5.4 million, or 9%, compared to
$58.3 million for the three months ended March 31, 2007. The increase was attributable to the full quarter benefit in 2008 of the $1.3 billion of investments acquired in the first
quarter of 2007. We also originated and acquired commercial real estate debt, commercial real estate securities and corporate debt subsequent to March 31, 2007 that had a net book value of
$1.2 billion. The interest income from these investments was partially offset by approximately $844.5 million of investment repayments subsequent to March 31, 2007, resulting in a
net increase to interest income of approximately $17.0 million. In addition, as a result of the sale of certain assets to the Securities Fund and the lower average LIBOR rate of approximately
200 basis points, there was an offsetting decrease in interest income of approximately $11.6 million quarter over quarter.



Interest income from related parties for the three months ended March 31, 2008 totaled $3.8 million, representing an increase of
$0.8 million, or 27%, compared to $3.0 million for the three months ended March 31, 2007. The increase is attributable to increases in our investments in the
non-investment grade note classes of our unconsolidated term debt transactions. All of our real estate securities term debt transactions completed since 2006 in which we retain the equity
notes have been accounted for as on-balance sheet financings.



Rental and escalation income for the three months ended March 31, 2008 totaled $29.0 million, representing an increase of $9.7 million, or
50%, compared to $19.3 million for the three months ended March 31, 2007. The increase was primarily attributable to net lease property acquisitions by our Wakefield joint venture. These
acquisitions collectively contributed $7.1 million of additional rental income. Other net lease properties acquired during the three months ended, or subsequent to, March 31, 2007,
contributed additional rental and escalation income of $2.3 million and rent increases at various properties, which are based on CPI indices, resulted in additional rental income of
$0.3 million for the three months ended March 31, 2008.



Advisory fees from related parties for the three months ended March 31, 2008 totaled $2.3 million, representing an increase of approximately
$0.9 million, or 64%, compared to $1.4 million for the three months ended March 31, 2007. The majority of the increase was attributable to the advisory fees earned on
N-Star IX of $0.8 million, which were formerly eliminated in consolidation and fees earned on the Securities Fund of $0.1 million. In July 2007, we sold our equity interest
in N-Star IX to the Securities Fund. As a result of the sale, N-Star IX is no longer consolidated into our financial statements, but we continue to earn management fees from
the financing.



Other revenue for the three months ended March 31, 2008 totaled $1.0 million, representing a decrease of $1.2 million, or 55%, compared to
$2.2 million the three months ended March 31, 2007. Other revenue for three months ended March 31, 2008 consisted primarily of $0.3 million in prepayment penalties,
$0.3 million of exit fees, $0.2 million in unused credit line fees, $0.1 million in

41

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draw
fees and $0.1 million miscellaneous other revenue. Other revenue for the three months ended March 31, 2007 included $1.0 million of recurring income from premiums received on
credit default swaps related to Abacus NS2, $0.3 million related to a one-time consent fee on the early repayment of one of our real estate securities investments,
$0.7 million in prepayment penalties and loan assumption fees from loans in our real estate debt portfolio and $0.2 million of net expense reimbursements from tenants in our net lease
portfolio.

Expenses



Interest expense for the three months ended March 31, 2008 totaled $54.9 million, representing an increase of $7.3 million, or 15%, compared
to $47.6 million for the three months ended March 31, 2007. Interest expense for the three months ended March 31, 2008 includes the impact of the June 2007 closing of our
$172.5 million exchangeable senior notes offering and the March 2007 and June 2007 private placement of $72.7 million of trust preferred debt resulting in additional interest expense of
approximately $4.1 million, additional mortgage loans payable due to acquisitions in our net lease portfolio resulting in $5.2 additional interest expense, increased term loan balance resulting
in $3.1 million additional interest expense, the addition of $423.3 million in financing from our MC Facility and our MC VFCC Facility resulting in $5.0 million additional
interest expense and the full quarter impact of the Euro-note resulting in $2.0 million additional interest expense. These increases were partially offset by the sale of
N-Star IX to the Securities Fund, decreasing interest expense by $3.8 million, the paydown of repurchase obligations resulting in decreased interest expense of $1.1 million,
and decreased interest expense of $7.4 million on N-Star IV, VI, VII and VIII bonds payable due to debt paydowns decreases in LIBOR and the effect of net settlements on interest
rate swaps being recorded in unrealized gain (loss) on investments and other as the result of the SFAS 159 election on the underlying debt.



Real estate property operating expenses for three months ended March 31, 2008 totaled $2.0 million, representing an increase of $0.1 million,
or 5%, compared to $1.9 million for three months ended March 31, 2007. The increase was attributable to net lease property acquisitions.



Advisory fees for related parties for the three months ended March 31, 2008 totaled $2.1 million, representing an increase of $1.5 million,
or 250%, compared to $0.6 million for the three months ended March 31, 2007. The increase was primarily attributable to our Monroe Management joint venture, which was formed in March
2007 and increased fees in our Wakefield joint venture resulting from healthcare property acquisitions. We incurred $1.3 million of advisory fees to Monroe Management for the three months ended
March 31, 2008 and $0.8 million and $0.6 million of advisory fees to Wakefield Capital Management for the three months ended March 31, 2008 and 2007, respectively.



Provision for loan loss for the three months ended March 31, 2008 totaled $0.8 million. The provision for loan loss was taken against a
$19.5 million first mortgage asset backed by two multi-family properties. There was no provision for loan loss for the three months ended March 31, 2007.



