Document Contents

Section 1: 10-Q (FORM 10-Q)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires:

‘‘Assets Under Management,’’ or ‘‘AUM,’’ refers to the assets we manage, including capital we have the right to call from our investors pursuant to their capital commitments to various funds. Our AUM equals the sum of:

We earn management fees pursuant to management agreements on a basis which varies from Fortress Fund to Fortress Fund (e.g., any of ‘‘net asset value’’, ‘‘capital commitments’’, ‘‘invested equity’’ or ‘‘gross equity,’’ each as defined in the applicable management agreement, may form the basis for a management fee calculation). Our calculation of AUM may differ from the calculations of other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. Our AUM measure includes, for instance, assets under management for which we charge either no or nominal fees, generally related to our principal investments in funds as well as investments in funds by our principals, directors and employees. Our definition of AUM is not based on any definition of assets under management contained in our operating agreement or in any of our Fortress Fund management agreements.

‘‘Fortress,’’ ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ and the ‘‘company’’ refer, (i) following the consummation of the reorganization and the Nomura transaction, collectively, to Fortress Investment Group LLC and its subsidiaries, including the Fortress Operating Group and all of its subsidiaries, and (ii) prior to the consummation of the reorganization and the Nomura transaction on January 17, 2007, to the Fortress Operating Group and all of its subsidiaries, in each case not including funds that, prior to March 31, 2007, were consolidated funds, except with respect to our historical financial statements and discussion thereof unless otherwise specified. Effective March 31, 2007, all of our previously consolidated funds were deconsolidated. The financial statements contained herein represent consolidated financial statements of Fortress Investment Group LLC subsequent to the reorganization and combined financial statements of Fortress Operating Group, considered the predecessor, prior to the reorganization. See Part I, Item 1, ‘‘Financial Statements.’’

‘‘Fortress Funds’’ and ‘‘our funds’’ refers to the private investment funds and alternative asset companies that are managed by the Fortress Operating Group.

‘‘Fortress Operating Group’’ refers to the combined entities, which were wholly-owned by the principals prior to the Nomura transaction and in each of which Fortress Investment Group LLC acquired an indirect controlling interest upon completion of the Nomura transaction (described below).

‘‘principals’’ or ‘‘Principals’’ refers to Peter Briger, Wesley Edens, Robert Kauffman, Randal Nardone and Michael Novogratz, collectively, who prior to the completion of our initial public offering and the Nomura transaction directly owned 100% of the Fortress Operating Group units and following completion of our initial public offering and the Nomura transaction own a majority of the Fortress Operating Group units and all of the Class B shares, representing a majority of the total combined voting power of all of our outstanding Class A and Class B shares. The principals’ ownership percentage is subject to change based on, among other things, equity offerings by Fortress and dispositions by the principals.

Some of the statements under Part I, Item 2, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ Part I, Item 3, ‘‘Quantitative and Qualitative Disclosures About Market Risk,’’ Part II, Item 1A, ‘‘Risk Factors,’’ and elsewhere in this Quarterly Report on Form 10-Q may contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. Readers can identify these forward-looking statements by the use of forward-looking words such as ‘‘outlook,’’ ‘‘believes,’’ ‘‘expects,’’ ‘‘potential,’’ ‘‘continues,’’ ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘seeks,’’ ‘‘approximately,’’ ‘‘predicts,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘estimates,’’ ‘‘anticipates’’ or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon the historical performance of us and our subsidiaries and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

FORTRESS INVESTMENT GROUP LLC
(PRIOR TO JANUARY 17, 2007, FORTRESS OPERATING GROUP — NOTE 1)
CONSOLIDATED AND COMBINED BALANCE SHEETS
(dollars in thousands, except share data)


