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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, 2007

or

[ ]  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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   [ ]             Accelerated filer   [ ]             Non-accelerated filer   [X]

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: 94,597,646 outstanding as of November 13, 2007.

Class B Shares: 312,071,550 outstanding as of November 13, 2007.





FORTRESS INVESTMENT GROUP LLC

FORM 10-Q

INDEX


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




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DEFINED TERMS

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

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

(i)  the net asset value, or ‘‘NAV,’’ of our private equity funds and hedge funds plus the capital that we are entitled to call from investors pursuant to the terms of their capital commitments to those funds; (ii)  the NAV of managed accounts; and (iii)  the market capitalization of the common stock of each of our publicly traded alternative investment vehicles, which we refer to as our ‘‘Castles’’.

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

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

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

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

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





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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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





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PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

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


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

See notes to consolidated and combined financial statements

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


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

See notes to consolidated and combined financial statements

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


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

See notes to consolidated and combined financial statements

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


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

See notes to consolidated and combined financial statements

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

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

1)  Private equity funds, which invest in debt and equity securities of public or privately held entities. 2)  Liquid hedge funds, which invest in the global fixed income, commodities, currency and equity markets, and their related derivatives. 3)  Hybrid hedge funds, which invest in undervalued, distressed and other less liquid investments, as well as investment funds managed by external managers. 4)  Publicly traded alternative investment vehicles that Fortress refers to as the ‘‘Castles,’’ which are companies that invest in operating real estate and real estate related loans and securities (debt and equity).

The accompanying consolidated financial statements include the following:

  subsequent to Fortress’s reorganization and the inception of operations of Fortress Investment Group LLC on January 17, 2007, the accounts of Fortress Investment Group LLC and its consolidated subsidiaries, and   prior to such reorganization and the inception of operations of Fortress Investment Group LLC, the accounts of eight affiliated entities under common control and management (‘‘Fortress Operating Group’’ or the ‘‘predecessor’’) and their respective consolidated subsidiaries. Each of the eight entities was owned either directly or indirectly by its members, Peter Briger, Wesley Edens, Robert Kauffman, Randal Nardone, and Michael Novogratz (the ‘‘Principals’’).

Reorganization of Fortress Operating Group

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

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

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

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

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

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

Nomura Transaction

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

Initial Public Offering (‘‘IPO’’)

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

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

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

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

Consolidation and Deconsolidation of Fortress Funds

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

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

The accompanying consolidated financial statements and related notes of Fortress have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Fortress’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Fortress’s combined financial statements for the year ended December 31, 2006 and notes thereto included in Fortress’s annual report on Form 10-K filed with the

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

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

2.  MANAGEMENT AGREEMENTS AND FORTRESS FUNDS

Management Fees, Incentive Income and Related Profit Sharing Expense

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


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

Incentive Income Subject to Annual Performance Criteria

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

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Table of Contents

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

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


  September 30,
2007
December 31,
2006
Distributed-gross $ 444,722 $ 252,774 Less: Recognized (A) (267,272 )  (9,473 )  Distributed-unrecognized $ 177,450 243,301 Undistributed (B) 688,436 1,405,481 Total $ 865,886 $ 1,648,782
(A) All related contingencies have been resolved. (B) On a consolidated basis, undistributed incentive income from the Fortress Funds is recognized on the balance sheet as deferred incentive income; on a deconsolidated basis subsequent to March 31, 2007, undistributed incentive income is no longer recorded and has been removed from the balance sheet.

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

The change in deferred incentive income is summarized as follows:


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

Recognized profit sharing compensation expense is summarized as follows:


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2007 2006 2007 2006 Private equity funds $ 1,556 $ 220 $ 94,001 $ 34,626 Liquid hedge funds 1,629 11,337 89,075 54,391 Hybrid hedge funds 5,517 18,903 43,763 44,839 Castles 1,155 1,391 8,029 6,752 Total $ 9,857 $ 31,851 $ 234,868 $ 140,608

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Table of Contents

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

Principals’ and Others’ Interests in Consolidated Subsidiaries

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


Employee interests in majority owned and controlled fund advisor and general partner entities $ 76,369 Principals’ Fortress Operating Group units 261,883 Other 135 Total $ 338,387

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


  Three Months Ended
September 30, 2007
Nine Months Ended
September 30, 2007
  Actual Actual Pro Forma (A) Employee interests in majority owned and controlled fund advisor and general partner entities $ 2,359 $ 8,359 $ 8,359 Third party investors in Fortress Funds (460,615 )  Principals’ Fortress Operating Group units (154,893 )  (402,294 )  (402,294 )  Total $ (152,534 )  $ (854,550 )  $ (393,935 ) 
(A) On a pro forma basis (Note 12), as adjusted for the deconsolidation of the consolidated Fortress Funds as if it had occurred on January 1, 2007.