General and administrative expenses for the three months ended March 31, 2008 totaled $18.1 million, representing an increase of
$3.4 million, or 23%, compared to $14.7 million for the three

42

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months
ended March 31, 2007. The primary components of our general and administrative expenses were the following:

Salaries
and equity-based compensation for the three months ended March 31, 2008 totaled $11.7 million, representing an increase of approximately $2.9 million, or
33%, compared to $8.8 million, for the three months ended March 31, 2007. The increase was attributable to a $3.3 million increase related to equity-based compensation, which was
partially offset by a $0.4 million decrease related to salaries due to lower staffing levels resulting from decreased investment activity. The $3.3 million increase in equity-based
compensation expense was attributable to an increase of approximately $2.7 million of vesting of equity-based awards issued under our 2004 Omnibus Stock Incentive Plan relating to grants issued
in the fourth quarter 2007 and first quarter 2008, an increase of $0.8 million in additional equity-based compensation granted in connection with employee compensation arrangements and an
increase of $1.1 million in connection with employee separation agreements. The increase was offset by a decrease of $0.7 million relating to the Long Term Incentive Bonus Plan, which
was fully vested as of September 30, 2007, and a decrease in equity-based compensation expense of $0.6 million related to our Employee Outperformance Plan.

Auditing
and professional fees for the three months ended March 31, 2008 totaled $2.4 million, representing a decrease of $0.3 million, or 11%, compared to
$2.7 million for the three months ended March 31, 2007. The decrease was primarily attributable to lower legal fees for general corporate work and investment activities, recruiting fees,
and fees related to agreed upon procedures in connection with term debt transactions.

Other
general and administrative expenses for the three months ended March 31, 2008 totaled $3.9 million, representing an increase of approximately $0.7 million, or
22%, compared to $3.2 million for the three months ended March 31, 2007. The increase was primarily attributable to increases in legal fees and other costs related to investment
initiatives not ultimately consummated during the three months ended March 31, 2008.



Depreciation and amortization expense for the three months ended March 31, 2008 totaled $9.9 million, representing an increase of
$3.3 million, or 50%, compared to $6.6 million for the three months ended March 31, 2007. This increase was primarily attributable to $319.4 million of net lease
acquisitions made subsequent to March 31, 2007.



Equity in (loss) earnings for the three months ended March 31, 2008 totaled a loss of $0.2 million, representing a decrease of $0.2 million,
compared to earnings of $16,000 for the three months ended March 31, 2007. In July 2007, we closed our Securities Fund, retaining a 25.7% interest that was accounted for under the equity method
of accounting. For the three months ended March 31, 2008, we recognized equity in loss of $0.6 million from the Securities Fund, of which $4.4 million was the unrealized loss
related to the mark-to-market adjustment on the securities in the Securities Fund, and equity in loss of $0.5 million on the LandCap joint venture. The losses were
partially offset by our investment in Monroe Management, which we recognized $0.9 million equity in earnings for the three months ended March 31, 2008.



Unrealized gain (loss) on investments and other increased by approximately $219.4 million for the three months ended March 31, 2008 to a gain of
$212.1 million, compared to a loss of $7.3 million for the three months ended March 31, 2007. The unrealized gain on investments for the three months ended March 31, 2008
consisted primarily of unrealized gains related to SFAS 159 mark-to-market

43

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adjustments
of $103.5 million on N-Star VIII bonds payable, $76.5 million on N-Star IV bonds payable, $64.9 million on N-Star VII bonds
payable, $46.7 million on N-Star VI bonds payable, $32.8 million on liability to subsidiary trusts issuing preferred securities and $1.1 million on exchangeable senior
notes, offset partially by unrealized losses related to SFAS 159 mark-to-market adjustments of $73.9 million on N-Star VII available for sale
securities, $7.7 million on N-Star IV available for sale securities and $31.5 million on interest rate swaps as a result of these swaps no longer qualifying for hedge
accounting under SFAS 133. The unrealized loss on investment for the three months ended March 31, 2007 consisted of a $3.9 million mark-to-market loss on a
term debt transaction warehouse agreement as a result of a decline in the fair market value of collateral held in the warehouses, and a $4.1 million mark-to-market loss
on credit default swaps. Both mark-to-market adjustments resulted from credit spread widening in the commercial real estate securities markets precipitated by credit issues in
the residential sub-prime lending markets. This negative adjustment was slightly offset by a $0.6 million unrealized gain related to the ineffective portion of one of our interest
rate swaps in N-Star IX.



The realized gain of $10,000 for the three months ended March 31, 2008 is comprised of a $117,000 gain on foreign currency translation on our
Euro-note, partially offset by a loss of $107,000 on the sale of two corporate loan investments. The realized gain of $2.5 million for the three months ended March 31, 2007
represented the increase in fair value related to the net carry of securities during the warehouse period of $1.3 million which was realized at the close of N-Star IX and a gain of
$1.5 million on the early redemption of REIT debt securities in N-Star VII, partially offset by a realized loss of $0.3 million on the closing of short securities position.



Income from discontinued operations represents the operations of properties sold or held for sale during the period. In 2007, our Wakefield venture sold two
assisted care living facilities, which were held for sale at March 31, 2007 and closed in April 2007. Accordingly, these operations were reclassified to income from discontinued operations. We
had no discontinued operations for the three months ended March 31, 2008.

Liquidity and Capital Resources

We require significant capital to fund our investment activities and operating expenses. Our capital sources may include cash flow from operations, borrowings
under revolving credit facilities, financings secured by our assets such as first mortgage and term debt transaction financings, long-term senior and subordinate corporate capital such as
senior notes, trust preferred securities and perpetual preferred and common stock.

Our
total available liquidity at March 31, 2008 was approximately $312.1 million, including $139.5 million of unrestricted cash and cash equivalents,
$72.6 million of cash in our term debt transactions, which is available for reinvestment within the term debt transaction, and $100.0 million of available undrawn liquidity under our
unsecured credit facility.

We
expect to meet our long term liquidity requirements, including the repayment of debt and our investment funding needs, through existing cash resources and additional borrowings, the
issuance of debt and/or equity securities and the liquidation or refinancing of assets at maturity. We believe that the value of the net lease portfolio is, and will continue to be, sufficient to
allow us to refinance the mortgage debt on this portfolio at maturity.