	September 30, 2007				December 31, 2006
	(Unaudited)
Assets
Cash and cash equivalents		$	169,492			$	61,120
Cash held at consolidated subsidiaries and restricted cash			—				564,085
Due from affiliates			39,872				635,748
Receivables from brokers and counterparties			—				109,463
Investment company holdings, at fair value
Loans and securities			—				6,874,748
Investments in affiliates			—				14,985,578
Derivatives			—				84,270
Other investments
Loans and securities			11,327				317
Equity method investees			990,441				37,250
Options in affiliates			48,351				139,266
Deferred tax asset			489,801				2,808
Other assets			58,298				187,920
		$	1,807,582			$	23,682,573
Liabilities and Shareholders’ Equity
Liabilities
Due to affiliates		$	409,652			$	15,112
Due to brokers and counterparties			—				187,495
Accrued compensation and benefits			192,589				159,931
Dividends payable			21,285				—
Other liabilities			70,577				152,604
Deferred incentive income			177,450				1,648,782
Securities sold not yet purchased, at fair value			—				97,717
Derivative liabilities, at fair value			5,132				123,907
Investment company debt obligations payable			—				2,619,456
Other debt obligations payable			425,000				687,153
			1,301,685				5,692,157
Commitments and Contingencies
Principals’ and Others’ Interests in Equity of Consolidated Subsidiaries			338,387				17,868,895
Shareholders’ Equity
Class A shares, no par value, 1,000,000,000 shares authorized, 94,597,646 shares issued and outstanding			—				—
Class B shares, no par value, 750,000,000 shares authorized, 312,071,550 shares issued and outstanding			—				—
Paid-in capital			332,992				—
Retained earnings (accumulated deficit)			(163,942	)			—
Fortress Operating Group members’ equity			—				119,561
Accumulated other comprehensive income (loss)			(1,540	)			1,960
			167,510				121,521
		$	1,807,582			$	23,682,573

FORTRESS INVESTMENT GROUP LLC
(PRIOR TO JANUARY 17, 2007, FORTRESS OPERATING GROUP — NOTE 1)
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)


	Three Months Ended September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
Revenues
Management fees from affiliates		$	124,991			$	32,339			$	286,956			$	106,883
Incentive income from affiliates			106,690				18,620				283,879				94,391
Other revenues			15,601				18,244				51,866				53,743
Interest and dividend income – investment company holdings
Interest income			—				219,336				243,713				596,149
Interest income from controlled affiliate investments			—				17,072				4,707				45,418
Dividend income			—				7,435				7,436				11,747
Dividend income from controlled affiliate investments			—				22,122				53,174				125,137
			247,282				335,168				931,731				1,033,468
Expenses
Interest expense
Investment company holdings			—				145,152				132,620				390,842
Other			7,285				17,011				26,016				36,206
Compensation and benefits			101,703				85,833				507,003				269,278
Principals agreement compensation			232,048				—				612,981				—
General, administrative and other			17,412				21,385				80,320				71,670
Depreciation and amortization			2,230				1,716				6,423				4,902
			360,678				271,097				1,365,363				772,898
Other Income
Gains (losses) from investments
Investment company holdings
Net realized gains (losses)			—				(200,640	)			86,264				(127,792	)
Net realized gains from controlled affiliate investments			—				59,888				715,024				582,348
Net unrealized gains (losses)			—				271,390				(19,928	)			48,227
Net unrealized gains (losses) from controlled affiliate investments			—				1,133,791				(1,428,837	)			2,178,971
Other investments
Net realized gains (losses)			777				(4,117	)			831				(4,231	)
Net realized gains (losses) from affiliate investments			(2,475	)			804				143,017				804
Net unrealized gains (losses)			(1,921	)			6,970				(2,597	)			4,029
Net unrealized gains (losses) from affiliate investments			(54,579	)			36,242				(221,745	)			94,271
Earnings (losses) from equity method investees			(30,716	)			992				(23,289	)			3,412
			(88,914	)			1,305,320				(751,260	)			2,780,039
Income (Loss) Before Deferred Incentive Income, Principals’ and Others’ Interests in Income of Consolidated Subsidiaries and Income Taxes			(202,310	)			1,369,391				(1,184,892	)			3,040,609
Deferred incentive income			—				(214,248	)			307,034				(475,655	)
Principals’ and others’ interests in loss (income) of consolidated subsidiaries			152,534				(1,088,810	)			854,550				(2,403,346	)
Income (Loss) Before Income Taxes			(49,776	)			66,333				(23,308	)			161,608
Income tax benefit (expense)			12,219				(1,628	)			(7,237	)			(8,898	)
Net Income (Loss)		$	(37,557	)		$	64,705			$	(30,545	)		$	152,710
Dividends declared per Class A share		$	0.2250							$	0.6174
Earnings Per Unit – Fortress Operating Group									January 1 through January 16
Net income per Fortress Operating Group unit						$	0.18			$	0.36			$	0.42
Weighted average number of Fortress Operating Group units outstanding							367,143,000				367,143,000				367,143,000
Earnings Per Class A share – Fortress Investment Group									January 17 through September 30
Net income (loss) per Class A share, basic		$	(0.41	)						$	(1.83	)
Net income (loss) per Class A share, diluted		$	(0.52	)						$	(1.83	)
Weighted average number of Class A shares outstanding, basic			94,894,636								91,255,519
Weighted average number of Class A shares outstanding, diluted			406,966,186								91,255,519

