UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission File Number: 001-33294

Fortress Investment Group LLC

(Exact name of registrant as specified in its charter)

Delaware		20-5837959
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1345 Avenue of the Americas, New York, NY		10105
(Address of principal executive offices)		(Zip Code)

(212) 798-6100

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 o		Accelerated filer þ		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 þ

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

Class A Shares: 94,638,415 outstanding as of May 6, 2009.

Class B Shares: 312,071,550 outstanding as of May 6, 2009.

 

 

FORTRESS INVESTMENT GROUP LLC
FORM 10-Q

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008			1
Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2009 and 2008			2
Consolidated Statement of Equity (unaudited) for the three months ended March 31, 2009			3
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2009 and 2008			4
Notes to Consolidated Financial Statements (unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			56
Item 4. Controls and Procedures			59
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			59
Item 1A. Risk Factors			60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			89
Item 3. Defaults upon Senior Securities			89
Item 4. Submission of Matters to a Vote of Security Holders			89
Item 5. Other Information			89
Item 6. Exhibits			90
SIGNATURES			91
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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

“Management Fee Paying Assets Under Management,” or “AUM,” refers to the management fee paying assets we manage, including, as applicable, capital we have the right to call from our investors pursuant to their capital commitments to various funds. Our AUM equals the sum of:

	(i)		the capital commitments or invested capital (or NAV, if lower) of our private equity funds and hybrid PE funds, depending on which measure management fees are being calculated upon at a given point in time, which in connection with funds raised after March 2006 includes the mark-to-market value of public securities held within the funds,
	(ii)		the contributed capital of our publicly traded alternative investment vehicles, which we refer to as our “Castles,”
	(iii)		the net asset value, or “NAV,” of our hedge funds; and
	(iv)		the NAV of our managed accounts, to the extent management fees are charged.

For each of the above, the amounts exclude 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 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 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, collectively, to Fortress Investment Group LLC and its subsidiaries, including the Fortress Operating Group and all of its subsidiaries.

“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 January 2007, and in each of which Fortress Investment Group LLC acquired an indirect controlling interest in January 2007.

“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 related transactions directly owned 100% of the Fortress Operating Group units and following completion of our initial public offering and related transactions own a majority of the Fortress Operating Group units and 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 and grants by Fortress and dispositions by the principals.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under Part II, Item 1A, “Risk Factors,” 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” 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. Accordingly, you should not place undue reliance on any forward-looking 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.

SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

•

should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

•

have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

•

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

•

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)

		March 31,				December 31,
		2009				2008
		(Unaudited)
Assets
Cash and cash equivalents		$	43,308			$	263,337
Due from affiliates			64,188				38,504
Investments
Equity method investees			759,980				774,382
Options in affiliates			72				39
Deferred tax asset			411,656				408,066
Other assets			93,299				93,407
		$	1,372,503			$	1,577,735
Liabilities and Shareholders’ Equity
Liabilities
Accrued compensation and benefits		$	42,679			$	158,033
Due to affiliates			350,380				346,265
Deferred incentive income			163,635				163,635
Debt obligations payable			604,041				729,041
Other liabilities			59,333				26,741
			1,220,068				1,423,715
Commitments and Contingencies
Equity
Class A shares, no par value, 1,000,000,000 shares authorized, 94,638,415 and 94,609,525 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively			—				—
Class B shares, no par value, 750,000,000 shares authorized, 312,071,550 shares issued and outstanding			—				—
Paid-in capital			663,848				596,803
Retained earnings (accumulated deficit)			(580,538	)			(513,379	)
Accumulated other comprehensive income (loss)			(939	)			(866	)
Total Fortress shareholders’ equity			82,371				82,558
Principals’ and others’ interests in equity of consolidated subsidiaries — Note 6			70,064				71,462
Total equity			152,435				154,020
		$	1,372,503			$	1,577,735

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)

