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

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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

For the transition period from to

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

(Registrant’s telephone number, including area code)

(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 x No ¨

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 No ¨

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 ¨

Accelerated filer x

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

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

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: 168,916,882 outstanding as of November 3, 2010.

Class B Shares: 300,273,852 outstanding as of November 3, 2010.

FORTRESS INVESTMENT GROUP LLC

FORM 10-Q

INDEX


		PAGE
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009		1

	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2010 and 2009		2

	Consolidated Statement of Equity (unaudited) for the nine months ended September 30, 2010		3

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2010 and 2009		4

	Notes to Consolidated Financial Statements (unaudited)		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		71

Item 4.	Controls and Procedures		74

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		75

Item 1A.	Risk Factors		75

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		106

Item 3.	Defaults upon Senior Securities		106

Item 4.	(Removed and Reserved)		106

Item 5.	Other Information		106

Item 6.	Exhibits		107

SIGNATURES			108

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 credit PE funds, depending on which measure management fees are being calculated upon at a given point in time, which in connection with private equity 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, including the Value Recovery Funds which pay fees based on realizations (and on certain managed assets); 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.

The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


	September 30, 2010 (Unaudited)			December 31, 2009
Assets
Cash and cash equivalents	$	233,724		$	197,099
Due from affiliates		148,069			64,511
Investments		907,456			867,215
Deferred tax asset		459,015			440,639
Other assets		117,736			90,803

	$	1,866,000		$	1,660,267

Liabilities and Equity
Liabilities
Accrued compensation and benefits	$	184,898		$	131,134
Due to affiliates		341,516			345,976
Deferred incentive income		252,885			160,097
Debt obligations payable		355,900			397,825
Other liabilities		76,729			25,921

		1,211,928			1,060,953

Commitments and Contingencies
Equity
Class A shares, no par value, 1,000,000,000 shares authorized, 168,916,882 and 145,701,622 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		—			—
Class B shares, no par value, 750,000,000 shares authorized, 300,273,852 and 307,773,852 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		—			—
Paid-in capital		1,362,359			1,029,536
Retained earnings (accumulated deficit)		(1,039,184	)		(767,994	)
Accumulated other comprehensive income (loss)		(2,015	)		(325	)

Total Fortress shareholders’ equity		321,160			261,217
Principals’ and others’ interests in equity of consolidated subsidiaries		332,912			338,097

Total equity		654,072			599,314

	$	1,866,000		$	1,660,267

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(dollars in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenues
Management fees: affiliates	$	107,752		$	106,926		$	327,182		$	321,003
Management fees: non-affiliates		8,628			1,748			17,513			3,522
Incentive income: affiliates		7,487			7,638			53,892			14,596
Incentive income: non-affiliates		371			279			8,679			1,264
Expense reimbursements from affiliates		36,745			24,952			100,606			58,660
Other revenues (affiliate portion disclosed in Note 6)		1,242			2,140			5,871			6,021

		162,225			143,683			513,743			405,066

Expenses
Interest expense		3,549			4,451			11,043			20,242
Compensation and benefits		184,107			132,033			523,029			354,725
Principals agreement compensation		239,975			239,975			712,101			712,101
General, administrative and other		26,620			18,461			71,970			56,680
Depreciation and amortization		3,361			2,719			9,337			8,121

		457,612			397,639			1,327,480			1,151,869

Other Income (Loss)
Gains (losses) (affiliate portion disclosed in Note 3)		2,025			20,189			(10,360	)		37,157
Tax receivable agreement liability adjustment		—			—			1,317			(55	)
Earnings (losses) from equity method investees		16,941			40,345			42,972			56,553

		18,966			60,534			33,929			93,655

Income (Loss) Before Income Taxes		(276,421	)		(193,422	)		(779,808	)		(653,148	)
Income tax benefit (expense)		4,545			3,116			(4,641	)		4,831

Net Income (Loss)	$	(271,876	)	$	(190,306	)	$	(784,449	)	$	(648,317	)

Principals’ and Others’ Interests in Income (Loss) of Consolidated Subsidiaries	$	(177,221	)	$	(131,704	)	$	(513,259	)	$	(477,964	)

Net Income (Loss) Attributable to Class A Shareholders	$	(94,655	)	$	(58,602	)	$	(271,190	)	$	(170,353	)

Dividends declared per Class A share	$	—		$	—		$	—		$	—

Earnings Per Class A share - Fortress Investment Group
Net income (loss) per Class A share, basic	$	(0.57	)	$	(0.41	)	$	(1.70	)	$	(1.50	)

Net income (loss) per Class A share, diluted	$	(0.62	)	$	(0.43	)	$	(1.75	)	$	(1.53	)

Weighted average number of Class A shares outstanding, basic		168,907,106			143,627,823			163,920,012			118,638,707

Weighted average number of Class A shares outstanding, diluted		469,180,958			454,064,379			466,666,392			430,159,270

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(dollars in thousands)


	Class A Shares		Class B Shares			Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Fortress Shareholders’ Equity			Principals’ and Others’ Interests in Equity of Consolidated Subsidiaries			Total Equity
Equity - December 31, 2009		145,701,622		307,773,852		$	1,029,536		$	(767,994	)	$	(325	)	$	261,217		$	338,097		$	599,314
Contributions from principals’ and others’ interests in equity		—		—			—			—			—			—			70,670			70,670
Distributions to principals’ and others’ interests in equity		—		—			(1,068	)		—			—			(1,068	)		(121,049	)		(122,117	)
Conversion of Class B to Class A shares		7,500,000		(7,500,000	)		7,351			—			(163	)		7,188			(7,188	)		—
Net deferred tax effects resulting from acquisition of Fortress Operating Group units		—		—			5,951			—			—			5,951			—			5,951
Net deferred tax effects resulting from exchange of Fortress Operating Group units		—		—			6,977			—			—			6,977			—			6,977
Director restricted share grant		210,302		—			194			—			—			194			367			561
Capital increase related to equity-based compensation, net		15,504,958		—			302,380			—			—			302,380			579,103			881,483
Dilution impact of Class A share issuance		—		—			11,038			—			(710	)		10,328			(10,328	)		—
Comprehensive income (loss) (net of tax)
Net income (loss)		—		—			—			(271,190	)		—			(271,190	)		(513,259	)		(784,449	)
Foreign currency translation		—		—			—			—			239			239			23			262
Comprehensive income (loss) from equity method investees		—		—			—			—			(1,056	)		(1,056	)		(3,524	)		(4,580	)

Total comprehensive income (loss)																						(788,767	)

Equity - September 30, 2010		168,916,882		300,273,852		$	1,362,359		$	(1,039,184	)	$	(2,015	)	$	321,160		$	332,912		$	654,072

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

SEPTEMBER 30, 2010

(dollars in thousands)


	Nine Months Ended September 30
	2010			2009
Cash Flows From Operating Activities
Net income (loss)	$	(784,449	)	$	(648,317	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation and amortization		9,337			8,121
Other amortization and accretion		2,423			7,988
(Earnings) losses from equity method investees		(42,972	)		(56,553	)
Distributions of earnings from equity method investees		5,630			2,156
(Gains) losses		10,360			(37,157	)
Deferred incentive income		(53,493	)		—
Deferred tax (benefit) expense		391			(12,428	)
Tax receivable agreement liability adjustment		(1,317	)		55
Equity-based compensation		881,200			878,808
Allowance for doubtful accounts		(2,303	)		—
Other		(46	)		(55	)
Cash flows due to changes in
Due from affiliates		(85,937	)		(66,712	)
Other assets		(5,076	)		(8,166	)
Accrued compensation and benefits		111,229			(58,861	)
Due to affiliates		(9,009	)		(18,087	)
Deferred incentive income		146,281			—
Other liabilities		36,200			26,548

Net cash provided by (used in) operating activities		218,449			17,340

Cash Flows From Investing Activities
Contributions to equity method investees		(48,857	)		(43,322	)
Distributions of capital from equity method investees		45,955			28,740
Purchase of fixed assets		(1,574	)		(1,972	)
Acquisitions, net of cash received		(13,474	)		—

Net cash provided by (used in) investing activities		(17,950	)		(16,554	)

Cash Flows From Financing Activities
Repayments of debt obligations		(41,925	)		(317,241	)
Payment of deferred financing costs		—			(4,162	)
Proceeds from public offering		—			230,000
Costs related to public offering		—			(10,500	)
Principals’ and others’ interests in equity of consolidated subsidiaries - contributions		653			92
Principals’ and others’ interests in equity of consolidated subsidiaries - distributions		(122,602	)		(55,326	)

Net cash provided by (used in) financing activities		(163,874	)		(157,137	)

Net Increase (Decrease) in Cash and Cash Equivalents		36,625			(156,351	)
Cash and Cash Equivalents, Beginning of Period		197,099			263,337

Cash and Cash Equivalents, End of Period	$	233,724		$	106,986

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	9,228		$	11,160

Cash paid during the period for income taxes	$	7,833		$	8,266

Supplemental Schedule of Non-cash Investing and Financing Activities
Employee compensation invested directly in subsidiaries	$	70,124		$	7,976

Investments of receivable amounts into Fortress Funds	$	8,127		$	—

Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid	$	11,821		$	—

Distributions declared but not yet paid on other non-controlling interests	$	4,898		$	—

Contingent consideration in purchase of Logan Circle Partners L.P.	$	4,000		$	—

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(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:

Private equity:

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

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.