Private Equity Funds

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

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

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

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

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

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

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

Liquid Hedge Funds and Hybrid Hedge Funds

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

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

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

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

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Table of Contents

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

3.  INVESTMENTS IN EQUITY METHOD INVESTEES AND OTHER EQUITY INVESTMENTS

Investments in Equity Method Investees

Fortress holds investments in certain unconsolidated Fortress Funds which are accounted for under the equity method. Upon the deconsolidation of the consolidated Fortress Funds on March 31, 2007 (Note 1), these funds also became equity method investees. Fortress’s maximum exposure to loss with respect to these entities is generally equal to its investment plus its basis in any options received from such entities as described below. In addition, unconsolidated affiliates also hold an ownership interest in certain of these entities. Summary financial information related to these investments is as follows:


  Equity Held by Fortress Fortress’s Equity in Net Income (Loss)       Nine Months Ended
September 30,
Three Months Ended
September 30,
  September 30,
2007
December 31,
2006
2007 2006 2007 2006 Private equity funds, excluding NIH (A) $ 512,951 $ (A )  $ (41,682 )  $ (A )  $ (33,658 )  $ (A )  NIH 6,330 8,213 2,995 1,256 4,019 462 Total private equity funds 519,281 8,213 (38,687 )  1,256 (29,639 )  462 Liquid hedge funds (A) 84,555 (A )  192 (A )  (3,801 )  (A )  Hybrid hedge funds (A) 368,956 (A )  12,984 (A )  1,649 (A )  Newcastle 4,655 13,756 777 2,029 (412 )  693 Eurocastle 11,271 11,844 1,398 (84 )  1,487 (288 )  Other 1,723 3,437 47 211 125   $ 990,441 $ 37,250 $ (23,289 )  $ 3,412 $ (30,716 )  $ 992
(A) These entities were consolidated prior to March 31, 2007.

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

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


  Nine Months Ended September 30, 2007   Private
Equity Funds
Liquid
Hedge
Funds
Hybrid
Hedge
Funds
Castles       NIH Other Newcastle Eurocastle Other Total Investment, beginning $ 8,213 $ $ $ $ 13,756 $ 11,844 $ 3,437 $ 37,250 Earnings from equity method investees 2,995 (41,682 )  192 12,984 777 1,398 47 (23,289 )  Other comprehensive income from equity method investees (360 )  (7,693 )  (1,246 )  (9,299 )  Contributions to equity method investees 284,431 150,905 95,793 29,143 560,272 Distributions of earnings from equity method investees (4,518 )  (1,849 )  (889 )  (1,640 )  (822 )  (47 )  (9,765 )  Distributions of capital from equity method investees (340 )  (96,673 )  (14,685 )  (545 )  (796 )  (2,151 )  (115,190 )  Total distributions from equity method investees (4,518 )  (340 )  (98,522 )  (15,574 )  (2,185 )  (1,618 )  (2,198 )  (124,955 )  Translation adjustment 893 893 Sale of investments (28,706 )  (28,706 )  Deconsolidation 270,542 31,980 275,753 578,275 Investment, ending $ 6,330 $ 512,951 $ 84,555 $ 368,956 $ 4,655 $ 11,271 $ 1,723 $ 990,441 Ending balance of undistributed
earnings
$ 4,056 $ $ $ 12,095 $ $ 576 $ $ 16,727

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.


  Private Equity Funds
excluding NIH
Newcastle Investment
Holdings LLC (“NIH”)
  September 30,
2007
September 30,
2007
December 31,
2006
Assets $ 16,442,688 $ 351,928 $ 457,436 Liabilities (2,286,589 )  (224,824 )  (315,732 )  Equity $ 14,156,099 $ 127,104 $ 141,704 Equity held by Fortress $ 512,951 $ 6,330 $ 8,213 Ownership (A) 3.6 %  4.8 %  4.8 % 

  Nine Months Ended
September 30, 2007
Six Months Ended September 30,   2007 2006 Revenues and gains (losses) on investments $ (3,329,819 )  $ 93,918 $ 51,202 Expenses (194,551 )  (22,962 )  (25,051 )  Net Income (Loss) $ (3,524,370 )  $ 70,956 $ 26,151 Fortress’s equity in net income (loss) $ (41,682 )  $ 2,995 $ 1,256   (B )     