		Three Months Ended March 31,
		2009				2008
Revenues
Management fees from affiliates		$	105,652			$	144,057
Incentive income from affiliates			—				37,144
Expense reimbursements from affiliates			13,047				14,270
Other revenues (affiliate portion disclosed in Note 6)			3,597				5,409
			122,296				200,880
Expenses
Interest expense			8,186				10,336
Compensation and benefits			109,236				127,019
Principals agreement compensation			234,759				237,367
General, administrative and other			17,185				16,570
Depreciation and amortization			2,641				2,436
			372,007				393,728
Other Income (Loss)
Gains (losses) from investments
Net realized gains (losses)			(396	)			1,613
Net realized gains (losses) from affiliate investments			(248	)			247
Net unrealized gains (losses)			—				—
Net unrealized gains (losses) from affiliate investments			(1,829	)			(29,817	)
Tax receivable agreement liability reduction			(55	)			—
Earnings (losses) from equity method investees			(34,849	)			(49,129	)
			(37,377	)			(77,086	)
Income (Loss) Before Income Taxes			(287,088	)			(269,934	)
Income tax benefit (expense)			407				(7,252	)
Net Income (Loss)		$	(286,681	)		$	(277,186	)
Principals’ and Others’ Interests in Income (Loss) of Consolidated Subsidiaries		$	(219,522	)		$	(208,269	)
Net Income (Loss) Attributable to Class A Shareholders — Note 6		$	(67,159	)		$	(68,917	)
Dividends declared per Class A share		$	—			$	0.225
Earnings Per Class A share — Fortress Investment Group
Net income (loss) per Class A share, basic		$	(0.71	)		$	(0.74	)
Net income (loss) per Class A share, diluted		$	(0.71	)		$	(0.74	)
Weighted average number of Class A shares outstanding, basic			95,202,243				94,894,636
Weighted average number of Class A shares outstanding, diluted			95,202,243				406,966,186

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2009
(dollars in thousands)

																										Principals’ and
														Retained				Accumulated								Others’ Interests in
														Earnings				Other				Total Fortress				Equity of
										Paid-In				(Accumulated				Comprehensive				Shareholders’				Consolidated
		Class A Shares				Class B Shares				Capital				Deficit)				Income (Loss)				Equity				Subsidiaries				Total Equity
Equity — December 31, 2008			94,609,525				312,071,550			$	596,803			$	(513,379	)		$	(866	)		$	82,558			$	71,462			$	154,020
Contributions from principals’ and others’ interests in equity			—				—				—				—				—				—				3,117				3,117
Distributions to principals’ and others’ interests in equity (net of tax)			—				—				9				—				—				9				(5,225	)			(5,216	)
Director restricted share grant			28,890				—				99				—				—				99				113				212
Capital increase related to equity-based compensation			—				—				66,937				—				—				66,937				220,718				287,655
Comprehensive income (loss) (net of tax)
Net income (loss)			—				—				—				(67,159	)			—				(67,159	)			(219,522	)			(286,681	)
Foreign currency translation			—				—				—				—				(2	)			(2	)			(244	)			(246	)
Comprehensive income (loss) from equity method investees			—				—				—				—				(71	)			(71	)			(355	)			(426	)
Total comprehensive income (loss)																															(287,353	)
Equity — March 31, 2009			94,638,415				312,071,550			$	663,848			$	(580,538	)		$	(939	)		$	82,371			$	70,064			$	152,435

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)

		Three Months Ended March 31,
		2009				2008
Cash Flows From Operating Activities
Net income (loss)		$	(286,681	)		$	(277,186	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation and amortization			2,641				2,436
Other amortization and accretion			3,414				628
(Earnings) losses from equity method investees			34,849				49,129
Distributions of earnings from equity method investees			11				3,252
(Gains) losses from investments			2,473				27,957
Deferred incentive income			—				(31,959	)
Deferred tax (benefit) expense			(3,759	)			279
Tax receivable agreement liablity reduction			55				—
Equity-based compensation			287,803				265,792
Cash flows due to changes in
Due from affiliates			(25,932	)			104,038
Other assets			(1,257	)			5,839
Accrued compensation and benefits			(108,216	)			(164,335	)
Due to affiliates			(1,367	)			11,446
Deferred incentive income			—				26,077
Other liabilities			32,657				28,462
Net cash provided by (used in) operating activities			(63,309	)			51,855
Cash Flows From Investing Activities
Contributions to equity method investees			(31,792	)			(70,215	)
Distributions of capital from equity method investees			10,538				155,006
Purchase of fixed assets			(1,110	)			(2,248	)
Proceeds from disposal of fixed assets			6				53
Net cash provided by (used in) investing activities			(22,358	)			82,596
Cash Flows From Financing Activities
Borrowings under debt obligations			—				450,000
Repayments of debt obligations			(125,000	)			(185,000	)
Payment of deferred financing costs			(4,162	)			(61	)
Dividends and dividend equivalents paid			—				(26,381	)
Principals’ and others’ interests in equity of consolidated subsidiaries — contributions			25				—
Principals’ and others’ interests in equity of consolidated subsidiaries — distributions			(5,225	)			(100,740	)
Net cash provided by (used in) financing activities			(134,362	)			137,818
Net Increase (Decrease) in Cash and Cash Equivalents			(220,029	)			272,269
Cash and Cash Equivalents, Beginning of Period			263,337				100,409
Cash and Cash Equivalents, End of Period		$	43,308			$	372,678
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest		$	3,730			$	9,462
Cash paid during the period for income taxes		$	3,008			$	1,109
Supplemental Schedule of Non-cash Investing and Financing Activities
Employee compensation invested directly in subsidiaries		$	1,701			$	16,743
Investments of receivable amounts into Fortress Funds		$	—			$	42,782
Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid		$	—			$	96,657