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.

Credit funds:

Credit 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 which include non-Fortress originated funds for which Fortress has been retained as manager as part of an advisory business; and

Credit 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, 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), and two Asia funds, a Japan real estate fund and an Asian investor based global opportunities fund.

Principal investments in the above described funds.

Financial Statement Guide


Selected Financial Statement Captions	Note Reference	Explanation
Balance Sheet

Due from Affiliates	6	Generally, management fees, expense reimbursements and incentive income due from Fortress Funds.

Investments	3	Primarily the carrying value of Fortress’s principal investments in the Fortress Funds.

Deferred Tax Asset	5	Relates to potential future tax benefits.

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.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)


Selected Financial Statement Captions	Note Reference	Explanation
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.

Statement of Operations

Management Fees: Affiliates	2	Fees earned for managing Fortress Funds, generally determined based on the size of such funds.

Management Fees: Non-Affiliates	2	Fees earned from managed accounts and our traditional fixed income asset management business, generally determined based on the amount managed.

Incentive Income: Affiliates	2	Income earned from Fortress Funds, based on the performance of such funds.

Incentive Income: Non-Affiliates	2	Income earned from managed accounts, based on the performance of such accounts.

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 Investments	N/A	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 Adjustment	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 the Fortress Funds resulting from its principal investments.

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.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)


Selected Financial Statement Captions	Note Reference	Explanation
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.

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 FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement presentation, revenue recognition, leases, financial instruments, hedging, contingencies and fair value. Some of the proposed changes are significant and could have a material impact on Fortress’s reporting. Fortress has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.

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 consolidated and combined financial statements for the year ended December 31, 2009 and notes thereto included in Fortress’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2010. Capitalized terms used herein, and not otherwise defined, are defined in Fortress’s consolidated financial statements for the year ended December 31, 2009.

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

2. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS

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 INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

Management Fees, Incentive Income and Related Profit Sharing Expense

Fortress recognized management fees and incentive income as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010			2009
Private Equity
Private Equity Funds
Management fees - affil.	$	36,341	$	32,048	$	103,313		$	108,638
Incentive income - affil.		5,436		—		32,862			—
Castles
Management fees - affil.		11,425		12,358		34,279			35,698
Incentive income - affil.		—		—		—			—
Management fees - non-affil.		579		596		1,953			1,936
Liquid Hedge Funds
Management fees - affil.		16,732		18,566		52,013			61,063
Incentive income - affil.		671		6,431		528			6,575
Management fees - non-affil.		2,879		—		5,883			25
Incentive income - non-affil.		371		—		371			—
Credit Funds
Credit Hedge Funds
Management fees - affil.		32,397		31,815		105,406			89,030
Incentive income - affil.		—		—		(129	)		—
Management fees - non-affil.		262		277		1,074			686
Incentive income - non-affil.		—		279		8,308			1,264
Credit PE Funds
Management fees - affil.		10,857		12,139		32,171			26,574
Incentive income - affil.		1,380		1,207		20,631			8,021
Management fees - non-affil.		—		875		—			875
Other (A)
Management fees - non-affil.		4,908		—		8,603			—
Total
Management fees - affil.	$	107,752	$	106,926	$	327,182		$	321,003
Management fees - non-affil.	$	8,628	$	1,748	$	17,513		$	3,522
Incentive income - affil. (B)	$	7,487	$	7,638	$	53,892		$	14,596
Incentive income - non-affil.	$	371	$	279	$	8,679		$	1,264

(A)	Related to Logan Circle.

(B)	See “Deferred Incentive Income” below.

Deferred Incentive Income

Incentive income from certain Fortress Funds, primarily private equity funds and credit 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.

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), is generally received subsequent to year end, and has not been recognized for these funds during the nine months ended September 30, 2010 and 2009. If the

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, $69.4 million and $1.8 million of additional incentive income from affiliates would have been recognized during the nine months ended September 30, 2010 and 2009, respectively. 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.

During the nine months ended September 30, 2010 and 2009, Fortress recognized $20.6 million and $8.0 million, respectively, of incentive income distributions from its credit PE funds which represented “tax distributions.” These tax distributions are not subject to clawback and reflect a cash amount equal to the amount expected to be paid out by Fortress for taxes or tax-related distributions on the allocated income from such funds.

Deferred incentive income from the Fortress Funds, subject to contingencies, was comprised of the following, on an inception to date basis:


	Distributed- Gross		Distributed- Recognized (A)			Distributed- Unrecognized (B)			Undistributed net of intrinsic clawback (C) (D)
Deferred incentive income as of December 31, 2009	$	503,415	$	(343,318	)	$	160,097		$	168,686
Share of income (loss) of Fortress Funds		—		—			—			209,321
Distribution of incentive income		146,281		—			146,281			(146,281	)
Recognition of previously deferred incentive income		—		(53,493	)		(53,493	)		—

Deferred incentive income as of September 30, 2010	$	649,696	$	(396,811	)	$	252,885		$	231,726

(A)	All related contingencies have been resolved.

(B)	Reflected on the balance sheet.

(C)

At September 30, 2010, the net undistributed incentive income is comprised of $315.0 million of gross undistributed incentive income, net of $83.3 million of intrinsic clawback (see next page). The net undistributed incentive income amount represents the amount that would be received by Fortress from the related funds if such funds were liquidated on September 30, 2010 at their net asset values.

(D)

From inception to September 30, 2010, Fortress has paid $174.6 million of compensation expense under its employee profit sharing arrangements (Note 7) in connection with distributed incentive income, of which $27.9 million has not been expensed because management has determined that it is not probable of being incurred as an expense and will be recovered from the related employees. If the $315.0 million of gross undistributed incentive income were realized, Fortress would recognize and pay an additional $116.4 million of compensation expense.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

The following tables summarize information with respect to the Fortress Funds, other than the Castles, and their related incentive income thresholds as of September 30, 2010:


Fund (Vintage) (A)	Maturity Date (B)		Inception to Date Capital Invested		Inception to Date Distributions			Net Asset Value (“NAV”)			NAV Surplus (Deficit) (C)			Current Preferred Return Threshold (D)		Gain to Cross Incentive Income Threshold (E)		Undistributed Incentive Income (F)		Distributed Incentive Income (G)		Distributed Incentive Income Subject to Clawback (H)		Gross Intrinsic Clawback (I)		Net Intrinsic Clawback (I)
Private Equity Funds
NIH (1998)		Indefinite	$	415,574	$	(798,947	)	$	25,417			N/A		$	—		N/A	$	—	$	94,513	$	—	$	—	$	—
Fund I (1999) (J)		Apr-10		1,027,871		(2,744,046	)		126,745			1,842,920			—		N/A		11,225		304,204		—		—		—
Fund II (2002)		Feb-13		1,974,296		(3,045,345	)		297,204			1,368,253			—		N/A		18,441		250,811		49,320		—		—
Fund III (2004)		Jan-15		2,762,993		(1,307,375	)		1,464,620			9,002			900,732		891,730		—		66,903		66,903		66,903		45,108
Fund III Coinvestment (2004)		Jan-15		273,648		(90,925	)		183,091			368			118,409		118,041		—		—		—		—		—
Fund IV (2006)		Jan-17		3,639,561		(119,640	)		2,608,871			(911,050	)		1,068,754		1,979,804		—		—		—		—		—
Fund IV Coinvestment (2006)		Jan-17		762,696		(12,676	)		545,253			(204,767	)		231,309		436,076		—		—		—		—		—
GAGACQ Fund (2004)		Nov-09		545,663		(595,401	)		N/A			N/A			N/A		N/A		N/A		51,476		N/A		N/A		N/A
FRID (2005)		Apr-15		1,220,228		(505,605	)		394,209			(320,414	)		433,847		754,261		—		16,447		16,447		16,447		10,041
FRIC (2006)		May-16		328,754		(17,460	)		147,020			(164,274	)		122,419		286,693		—		—		—		—		—
FICO (2006)		Jan-17		724,525		—			(8,510	)		(733,035	)		248,147		981,182		—		—		—		—		—
FHIF (2006)		Jan-17		1,493,486		(63,154	)		1,313,052			(117,280	)		445,091		562,371		—		—		—		—		—
Mortgage Opportunities Fund III (2008)		Jun-13		193,861		(39,354	)		116,119			(38,388	)		—		38,388		—		—		—		—		—