FORTRESS INVESTMENT GROUP LLC
(PRIOR TO JANUARY 17, 2007, FORTRESS OPERATING GROUP — NOTE 1)
CONSOLIDATED AND COMBINED STATEMENT OF MEMBERS’
AND SHAREHOLDERS’ EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(dollars in thousands)


	Class A Shares		Class B Shares		Paid-In Capital				Retained Earnings (Accumulated Deficit) (Subsequent to January 16, 2007)				Fortress Operating Group Members’ Equity (Prior to January 17, 2007)				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ / Members’ Equity
Fortress Operating Group Members’ equity – December 31, 2006		—		—		$	—			$	—			$	119,561			$	1,960			$	121,521
Distributions declared by Fortress Operating Group prior to January 17, 2007		—		—			—				—				(415,876	)			—				(415,876	)
Reorganization and issuance of shares to Nomura		55,071,450		312,071,550			888,000				—				—				—				888,000
Dilution impact of Nomura transaction		—		—			(912,437	)			—				162,918				—				(749,519	)
Dividends declared after January 16, 2007 but prior to initial public offering		—		—			(2,474	)			—				—				—				(2,474	)
Initial public offering of Class A shares		39,428,900		—			652,669				—				—				—				652,669
Dilution impact of initial public offering		—		—			(490,648	)			—				—				—				(490,648	)
Deferred tax effects resulting from acquisition of Fortress Operating Group units		—		—			89,026				—				—				—				89,026
Director restricted share grant		97,296		—			89				—				—				—				89
Dividends declared subsequent to initial public offering		—		—			(54,159	)			—				—				—				(54,159	)
Capital increase related to equity-based compensation		—		—			165,952				—				—				—				165,952
Dividend equivalents accrued in connection with equity-based compensation		—		—			(3,026	)			—				—				—				(3,026	)
Comprehensive income
Net income (loss)		—		—			—				(163,942	)			133,397				—				(30,545	)
Foreign currency translation		—		—			—								—				(24	)			(24	)
Net unrealized (loss) on derivatives designated as cash flow hedges		—		—			—				—				—				(8	)			(8	)
Net unrealized gain on securities available for sale		—		—			—				—				—				749				749
Comprehensive income (loss) from equity method investees		—		—			—				—				—				(9,299	)			(9,299	)
Allocation to Principals’ and others’ interests in equity of consolidated subsidiaries		—		—			—				—				—				5,082				5,082
Total comprehensive income																							(34,045	)
Shareholders’ equity – September 30, 2007		94,597,646		312,071,550		$	332,992			$	(163,942	)		$	—			$	(1,540	)		$	167,510

FORTRESS INVESTMENT GROUP LLC
(PRIOR TO JANUARY 17, 2007, FORTRESS OPERATING GROUP — NOTE 1)
CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS (Unaudited)
SEPTEMBER 30, 2007
(dollars in thousands)