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


  Liquid Hedge Funds Hybrid Hedge Funds   September 30,
2007
September 30,
2007
Assets $ 7,781,999 $ 10,674,936 Liabilities (93,348 )  (3,290,353 )  Equity $ 7,688,651 $ 7,384,583 Equity held by Fortress $ 84,555 $ 368,956 Ownership (A) 1.1 %  5.0 % 

  Nine Months Ended
September 30,
2007
Nine Months Ended
September 30,
2007
Revenues and gains (losses) on investments $ 1,092,573 $ 720,455 Expenses (710,854 )  (255,716 )  Net Income $ 381,719 $ 464,739 Fortress’s equity in net income $ 192 $ 12,984   (B )  (B ) 
(A) Excludes ownership interests held by other Fortress Funds, the Principals, employees and other affiliates. (B) The revenues and expenses of these entities were consolidated through March 31, 2007, the effective date of the deconsolidation (Note 1). As a result, the amounts shown for Fortress’s equity in net income of these entities relate to the period subsequent to March 31, 2007.
  Newcastle Investment Corp. Eurocastle Investment Ltd.   September 30,
2007
December 31,
2006
September 30,
2007
December 31,
2006
Assets $ 8,505,473 $ 8,604,392 $ 10,997,553 $ 7,295,320 Liabilities (7,684,852 )  (7,602,412 )  (9,078,267 )  (5,427,716 )  Minority interest (8 )  (8 )  Equity $ 820,621 $ 1,001,980 $ 1,919,278 $ 1,867,596 Equity held by Fortress $ 4,655 $ 13,756 $ 11,271 $ 11,844 Ownership, basic (A) 1.9 %  2.2 %  1.6 %  1.6 %  Ownership, diluted (A) (B) 4.5 %  4.8 %  10.0 %  10.4 %  Ownership by Fortress and affiliates, diluted (B) 15.0 %  12.3 %  29.5 %  26.6 %  Market value of shares owned (A) (C) $ 18,073 $ 32,126 $ 34,799 $ 51,203

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


  Nine Months Ended
September 30,
Nine Months Ended
September 30,
  2007 2006 2007 2006 Revenues $ 543,369 $ 401,245 $ 552,586 $ 232,269 Expenses (505,960 )  (307,481 )  (542,100 )  (225,532 )  Net gain on sale of investment property 65,846 Discontinued operations (2 )  212 Preferred dividends (9,265 )  (6,985 )  Net Income $ 28,142 $ 86,991 $ 76,332 $ 6,737 Fortress’s equity in net income (loss) $ 777 $ 2,029 $ 1,398 $ (84 ) 
(A) Excludes shares owned by other Fortress Funds, the Principals, employees and other affiliates. (B) Fully diluted ownership represents the percentage of outstanding common shares owned assuming that all options are exercised. (C) Based on the closing price of the related shares and, if applicable, the foreign currency exchange rate on the last day of trading in the applicable period.

Options in Affiliates

Fortress holds options to purchase additional shares of its equity method investees with carrying values as follows:


  September 30,
2007
December 31,
2006
Accounting Treatment Newcastle options $ 201 $ 2,950 Held at cost subject to impairment Eurocastle options 48,150 136,316 Qualify as a derivative, held at fair value   $ 48,351 $ 139,266  

The fair value of the Newcastle options as of September 30, 2007 was approximately $0.2 million. The Newcastle options were written down to fair value from their cost basis of $3.6 million at September 30, 2007 due to impairment resulting from an other-than-temporary decrease in Newcastle’s common share price.

In January 2007, in connection with a capital raise, Newcastle issued 242,000 options to purchase shares of its common stock at $31.30 per share to Fortress, which were valued at $0.8 million. Fortress assigned 121,605 of these options to employees, recording compensation expense of $0.4 million. In addition, during May 2004 and January 2005, Newcastle issued 675,000 options (at a weighted average strike price of $27.63) to purchase shares of its common stock to Fortress. During March 2007, Fortress assigned 261,525 of these options to employees, recording compensation expense of $0.5 million.

During the nine months ended September 30, 2007, Fortress assigned a total of 320,099 Eurocastle options, with a weighted average strike price of €19.23 per share, to certain of its employees. Fortress recorded compensation expense of $3.3 million associated with the assignment of these options during the nine months ended September 30, 2007.