																		$	29,666	$	784,354	$	132,670	$	83,350	$	55,149

PE Funds in Investment Period
Fund V (2007)		Feb-18	$	3,613,917	$	(2,594	)	$	2,109,275		$	(1,502,048	)	$	704,502	$	2,206,550	$	—	$	—	$	—	$	—	$	—
Fund V Coinvestment (2007)		Feb-18		936,145		(126	)		486,691			(449,328	)		202,917		652,245		—		—		—		—		—
FECI (2007)		Feb-18		982,779		(144	)		728,817			(253,818	)		267,635		521,453		—		—		—		—		—

																		$	—	$	—	$	—	$	—	$	—

Credit PE Funds
Long Dated Value Fund I (2005)		Apr-30	$	267,325	$	(45,656	)	$	254,243		$	32,574		$	66,233	$	33,659	$	—	$	—	$	—	$	—	$	—
Long Dated Value Fund II (2005)		Nov-30		270,783		(50,548	)		250,508			30,273			54,292		24,019		—		412		—		—		—
Long Dated Value Fund III (2007)		Feb-32		334,665		(76,224	)		324,922			66,481			—		N/A		10,447		1,983		—		—		—
LDVF Patent Fund (2007)		Nov-27		39,294		(9,631	)		51,126			21,463			—		N/A		1,480		484		—		—		—
Real Assets Fund (2007)		Jun-17	$	353,671	$	(131,791	)	$	269,330		$	47,450		$	—		N/A		6,113		1,316		—		—		—

																		$	18,040	$	4,195	$	—	$	—	$	—

Credit PE Funds in Investment Period
Assets Overflow Fund (2008)		May-18	$	90,500	$	(57,070	)	$	51,643		$	18,213		$	—		N/A	$	1,155	$	662	$	—	$	—	$	—
Credit Opportunities Fund (2008)		Oct-20		3,890,474		(3,503,137	)		1,666,204			1,278,867			—		N/A		131,200		122,172		87,997		—		—
FTS SIP L.P. (2008)		Oct-18		850,294		(728,519	)		389,650			267,875			—		N/A		16,420		37,044		32,218		—		—
Credit Opportunities Fund II (2009)		Jul-22		731,606		(33,057	)		751,521			52,972			—		N/A		10,767		—		—		—		—
Net Lease Fund I (2010)		Jan-23		30,529		(1,175	)		32,567			3,213			—		N/A		636		—		—		—		—
FCO MA LSS (2010)		Jun-24		48,635		(334	)		50,330			2,029			—		N/A		399		—		—		—		—
FCO MA II (2010)		Jun-22		120,281		(327	)		127,469			7,515			—		N/A		1,429		—		—		—		—
Japan Opportunity Fund (2009)		Jun-19		497,558		(187,219	)		400,554			90,215			—		N/A		18,988		—		—		—		—

																		$	180,994	$	159,878	$	120,215	$	—	$	—

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)


	Incentive Income Eligible NAV (K)		Gain to Cross Incentive Income Threshold (L)		Percentage of Incentive Income Eligible NAV Above Incentive Income Threshold (M)			Undistributed Incentive Income (N)		Year to date Incentive Income Crystallized (O)
Liquid Hedge Funds
Macro Funds (P)
Main fund investments	$	2,241,687	$	784		96.5	%	$	16,519	$	1,193
Sidepocket investments (Q)		101,036		60,181		N/A			347		—
Sidepocket investments - redeemers (R)		217,490		118,123		N/A			987		—
Managed accounts		600,747		—		100.0	%		7,279		—
Fortress Commodities Funds (S)
Main fund investments		888,589		25,352		15.4	%		216		1
Managed accounts		172,680		2,878		64.3	%		—		371
Credit Hedge Funds
Special Opportunities Funds (S)
Main fund investments	$	2,866,287	$	—		100.0	%	$	41,386	$	—
Sidepocket investments (Q)		153,389		1,947		N/A			3,285		—
Sidepocket investments - redeemers (R)		217,852		68,404		N/A			228		—
Main fund investments (liquidating) (T)		1,705,698		219,103		61.8	%		11,550		—
Managed accounts		40,416		5,875		0.0	%		—		265
Fortress Partners Funds (S)
Main fund investments		210,401		60,916		35.2	%		1,486		—
Sidepocket investments (Q)		101,070		22,499		N/A			389		—
Worden Funds
Main fund investments		140,204		—		100.0	%		2,704		—

(A)	Vintage represents the year in which the fund was formed.

(B)

Represents the contractual maturity date including the assumed exercise of all extension options, which in some cases may require the approval of the applicable fund advisory board. Private equity funds that have reached their maturity date are included in the table to the extent they have generated incentive income.

(C)

Represents the gain needed to cross the incentive income threshold (as described in (E) below), excluding the impact of any relevant performance (i.e. preferred return) thresholds (as described in (D) below). The aggregate “NAV deficit,” net of surpluses, of the private equity funds was $1.5 billion as of period end.

(D)	Represents the gain needed to achieve the current relevant performance thresholds, assuming the gain described in (C) above is already achieved.

(E)

Represents the immediate increase in NAV needed for Fortress to begin earning incentive income, including the achievement of any relevant performance thresholds. It does not include the amount needed to earn back intrinsic clawback (see (I) below), if any. Incentive income is not recorded as revenue until it is received and any related contingencies are resolved (see (H) below).

(F)	Represents the amount of additional incentive income Fortress would receive if the fund were liquidated at the end of the period at its NAV.

(G)	Represents the amount of incentive income previously received from the fund since inception.

(H)

Represents the amount of incentive income previously received from the fund which is still subject to contingencies and is therefore recorded on the consolidated balance sheet as Deferred Incentive Income. This amount will either be recorded as revenue when all related contingencies are resolved, or, if the fund does not meet certain performance thresholds, will be returned by Fortress to the fund (i.e., “clawed back”).

(I)

Represents the amount of incentive income previously received from the fund that would be clawed back (i.e., returned by Fortress to the fund) if the fund were liquidated at the end of the period at its NAV, excluding the effect of any tax adjustments. Employees, former employees and affiliates of Fortress would be required to return a portion of this incentive income that was paid to them under profit sharing arrangements. “Gross” and “Net” refer to amounts that are gross and net, respectively, of this employee/affiliate portion of the intrinsic clawback. Fortress remains liable to the funds for these amounts even if it is unable to collect the amounts from employees/affiliates. Fortress withheld a portion of the amounts due to employees under these profit sharing arrangements as a reserve against future clawback; as of September 30, 2010, Fortress held $41.9 million of such amounts on behalf of employees related to all of the private equity funds.

(J)	Fund I undistributed and distributed incentive income amounts are presented for the total fund, of which Fortress is entitled to approximately 50%. Distributed incentive income subject to clawback for Fund I is presented with respect to Fortress’s portion only.

(K)	Represents the portion of a fund’s NAV that is eligible to earn incentive income.