	Nine Months Ended September 30,
	2007				2006
Cash Flows From Operating Activities
Net income (loss)		$	(30,545	)		$	152,710
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization			6,423				4,902
Other amortization and accretion			1,876				4,211
(Earnings) losses from equity method investees			23,289				(3,412	)
Distributions of earnings from equity method investees			9,765				7,057
(Gains) losses from investments			727,971				(2,776,627	)
Deferred incentive income			(355,381	)			475,655
Principals’ and others’ interests in income (loss) of consolidated subsidiaries			(854,550	)			2,403,346
Deferred tax expense			(16,775	)			751
Options received from affiliates			(2,006	)			(18,692	)
Assignments of options to employees			4,627				7,577
Equity-based compensation			713,850				—
Cash flows due to changes in
Cash held at consolidated subsidiaries and restricted cash			(166,199	)			(285,058	)
Due from affiliates			562,731				(160,906	)
Receivables from brokers and counterparties and other assets			(23,024	)			(28,070	)
Due to affiliates			(6,392	)			(45,795	)
Accrued compensation and benefits			48,174				71,194
Due to brokers and counterparties and other liabilities			118,098				(34,844	)
Investment company holdings
Purchases of investments			(5,105,865	)			(10,223,969	)
Proceeds from sale of investments			3,398,739				6,992,398
Net cash used in operating activities			(945,194	)			(3,457,572	)
Cash Flows From Investing Activities
Purchase of other loan and security investments			(10,578	)			(351,852	)
Proceeds from sale of other loan and security investments			317				320,644
Contributions to equity method investees			(560,272	)			(828	)
Proceeds from sale of equity method investments			29,071				—
Distributions of capital from equity method investees			115,190				572
Cash received on settlement of derivatives			132				(454	)
Purchase of fixed assets			(8,907	)			(10,814	)
Proceeds from disposal of fixed assets			2,532				—
Net cash used in investing activities			(432,515	)			(42,732	)
Cash Flows From Financing Activities
Borrowings under debt obligations			1,999,070				3,901,047
Repayments of debt obligations			(2,010,025	)			(3,034,196	)
Payment of deferred financing costs			(6,813	)			(27,487	)
Issuance of Class A shares to Nomura			888,000				—
Issuance of Class A shares in initial public offering			729,435				—
Costs related to initial public offering			(76,766	)			—
Dividends and dividend equivalents paid			(43,237	)			—
Fortress Operating Group capital distributions to Principals			(415,876	)			(350,106	)
Purchase of Fortress Operating Group units from Principals			(888,000	)			—
Principals’ and others’ interests in equity of consolidated subsidiaries – contributions			3,249,847				4,078,527
Principals’ and others’ interests in equity of consolidated subsidiaries – distributions			(1,939,554	)			(1,072,117	)
Net cash provided by financing activities			1,486,081				3,495,668
Net Increase (Decrease) in Cash and Cash Equivalents			108,372				(4,636	)
Cash and Cash Equivalents, Beginning of Period			61,120				36,229
Cash and Cash Equivalents, End of Period		$	169,492			$	31,593
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest (excluding interest paid by master funds while such funds were consolidated of $85.1 million and $257.9 million, respectively)		$	70,003			$	121,717
Cash paid during the period for income taxes		$	30,158			$	1,912
Supplemental Schedule of Non-cash Investing and Financing Activities
Investment of amounts payable to employees into Fortress Funds		$	15,102			$	24,019
Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid		$	43,009			$	—
See Note 1 regarding the non-cash deconsolidation transaction

FORTRESS INVESTMENT GROUP LLC
(PRIOR TO JANUARY 17, 2007, FORTRESS OPERATING GROUP – NOTE 1)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)

Fortress Investment Group LLC (the ‘‘Registrant,’’ or, together with its subsidiaries, ‘‘Fortress’’) is a global alternative asset management firm whose predecessor was founded in 1998. Its primary business is to sponsor the formation of, and provide investment management services for, various investment funds and companies (the ‘‘Fortress Funds’’). Fortress generally makes principal investments in these funds.