As
a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where we do not receive corresponding cash, and we
intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT

44

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distribution
requirements of the Internal Revenue Code and to avoid federal income tax and the non deductible excise tax.

These
distribution requirements limit our ability to retain earnings and thereby replenish or increase capital committed to our operations; however, we believe that our existing capital
resources and financing will enable us to meet current non-discretionary capital requirements. We believe that our existing sources of funds will be adequate for purposes of meeting our
short-term liquidity needs. Our ability to meet a long-term (beyond one year) liquidity requirement is subject to obtaining additional debt and equity financing. Any decision
by our lenders and investors to provide us with financing will depend upon a number of factors, such as our compliance with the terms of its existing credit arrangements, our financial performance,
industry or market trends, the general availability of and rates applicable to financing transactions, such lenders' and investors' resources and policies concerning the terms under which they make
capital commitments and the relative attractiveness of alternative investment or lending opportunities.

Dividend Reinvestment and Stock Purchase Plan

Effective as of April 27, 2007, we implemented a Dividend Reinvestment and Stock Purchase Plan, or the Plan, pursuant to which we registered and reserved
for issuance 15,000,000 shares of our common stock. Under the terms of the Plan, stockholders who participate in the Plan may purchase shares of our common stock directly from us, in cash investments
up to $10,000. At our sole discretion, we may accept optional cash investments in excess of $10,000 per month, which may qualify for a discount from the market price of 0% to 5%. Plan participants may
also automatically reinvest all or a portion of their dividends for additional shares of our stock. We expect to use the proceeds from any dividend reinvestments or stock purchases for general
corporate purposes.

During
the three months ended March 31, 2008, we issued a total of approximately 34,243 common shares pursuant to the Plan for a gross sales price of approximately
$0.3 million.

Cash Flows

The net cash flow provided by operating activities of $23.9 million, decreased by $1.5 million for the three months ended March 31, 2008 from
$25.4 million for the three months ended March 31, 2007. This was primarily due to the lower libor rates which decreased interest income generated from our asset base.

The
net cash flow provided by investing activities was $91.4 million for the three months ended March 31, 2008 compared to the net cash used by investing activities of
$1.7 billion of cash used in investing activities for the three months ended March 31, 2007. The primary source of the cash provided by investing activities in 2008 was a result of the
payoffs and principal paydowns of our real estate debt investments and corporate loan investments combined with decreased investment activity.

The
net cash flow used in financing activities was $129.7 million for the three months ended March 31, 2008 compared to $1.6 billion of cash provided by financing
activities for the three months ended March 31, 2007. The primary source of cash flow used in financing activities was the paydown of our bonds, credit facilities, and secured term loan as a
result of principal paydowns of our assets.

45

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Contractual Obligations and Commitments

As of March 31, 2008, we had the following contractual commitments and commercial obligations (in thousands):

|                                                            |  | Payments Due by Period
|----------------------------------------------------------- |  | ----------------------
|
|Mortgage notes                                              |  | $                     
|Mezzanine loan payable                                      |  |                       
|Exchangeable senior notes                                   |  |                       
|Bonds payable                                               |  |                       
|Credit facilities                                           |  |                       
|Secured term loan                                           |  |                       
|Liability to subsidiary trusts issuing preferred securities |  |                       
|Capital leases(1)                                           |  |                       
|Operating leases                                            |  |                       
|Placement fees                                              |  |                       
|Outstanding unfunded commitments(2)                         |  |                       
|                                                            |  |                       
|Total contractual obligations                               |  | $                     
|                                                            |  |                       

---

Our
debt obligations contain covenants that are both financial and non-financial in nature. Significant financial covenants include a requirement that we maintain a minimum
tangible net worth, a minimum level of liquidity and a minimum fixed charge coverage ratio. As of March 31, 2008, we were in compliance with all financial and non-financial
covenants in our debt agreements.

Off-Balance Sheet Arrangements

Term Debt Issuances

The terms of the portfolio of real estate securities held by the term debt transactions are structured to be matched with the terms of the
non-recourse term debt liabilities. These term debt liabilities are repaid with the proceeds of the principal payments on the real estate securities collateralizing the term debt
liabilities when these payments are actually received. There is no refinancing risk associated with the term debt liabilities, as principal is only due to the extent that it has been collected on the
underlying real securities and the stated maturities are noted above. Term debt transactions produce a relatively predictable income stream based on the spread between the interest earned on the
underlying securities and the interest paid on the term debt transaction liabilities. This spread may be reduced by credit losses on the underlying securities or by hedging mismatches. Our term debt
transactions have not incurred any losses on any of their securities investments from the date

46

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of
purchase through March 31, 2008. We receive quarterly cash distributions from N-Star I and monthly cash distributions from N-Star II, N-Star III and
N-Star V, each representing our proportionate share of the residual cash flow from the term debt transactions, as well as collateral advisory fees and interest income on the unrated income
notes of the term debt transactions.

The
following tables describe certain terms of the collateral for and the notes issued by term debt transactions at March 31, 2008 (dollars in thousands):

|            |       |         |  |   |         |           |      |      |      | Term NotesMarch 31, 2008
|----------- | ----- | ------- |  | - | ------- | --------- | ---- | ---- | ---- | -------------------------
|
|
|
|N-Star I(2) |       | 8/21/03 |  | $ | 319,906 |           | 6.45 | %    | 4.40 |                          
|N-Star II   |       | 7/01/04 |  |   | 334,764 |           | 6.21 |      | 4.74 |                          
|N-Star III  |       | 3/10/05 |  |   | 404,682 |           | 5.90 |      | 4.88 |                          
|N-Star V    |       | 9/22/05 |  |   | 495,971 |           | 5.68 |      | 6.84 |                          
|            |       |         |  |   |         |           |      |      |      |                          
|            | Total |         |  |   | $       | 1,555,323 |      | 6.01 | %    | 5.37                     
|            |       |         |  |   |         |           |      |      |      |                          

---

Any
potential losses in our off balance sheet term debt transactions is limited to the carrying value of our investment of $68.6 million at March 31, 2008.