(L)

Represents, for those fund investors whose NAV is below the performance threshold Fortress needs to obtain before it can earn incentive income from such investors (their “incentive income threshold” or “high water mark”), the amount by which their aggregate incentive income thresholds exceed their aggregate NAVs. The amount by which the NAV of each investor within this category is below their respective incentive income

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

threshold varies and, therefore, Fortress may begin earning incentive income from certain investors before this entire amount is earned back. Fortress earns incentive income whenever the assets of new investors, as well as of investors whose NAV exceeds their incentive income threshold, increase in value.

(M)

Represents the percentage which is computed by dividing (i) the aggregate NAV of all investors who are at or above their respective incentive income thresholds, by (ii) the total incentive income eligible NAV of the fund. The amount by which the NAV of each fund investor who is not in this category is below their respective incentive income threshold varies, and may vary significantly. This percentage represents the performance of only the main fund investments relative to their respective incentive income thresholds. It does not incorporate the impact of unrealized losses on sidepocket investments that can reduce the amount of incentive income earned from certain funds. See footnote Q below.

(N)

Represents the amount of additional incentive income Fortress would earn from the fund if it were liquidated at the end of the period at its NAV. This amount is currently subject to performance contingencies generally until the end of the year or, in the case of sidepocket investments, until such investments are realized. Main Fund Investments (Liquidating) pay incentive income only after all capital is returned.

(O)	Represents the amount of incentive income Fortress has earned in the current period from the fund which is no longer subject to contingencies.

(P)

Represents the Drawbridge Global Macro Funds and Fortress Macro Funds. The Drawbridge Global Macro SPV (the “SPV”), which was established in February 2009 to liquidate illiquid investments and distribute the proceeds to then existing investors, is not subject to incentive income and is therefore not presented in the table. However, realized gains or losses within the SPV can decrease or increase, respectively, the gain needed to cross the incentive income threshold for investors with a corresponding investment in the main fund. The impact of the unrealized gains and losses within the SPV at September 30, 2010, as if they became realized, was immaterial to the amounts presented in the table for the Macro main fund.

(Q)

Represents investments held in sidepockets (also known as special investment accounts), which generally have investment profiles similar to private equity funds. The performance of these investments may impact Fortress’s ability to earn incentive income from main fund investments. For the credit hedge funds, realized and unrealized losses from individual sidepockets below original cost may reduce the incentive income earned from main fund investments. For the Macro Funds, only realized losses from individual sidepockets reduce the incentive income earned from main fund investments. Based on current unrealized losses in Macro Fund sidepockets, if all of the Macro Fund sidepockets were liquidated at their NAV at September 30, 2010, the undistributed incentive income from the Macro main fund would be decreased by approximately $1.2 million.

(R)	Represents investments held in sidepockets for investors with no corresponding investment in the related main fund investments. In the case of the Macro Funds, such investors may have investments in the SPV (see (P) above).

(S)	Includes onshore and offshore funds.

(T)	Relates to accounts where investors have provided return of capital notices and are subject to payout as underlying fund investments are realized.

Private Equity Funds and Credit PE Funds

During the nine months ended September 30, 2010, Fortress formed new private equity funds or credit PE funds which had capital commitments as follows as of September 30, 2010 (based on September 30, 2010 foreign exchanges rates):


Fortress’s commitments	$	18,914
Fortress’s affiliates’ commitments		23,700
Third party investors’ commitments		656,429

Total capital commitments	$	699,043

Liquid Hedge Funds and Credit Hedge Funds

During the nine months ended September 30, 2010, Fortress formed, or became the manager of, hedge funds with net asset values as follows as of September 30, 2010:


	Liquid		Credit
Fortress	$	—	$	220
Fortress’s affiliates		—		—
Third party investors		—		140,204

Total NAV (A)	$	—	$	140,424

(A)	Or other fee paying basis, as applicable.

Redemption notices received, and redemption payments which are made in periods after notices are received, including affiliates, have been as follows:


	Liquid Hedge Funds				Credit Hedge Funds
Nine Months Ended September 30,	Redemption Notices Received		Redemptions Paid During the Period		Redemption Notices Received		Redemptions Paid During the Period
2010	$	692,730	$	1,450,098	$	789,619	$	1,055,462
2009	$	1,427,563	$	4,159,798	$	1,548,060	$	423,319

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(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. In some cases, including all of the credit hedge funds, these agreements allow for delayed payment. In particular, the redemptions within the flagship credit hedge fund in 2008 and 2009, and the redemptions within the flagship liquid hedge fund in the fourth quarter of 2008 which related to illiquid investments, were subject to delayed payment.

Traditional Asset Management

In February 2010, Fortress announced that certain of its consolidated affiliates had agreed to acquire 100% of the equity of Logan Circle Partners, L.P. (“Logan Circle”) and its general partner, Logan Circle Partners GP, LLC, for approximately $19 million, with the potential for an additional payment at the end of 2011. The closing of the transaction occurred on April 16, 2010. The additional payment, or contingent consideration, is contingent on the growth and performance of Logan Circle’s business (but not contingent on the continued employment of any employees). The contingent consideration is payable in cash or Class A shares, at Fortress’s option, and had an estimated fair value of approximately $4 million at closing (maximum payment of $28 million). In addition, Fortress may make payments to the prior owners of Logan Circle, contingent upon the settlement of certain liabilities subject to pending litigation, of up to $2 million as of the date of acquisition. Fortress attributed a nominal fair value to these possible additional payments to the prior owners of Logan Circle. The total purchase price was approximately $23 million, which has been allocated approximately as follows: $14 million to goodwill (all expected to be tax deductible), $8 million to amortizable intangible assets, and $1 million to miscellaneous net assets.

The goodwill and other intangible assets have been recorded in Other Assets. The intangible assets are being amortized over their estimated useful lives, which range from 1 to 8 years. The contingent consideration is measured at fair value with changes in fair value being recorded as a gain (loss). This fair value is measured based on the expected performance of Logan Circle in 2011 and a discount rate, and therefore is considered a Level 3 valuation (Note 3). During the period from April 16, 2010 through September 30, 2010, the fair value of the contingent consideration decreased by approximately $28,000, which is recorded in Gains (Losses).

Fortress will test the Logan Circle goodwill and other intangible assets for impairment annually in the fourth quarter of each calendar year, or whenever events or circumstances indicate that it is more likely than not that Logan Circle’s fair value has declined below its carrying value. Logan Circle’ fair value will be estimated based on the following key assumptions: expected retention rate of existing investors, growth expectations, estimated future fee rates, and estimated operating margin. These assumptions are determined primarily based on Logan Circle’s past experience, Logan Circle’s historical and recent investment performance, current industry trends, and general economic expectations. These assumptions, particularly those relating to investor retention and growth expectations, are highly subjective and are subject to significant uncertainty with respect to future events. Continued challenging credit market conditions could adversely impact the value of Logan Circle.

In connection with the acquisition of Logan Circle, Fortress established a compensation plan for former Logan Circle employees who became employees of Fortress (the “Logan Circle Comp Plan”). The Logan Circle Comp Plan is further described in Note 7. From the date of acquisition through September 30, 2010, Logan Circle generated approximately $9 million of revenues (primarily management fees from non-affiliates, recorded in Other Revenues) and $(9) million of net (loss). This net (loss) does not include the above referenced change in fair value of the contingent consideration, but does include approximately $4 million of allocated corporate overhead.