Fortress has three principal sources of income from the Fortress Funds: management fees, incentive income, and investment income on its principal investments in the funds. The Fortress Funds fall into four primary business segments in which Fortress operates:

Fortress Investment Group LLC was formed on November 6, 2006 for the purpose of becoming the general partner of Fortress Operating Group, completing the Nomura Transaction (described below), and effecting a public offering of shares and related transactions (the ‘‘Transactions’’) in order to carry on the business of its predecessor, Fortress Operating Group, as a publicly traded entity. The Registrant completed the Nomura Transaction and commenced its operations on January 17, 2007 and completed its initial public offering on February 8, 2007. As a result of the Transactions, the Registrant acquired control of Fortress Operating Group and held, through two intermediate holding companies (FIG Corp. and FIG Asset Co. LLC), approximately 23.3% of the Fortress Operating Group limited partnership units and all of the general partner interests. The Principals retained the remaining 76.7% of the Fortress Operating Group limited partnership units and a 76.7% voting interest in the Registrant. All of the businesses engaged in by the Registrant continue to be conducted by Fortress Operating Group. The ownership percentages are subject to change based on, among other things, equity offerings by Fortress and dispositions by the Principals. As of September 30, 2007, the Fortress Operating Group units were owned as follows: Registrant 23.3%, Principals 76.7%.

In January 2007, in connection with the Nomura transaction and the initial public offering, Fortress Operating Group was reorganized from eight limited liability companies, each having individual capital accounts for each of the Principals, into four limited partnerships, each having a unitized capital structure. The Principals were issued 367,143,000 non-voting limited partner interests in each of the four limited partnerships and the Registrant, through two intermediate holding companies, was issued the non-economic general partner interest in each of them. The Principals were also issued 367,143,000 non-economic Class B shares of the Registrant, of which 55,071,450 were cancelled in the Nomura transaction (see below). The term ‘‘Fortress Operating Group unit’’ is used to represent one limited partner interest in each limited partnership. A Fortress Operating Group unit is not a legal interest but is the term used to refer to the aggregate of one limited partnership interest in each reorganized Fortress Operating Group entity.

As the Registrant is a newly formed company, Fortress Operating Group is considered its predecessor for accounting purposes, and its combined financial statements have become the Registrant’s historical financial statements. Also, because the Principals controlled Fortress Operating Group before the Transactions and control the Registrant after the Transactions, the Transactions have been accounted for as a reorganization of entities under common control. Accordingly, the Registrant has carried forward unchanged the value of assets and liabilities recognized in Fortress Operating Group’s combined financial statements into its consolidated financial statements. When the Registrant purchased Fortress Operating Group units, from the Principals and directly from the Fortress Operating Group partnerships, it recorded the proportion of Fortress Operating Group net assets acquired at their historical carrying value and proportionately reduced the Principals’ and others’ interests in equity of consolidated subsidiaries. The excess of the amounts paid for the purchase of Fortress Operating Group units over the historical carrying value of the proportion of net assets acquired was charged to paid-in capital and is identified in the statement of members’ and shareholders’ equity as dilution.

FIG Corp. is a corporation for tax purposes. As a result, the Registrant is subject to income taxes on that portion of its income which flows through FIG Corp.

Following completion of the Transactions, substantially all of Fortress’s expenses (other than (i) income tax expenses of the Registrant, FIG Corp. and FIG Asset Co. LLC (Note 5), (ii) obligations incurred under the tax receivable agreement (Note 5) and (iii) payments on indebtedness incurred by the Registrant, FIG Corp. and FIG Asset Co. LLC), including substantially all expenses incurred by or attributable solely to the Registrant, such as expenses incurred in connection with the Transactions, are accounted for as expenses of Fortress Operating Group.

On December 18, 2006, the Principals entered into a securities purchase agreement with Nomura Investment Managers U.S.A., Inc., a Delaware corporation, or Nomura (whose ultimate parent is Nomura Holdings, Inc., a Japanese corporation), pursuant to which Nomura acquired a then 15% indirect stake in Fortress Operating Group for $888 million, all of the proceeds of which were paid to the Principals. On January 17, 2007, Nomura completed the transaction by purchasing 55,071,450 Class A shares of the Registrant for $888 million and the Registrant, in turn, purchased 55,071,450 Fortress Operating Group units, which then represented 15% of Fortress Operating Group’s economic interests, and the sole general partner interest, from the Principals for $888 million.