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

1. ORGANIZATION AND BASIS OF PRESENTATION

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 primary 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 the following business segments in which Fortress operates:

1)

Private equity:

	a)		Private equity funds which make significant, control-oriented investments in debt and equity securities of public or privately held entities in North America and Western Europe, with a focus on acquiring and building assets-based businesses with significant cash flows; and
	b)		Publicly traded alternative investment vehicles, which Fortress refers to as “Castles,” which are companies that invest primarily in real estate and real estate related debt investments.

	2)		Liquid hedge funds, which invest globally in fixed income, currency, equity and commodity markets, and related derivatives to capitalize on imbalances in the financial markets.
	3)		Hybrid funds:

	a)		Hybrid hedge funds, which make highly diversified investments globally in assets, opportunistic lending situations and securities throughout the capital structure with a value orientation, as well as in investment funds managed by external managers; and
	b)		Hybrid private equity (“PE”) funds which are comprised of a family of “credit opportunities” funds focused on investing in distressed and undervalued assets, a family of ''long dated value’’ funds focused on investing in undervalued assets with limited current cash flows and long investment horizons, and a family of “real assets” funds focused on investing in tangible and intangible assets in four principal categories (real estate, capital assets, natural resources and intellectual property).

4)

Principal investments in the above described funds.

2007 Reorganization of Fortress Operating Group

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 is a limited liability company and its members are not responsible for any of its liabilities beyond the equity they have invested. Fortress’s formation documents allow for an indefinite life.

On January 17, 2007, Nomura Investment Managers U.S.A Inc. (“Nomura”) completed a transaction (the “Nomura Transaction”) whereby it purchased 55,071,450 Class A shares of the Registrant and the Registrant, in turn, purchased 55,071,450 Fortress Operating Group units, which then represented 15% of Fortress Operating Group’s economic interests, from the Principals. On February 8, 2007, the Registrant completed an initial public offering (“IPO”) of 39,428,900 of its Class A shares.

Financial Statement Guide

Selected Financial Statement		Note
Captions		Reference				Explanation
Balance Sheet
Due from Affiliates			6			Generally, management fees, expense reimbursements and incentive income earned from Fortress Funds which are expected to be received in the short term.
Investments in Equity Method Investees			3			The carrying value of Fortress’s principal investments in the Fortress Funds.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