CLO Equity Notes

We own a 40% residual equity interests in a CLO originated by Monroe Capital, LLC. The CLO includes collateral of approximately $400 million backed
primarily by first lien senior secured loans. We also acquired a 12.5% and 33.5% residual equity interest in two third party CLOs. Based on the projected future cash flows, the equity interests are
yielding an internal rate of return ranging from approximately 15% to 18%. The CLOs were determined to be variable interest entities under Fin 46(R)-6 and we were determined not to be the
primary beneficiary, therefore, the financial statements are not consolidated into our condensed consolidated financial statements. Our residual equity interests are accounted for as debt securities
available for sale pursuant to EITF 99-20. The fair market value was $21.8 million at March 31, 2008.

NorthStar Real Estate Securities Opportunity Fund

In July 2007, we closed on $109.0 million of equity capital for its Securities Fund, an investment vehicle in which we intend to prospectively conduct our
real estate securities investment business.

We
are the manager and general partner of the Securities Fund. We will typically receive base management fees ranging from 1.0% to 2.0% per annum on third-party capital, and we are
entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary
depending on the investor capital lockup periods.

During
the first quarter 2008, the Securities Fund made all cash deposits that it was obligated to make under its $250 million warehouse agreement maturing May 1, 2008.
Subsequently during the quarter, the lender made additional margin calls as a result of declining values of the securities financed under the warehouse. The Securities Fund was under no obligation to
make further collateral deposits and determined not to do so, which triggered the lender's right to take control of the

47

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collateral.
As of March 31, 2008, the lender had not liquidated the collateral and the Securities Fund estimated that it could recover $1.0 million of its deposits based on the market
values of the underlying securities. During the first quarter 2008, the Securities Fund also monetized investment positions which were established to hedge its exposure to declining values in the
warehouse securities, thereby offsetting the recognized loss from the warehouse. The net realized gain, as of March 31, 2008, on the two transactions was $11.3 million, of which
$3.4 million represents our share of the realized gain. The actual amount of cash deposits recovered from the lender upon liquidation of the collateral, if any, will be based on proceeds
received on sale of the securities, which are controlled by the lender.

At
March 31, 2008, we had invested a total of $32.4 million and the carrying value of our investment was $22.2 million, representing a 30% interest in the Securities
Fund. We also had advanced $10.0 million to the Securities Fund under a revolving credit agreement which was paid in full as of March 31, 2008. For the three months ended
March 31, 2008, we recognized equity in loss of $0.6 million, of which $4.4 million represented an unrealized loss on the mark-to-market adjustment of the
securities in the Securities Fund. We also earned $0.1 million of management fees from the Securities Fund for the three months ended March 31, 2008.

Recent Developments

Securities Fund

On April 10, 2008, we contributed an additional $16.0 million to the Securities Fund and increased our ownership interest to approximately 45%.

Jean-Michel Wasterlain

Jean-Michel Wasterlain, an Executive Vice President of the Company, left the Company as of April 11, 2008. As a result,
Mr. Wasterlain's employment agreement with the Company was terminated effective April 11, 2008. Mr. Wasterlain was not entitled to any severance, bonus or other payments or awards
as a result of his departure. However, pursuant to Mr. Wasterlain's Outperformance Bonus Plan, Mr. Wasterlain is deemed to have a vested interest in, and may continue to receive the
following: (i) 20% of the bonus participation amount relating to fee streams and securities investments that were made in the 12 months prior to April 11, 2008; (ii) 40% of
the bonus participation amount relating to fee streams and securities investments that were made more than 12 months and less than 24 months prior to April 11, 2008;
(iii) 60% of the bonus participation amount relating to fee streams and securities investments that were made more than 24 months and less than 36 months prior to April 11,
2008; (iv) 80% of the bonus participation amount relating to fee streams and securities investments that were made more than 36 months and less than 48 months prior to
April 11, 2008; and (v) 100% of the bonus participation amount relating to fee streams and securities investments that were made more than 48 months prior to April 11,
2008.

Dividends

On April 22, 2008, we declared a dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share
of Series B preferred stock. The dividends were paid on May 15, 2008 to the stockholders of record as of the close of business on May 5, 2008.

48

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Monroe Capital

On May 7, 2008, we completed a recapitalization of our middle market corporate lending venture known as Monroe Capital. As part of the recapitalization, a
money-manager invested approximately $87.2 million of cash equity capital into the business, we contributed $6.8 million and the lender, under two consolidated revolving credit
facilities totaling $800 million of capacity and having $423 million of outstanding at March 31, 2008, extinguished a portion of the outstanding debt balance and refinanced the
remaining indebtedness in the form of a private collateralized loan obligation match funding the underlying assets. We also contributed our ownership CLO equity interests into the recapitalized
entity. Upon completion of the recapitalization transaction, the new investor became the manager of the assets and we deconsolidated the venture and prospectively will use the equity method of
accounting for the investment. As part of this recapitalization, we terminated our joint venture with Monroe Management.

Inflation

Our leases for tenants of operating real estate are generally either:



We
believe that most inflationary increases in expenses will be offset by the expense reimbursements and contractual rent increases described above to the extent of occupancy.

We
believe that the risk associated with an increase in market interest rates on the floating rate debt used to finance our investments in our term debt transactions and our direct
investments in real estate debt, will be largely offset by our strategy of matching the terms of our assets with the terms of our liabilities and through our use of hedging instruments.