Logan Circle is a fixed income asset manager with approximately $11.4 billion in assets under management as of the date of acquisition. With this acquisition, Fortress has expanded its investment management business to offer fixed income products to investors worldwide. Logan Circle is initially being reported in the “unallocated” section of Fortress’s segments until such time as it becomes material to Fortress’s operations.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

3. INVESTMENTS

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

Investments can be summarized as follows:


	September 30, 2010		December 31, 2009
Equity method investees	$	855,748	$	809,757
Equity method investees, held at fair value		50,761		56,710

Total equity method investments		906,509		866,467
Options in equity method investees		947		748

Total investments	$	907,456	$	867,215

Gains (losses) from investments can be summarized as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net realized gains (losses)	$	(637	)	$	(408	)	$	(292	)	$	(1,180	)
Net realized gains (losses) from affiliate investments		581			315			(601	)		301
Net unrealized gains (losses)		(3,116	)		—			(3,753	)		—
Net unrealized gains (losses) from affiliate investments		5,197			20,282			(5,714	)		38,036

Total gains (losses) from investments	$	2,025		$	20,189		$	(10,360	)	$	37,157

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)						Fortress’s Equity in Net Income (Loss)
	September 30,		December 31,		Three Months Ended Sept 30,						Nine Months Ended Sept 30,
	2010		2009		2010			2009			2010			2009
Private equity funds, excluding NIH (A)	$	539,865	$	506,383	$	4,326		$	22,197		$	21,012		$	18,366
NIH		1,867		2,486		388			300			207			144
Newcastle (B)		3,180		2,144		N/A			N/A			N/A			N/A
Eurocastle (B)		2,238		2,616		N/A			N/A			N/A			N/A

Total private equity		547,150		513,629		4,714			22,497			21,219			18,510
Liquid hedge funds		12,480		12,296		245			1,285			266			3,254
Credit hedge funds		224,275		220,511		9,603			11,299			20,958			25,641
Credit PE funds		117,157		115,896		2,399			5,307			(1,537	)		8,806
Other		5,447		4,135		(20	)		(43	)		2,066			342

	$	906,509	$	866,467	$	16,941		$	40,345		$	42,972		$	56,553

(A)	Includes Fortress’s direct investment in GAGFAH (XETRA:GFJ) common stock (a private equity portfolio company).

(B)	Fortress elected to record these investments, as well as its direct investment in GAGFAH, at fair value pursuant to the fair value option for financial instruments.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

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


	Nine Months Ended September 30, 2010
	Private Equity									Liquid			Credit
	NIH			Other Funds (A)			Castles (B)			Hedge Funds			Hedge Funds			PE Funds			Other			Total
Investment, beginning	$	2,486		$	506,383		$	4,760		$	12,296		$	220,511		$	115,896		$	4,135		$	866,467
Earnings from equity method investees		207			21,012			N/A			266			20,958			(1,537	)		2,066			42,972
Other comprehensive income from equity method investees		(15	)		—			N/A			—			—			(4,838	)		—			(4,853	)
Contributions to equity method investees		—			21,728			—			10,295			1,034			37,995			466			71,518
Distributions of earnings from equity method investees		(207	)		(55	)		N/A			(174	)		(14	)		(4,465	)		(715	)		(5,630	)
Distributions of capital from equity method investees		(604	)		(2,596	)		N/A			(10,203	)		(18,214	)		(25,898	)		(505	)		(58,020	)

Total distributions from equity method investees		(811	)		(2,651	)		N/A			(10,377	)		(18,228	)		(30,363	)		(1,220	)		(63,650	)

Mark to fair value - during period (C)		N/A			(3,699	)		836			N/A			N/A			N/A			N/A			(2,863	)
Translation adjustment		—			(2,908	)		(178	)		—			—			4			—			(3,082	)

Investment, ending	$	1,867		$	539,865		$	5,418		$	12,480		$	224,275		$	117,157		$	5,447		$	906,509

Ending balance of undistributed earnings	$	—		$	126			N/A		$	12		$	7,238		$	3,234		$	1,661		$	12,271

(A)	Includes Fortress’s direct investment in GAGFAH (XETRA:GFJ) common stock (a private equity portfolio company).

(B)	Fortress elected to record these investments, as well as its direct investment in GAGFAH, at fair value pursuant to the fair value option for financial instruments.

(C)	Recorded to Gains (Losses).

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. NIH, the Castles, GAGFAH and Other are not presented as they are insignificant to Fortress’s investments.


	*Private Equity Funds excluding NIH*
	September 30, 2010			December 31, 2009
Assets	$	11,637,348		$	10,993,214
Debt		(490,651	)		(705,432	)
Other liabilities		(213,376	)		(275,702	)

Equity	$	10,933,321		$	10,012,080

Fortress’s Investment (A)	$	539,865		$	506,383

Ownership (B)		4.9	%		5.1	%


	Nine Months Ended September 30,
	2010			2009
Revenues and gains (losses) on investments	$	705,106		$	1,864,675
Expenses		(172,722	)		(188,682	)

Net Income (Loss)	$	532,384		$	1,675,993

Fortress’s equity in net income (loss)	$	21,012		$	18,366

(A)	Includes Fortress’s direct investment in GAGFAH (XETRA:GFJ) common stock (a private equity portfolio company). GAGFAH’s summary financial information is not included in this table.

(B)	Excludes ownership interests held by other Fortress Funds, the Principals, employees and other affiliates.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)


	*Liquid Hedge Funds*						*Credit Hedge Funds*						*Credit PE Funds (B) (C)*
	September 30, 2010			December 31, 2009			September 30, 2010			December 31, 2009			September 30, 2010			December 31, 2009
Assets	$	5,719,045		$	9,641,111		$	12,106,558		$	11,048,076		$	5,859,279		$	6,243,776
Debt		—			—			(3,838,424	)		(2,938,213	)		(593,143	)		(1,767,331	)
Other liabilities		(1,899,355	)		(6,187,965	)		(654,860	)		(667,604	)		(255,180	)		(95,807	)
Non-controlling interest		—			—			(9,320	)		(16,600	)		(2,713	)		(153,016	)

Equity	$	3,819,690		$	3,453,146		$	7,603,954		$	7,425,659		$	5,008,243		$	4,227,622

Fortress’s Investment	$	12,480		$	12,296		$	224,275		$	220,511		$	117,157		$	115,896

Ownership (A)		0.3	%		0.4	%		2.9	%		3.0	%		2.3	%		2.7	%


	Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009			2010			2009
Revenues and gains (losses) on investments	$	242,814		$	899,569		$	1,170,760		$	1,307,348		$	871,615		$	1,559,414
Expenses		(104,125	)		(130,254	)		(224,101	)		(216,459	)		(214,131	)		(98,119	)

Net Income (Loss)	$	138,689		$	769,315		$	946,659		$	1,090,889		$	657,484		$	1,461,295

Fortress’s equity in net income (loss)	$	266		$	3,254		$	20,958		$	25,641		$	(1,537	)	$	8,806

(A)	Excludes ownership interests held by other Fortress Funds, the Principals, employees and other affiliates.

(B)

Includes one entity which is recorded on a one quarter lag (i.e., the balances reflected for this entity are for the periods ended June 30, 2010 and 2009, respectively) and two entities which are recorded on a one month lag. They are recorded on a lag because they are foreign entities and do not provide financial reports under U.S. GAAP within the reporting timeframe necessary for U.S. public entities.

(C)	Includes certain entities in which Fortress has both a direct and an indirect investment.

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 nine months ended September 30, 2010 which caused a change in Fortress’s accounting, except as described below.

The following table sets forth certain information as of September 30, 2010 regarding entities formed during the nine months ended September 30, 2010 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.


	Fortress is not Primary Beneficiary
Business Segment	Gross Assets		Financial Obligations (A)		Fortress Investment (B)		Notes
Credit Hedge Funds	$	152,719	$	6,018	$	294	(C) (D)
Credit PE Funds	$	280,325	$	189,314	$	728	(C)

(A)

(B)

Represents Fortress’s maximum exposure to loss with respect to these entities, which includes direct and indirect investments in the funds. In addition to the table above, Fortress is exposed to potential changes in cash flow and revenues attributable to the management fees and/or incentive income Fortress earns from these entities.

(C)

Fortress is not the primary beneficiary of these entities, which represent investing vehicles and master funds, because the related funds and feeder funds (which are not consolidated) are more closely associated with these funds than Fortress based on both a quantitative and qualitative analysis. The investing vehicles and master funds were formed for the sole purpose of acting as investment vehicles for the related funds.

(D)	Fortress’s investment includes $74,000 and $16,000 of other receivables from the credit hedge funds and credit PE funds, respectively.

In June 2009, the FASB issued new guidance on consolidation which became effective for Fortress on January 1, 2010. This guidance changes the definition of a variable interest entity (“VIE”) and changes the methodology to determine who is the primary beneficiary of, or in other words who consolidates, a VIE. Generally, the changes are expected to cause more entities to be defined as VIE’s and to shift consolidation to those entities that exercise day-to-day control over the VIE’s, such as investment managers. In February 2010, the FASB updated this guidance to defer its application to certain managed entities, particularly investment companies and similar entities. As a result, this guidance had no material impact on Fortress’s financial position, results of operations or liquidity.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

The following table sets forth certain information regarding VIEs in which Fortress held a variable interest. The September 30, 2010 amounts presented below include VIEs formed during the period (as shown in the immediately preceding table) 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.