In April 2007, in connection with a capital raise, Newcastle issued 456,000 options to purchase shares of its common stock at $27.75 per share to Fortress, which were valued at $1.2 million. Fortress

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

assigned 162,450 of these options to employees and recorded compensation expense of $0.4 million. The Principals in their personal capacities purchased approximately $60 million in the aggregate of the shares sold in this offering directly from the underwriter at the public offering price.

Investments in Variable Interest Entities

As part of the deconsolidation of the consolidated Fortress Funds (Note 1), Fortress caused reconsideration events to occur in each of the variable interest entities in which it was deemed to be the primary beneficiary. As a result of these reconsideration events, Fortress is no longer considered the primary beneficiary of, and therefore does not consolidate, any of the variable interest entities in which it holds an interest. No other reconsideration events occurred during the nine months ended September 30, 2007 which caused a change in Fortress’s accounting.

The following table represents information as of September 30, 2007 regarding entities formed during the nine months ended September 30, 2007 that were determined to be VIEs in which Fortress holds a variable interest:


  Fortress is not Primary Beneficiary Business Segment Gross Assets Fortress Investment Liquid Hedge Funds $ 6,891,005 $ 47,355 (A)  Hybrid Hedge Funds $ 502,678 $ 511
(A) Includes $0.3 million of incentive income receivable. Also represents Fortress’s maximum exposure to loss with respect to these entities.

Investments in Marketable Equity Securities

As of September 30, 2007, Fortress has investments in marketable equity securities, treated as available for sale, as shown in the following table. All of these securities were purchased subsequent to June 30, 2007.


    Gross Unrealized     Industry Cost Basis Gains Greater Than
12 months (A)
Losses
Less Than
12 months (A)
Losses
Fair Value/
Carrying
Value
Range of
Ownership
Interests
Information Services $ 10,578 $ 749 $   — $   — $ 11,327 0.2 % 
(A) Determined by whether a particular security has continuously been in an unrealized loss position for greater than twelve months.

Securities available for sale are carried at market value with net unrealized gains or losses reported as a separate component of accumulated other comprehensive income. At disposition, the net realized gain or loss is determined on the basis of the cost of the specific investments and is included in earnings. Unrealized losses on securities are charged to earnings if they reflect a decline in value that is other than temporary. A decline in value is considered other than temporary if Fortress does not have the intent and ability to hold such investment until a forecasted market price recovery.

Fortress reviews its marketable equity securities on a regular basis to determine whether any security has experienced an other than temporary decline in value. Fortress considers the investee company’s current earnings, earnings outlook, credit ratings, liquidity, stock price performance and volatility, and industry and general economic factors, among other factors, as well as the severity and duration of the decline in value, in its review. To date, no such determinations of impairment have been made.

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

4.    DEBT AND DERIVATIVE OBLIGATIONS

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


    Face Amount and
Carrying Value
Contractual
Interest Rate
Final
Stated
Maturity
As of June 30, 2007 Debt Obligation/Collateral Month
Issued
September 30,
2007
December 31,
2006
Weighted
Average
Funding
Cost (D)
Weighted
Average
Maturity
(Years)
Collateral
Carrying
Value
Credit agreement                 Revolving debt (A) May 2007 $ 75,000 $ 85,000 LIBOR + 1.20% (B) May 2012 9.49 %  4.61 (C)  Term loan May 2007 350,000 600,000 LIBOR + 1.20% May 2012 7.20 %  4.61 (C)  Delayed term loan (A) May 2007 LIBOR + 1.20% (B) May 2012 0.00 %  (C)  Aircraft loan Jun 2002 2,153 LIBOR + 2.25% Repaid 0.00 %  N/A Total   $ 425,000 687,153     7.60 %  4.61   Consolidated Fortress Fund debt     2,619,456           Total     $ 3,306,609          
(A) Approximately $114.5 million and $450 million were undrawn and available on the revolving debt and delayed term loan, respectively, as of September 30, 2007, including a $25 million letter of credit subfacility of which $10.5 million was utilized. The delayed term loan must be drawn by February 2008 or its availability expires. (B) Subject to unused commitment fees of 0.375% per annum. (C) 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 interest therein. (D) Includes amortzation of deferred financing costs.