Non-GAAP Financial Measures

Funds from Operations and Adjusted Funds from Operations

Management believes that funds from operations, or FFO, and adjusted funds from operations, or AFFO, each of which are non-GAAP measures, are
additional appropriate measures of the operating performance of a REIT and NorthStar in particular. We compute FFO in accordance with the standards established by the National Association of Real
Estate Investment Trusts (NAREIT), as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of depreciable properties, the cumulative effect of changes in
accounting principles, real estate-related depreciation and amortization, and after adjustments for unconsolidated/uncombined partnerships and joint ventures. AFFO, as defined by NAREIT, is a
computation made by analysts and investors to measure a real estate company's cash flow generated by operations.

We
calculate AFFO by subtracting from (or adding) to FFO:



49

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Our
calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs.
Our management utilizes FFO and AFFO as measures of our operating performance, and believes they are also useful to investors, because they facilitate an understanding of our operating performance
after adjustment for certain non-cash expenses, such as real estate depreciation, which assumes that the value of real estate assets diminishes predictably over time and, in the case of
AFFO, equity based compensation. Additionally, FFO and AFFO serve as measures of our operating performance because they facilitate evaluation of our company without the effects of selected items
required in accordance with GAAP that may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore,
although FFO, AFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our investors with an
additional useful measure to compare our financial performance to certain other REITs.

Neither
FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with U.S. GAAP. Furthermore, FFO and AFFO do not represent
amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be
considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

50

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Set
forth below is a reconciliation of FFO and AFFO to net income from continuing operations before minority interest for the three months ended March 31, 2008 and 2007 (in
thousands):

Three Months
Ended March 31,
2008

Three Months
Ended March 31,
2007Funds from Operations:Income from continuing operations before minority interest

$
223,793

$
8,087Minority interest in joint ventures


(245
)

Income from continuing operations before minority interest in operating partnership


223,548


8,087Adjustments:Preferred dividend


(5,231
)

(1,313
)Depreciation and amortization


9,938


6,590Funds from discontinued operations





22Real estate depreciation and amortizationunconsolidated ventures


247


249Funds from Operations

$
228,502

$
13,635Adjusted Funds from Operations:Funds from Operations

$
228,502

$
13,635Straight-line rental income, net


(757
)

(324
)Straight-line rental income, discontinued operations





10Straight-line rental income, unconsolidated ventures


(46
)

(60
)Amortization of equity-based compensation


6,991


3,731Fair value lease revenue (SFAS 141 adjustment)


(306
)

(176
)Unrealized(gains)/losses from mark-to-market adjustments


(214,558
)

8,010Unrealized losses from mark-to-market adjustments, unconsolidated ventures


4,355


Adjusted Funds from Operations

$
24,181

$
24,826


Return on Average Common Book Equity

We calculate return on average common book equity ("ROE") on a consolidated basis and for each of our major business lines. We believe that ROE provides a good
indication of the performance of the Company and our business lines because we believe it provides the best approximation of cash returns on common equity invested. Management also uses ROE, among
other factors, to evaluate profitability and efficiency of equity capital employed, and as a guide in determining where to allocate capital within its business. ROEs may fluctuate from quarter to
quarter based upon a variety of factors, including the timing and amount of investment fundings, repayments and asset sales, capital raised and leverage used, and the yield on investments funded.

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Return on Average Common Book Equity (including and excluding G&A and one-time items)  (dollars in thousands)

|                                                                        |                                                                                             |     |         | Three Months
Ended
March 31, 2008 |         |      |     | Annualized
March 31, 2008(2) |   | Year Ended
December 31, 2007 | 
|----------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | --- | ------- | --------------------------------- | ------- | ---- | --- | ---------------------------- | - | ---------------------------- | 
|Adjusted Funds from Operations (AFFO)                                   |                                                                                             |     |         | $                                 | 24,181  |      | [A] |                              | $ | 96,724                       | 
|Plus: Fund Raising Fees and Other Joint Venture Costs                   |                                                                                             |     |         |                                   |        |      |     |                              |   |                              | 
|                                                                        |                                                                                             |     |         |                                   |         |      |     |                              |   |                              | 
|AFFO, excluding Fund Raising Fees and Other Joint Venture Costs         |                                                                                             |     |         |                                   | 24,181  |      | [B] |                              |   | 96,724                       | 
|Plus: General & Administrative Expenses                                 |                                                                                             |     |         |                                   | 18,054  |      |     |                              |   |                              | 
|Plus: General & Administrative Expenses from Unconsolidated Ventures    |                                                                                             |     |         |                                   | 595     |      |     |                              |   |                              | 
|Less: Equity-Based Compensation and Straight-Line Rent included in G&A  |                                                                                             |     |         |                                   | 6,995   |      |     |                              |   |                              | 
|                                                                        |                                                                                             |     |         |                                   |         |      |     |                              |   |                              | 
|AFFO, excluding G&A                                                     |                                                                                             |     |         |                                   | 35,835  |      | [C] |                              |   | 143,340                      | 
|Average Common Book Equity & Operating Partnership Minority Interest(1) |                                                                                             | [D] |         | $                                 | 628,494 |      |     |                              |   |                              | 
|                                                                        | Return on Average Common Book Equity (including G&A)                                        |     | [A]/[D] |                                   |         | 15.4 | %   |                              |   |                              | 
|                                                                        | Return on Average Common Book Equity (excluding Fund Raising and Other Joint Venture Costs) |     | [B]/[D] |                                   |         | 15.4 | %   |                              |   |                              | 
|                                                                        | Return on Average Common Book Equity (excluding G&A)                                        |     | [C]/[D] |                                   |         | 22.8 | %   |                              |   |                              | 

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Market risk is the exposure to loss resulting from changes in interest rates and asset prices. We are subject to credit risk and interest rate risk with respect
to our investments in real estate debt, real estate securities and net leased real estate. The primary market risk that we are exposed to is interest rate risk. Interest rates are highly sensitive to
many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our interest rate risk sensitive
assets, liabilities and related derivative positions are generally held for non-trading purposes. At March 31, 2008, a hypothetical 100 basis point increase in interest rates
applied to our variable rate assets would increase our annual interest income by approximately $32.1 million, offset by an increase in our interest expense of approximately $25.4 million
on our variable rate liabilities.