Selected Financial Statement		Note
Captions		Reference				Explanation
Options in Affiliates			3			The fair value of common stock options received from the Castles.
Due to Affiliates			6			Generally, amounts due to the Principals related to their interests in Fortress Operating Group and the tax receivable agreement.
Deferred Incentive Income			2			Incentive income already received from certain Fortress Funds based on past performance, which is subject to contingent repayment based on future performance.
Debt Obligations Payable			4			The balance outstanding on the credit agreement.
Principals’ and Others’ Interests in Equity of Consolidated Subsidiaries			6			The GAAP basis of the Principals’ ownership interests in Fortress Operating Group as well as employees’ ownership interests in certain subsidiaries.
Income Statement
Management Fees from Affiliates			2			Fees earned for managing Fortress Funds, generally determined based on the size of such funds.
Incentive Income from Affiliates			2			Income earned from Fortress Funds, based on the performance of such funds.
Compensation and Benefits			7			Includes equity-based, profit-sharing and other compensation to employees.
Principals Agreement Compensation			N/A			As a result of the principals agreement, the value of a significant portion of the Principals’ equity in Fortress prior to the Nomura Transaction is being recorded as an expense over a five year period. Fortress is not a party to this agreement. It is an agreement between the Principals to further incentivize them to remain with Fortress. This GAAP expense has no economic effect on Fortress or its shareholders.
Gains (Losses) from Other Investments			N/A			Subsequent to the IPO, the result of asset dispositions or changes in the fair value of assets which are marked to market (primarily the Castles and GAGFAH).
Tax Receivable Agreement Liability Reduction			5			Represents a change in the amount due to the Principals under the tax receivable agreement.
Earnings (Losses) from Equity Method Investees			3			Fortress’s share of the net earnings (losses) of Fortress Funds resulting from its principal investments.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

Selected Financial Statement		Note
Captions		Reference				Explanation
Income Tax Benefit (Expense)			5			The net tax result related to the current period. Certain of Fortress’s revenues are not subject to taxes because they do not flow through taxable entities. Furthermore, Fortress has significant permanent differences between its GAAP and tax basis earnings.
Principals’ and Others’ Interests in (Income) Loss of Consolidated Subsidiaries			6			Primarily the Principals’ and employees’ share of Fortress’s earnings based on their ownership interests in subsidiaries, including Fortress Operating Group. This amount is disclosed in order to provide a net income (loss) which relates only to Fortress’s Class A shareholders.
Earnings Per Share			8			GAAP earnings per Class A share based on Fortress’s capital structure, which is comprised of outstanding and unvested equity interests, including interests which participate in Fortress’s earnings, at both the Fortress and subsidiary levels.
Other
Distributions			8			A summary of dividends and distributions, and the related outstanding shares and units, is provided.
Distributable Earnings			10			A presentation of our financial performance by segment (fund type) is provided, on the basis of the operating performance measure used by Fortress’s management committee.

The accompanying consolidated and combined 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 consolidated and combined financial statements for the year ended December 31, 2008 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 consolidated and combined financial statements for the year ended December 31, 2008.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

2. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS

Management Fees, Incentive Income and Related Profit Sharing Expense

Fortress has two principal sources of income from its agreements with the Fortress Funds: contractual management fees, which are generally based on a percentage of fee paying assets under management, and related incentive income, which is generally based on a percentage of profits subject to the achievement of performance criteria. Substantially all of Fortress’s net assets, after deducting the portion attributable to principals’ and others’ interests, are a result of principal investments in, or receivables from, these funds.

The Fortress Funds are divided into segments and Fortress’s agreements with each are detailed below.

Fortress recognized management fees and incentive income as follows:

		Three Months Ended March 31,
		2009				2008
Private Equity
Private Equity Funds
Management fees — affil.		$	37,669			$	39,808
Incentive income — affil.			—				34,640
Castles
Management fees — affil.			11,390				12,937
Incentive income — affil.			—				12
Management fees — non-affil. (A)			646				882
Liquid Hedge Funds
Management fees — affil.			22,604				52,647
Incentive income — affil.			—				2,492
Management fees — non-affil. (A)			25				72
Incentive income — non-affil. (A)			—				203
Hybrid Funds
Hybrid Hedge Funds
Management fees — affil.			27,908				36,656
Incentive income — affil.			—				—
Management fees — non-affil. (A)			215				189
Incentive income — non-affil. (A)			822				—
Hybrid PE Funds
Management fees — affil.			6,081				2,009
Incentive income — affil.			—				—
Total
Management fees — affil.		$	105,652			$	144,057
Incentive income — affil. (B)		$	—			$	37,144
Management fees — non-affil. (A)		$	886			$	1,143
Incentive income — non-affil. (A)		$	822			$	203

Deferred Incentive Income

Incentive income from certain Fortress Funds, primarily private equity funds and hybrid PE funds, is received when such funds realize profits, based on the related agreements. However, this incentive income is subject to contingent repayment by Fortress to the funds until certain overall fund performance criteria are met. Accordingly, Fortress does not recognize this incentive income as revenue until the related contingencies are resolved. Until such time, this incentive income is recorded on the balance sheet as deferred incentive income and is included as “distributed-unrecognized” deferred incentive income in the table below. Incentive income from such funds, based on their net asset value, which has not yet been received is not recorded on the balance sheet and is included as “undistributed” deferred incentive income in the table below.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