In connection with a repayment of a prior credit facility, deferred loan costs of $3.1 million were written off to interest expense in June 2006. In connection with the repayment of a portion of a prior term loan, $2.0 million of deferred loan costs were written off to interest expense in February 2007. In May 2007, Fortress entered into a new credit agreement to refinance its existing credit agreement, reduce the amount of interest and other fees payable under its credit facilities, and increase the amount of funds available for investments.

Management believes that for similar financial instruments with comparable credit risks, the stated interest rates of Fortress’s debt as of September 30, 2007 approximate market rates. Accordingly, the carrying values outstanding are believed to approximate fair value.

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

The following table presents summarized information regarding Fortress’s derivative assets (obligations):


  Notional
Amount
Fair Value Longest Maturity   September 30,
2007
September 30,
2007
December 31,
2006
September 30,
2007
Interest rate swaps, treated as hedges $ $ $ 8 N/A Foreign currency derivatives, treated as hedges 8,169 (1,158 )  (435 )  Oct 30, 2007 Foreign currency derivatives, non-hedges 28,031 (3,974 )  (1,184 )  Oct 30, 2007 Consolidated Fortress Fund derivatives, net   (38,018 )    Total   $ (5,132 )  $ (39,629 )   

5.    INCOME TAXES AND TAX RELATED PAYMENTS

Prior to January 17, 2007, Fortress, as a partnership, generally had not been subject to U.S. federal income tax but certain of its subsidiaries had been subject to the New York City unincorporated business tax (‘‘UBT’’) on its U.S. earnings based on a statutory rate of 4%. One subsidiary of Fortress was subject to U.S. federal corporate income taxes. Certain subsidiaries of Fortress are subject to income tax of the foreign countries in which they conduct business. In connection with the Nomura transaction and the initial public offering (Note 1), Fortress was reorganized. Fortress was established as a publicly traded partnership and also established a wholly owned corporate subsidiary. Accordingly, a substantial portion of Fortress’s income earned by the corporate subsidiary is subject to U.S. federal income taxation and taxed at prevailing rates. The remainder of Fortress’s income is allocated directly to its shareholders and is not subject to a corporate level of taxation.

The Nomura transaction involved Fortress’s purchase of Fortress Operating Group units from the Principals and an election by certain Fortress Operating Group entities under Section 754 of the Code, resulting in the tax basis of the assets owned by Fortress Operating Group to increase. Fortress established a deferred tax asset of $454.8 million for the expected tax benefit associated with the difference between the book value of net assets and the tax basis of net assets, based on an estimated combined marginal federal and state tax rate of approximately 39.4 % and the expectation, based on an analysis of expected future earnings, that it is more likely than not that this benefit will be realized. The establishment of the deferred tax asset increased additional paid in capital as the transaction giving rise to the increase in tax basis was between Fortress and its shareholders. The deferred tax asset described above reflects the tax impact of payments expected to be made under the tax receivable agreement (described below), which further increase Fortress’s deferred tax benefits and the estimated payments due under the tax receivable agreement.

As a result of the contribution of $578.3 million of the net proceeds of the initial public offering by FIG Corp. to the capital of Fortress Operating Group, a temporary difference arose between the carrying value of Fortress Operating Group for financial reporting purposes and that for income tax purposes. A gross deferred tax asset of $24.6 million has been recorded to reflect the deferred tax effects of the tax basis over financial reporting basis.

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

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


  September 30,
2007
December 31,
2006
Deferred tax assets $ 489,801 $ 2,808 Deferred tax liabilities (A) $ 3,143 $ 12,989
(A) Included in Other Liabilities.

For the period January 17, 2007, the reorganization date, through September 30, 2007, an estimated annual (January 17, 2007 through December 31, 2007) negative effective tax rate of (5.18%) was used to compute the tax provision on the Registrant’s income subject to U.S. federal, state and local income taxes. Fortress incurred a loss before income taxes for financial reporting purposes, in this period, after deducting the compensation expense arising from the Principals’ forfeiture agreement (Note 7). However, this compensation expense is not deductible for income tax purposes. Also, after the reorganization, a portion of Fortress’s income is not subject to U.S. federal corporate income tax but is allocated directly to Fortress’s shareholders.

The actual effective tax rate for the period ended September 30, 2007 is significantly different than the effective tax rate above primarily because (i) all of the income earned by the predecessor prior to January 17, 2007 was earned through partnerships and only subject to the New York City UBT; and (ii) significant income was earned by the predecessor prior to January 17, 2007 as compared to a loss incurred by the Registrant for the period from January 17, 2007 through September 30, 2007.