Real Estate Debt

We invest in real estate debt which are generally instruments secured by commercial and multifamily properties, including first lien mortgage loans, junior
participations in first lien mortgage loans, second lien mortgage loans, mezzanine loans, and preferred equity interests in borrowers who own such properties. We generally hold these instruments for
investment rather than trading purposes. These investments are either floating or fixed rate. The interest rates on our floating rate investments

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typically
float at a fixed spread over an index such as LIBOR. These instruments typically reprice every 30 days based upon LIBOR in effect at that time. Given the frequent and periodic
repricing of our floating rate investments, changes in interest rates are unlikely to materially affect the value of our floating rate portfolio. Changes in short-term rates will, however,
affect earnings from our investments. Increases in LIBOR will increase the interest income received by us on our investments and therefore increase our earnings. Decreases in LIBOR have the opposite
effect.

We
also invest in fixed rate investments. The value of these investments may be affected by changes in long-term interest rates. To the extent that long-term
interest rates increase, the value of long-term fixed rate assets is diminished. Any fixed rate real estate debt investments which we hold would be similarly impacted. We do not generally
seek to hedge this type of risk unless the asset is leveraged as we believe the costs of such a hedging transaction over the term of such an investment would generally outweigh the benefits. If fixed
rate real estate debt is funded with floating rate liabilities, we typically convert the floating rate to fixed through the use of interest rate swaps, caps or other hedges. Because the interest rates
on our fixed rate investments are generally fixed through maturity of the investment, changes in interest rates do not affect the income we earn from our fixed rate investments.

In
our real estate debt business we are also exposed to credit risk, which is the risk that the borrower under our loan agreements cannot repay its obligations to us in a timely manner.
While we have not experienced a payment default as of the date of this Quarterly Report on Form 10-Q, our position in the capital structure may expose us to losses as a result of
such default in the future. In the event that the borrower cannot repay our loan, we may exercise our remedies under the loan documents, which may include a foreclosure against the collateral if we
have a foreclosure right as a real estate debtholder under the loan agreement. The real estate debt that we intend to invest in will often allow us to demand foreclosure as a real estate debtholder if
our loan is in default. To the extent the value of our collateral exceeds the amount of our loan (including all debt senior to us) and the expenses we incur in collecting on our loan, we would collect
100% of our loan amount. To the extent that the amount of our loan plus all debt senior to our position exceeds the realizable value of our collateral, then we would incur a loss. We also incur credit
risk in our periodically scheduled interest payments which may be interrupted as a result of the operating performance of the underlying collateral.

We
seek to manage credit risk through a thorough financial analysis of a transaction before we make such an investment. Our analysis is based upon a broad range of real estate,
financial, economic and borrower-related factors which we believe are critical to evaluating the credit risk inherent in a transaction.

We
expect our investments to be denominated in U.S. dollars or, if they are denominated in another currency, to be converted back to U.S. dollars through the use of currency swaps. It
may not be possible to eliminate all of the currency risk as the payment characteristics of the currency swap may not exactly match the payment characteristics of the investments.

Real Estate Securities

In our real estate securities business, we mitigate credit risk through credit analysis, subordination and diversification. The CMBS we invest in are generally
junior in right of payment of interest and principal to one or more senior classes, but benefit from the support of one or more subordinate classes of securities or other form of credit support within
a securitization transaction. The senior unsecured REIT debt securities we invest in reflect comparable credit risk. Credit risk refers to each individual borrower's ability to make required interest
and principal payments on the scheduled due dates. We believe that these securities offer attractive risk-adjusted returns with reasonable long-term principal protection under
a variety of default and loss scenarios. While the expected yield on these

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securities
is sensitive to the performance of the underlying assets, the more subordinated securities and certain other features of a securitization, in the case of mortgage backed securities, and the
issuer's underlying equity and subordinated debt, in the case of REIT securities, are designed to bear the first risk of default and loss. The real estate securities portfolios of our investment grade
term debt transactions are diversified by asset type, industry, location and issuer. We further minimize credit risk by monitoring the real estate securities portfolios of our investment grade term
debt transactions and the underlying credit quality of their holdings.

The
real estate securities underlying our investment grade term debt transactions are also subject to spread risk. The majority of these securities are fixed rate securities, which are
valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. In other words, their value is dependent on the yield demanded on such securities by the
market, based on their credit relative to U.S. Treasuries. An excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these
securities, resulting in the use of a higher or "wider" spread over the benchmark rate (usually the applicable U.S. Treasury security yield) to value these securities. Under these conditions, the
value of our real estate securities portfolio would tend to decrease. Conversely, if the spread used to value these securities were to decrease or "tighten," the value of our real estate securities
would tend to increase. Such changes in the market value of our real estate securities portfolio may affect our net equity or cash flow either directly through their impact on unrealized gains or
losses on available for sale securities by
diminishing our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital.

Returns
on our real estate securities are sensitive to interest rate volatility. If interest rates increase, the funding cost on liabilities that finance the securities portfolio will
increase if these liabilities are at a floating rate or have maturities shorter than the assets.

Our
general financing strategy focuses on the use of "match-funded" structures. This means that we seek to align the maturities of our debt obligations with the maturities of our
investments in order to minimize the risk of being forced to refinance our liabilities prior to the maturities of our assets, as well as to reduce the impact of fluctuating interest rates on earnings.
In addition, we generally match interest rates on our assets with like-kind debt, so that fixed rate assets are financed with fixed rate debt and floating rate assets are financed with
floating rate debt, directly or through the use of interest rate swaps, caps or other financial instruments or through a combination of these strategies. Our investment grade term debt transactions
utilize interest rate swaps to minimize the mismatch between their fixed rate assets and floating rate liabilities.