Incentive income from certain Fortress Funds, primarily hybrid hedge funds, as well as liquid hedge funds beginning in the second quarter of 2009, 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), is generally received subsequent to year end, and has not been recognized for these funds during the three months ended March 31, 2009 and 2008. As a result of not achieving incentive income thresholds, if the amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, no additional incentive income from affiliates would have been recognized during the three months ended March 31, 2009 or 2008. Incentive income based on achieving annual performance criteria that has not yet been recognized, if any, is not recorded on the balance sheet and is 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, on an inception to date basis:

														Undistributed net of
		Distributed-				Distributed-				Distributed-				intrinsic clawback
		Gross				Recognized (A)				Unrecognized (B)				(C) (D)
Deferred incentive income as of December 31, 2008		$	470,798			$	(307,163	)		$	163,635			$	(89,085	)
Share of income (loss) of Fortress Funds			—				—				—				(15,022	)
Recognition of previously deferred incentive income			—				—				—				—
Deferred incentive income as of March 31, 2009		$	470,798			$	(307,163	)		$	163,635			$	(104,107	)

Private Equity Funds and Hybrid PE Funds

During the three months ended March 31, 2009, Fortress did not form any new private equity funds or hybrid PE funds.

Unrealized losses in a significant portion of Fortress’s private equity funds and hybrid PE funds have resulted in higher future returns being required before Fortress earns incentive income from such funds.

In February 2009, one of the private equity Fortress Funds issued notes in the amount of $80 million. These notes bear interest at 20% per annum, payable at maturity, and mature in January 2014. The notes were offered to existing investors in proportion to their ownership of the fund’s equity and Fortress consequently subscribed to and received $0.5 million of these notes, which are recorded as part of Fortress’s investment in such fund. In addition, the Principals concurrently acquired $4.7 million of these notes.

In March 2009, one of the private equity Fortress Funds which was formed as a coinvestment fund to invest solely in GAGFAH (XETRA: GFJ), was liquidated and distributed all of its shares in GAGFAH to its investors, including Fortress. As a result, Fortress received 5.7 million shares of GAGFAH valued at $28.2 million as of March 31, 2009. Fortress elected to account for these shares at fair value pursuant to SFAS 159.

Liquid Hedge Funds and Hybrid Hedge Funds

During the three months ended March 31, 2009, Fortress did not form any new hedge funds.

Historical redemptions during the periods, including affiliates, have been as follows:

		Liquid Hedge Funds								Hybrid Hedge Funds
		Redemption Notices								Redemption Notices
Three Months Ended March 31,		Received				Redemptions Paid				Received				Redemptions Paid
2009		$	582,785			$	2,801,035			$	—			$	141,092
2008		$	8,587			$	138,862			$	—			$	549,315

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

The differences between notices received and redemptions paid are a result of timing (notices received prior to quarter end, paid afterwards) and the contractual agreements regarding redemptions, which in some cases allow for delayed payment.

As a result of not meeting the incentive income thresholds with respect to current investors, the incentive income from a significant portion of the capital invested in Fortress’s liquid and hybrid hedge funds has been discontinued for an indeterminate period of time. Returns earned on capital from new investors continue to be incentive income eligible.

3. INVESTMENTS IN EQUITY METHOD INVESTEES AND OTHER EQUITY INVESTMENTS

Investments consist primarily of investments in equity method investees and options in these investees. The investees are primarily Fortress Funds.

Investments in Equity Method Investees

Fortress holds investments in certain Fortress Funds which are recorded based on the equity method of accounting. Fortress’s maximum exposure to loss with respect to these entities is generally equal to its investment plus its basis in any options received from such entities as described below, plus any receivables from such entities as described in Note 6. In addition, unconsolidated affiliates also hold ownership interests in certain of these entities. Summary financial information related to these investments is as follows:

		Fortress’s Investment								Fortress’s Equity in Net Income (Loss)
		March 31,				December 31,				Three Months Ended March 31,
		2009				2008				2009				2008
Private equity funds, excluding NIH (A)		$	450,578			$	455,691			$	(32,308	)		$	(41,459	)
NIH			3,382				3,666				(279	)			1,059
Castles (B)			1,027				1,171				N/A				N/A
Total private equity			454,987				460,528				(32,587	)			(40,400	)
Liquid hedge funds (C)			28,777				29,338				1,012				963
Hybrid hedge funds			183,527				185,676				(2,149	)			(10,823	)
Hybrid PE funds			88,516				96,610				(1,528	)			1,130
Total hybrid funds			272,043				282,286				(3,677	)			(9,693	)
Other			4,173				2,230				403				1
		$	759,980			$	774,382			$	(34,849	)		$	(49,129	)

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

A summary of the changes in Fortress’s investments in equity method investees is as follows:

		Three Months Ended March 31, 2009
		Private Equity												Liquid				Hybrid
		NIH				Other Funds (A)				Castles (B)				Hedge Funds				Hedge Funds				PE Funds				Other				Total
Investment, beginning		$	3,666			$	455,691			$	1,171			$	29,338			$	185,676			$	96,610			$	2,230			$	774,382
Earnings from equity method investees			(279	)			(32,308	)			N/A				1,012				(2,149	)			(1,528	)			403				(34,849	)
Other comprehensive income from equity method investees			(5	)			—				N/A				—				—				(462	)			—				(467	)
Contributions to equity method investees			—				29,102				N/A				—				—				3,986				1,560				34,648
Distributions of earnings from equity method investees			—				—				N/A				—				—				—				(11	)			(11	)
Distributions of capital from equity method investees			—				(198	)			N/A				(1,573	)			—				(10,090	)			(9	)			(11,870	)
Total distributions from equity method investees			—				(198	)			N/A				(1,573	)			—				(10,090	)			(20	)			(11,881	)
Mark to fair value — during period (C)			N/A				(981	)			(132	)			N/A				N/A				N/A				N/A				(1,113	)
Translation adjustment			—				(728	)			(12	)			—				—				—				—				(740	)
Investment, ending (D)		$	3,382			$	450,578			$	1,027			$	28,777			$	183,527			$	88,516			$	4,173			$	759,980
Ending balance of undistributed earnings		$	776			$	—				N/A			$	87			$	301				5,859			$	392			$	7,415

The ownership percentages presented in the following tables are reflective of the ownership interests held as of the end of the respective periods. For tables which include more than one Fortress Fund, the ownership percentages are based on a weighted average by total equity of the funds as of period end.

										Newcastle Investment Holdings LLC
		Private Equity Funds excluding NIH								(“NIH”)
		March 31,				December 31,				March 31,				December 31,
		2009				2008				2009				2008
Assets		$	8,693,410			$	9,362,237			$	268,891			$	278,161
Liabilities			(856,169	)			(1,058,392	)			(212,065	)			(215,416	)
Equity		$	7,837,241			$	8,303,845			$	56,826			$	62,745
Fortress’s Investment (A)		$	450,578			$	455,691			$	3,382			$	3,666
Ownership (B)			5.7	%			5.5	%			4.8	%			4.8	%

		Three Months Ended March 31,								Three Months Ended March 31,
		2009				2008				2009				2008
Revenues and gains (losses) on investments		$	(767,348	)		$	(1,178,032	)		$	(1,021	)		$	30,363
Expenses			(121,035	)			(103,852	)			(4,474	)			(7,398	)
Net Income (Loss)		$	(888,383	)		$	(1,281,884	)		$	(5,495	)		$	22,965
Fortress’s equity in net income (loss)		$	(32,308	)		$	(41,459	)		$	(279	)		$	1,059

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

		Liquid Hedge Funds								Hybrid Hedge Funds								Hybrid PE Funds (C)
		March 31,				December 31,				March 31,				December 31,				March 31,				December 31,
		2009				2008				2009				2008				2009				2008
Assets		$	5,099,120			$	7,819,859			$	10,518,758			$	10,803,738			$	4,486,562			$	4,103,809
Liabilities			(634,141	)			(540,204	)			(4,153,920	)			(4,407,170	)			(2,187,367	)			(1,517,607	)
Minority interest			—				—				(38,242	)			(29,922	)			—				—
Equity		$	4,464,979			$	7,279,655			$	6,326,596			$	6,366,646			$	2,299,195			$	2,586,202
Fortress’s Investment (A)		$	28,777			$	29,338			$	183,527			$	185,676			$	88,516			$	96,610
Ownership (B)			0.6	%			0.4	%			2.9	%			2.9	%			3.8	%			3.7	%