	Fortress is not Primary Beneficiary
	September 30, 2010						December 31, 2009
Business Segment	Gross Assets		Financial Obligations (A)		Fortress Investment (B)		Gross Assets		Financial Obligations (A)		Fortress Investment (B)		Notes
Private Equity Funds	$	335,766	$	192,266	$	2,130	$	352,787	$	197,791	$	2,740	(C) (D)
Castles		10,581,680		10,538,557		18,464		11,150,750		12,066,365		13,335	(C) (D)
Liquid Hedge Funds		4,604,576		1,741,280		3,940		7,773,895		5,090,344		7,170	(C) (D)
Credit Hedge Funds		2,415,765		153,509		14,738		2,153,220		598,216		3,132	(C) (D)
Credit PE Funds		550,589		189,314		1,254		268,919		5,300		3,710	(C) (D)

(A)

Represents financial obligations at the fund level, which are not recourse to Fortress. Financial obligations include financial borrowings, derivative liabilities and short securities. In many cases, these funds have additional debt within unconsolidated subsidiaries. Of the financial obligations represented herein as of September 30, 2010, $192.3 million, $9,891.5 million, $118.0 million and $189.3 million represent financial borrowings which have weighted average maturities of 0.6, 3.7, 2.5, and 0.2 years for the private equity funds, Castles, credit hedge funds and credit PE funds, respectively. Of the financial obligations represented herein as of December 31, 2009, $197.8 million, $11,438.7 million, $551.4 million, and $5.3 million represent financial borrowings which have weighted average maturities of 1.4, 4.5, 3.2, and 0.5 years for the private equity funds, Castles, credit hedge funds, and credit PE funds, respectively.

(B)

Represents Fortress’s maximum exposure to loss with respect to these entities, which includes direct and indirect investments in these funds. In addition to the table above, Fortress is exposed to potential changes in cash flow and revenues attributable to the management fee and/or incentive income Fortress earns from those entities.

(C)

Fortress is not the primary beneficiary of the Castles and NIH because it does not absorb a majority of their expected income or loss based on a quantitative analysis. Of the remaining entities represented herein, which represent investing vehicles, intermediate entities and master funds, Fortress is not the primary beneficiary because the related funds, intermediate entities and feeder funds (which are not consolidated) are more closely associated with these funds than Fortress based on both a quantitative and qualitative analysis. The investing vehicles, intermediate entities and master funds were formed for the sole purpose of acting as investment vehicles for the related funds.

(D)

As of September 30, 2010, Fortress’s investment includes $7.7 million, $12.1 million, and $0.2 million of management fees receivable from the Castles, credit hedge funds, and credit PE funds, respectively, as well as $0.7 million in incentive income receivable from the liquid hedge funds. As of September 30, 2010, Fortress’s investment also includes $0.2 million, $4.4 million, $1.4 million and $1.2 million of expense reimbursements and other receivables from the private equity funds, Castles, liquid hedge funds and credit hedge funds, respectively. As of December 31, 2009, Fortress’s investment includes $4.1 million, $0.5 million, and $1.0 million of management fees receivable from the Castles, credit hedge funds, and credit PE funds, respectively, as well as $3.7 million and $0.9 million in incentive income receivable from the liquid hedge funds and credit hedge funds, respectively. As of December 31, 2009, Fortress’s investment also includes $0.2 million, $3.7 million, $1.5 million, $0.6 million and $0.7 million of expense reimbursements and other receivables from the private equity funds, Castles, liquid hedge funds, credit hedge funds and credit PE funds, respectively. In addition, Fortress has remaining capital commitments to certain credit PE funds which are VIEs which aggregated $0.9 million at September 30, 2010.

In March 2010, Fortress determined that a reconsideration event had occurred with respect to an operating subsidiary (“FCF”) of one of its private equity funds. FCF provides operating services to all of Fortress’s private equity funds and is reimbursed for related costs by the private equity funds based on a contractual formula. Therefore, FCF by design does not produce net income or have equity. Historically, Fortress has provided temporary advances to FCF as a result of certain funds having insufficient current liquidity to make their required reimbursements on a timely basis; these advances were deemed fully collectable. In March 2010, Fortress determined it would make advances to FCF related to a fund from which reimbursement was subject to significant uncertainty. Management determined that these advances would represent the provision of financial support to FCF. As a result of this reconsideration event, FCF was deemed to be a VIE and Fortress, as a result of directing the operations of FCF through its management contracts with the private equity funds, and providing financial support to FCF beginning in March 2010, was deemed to be its primary beneficiary. Therefore, Fortress consolidated FCF beginning in March 2010, which resulted in a gross up of reimbursement revenues, compensation and miscellaneous expenses, receivables, and payables, but had no impact on Fortress’s net income or equity. As of September 30, 2010, FCF’s gross assets were approximately $36.2 million, primarily comprised of affiliate receivables. Fortress’s exposure to loss from FCF is limited to its outstanding advances, which were approximately $13.5 million at September 30, 2010, plus any future advances. Subsequent to Fortress’s consolidation of FCF, these advances are eliminated in consolidation. FCF’s creditors do not have recourse to Fortress’s other assets.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

Fair Value of Financial Instruments

The following table presents information regarding Fortress’s financial instruments that are recorded at fair value. Investments denominated in foreign currencies have been translated at the period end exchange rate. Changes in fair value are recorded in Gains (Losses).


	Fair Value				Valuation Method
	September 30, 2010		December 31, 2009
Assets
Newcastle and Eurocastle common shares	$	3,536	$	2,662	Level 1 - Quoted prices in active markets for identical assets
GAGFAH common shares	$	45,343	$	51,950	Level 1 - Quoted prices in active markets for identical assets
Eurocastle convertible debt (A)	$	1,882	$	2,098	Level 3 - Binomial lattice-based option valuation models, adjusted for non-option
Newcastle and Eurocastle options	$	947	$	748	Level 2 - Lattice-based option valuation models using significant observable inputs
Liabilities
Logan Circle Contingent Consideration	$	3,972	$	—	Level 3 - Internal model using significant unobservable inputs
Derivatives	$	3,753	$	—	Level 2 - See below

(A)

The debt bears interest at 20% per annum and is perpetual, but ECT may redeem the securities after June 2011 at a premium of 20%. As of September 30, 2010, it had a face amount of €1.2 million ($1.6 million) and was convertible into ECT common shares at €0.30 per share. The fair value was determined using the market value approach.

Fortress’s interests in instruments measured at fair value using Level 3 inputs changed during the nine months ended September 30, 2010 as follows:


	Assets			Liabilities
Balance at December 31, 2009	$	2,098		$	—
Total gains (losses) included in net income (including foreign currency translation)		(216	)		28
Issuance of Logan Circle contingent consideration (Note 2)		—			(4,000	)

Balance at September 30, 2010	$	1,882		$	(3,972	)

See Note 4 regarding the fair value of Fortress’s outstanding debt.

Derivatives

Fortress is exposed to certain risks relating to its ongoing business operations. The primary risk managed by Fortress using derivative instruments is foreign currency risk. Fortress enters into foreign exchange forward contracts to economically hedge the risk of fluctuations in foreign exchange rates with respect to certain foreign currency denominated assets. Foreign exchange forward contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. Fortress entered into four foreign exchange forward contracts in June 2010 which were not designated as hedges for accounting purposes. Gains and losses on these contracts are reported currently in Gains (Losses).

Fortress’s derivative instruments are carried at fair value and are generally valued using models with observable market inputs that can be verified and which do not involve significant judgment. The significant observable inputs used in determining the fair value of our Level 2 derivative contracts are contractual cash flows and market based parameters such as foreign exchange rates.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

Fortress’s derivatives are recorded as follows:


	Balance Sheet Location		Fair Value September 30, 2010			Notional Amount September 30, 2010		Gains/(Losses) Nine Months Ended September 30, 2010			Maturity Date
Foreign Exchange forward contracts (not designated as hedges)		Other Liabilities	($	3,753	)	€	20,000	($	4,284	)		June 2011

The counterparty on this derivative is Citibank N.A.