Our
financing strategy is dependent on our ability to place the match-funded debt we use to finance our real estate securities at spreads that provide a positive arbitrage. If spreads on
the bonds issued by term debt transactions widen or if demand for these liabilities ceases to exist, then our ability to execute future term debt transaction financings will be severely restricted.

Interest
rate changes may also impact our net book value as our investments in debt securities are marked-to-market each quarter with changes in fair value
reflected in other comprehensive income (a separate component of owners' equity). Generally, as interest rates increase, the value of fixed rate securities within the term debt transaction, such as
CMBS, decreases and as interest rates decrease, the value of these securities will increase. These swings in value have a corresponding impact on the value of our investment in the term debt
transaction. Within the term debt transaction, we seek to hedge against changes in cash flows attributable to changes in interest rates by entering into interest rate swaps/caps and other derivative
instruments. Such derivatives are typically designated as cash flow hedge relationships according to SFAS No. 133.

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Net Lease Properties

Our ability to manage the interest rate risk and credit risk associated with the assets we acquire is integral to the success of our net lease properties
investment strategy. Although we may, in special situations, finance our purchase of net lease assets with floating rate debt, our general policy will be to mitigate our exposure to rising interest
rates by financing our purchases with fixed rate mortgages. We seek to match the term of fixed rate mortgages to our expected holding period for the underlying asset. Factors we consider to assess the
expected holding period include, among others, the primary term of the lease as well as any extension options that may exist.

In
order to ensure that we have as complete an understanding as possible of a tenant's ability to satisfy its obligations under its lease, we undertake a rigorous credit evaluation of
each tenant prior to executing sale/leaseback or net lease asset acquisitions. This analysis includes an extensive due diligence investigation of the tenant's business as well as an assessment of the
strategic importance of the underlying real estate to the tenant's core business operations. Where appropriate, we may seek to augment the tenant's commitment to the facility by structuring various
credit enhancement mechanisms into the underlying leases. These mechanisms could include security deposit requirements or affiliate guarantees from entities we deem to be creditworthy.

Corporate Lending

Credit risk management for the corporate loan portfolio begins with an assessment of the credit risk of a borrower which is based on its financial position. As
part of the overall credit risk assessment of a borrower, each corporate loan transaction is assigned a risk rating that is subject to approval based on defined credit approval process. Our credit
rating criteria for each loan rating focuses on three factors, which are credit, collateral, and financial performance. Subsequent to loan origination, risk ratings are monitored on an ongoing basis.
If necessary, risk ratings are adjusted to reflect changes in the borrower's financial condition, cash flow or financial situation. We use risk rating to measure and evaluate concentrations within
portfolios. In making decisions regarding credit, we consider risk rating, collateral, industry and single name concentration limits.

We
use a variety of tools to continuously monitor a borrower's or counterparty's ability to perform under its obligations. Additionally, we utilize syndication of exposure to other
entities, loan sales and other risk mitigation techniques to manage the size and risk profile of the loan portfolio.

Derivatives and Hedging Activities

We use derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap agreements and the primary
objective is to minimize interest rate risks associated with the our investment and financing activities. The counterparties of these arrangements are major financial institutions with which we may
also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties; however, we do not anticipate that any of the counterparties
will fail to meet their obligations because of their high credit ratings. The objective in using interest rate derivatives is to add stability to interest expense and to manage exposure to interest
rate movements.

In
January 2008, we adopted SFAS 159 and elected the fair value option for our bonds payable and our liability to subsidiary trusts issuing preferred securities. Under
SFAS 159, the changes in fair value of these financial instruments are now recorded in earnings. As a result of this election, the interest rate swap agreements associated with these debt
instruments no longer qualify for hedge accounting, in accordance with SFAS 133 "Derivatives and Hedging Activity", since the underlying debt is remeasured with changes in the fair value
recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earning over the shorter of either the
life of the swap or the associated debt with current

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mark-to-market
unrealized gains or losses recorded in earnings. For the three months ended March 31, 2008, we recorded, in earnings, a mark-to-market unrealized loss of $30.3 million and
a $1.2 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps.

The
following tables summarize our derivative financial instruments as of March 31, 2008 (in thousands).

|                                    |  | Notional
Amount |  | Fair Value |   | Range of
Strike Rate |  | Range of Maturity     
|----------------------------------- |  | --------------- |  | ---------- | - | -------------------- |  | ----------------------
|Interest rate swaps and basis swaps |  | 793,957         |  | (83,497    | ) | 4.18%5.63%          |  | March 2010August 2018

Item 4.    Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation (as required under Rules 13a-15(b) and
15d-15(b) under the Securities Exchange Act), under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in our periodic reports.

Internal Control over Financial Reporting

Changes in internal control over financial reporting.There have not been any changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial reporting.

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PART II.    OTHER INFORMATION

Item 6.    Exhibits

|Exhibit
Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Articles of Amendment and Restatement of NorthStar Realty Finance Corp., as filed with the State Department of Assessments and Taxation of Maryland on October 20, 2004 (incorporated by reference to Exhibit 3.1
to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))                                                                                                                        
|3.2            |  | Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))                                                                                                                                                                                                                                                       
|3.3            |  | Amendment No. 1 to the Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on April 27,
2005)                                                                                                                                                                                                                                       
|3.4            |  | Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.75% Series A Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance
Corp.'s Registration Statement on Form 8-A, dated September 14, 2006)                                                                                                                                                   
|3.5            |  | Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance
Corp.'s Registration Statement on Form 8-A, dated February 7, 2007)                                                                                                                                                     
|3.6            |  | Articles Supplementary Classifying and Designating Additional Shares of NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to
Exhibit 3.6 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)                                                                                                         
|10.1           |  | Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of October 19, 2004, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the
other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.1 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
|10.2           |  | NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)                                                                                                                                                                                                                 
|10.3           |  | LTIP Unit Vesting Agreement under the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and NRF Employee, LLC
(incorporated by reference to Exhibit 10.10 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)                                                                 
|10.4           |  | Form of Vesting Agreement for Units of NRF Employee, LLC, each dated as of October 29, 2004, between NRF Employee, LLC and certain employees and co-employees of NorthStar Realty Finance Corp. (incorporated
by reference to Exhibit 10.11 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)                                                                                 
|10.5           |  | Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.7(a) to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))                                                                                                                                                                                                                                                         