On February 8, 2007, the Registrant completed an initial public offering of 39,428,900 of its Class A shares, including the underwriters’ over allotment option, for net proceeds of approximately

$652.7 million. The Registrant contributed the net proceeds from the offering to Fortress Operating Group in exchange for 39,428,900 Fortress Operating Group units. As of September 30, 2007, Fortress Operating Group had applied those proceeds in accordance with its IPO registration statement as follows: (a) to pay $250 million then outstanding under its term loan facility, as required by the credit agreement (Note 4), (b) to pay $85 million then outstanding under its revolving credit facility (Note 4), (c) to fund $169 million of commitments to private equity funds, and (d) to fund $149 million of general business purposes, including additional investments.

Following the IPO, Fortress adopted accounting policies with respect to new transactions as described in Notes 5, 7 and 8.

Certain of the Fortress Funds were consolidated into Fortress prior to the Transactions, notwithstanding the fact that Fortress has only a minority economic interest in these funds. Consequently, Fortress’s financial statements reflected the assets, liabilities, revenues, expenses and cash flows of the consolidated Fortress Funds on a gross basis through the date of their deconsolidation, as described below. The majority ownership interests in these funds, which are not owned by Fortress, were reflected as Principals’ and others’ interests in equity of consolidated subsidiaries in the accompanying financial statements during periods in which such funds were consolidated. The management fees and incentive income earned by Fortress from the consolidated Fortress Funds were eliminated in consolidation; however, Fortress’s allocated share of the net income from these funds was increased by the amount of these eliminated fees. Accordingly, the consolidation of these Fortress Funds had no net effect on Fortress’s earnings from the Fortress Funds. For a reconciliation between the financial statements and the segment-based financial data that management uses for making operating decisions and assessing performance, see Note 10.

Following the IPO, each Fortress subsidiary that acts as a general partner of a consolidated Fortress Fund has granted rights, effective March 31, 2007, to the investors in the fund to provide that a simple majority of the fund’s unrelated investors are able to liquidate the fund, without cause, in accordance with certain procedures, or to otherwise have the ability to exert control over the fund. The granting of these rights has led to the deconsolidation of the Fortress Funds from Fortress’s financial statements as of March 31, 2007. The deconsolidation of the Fortress Funds has had significant effects on many of the items within these financial statements but has had no net effect on net income or equity. Since the deconsolidation did not occur until March 31, 2007, the statement of operations and the statement of cash flows for the nine months ended September 30, 2007 are presented with these funds on a consolidated basis for three of the nine months. The unaudited pro forma effects of the deconsolidation on these financial statements are described in Note 12.

The accompanying consolidated financial statements and related notes of Fortress 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 U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Fortress’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 Fortress’s combined financial statements for the year ended December 31, 2006 and notes thereto included in Fortress’s annual report on Form 10-K filed with the

Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in Fortress’s combined financial statements for the year ended December 31, 2006.

On a pro forma basis (Note 12), as adjusted for the deconsolidation of the consolidated Fortress Funds as if it had occurred on January 1, 2007, Fortress recognized management fees and incentive income as follows:

Incentive income from certain Fortress Funds is earned based on achieving annual performance criteria. Accordingly, this incentive income is recorded as revenue at year end (in the fourth quarter of each year) and has not been recognized for these funds during the nine months ended September 30, 2007 and 2006. If the amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, $92.0 million and $85.6 million of additional incentive income from affiliates would have been recognized during the nine months ended September 30, 2007 and 2006, respectively. These amounts are included as ‘‘undistributed’’ deferred incentive income in the table below.