4. DEBT OBLIGATIONS

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


									September 30, 2010
	Face Amount and								Weighted			Weighted
	Carrying Value						Final		Average			Average
	September 30,		December 31,		Contractual		Stated		Funding			Maturity
Debt Obligation	2010		2009		Interest Rate		Maturity		Cost (A)			(Years)
Credit agreement (B)
Revolving debt (C)	$	—	$	—		LIBOR + 2.50% (D)		May 2012		—			—
Term loan		350,000		350,000		LIBOR + 2.50%		May 2012		3.53	%		1.42
Delayed term loan (C)		5,900		47,825		LIBOR + 2.50%		May 2012		2.97	%		0.04

Total	$	355,900	$	397,825						3.52	%		1.40

(A)	The weighted average funding cost is calculated based on the contractual interest rate (utilizing the most recently reset LIBOR rate) plus the amortization of deferred financing costs. The most recently reset LIBOR rate was 0.25%.

(B)	Collateralized by substantially all of Fortress Operating Group’s assets as well as Fortress Operating Group’s rights to fees from the Fortress Funds and its equity interests therein.

(C)

Approximately $65.7 million was undrawn on the revolving debt facility as of September 30, 2010. The revolving debt facility includes a $25 million letter of credit subfacility of which $9.3 million was utilized. Lehman Brothers Commercial Paper, Inc., which is committed to fund $7.2 million (including $0.9 million of the outstanding letters of credit) of the $75 million revolving credit facility, has filed for bankruptcy protection, did not fund its pro rata portion of the last borrowing under this facility, and it is reasonably possible that it will not fund its portion of the commitments. As a result, $59.5 million of the undrawn amount was available.

(D)	Subject to unused commitment fees of 0.50% per annum.

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 approximately equal to its face amount at September 30, 2010.

Fortress was in compliance with all of its debt covenants as of September 30, 2010. The following table sets forth the financial covenant requirements as of September 30, 2010 (dollars in millions).


	September 30, 2010 (dollars in millions)
	Requirement		Actual		Notes
AUM	³$	20,000	$	43,992		(A	)
Consolidated Leverage Ratio	£	3.50		1.10		(B	)
Required Investment Assets	³$	378	$	1,018		(C	)
Fortress Fund Investments	³$	151	$	683		(C	)
Total Investments	³$	227	$	844		(C	)

(A)	Impacted by capital raised in funds, redemptions from funds, and valuations of fund investments.

(B)	Impacted by EBITDA, as defined, which is impacted by the same factors as distributable earnings, except EBITDA is not impacted by changes in clawback reserves or gains and losses, including impairment, on investments.

(C)	Impacted by capital investments in funds and the valuation of such funds’ investments.

In October 2010, Fortress entered into a new credit agreement and repaid its existing credit agreement in full (Note 11).

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

5. INCOME TAXES AND TAX RELATED PAYMENTS

For the nine months ended September 30, 2010, an estimated annual effective tax rate of (1.74)% 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 September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Current
Federal income tax expense (benefit)	$	(3,134	)	$	(232	)	$	(505	)	$	387
Foreign income tax expense (benefit)		631			433			1,723			1,424
State and local income tax expense (benefit)		6			1,951			3,032			5,786

		(2,497	)		2,152			4,250			7,597

Deferred
Federal income tax expense (benefit)		(3,047	)		(1,956	)		(2,518	)		(5,227	)
Foreign income tax expense (benefit)		14			(127	)		45			219
State and local income tax expense (benefit)		985			(3,185	)		2,864			(7,420	)

		(2,048	)		(5,268	)		391			(12,428	)

Total expense (benefit)	$	(4,545	)	$	(3,116	)	$	4,641		$	(4,831	)

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


	September 30, 2010			December 31, 2009
Total deferred tax assets	$	565,487		$	545,253
Valuation allowance		(106,472	)		(104,614	)

Net deferred tax assets	$	459,015		$	440,639

Total deferred tax liabilities (A)	$	535		$	456

(A)	Included in Other Liabilities

For the nine months ended September 30, 2010, a deferred income tax benefit of $1.0 million was credited to other comprehensive income, primarily related to the equity method investees. A current income tax benefit of $0.7 million was credited to paid-in capital, related to (i) dividend equivalent payments on RSUs (Note 8), and (ii) distributions to Fortress Operating Group restricted partnership unit holders (Note 7), which are currently deductible for income tax purposes.

The exchange by the principals of Fortress Operating Group units and Class B shares for Class A shares during the second quarter (as described in Note 8) increased FIG Corp’s ownership percentage in the underlying Fortress Operating Group entities. As a result of the increased ownership, the deferred tax asset was increased by $7.2 million with an offsetting increase of $2.8 million to the valuation allowance. In addition, the deferred tax asset was increased by $8.2 million related to a step-up in tax basis due to the share exchange which will result in additional tax deductions, while the liability for the tax receivable agreement was increased by $5.7 million to represent 85% of the expected cash tax savings resulting from the increase in tax basis deductions. The establishment of these net deferred tax assets, net of the change in the tax receivable agreement liability, as well as a $6.0 million increase to the deferred tax asset relating to the vesting of RSUs, also increased paid-in capital.

Tax Receivable Agreement

Although the tax receivable agreement payments are calculated based on annual tax savings, for the nine months ended September 30, 2010, the payments which would have been made pursuant to the tax receivable agreement, if such period was calculated by itself, were estimated to be $11.8 million.

In April 2010, $14.7 million was paid out under the tax receivable agreement related to prior periods.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(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						Credit
	Funds		Castles		Liquid Hedge Funds		Hedge Funds		PE Funds		Other		Total
September 30, 2010
Management fees and incentive income (A)	$	59,170	$	7,653	$	723	$	14,762	$	11,392	$	—	$	93,700
Expense reimbursements (A)		1,046		3,196		2,077		7,851		3,258		—		17,428
Expense reimbursements - FCF (B)		34,489		—		—		—		—		—		34,489
Dividends and distributions		—		—		—		—		—		—		—
Other		78		432		—		—		2		1,940		2,452

Total	$	94,783	$	11,281	$	2,800	$	22,613	$	14,652	$	1,940	$	148,069


	Private Equity						Credit
	Funds		Castles		Liquid Hedge Funds		Hedge Funds		PE Funds		Other		Total
December 31, 2009
Management fees and incentive income (C)	$	17,116	$	4,087	$	7,557	$	4,038	$	11,200	$	—	$	43,998
Expense reimbursements (C)		5,471		3,750		1,802		4,752		3,010		—		18,785
Dividends and distributions		—		—		—		—		—		—		—
Other		88		179		—		—		1		1,460		1,728

Total	$	22,675	$	8,016	$	9,359	$	8,790	$	14,211	$	1,460	$	64,511

(A)	Net of allowances for uncollectable management fees and expense reimbursements of $11.5 million and $1.2 million, respectively.

(B)	Represents expense reimbursements due to FCF, a consolidated VIE (Note 3).

(C)	Net of allowances for uncollectable management fees and expense reimbursements of $13.8 million and $0.8 million, respectively.

As of September 30, 2010, amounts due from Fortress Funds recorded in Due from Affiliates included $59.0 million of past due management fees, excluding $11.6 million which has been subordinated to other liabilities of the related fund and has been fully reserved by Fortress, and $12.6 million of private equity general and administrative expenses advanced on behalf of certain Fortress Funds. Although such funds are currently experiencing liquidity issues, Fortress believes the unreserved fees will ultimately be collectable as the NAV’s of the respective funds exceed the amounts owed.

Due to affiliates was comprised of the following:


	September 30, 2010		December 31, 2009
Principals
- Tax receivable agreement - Note 5	$	316,305	$	326,467
- Distributions payable on Fortress Operating Group units		11,821		16,552
- Distributions payable on other non-controlling interests		4,898		—
Other		8,492		2,957

	$	341,516	$	345,976

Other Related Party Transactions

For the nine months ended September 30, 2010 and 2009, Other Revenues included approximately $5.1 million and $5.0 million, respectively, of revenues from affiliates, primarily dividends.