		Three Months Ended March 31,								Three Months Ended March 31,								Three Months Ended March 31,
		2009				2008				2009				2008				2009				2008
Revenues and gains (losses) on investments		$	158,965			$	106,405			$	172,679			$	(123,468	)		$	(18,429	)		$	23,413
Expenses			(48,119	)			(156,539	)			(77,849	)			(109,619	)			(31,590	)			(6,658	)
Net Income (Loss)		$	110,846			$	(50,134	)		$	94,830			$	(233,087	)		$	(50,019	)		$	16,755
Fortress’s equity in net income (loss)		$	1,012			$	963			$	(2,149	)		$	(10,823	)		$	(1,528	)		$	1,130

Investments in Variable Interest Entities

Fortress is not considered the primary beneficiary of, and therefore does not consolidate, any of the variable interest entities in which it holds an interest. No reconsideration events occurred during the three months ended March 31, 2009 which caused a change in Fortress’s accounting.

The following table presents information as of March 31, 2009 regarding entities formed during the three months ended March 31, 2009 that were determined to be VIEs in which Fortress holds a variable interest. The amounts presented below are included in, and not in addition to, the equity method investment tables above. The only VIE formed during this period was not yet capitalized as of quarter end and therefore had no assets or liabilities.

Fortress is not Primary Beneficiary

Business Segment

Gross Assets

Financial Obligations

Fortress Investment (A)

Hybrid PE Funds

$

—

$

—

$

—

Fair Value of Financial Instruments

The following table presents information regarding Fortress’s financial instruments which are recorded at fair value:

		Fair Value
		March 31, 2009				December 31, 2008				Valuation Method
Assets — Carried at Fair Value
Newcastle, Eurocastle and GAGFAH common shares		$	29,249			$	1,171			Level 1 — Quoted prices in active markets for identical assets
Newcastle and Eurocastle options		$	72			$	39			Level 2 — Lattice-based option valuation models using significant observable inputs

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

4. DEBT OBLIGATIONS

The following table presents summarized information regarding Fortress’s debt obligations:

														March 31, 2009
		Face Amount and												Weighted				Weighted
		Carrying Value								Contractual		Final		Average				Average
		March 31,				December 31,				Interest		Stated		Funding				Maturity
Debt Obligation		2008				2008				Rate		Maturity		Cost (A)				(Years)
Credit agreement (B)
Revolving debt (C)		$	54,041			$	104,041			LIBOR + 2.50% (D)		May 2012			3.04	%			3.11
Term loan			350,000				350,000			LIBOR + 2.50%		May 2012			3.20	%			2.40
Delayed term loan (C)			200,000				275,000			LIBOR + 2.50%		May 2012			3.11	%			0.77
Total		$	604,041			$	729,041								3.16	%			1.92

On March 12 and March 13, 2009, Fortress entered into amendments to its credit agreement. The amendments, among other things: (i) modified the financial covenants by (a) amending the amount of required management fee earning assets to $22 billion as of the end of each fiscal quarter through December 31, 2009 and $20 billion as of the end of each fiscal quarter thereafter; (b) reducing the amount of investment assets required as of any point in time to an amount equal to the term loans and revolving loans (including outstanding letters of credit) then outstanding; (c) changing the required Consolidated Leverage Ratio to 3.5 to 1.0 for the remainder of the term of the credit agreement; (ii) increased the rate on LIBOR loans to LIBOR + 2.50 (and Base Rate loans to the prime rate plus 1.50%); (iii) reduced the revolving credit facility commitments to $75 million; (iv) established an annual requirement, beginning in 2010, that outstanding loans be prepaid in an amount equal to 75% of Free Cash Flow (as defined in the agreement) generated during the previous year; (v) increased the amount of Fortress’s scheduled amortization payments (the amortization schedule now requires the following payments: $50 million in July 2009, $25 million in each of October 2009 and January, April, July and October 2010, and $75 million in January 2011); (vi) established a requirement that 50% of the net proceeds from any equity issuance by the Fortress Operating Group be applied to prepay outstanding term loans; (vii) reduced the amount of certain types of distributions Fortress can make to equity holders of the Fortress Operating Group and, in turn, Fortress’s Class A shareholders, and (viii) provided that the dissolution or termination of specified material funds would not constitute an event of default. In connection with the amendment, Fortress prepaid $75 million of outstanding term loans and $50 million of outstanding revolving facility loans.