Deferred incentive income from the Fortress Funds, subject to contingent repayment, was comprised of the following:

As of September 30, 2007, from inception to date, Fortress has recognized and paid compensation expense under its employee profit sharing arrangements in connection with the $444.7 million of distributed incentive income. If the $688.4 million of undistributed incentive income were realized, Fortress would recognize an additional $213.3 million of compensation expense.

This balance sheet caption was comprised of the following at September 30, 2007:

This statement of operations caption was comprised of shares of consolidated net income related to the following, on a pre-tax basis:

In January 2007, Fortress increased its capital commitment to one of its private equity funds by $80 million.

In February 2007, Fortress had its first closing of a new private equity Fortress Fund, Long Dated Value Fund III (‘‘LDVF III’’). A second closing was held in March 2007. A third and final closing was held in June 2007 resulting in total commitments of $345.1 million. Fortress, its affiliates and employees represent $22.3 million of the total commitments. Fortress will manage LDVF III under similar terms to the other private equity Fortress Funds.

In March 2007, $11.6 million of Fortress’s remaining capital commitment to one of its private equity funds was extinguished.

In May 2007, Fortress formed a new private equity Fortress Fund known as Fortress Investment Fund V (‘‘Fund V’’) with total capital commitments from third-party investors of $4.0 billion. Fortress has committed to contribute to Fund V an amount equal to 1.5% of Fund V’s total equity contributed by third party investors, or $60 million. In June 2007, Fortress formed two additional private equity funds for the purpose of co-investing alongside Fund V in either single or multiple transactions. In total, $2.0 billion was committed by investors to these two additional funds, of which $0.4 billion was committed by Fortress and its employees. Fortress has entered into management

agreements with the Fund V entities and will manage Fund V and the related funds under essentially the same terms as the other private equity Fortress Funds, including management fees and incentive income.

In June 2007, Fortress formed a new private equity Fortress Fund known as Real Assets Fund with total capital commitments of $300.4 million. Fortress, its affiliates and employees represent $95.0 million of the total commitments. Fortress will manage Real Assets Fund under similar terms to the other private equity Fortress Funds.

Approximately $383.8 million of distributions were made to the Principals during the period from January 1, 2007 through the date of the IPO from the net proceeds from collection of deferred fee receivables, earned in prior periods, related to the liquid and hybrid hedge funds. Following this distribution, all of the deferred fee arrangements were terminated. Subsequently, $27.4 million of net proceeds from all of the remaining deferred fee receivables were collected.

In February 2007, one of the then consolidated hybrid hedge funds raised $1.2 billion of capital commitments from existing and new limited partners, of which 18% was called in the first quarter of 2007, 20% was called in the second quarter of 2007, and 12% was called in the third quarter of 2007. During the capital commitment period, which expires on the earlier of when it is fully drawn or December 31, 2008, no other new third party investors will be permitted in this fund.

In February 2007, one of the consolidated hybrid hedge funds originated a $1.2 billion loan in connection with a transaction between two third parties. As part of the syndication of this loan, Fortress formed four managed account relationships totaling $425 million, whereby Fortress manages investments on behalf of third parties in exchange for fees, syndicated $300 million to a third party participant and retained the remainder in certain Fortress Funds. Fortress will earn incentive income from the managed account relationships based upon the performance of the underlying investment.

In June 2007, one of the liquid hedge funds, which had begun an orderly liquidation process after the completion of Fortress’s initial public offering, liquidated its positions and all investors fully redeemed out of the fund, including $14.5 million redeemed to third party investors.

Fortress holds investments in certain unconsolidated Fortress Funds which are accounted for under the equity method. Upon the deconsolidation of the consolidated Fortress Funds on March 31, 2007 (Note 1), these funds also became equity method investees. Fortress’s maximum exposure to loss with respect to these entities is generally equal to its investment plus its basis in