Fortress has entered into cost sharing arrangements with the Fortress Funds, including market data services and subleases of certain of its office space. Expenses borne by the Fortress Funds under these agreements are generally paid directly by those entities (i.e. they are generally not paid by Fortress and reimbursed). For the nine months ended September 30, 2010 and 2009, these expenses, mainly related to subscriptions to market data services, approximated $12.6 million and $12.5 million, respectively.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

In February 2010, two employees terminated their employment at Fortress in order to form their own management company. Effective April 1, 2010, a subsidiary of Fortress entered into a sub-advisory agreement with them and their management company for the purpose of continuing to have them advise on an existing portfolio of illiquid investments in emerging markets on which they previously worked while they were employees. Pursuant to the terms of the agreement, the subsidiary will pay their management company an annual advisory fee and pay them a percentage of realized net proceeds from certain of such investments. As part of the agreement, the former employees have agreed to notify Fortress about certain investment opportunities in which they are involved. Through September 30, 2010, such payments have aggregated $1.1 million.

In April 2010, Fortress entered into a software sublicensing agreement on an “as is” basis with a subsidiary of several Fortress Funds. The software is designed to facilitate cash management, legal entity management and data reconciliation. Fortress paid a one-time licensing fee of $150,000. The license is perpetual and irrevocable and for the non-exclusive use of Fortress’s affiliates.

Principals’ and Others’ Interests in Consolidated Subsidiaries

These amounts relate to equity interests in Fortress’s consolidated, but not wholly owned, subsidiaries, which are held by the Principals, employees and others.

This balance sheet caption was comprised of the following:


	September 30, 2010		December 31, 2009
Principals’ Fortress Operating Group units	$	290,612	$	301,469
Employee interests in majority owned and controlled fund advisor and general partner entities		40,991		35,789
Other		1,309		839

Total	$	332,912	$	338,097

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Principals’ Fortress Operating Group units	$	(179,768	)	$	(133,712	)	$	(520,543	)	$	(482,261	)
Employee interests in majority owned and controlled fund advisor and general partner entities		2,554			2,013			6,800			4,234
Other		(7	)		(5	)		484			63

Total	$	(177,221	)	$	(131,704	)	$	(513,259	)	$	(477,964	)

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

The purpose of this schedule is to disclose the effects of changes in Fortress’s ownership interest in Fortress Operating Group on Fortress’s equity:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net income (loss) attributable to Fortress	$	(94,655	)	$	(58,602	)	$	(271,190	)	$	(170,353	)
Transfers (to) from the Principals’ and Others’ Interests:
Increase in Fortress’s shareholders’ equity for the conversion of Fortress Operating Group units by the Principals		—			4,100			7,188			4,100
Increase in Fortress’s shareholders’ equity for the delivery of Class A shares primarily in connection with vested RSUs		2,795			—			10,328			—
Decrease in Fortress’s shareholders’ equity for the purchase of Fortress Operating Group units in connection with an equity offering		—			—			—			(144,572	)

Change from net income (loss) attributable to Fortress and transfers (to) from Principals’ and Others’ Interests	$	(91,860	)	$	(54,502	)	$	(253,674	)	$	(310,825	)

7. EQUITY-BASED AND OTHER COMPENSATION

Fortress’s total compensation and benefits expense, excluding Principals Agreement compensation, is comprised of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Equity-based compensation, per below	$	57,070	$	60,883	$	169,100	$	166,707
Profit-sharing expense, per below		32,286		8,949		111,720		20,798
Discretionary bonuses		54,932		31,396		133,611		77,545
Other payroll, taxes and benefits		39,819		30,805		108,598		89,675

	$	184,107	$	132,033	$	523,029	$	354,725

Equity-Based Compensation

The following tables set forth information regarding equity-based compensation activities.


	RSUs										Restricted Shares Issued to Directors				RPUs
	Employees					Non-Employees					Restricted Shares Issued to Directors				Employees
	Number			Value (A)		Number			Value (A)		Number		Value (A)		Number		Value (A)
Outstanding as of December 31, 2009		44,941,811		$	14.59		6,689,054		$	13.42		216,367	$	9.58		31,000,000	$	13.75
Issued		8,630,101			4.59		1,004,551			4.70		210,302		3.50		—		—
Converted to Class A shares		(14,408,930	)		13.71		(938,390	)		13.40		—		—		—		—
Transfers (C)		5,345,717			12.50		(5,345,717	)		12.50		—		—		—		—
Forfeited		(1,875,052	)		12.65		(212,555	)		8.42		—		—		—		—

Outstanding as of September 30, 2010 (B)		42,633,647		$	12.69		1,196,943		$	11.11		426,669	$	6.58		31,000,000	$	13.75


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Expense incurred (B)
Employee RSUs	$	32,241	$	29,431	$	94,004	$	78,696
Non-Employee RSUs		119		6,607		1,934		14,577
Restricted Shares		164		299		325		596
LTIP		1,733		1,733		5,143		5,143
RPUs		22,813		22,813		67,694		67,695

Total equity-based compensation expense	$	57,070	$	60,883	$	169,100	$	166,707

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

(A)

Represents the weighted average grant date estimated fair value per share or unit. The weighted average estimated fair value per unit as of September 30, 2010 for awards granted to non-employees was $3.59, which is equal to the closing trading price per share of Fortress’s Class A shares on such date.

(B)	In future periods, Fortress will recognize compensation expense on its non-vested equity based awards of $493 million, with a weighted average recognition period of 2.45 years. This does not include contingent amounts or amounts related to the Principals Agreement.

(C)	Relates to FCF employees who became employees of Fortress (see Note 3).

When Fortress records equity-based compensation expense, including that related to the Principals Agreement, it records a corresponding increase in capital. When Fortress delivers Class A shares as a result of the vesting of equity-based compensation, to the extent that it pays withholding taxes in cash (rather than through the sale of employee shares upon delivery) it will record a decrease in capital related to these payments.

In January 2010, Fortress granted 8.0 million RSUs to its employees and affiliates. These RSUs generally vest over two and a half years.

In April 2010, in connection with the acquisition of Logan Circle, Fortress created the Logan Circle Comp Plan (see Note 2). The Logan Circle Comp Plan provides for annual bonuses to a senior employee which may be paid partially in RSUs, as well as for potential Class A share awards to certain employees, including this senior employee, in the years 2015, 2016 and 2017. These awards are annual performance-based awards and depend on the future performance of Logan Circle in the specific years to which they relate. Furthermore, the amounts of RSUs or shares to be awarded are not fixed until the respective year is completed. As such, these awards are expensed in the year to which they pertain based on the estimated value of awards expected to vest in that year. No equity-based compensation expense relating to the Logan Circle Comp Plan has been recorded to date.

In September 2010, based on actual forfeitures experienced to date and their impact on management’s expectations, Fortress’s forfeiture assumptions for dividend-paying RSU awards granted prior to 2010 and non-dividend paying RSU awards granted prior to 2010 and during 2010 were changed to 24%, 43% and 17%, from 30%, 39% and 12% as of June 30, 2010, respectively. The forfeiture assumptions for dividend-paying and non-dividend paying RSU awards were 26% and 35%, respectively, as of December 31, 2009.

Profit Sharing Expense

Recognized profit sharing compensation expense is summarized as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009
Private equity funds (A)	$	2,010	$	—		$	2,010	$	(15	)
Castles (A)		—		(55	)		—		(192	)
Liquid hedge funds		4,927		6,723			8,773		12,173
Credit hedge funds		20,300		1,646			28,494		4,603
Credit PE funds		5,049		635			72,443		4,229

Total	$	32,286	$	8,949		$	111,720	$	20,798

(A)	Negative amounts reflect the reversal of previously accrued profit sharing expense resulting from the determination that this expense is no longer probable of being incurred.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

(dollars in tables in thousands, except share data)

8. EARNINGS PER SHARE AND DISTRIBUTIONS


	Three Months Ended September 30, 2010				Nine Months Ended September 30, 2010
	Basic		Diluted		Basic		Diluted
Weighted average shares outstanding
Class A shares outstanding		166,657,562		166,657,562		158,130,022		158,130,022
Fully vested restricted Class A share units with dividend equivalent rights		2,024,800		2,024,800		5,632,820		5,632,820
Fully vested restricted Class A shares		224,744		224,744		157,170		157,170
Fortress Operating Group units exchangeable into Class A shares (1)		—		300,273,852		—		302,746,380
Class A restricted shares and Class A restricted share units granted to employees and directors (eligible for dividend and dividend equivalent payments) (2)		—		—		—		—
Class A restricted share units granted to employees (not eligible for dividend and dividend equivalent payments) (3)		—		—		—		—

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

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