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|10.6  |  | NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.13 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)                                                                                                                                                                                                                                                                             
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7  |  | Form of Notification under NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.14 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004)                                                                                                                                                                                                                                                  
|10.8  |  | Form of Indemnification Agreement for directors and officers of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.15 to the NorthStar Realty Finance Corp. Registration Statement on
Form S-11 (File No. 333-114675))                                                                                                                                                                                                                                                              
|10.9  |  | Junior Subordinated Indenture, dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to
Exhibit 10.31 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2005)                                                                                                                                                                
|10.10 |  | Amended and Restated Trust Agreement, dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property
trustee and Delaware trustee and Andrew Richardson, David Hamamoto and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.32 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year
ended December 31, 2005)       
|10.11 |  | Amendment No. 1 to Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of March 14, 2006, by and among NorthStar Realty Finance Corp., as sole general partner and initial
limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.34 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2005)                                                      
|10.12 |  | Junior Subordinated Indenture, dated as of August 1, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to
Exhibit 10.39 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)                                                                                                                                                         
|10.13 |  | Amended and Restated Trust Agreement, dated as of August 1, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property
trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.40 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006)
|10.14 |  | Second Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of September 14, 2006 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance
Corp. Current Report on Form 8-K filed September 14, 2006)                                                                                                                                                                                                                            
|10.15 |  | Junior Subordinated Indenture, dated as of October 6, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to
Exhibit 10.42 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)                                                                                                                                                      

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|10.16 |  | Amended and Restated Trust Agreement, dated as of October 6, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as
property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.43 to the NorthStar Realty Finance Corp. Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17 |  | Revolving Credit Agreement, dated as of November 3, 2006, between NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, NRFC Sub-REIT Corp., NS Advisors, LLC, Keybanc Capital Markets and
Bank of America, N.A. (incorporated by reference to Exhibit 10.44 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)                                                                                                          
|10.18 |  | Third Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of February 7, 2007 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance
Corp. Current Report on Form 8-K filed February 9, 2007)                                                                                                                                                                                                                                    
|10.19 |  | Junior Subordinated Indenture, dated as of March 30, 2007, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to
Exhibit 10.46 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007)                                                                                                                                                                
|10.20 |  | Amended and Restated Trust Agreement, dated as of March 30, 2007, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property
trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.47 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2007)       
|10.21 |  | Form of NorthStar Realty Finance Corp. 2006 Outperformance Plan Award Agreement (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 2 to Form S-8
filed on April 13, 2007)                                                                                                                                                                                                                                                                        
|10.22 |  | Amendment No. 1 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 2 to
Form S-8 filed on April 13, 2007)                                                                                                                                                                                                                                                                    
|10.23 |  | Amendment No. 2 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 3 to
Form S-8 filed on June 6, 2007)                                                                                                                                                                                                                                                                      
|10.24 |  | Junior Subordinated Indenture, dated as of June 7, 2007, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to
Exhibit 10.52 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)                                                                                                                                                                   
|10.25 |  | Amended and Restated Trust Agreement, dated as of June 7, 2007, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property
trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.53 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2007)          

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|10.26 |  | Registration Rights Agreement relating to the 7.25% Exchangeable Senior Notes due 2027 of NorthStar Realty Finance Limited Partnership, dated June 18, 2007 (incorporated by reference to Exhibit 4.2 to the
NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-146679))                                                                                                                                                                              
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.27 |  | Master Repurchase Agreement, dated as of August 8, 2007, by and among NRFC JP Holdings, LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.56 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)                                                                                                                                                                                                       
|10.28 |  | Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and David T. Hamamoto (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current
Report on Form 8-K filed October 5, 2007)                                                                                                                                                                                                                      
|10.29 |  | Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Andrew C. Richardson (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed October 5, 2007)                                                                                                                                                                                                                   
|10.30 |  | Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Daniel R. Gilbert (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Current
Report on Form 8-K filed October 5, 2007)                                                                                                                                                                                                                      
|10.31 |  | Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Richard J. McCready (incorporated by reference to Exhibit 99.4 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed October 5, 2007)                                                                                                                                                                                                                    
|10.32 |  | Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Daniel Raffe (incorporated by reference to Exhibit 99.5 to the NorthStar Realty Finance Corp. Current
Report on Form 8-K filed October 5, 2007)                                                                                                                                                                                                                           
|10.33 |  | Credit Agreement, dated as of November 6, 2007, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC, NRFC WA Holdings VII, LLC, NRFC WA Holdings X, LLC, NRFC WA Holdings XII, LLC,
NorthStar Realty Finance Corp., NorthStar Realty Finance L.P. and Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.53 to NorthStar Realty Finance Corp.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2007)
|10.34 |  | Limited Guaranty Agreement, dated as of November 6, 2007, by and among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and Wachovia Bank, National Association, as Administrative Agent
(incorporated by reference to Exhibit 10.54 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)                                                                                                       
|31.1  |  | Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                   
|31.2  |  | Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                   
|32.1  |  | Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                                                                                                                                
|32.2  |  | Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                                                                                                                                

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                  |  | NORTHSTAR REALTY FINANCE CORP.
|----------------- |  | ------------------------------
|Date: May 9, 2008 |  | By:                           

| |  | By: | /s/ANDREW C. RICHARDSONAndrew C. Richardson Chief
Financial Officer
| |  | --- | -------------------------------------------------------------------

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