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		PAGE
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheet as of September 30, 2007 (unaudited) and Combined Balance Sheet as of December 31, 2006		1
	The following statements are presented on a combined basis prior to the date of Fortress’s reorganization (Note 1) on January 17, 2007 and consolidated thereafter:
	Statements of Operations (unaudited) for the three and nine months ended September 30, 2007 and 2006		2
	Statement of Members’ and Shareholders’ Equity (unaudited) for the nine months ended September 30, 2007		3
	Statements of Cash Flows (unaudited) for the nine months ended September 30, 2007 and 2006		4
	Notes to Consolidated and Combined Financial Statements (unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		85
Item 4.	Controls and Procedures		88
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		89
Item 1A.	Risk Factors		90
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		117
Item 3.	Defaults upon Senior Securities		117
Item 4.	Submission of Matters to a Vote of Security Holders		117
Item 5.	Other Information		117
Item 6.	Exhibits		118
SIGNATURES			119


	Nine Months Ended September 30, 2007
Private Equity Funds
Management fees		$	97,358
Incentive income			317,574
Liquid Hedge Funds
Management fees			112,381
Incentive income			157,559
Hybrid Hedge Funds
Management fees			93,032
Incentive income			1,832
Castles
Management fees			35,251
Management fees-options			2,006
Incentive income			18,596
Total
Management fees		$	340,028
Incentive income		$	495,561


	September 30, 2007				December 31, 2006
Distributed-gross		$	444,722			$	252,774
Less: Recognized (A)			(267,272	)			(9,473	)
Distributed-unrecognized		$	177,450				243,301
Undistributed (B)			688,436				1,405,481
Total		$	865,886			$	1,648,782


	Distributed				Undistributed				Total
Deferred incentive income as of December 31, 2006		$	243,301			$	1,405,481			$	1,648,782
Share of income (loss) of Fortress Funds			243,424				(717,045	)			(473,621	)
Recognition of previously deferred incentive income			(309,275	)			—				(309,275	)
Deferred incentive income as of September 30, 2007		$	177,450			$	688,436			$	865,886


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


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


	(i)	the net asset value, or ‘‘NAV,’’ of our private equity funds and hedge funds plus the capital that we are entitled to call from investors pursuant to the terms of their capital commitments to those funds;


	(iii)	the market capitalization of the common stock of each of our publicly traded alternative investment vehicles, which we refer to as our ‘‘Castles’’.


	1)	Private equity funds, which invest in debt and equity securities of public or privately held entities.


	2)	Liquid hedge funds, which invest in the global fixed income, commodities, currency and equity markets, and their related derivatives.


	3)	Hybrid hedge funds, which invest in undervalued, distressed and other less liquid investments, as well as investment funds managed by external managers.


	4)	Publicly traded alternative investment vehicles that Fortress refers to as the ‘‘Castles,’’ which are companies that invest in operating real estate and real estate related loans and securities (debt and equity).


	–	subsequent to Fortress’s reorganization and the inception of operations of Fortress Investment Group LLC on January 17, 2007, the accounts of Fortress Investment Group LLC and its consolidated subsidiaries, and


	–	prior to such reorganization and the inception of operations of Fortress Investment Group LLC, the accounts of eight affiliated entities under common control and management (‘‘Fortress Operating Group’’ or the ‘‘predecessor’’) and their respective consolidated subsidiaries. Each of the eight entities was owned either directly or indirectly by its members, Peter Briger, Wesley Edens, Robert Kauffman, Randal Nardone, and Michael Novogratz (the ‘‘Principals’’).


1.	ORGANIZATION AND BASIS OF PRESENTATION


2.	MANAGEMENT AGREEMENTS AND FORTRESS FUNDS


	Three Months Ended September 30, 2007				Nine Months Ended September 30, 2007
	Actual				Actual				Pro Forma (A)
Employee interests in majority owned and controlled fund advisor and general partner entities		$	2,359			$	8,359			$	8,359
Third party investors in Fortress Funds			—				(460,615	)			—
Principals’ Fortress Operating Group units			(154,893	)			(402,294	)			(402,294	)
Total		$	(152,534	)		$	(854,550	)		$	(393,935	)


3.	INVESTMENTS IN EQUITY METHOD INVESTEES AND OTHER EQUITY INVESTMENTS

Employee interests in majority owned and controlled fund advisor and general partner entities

Principals’ Fortress Operating Group units