To management’s knowledge, there have not been any market transactions in Fortress’s debt obligations. However, management believes the fair value of this debt was between 55% and 60% of face value at March 31, 2009.

Fortress was in compliance with all of its debt covenants as of March 31, 2009. The following table sets forth the financial covenant requirements as of March 31, 2009 (dollars in millions).

		Requirement				Actual
AUM		≥ $	22,000			$	26,538
Consolidated Leverage Ratio		≤	3.50				1.98
Required Investment Assets		≥ $	614			$	731
Fortress Fund Investments		≥ $	245			$	394
Total Investments		≥ $	368			$	521

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

5. INCOME TAXES AND TAX RELATED PAYMENTS

For the three months ended March 31, 2009, an estimated annual effective tax rate of 0.62% was used to compute the tax provision. Fortress incurred a loss before income taxes for financial reporting purposes, after deducting the compensation expense arising from the Principals’ forfeiture agreement. However, this compensation expense is not deductible for income tax purposes. Also, a portion of Fortress’s income is not subject to U.S. federal income tax, but is allocated directly to Fortress’s shareholders.

The provision for income taxes consists of the following:

		Three Months Ended March 31,
		2009				2008
Current
Federal income tax		$	814			$	2,654
Foreign income tax			411				637
State and local income tax			2,127				3,682
			3,352				6,973
Deferred
Federal income tax expense (benefit)			(1,518	)			1,291
Foreign income tax expense (benefit)			(96	)			166
State and local income tax expense (benefit)			(2,145	)			(1,178	)
			(3,759	)			279
Total expense (benefit)		$	(407	)		$	7,252

The tax effects of temporary differences have resulted in deferred income tax assets and liabilities as follows:

		March 31, 2009				December 31, 2008
Total deferred tax assets		$	507,723			$	504,017
Valuation allowance			(96,067	)			(95,951	)
Net deferred tax assets		$	411,656			$	408,066
Total deferred tax liabilities (A)		$	482			$	592

For the three months ended March 31, 2009, a deferred income tax provision of $0.11 million was credited to other comprehensive income, primarily related to the equity method investees. A current income tax benefit of $0.01 million was credited to additional paid in capital, related to (i) dividend equivalent payments on RSUs (Note 7), and (ii) distributions to Fortress Operating Group restricted partnership unit holders (Note 7), which are currently deductible for income tax purposes.

Tax Receivable Agreement

Although the tax receivable agreement payments are calculated based on annual tax savings, for the three months ended March 31, 2009, the payments which would have been made pursuant to the tax receivable agreement, if such period was calculated by itself, were estimated to be $3.9 million.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2009
(dollars in tables in thousands, except share data)

6. RELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED SUBSIDIARIES

Affiliate Receivables and Payables

Due from affiliates was comprised of the following:

		Private Equity												Hybrid
										Liquid Hedge				Hedge
March 31, 2009		Funds				Castles				Funds				Funds				PE Funds				Other				Total
Management fees and incentive income		$	28,014			$	3,933			$	127			$	1,300			$	6,080			$	—			$	39,454
Expense reimbursements			7,957				2,960				2,708				3,371				3,726				—				20,722
Dividends and distributions			1,509				—				—				—				—				—				1,509
Other			166				—				—				—				509				1,828				2,503
Total		$	37,646			$	6,893			$	2,835			$	4,671			$	10,315			$	1,828			$	64,188

		Private Equity												Hybrid
										Liquid Hedge				Hedge
December 31, 2008		Funds				Castles				Funds				Funds				PE Funds				Other				Total
Management fees and incentive income		$	7,833			$	4,094			$	329			$	1,285			$	6,907			$	—			$	20,448
Expense reimbursements			6,289				2,734				1,211				2,115				3,536				—				15,885
Dividends and distributions			—				89				—				—				—				—				89
Other			1				—				—				—				—				2,081				2,082
Total		$	14,123			$	6,917			$	1,540			$	3,400			$	10,443			$	2,081			$	38,504