As a result of the foregoing, Fortress’s effective tax rate for GAAP reporting purposes may be subject to significant variation from period to period.

Tax Receivable Agreement

The Principals have the right to exchange each of their Fortress Operating Group units for one of the Class A shares. The Fortress Operating Group entities intend to make an election under Section 754 of the Internal Revenue Code, as amended, which may result in an adjustment to the tax basis of the assets owned by Fortress Operating Group at the time of an exchange. The exchanges may result in increases in tax deductions and tax basis that would reduce the amount of tax that the corporate taxpayers (i.e. FIG Corp.) would otherwise be required to pay in the future. Additionally, the further acquisition of Fortress Operating Group units from the Principals, such as in the Nomura transaction (Note 1), also may result in increases in tax deductions and tax basis that would reduce the amount of tax that the corporate taxpayers would otherwise be required to pay in the future. The corporate taxpayers entered into a tax receivable agreement with each of the Principals that provides for the payment to an exchanging or selling Principal of 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income tax that the corporate taxpayers actually realize (or are deemed to realize in the case of an early termination payment by the corporate taxpayers or a change of control, as defined) as a result of these increases in tax basis. Such payments are expected to occur over approximately the next 15 years. In connection with the Nomura transaction and related tax effects, a $390 million capital decrease and offsetting liability to the Principals was recorded with respect to the tax receivable agreement. Such amount is a component of the deferred tax effects reflected in the Statement of Members’ and Shareholders’ Equity. No further liability was recorded during the period ended September 30, 2007, nor were any payments made during that period.

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

Although the tax receivable agreement payments are calculated based on annual tax savings, for the period ended September 30, 2007 the payments which would have been made pursuant to the tax receivable agreement, if such period was calculated by itself, were $11.3 million.

Recently Adopted Accounting Pronouncement

We adopted the Financial Accounting Standards Board’s Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109’’ (‘‘FIN 48’’), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The adoption of FIN 48 did not have a material effect on our consolidated financial position, liquidity or results of operations.

6.    RELATED PARTY TRANSACTIONS


  Management Fees
and Incentive Income
Dividends and Distributions Total Due from Affiliates September 30,
2007
December 31,
2006
September 30,
2007
December 31,
2006
September 30,
2007
December 31,
2006
Private equity funds $ 1,971 $ $ $ 26,315 $ 1,971 $ 26,315 Castles 26,278 47,832 739 1,297 27,017 49,129 Liquid and hybrid hedge funds 3,850 500,889 3,850 500,889 Unconsolidated subsidiaries of liquid hedge fund subsidiaries 19,309 19,309 Subtotal $ 32,099 $ 548,721 $ 739 $ 46,921 32,838 595,642 Other         7,034 40,106 Total         $ 39,872 $ 635,748

Due to Affiliates September 30,
2007
December 31,
2006
Private equity funds     – Payments on behalf of Fortress Funds $ $ 14,123 Principals     – Tax receivable agreement – Note 5 390,383 – Distributions payable on Fortress Operating Group units 16,616 Other 2,653 989   $ 409,652 $ 15,112

In February 2007, Fortress entered into a preliminary agreement with two employees who were departing from Fortress to form their own investment management company. Fortress received a profits interest in their management company, and, as part of the transaction, a Fortress Fund received certain rights to invest at discounted fee rates in the fund being formed by the departing employees, and committed to invest $200 million in that fund subject to certain conditions. The transaction was approved by the advisory board of the Fortress Fund.

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

During 2007, two departing Fortress employees entered into sourcing agreements with a Fortress Fund pursuant to which the Fortress Fund agreed to make contingent payments to the former employees based on the employees sourcing future transactions for that Fortress Fund.

In March 2007, one of the Portfolio Companies leased office space to a company owned by one of the Principals. The Principal pays approximately $0.2 million per annum in rent to the Portfolio Company.

In March 2007, in conjunction with the deconsolidation (Note1), Fortress transferred its general partner interests in certain CDO Portfolio Companies to certain Fortress Funds for $6.5 million.

In connection with the IPO, Fortress entered into a tax receivable agreement with the Principals, as described in Note 5, and the Principals entered into a forfeiture agreement with each other, as described in Note 7. The Principals, employees, directors and Fortress Funds have and continue to make investments in Fortress Funds.

In June 2007, Fortress sold two investments to Real Assets Fund, a private equity Fortress Fund. Fortress received $29.1 million from the sales and recorded gains aggregating $0.4 million.

In September 2007, three of the Principals made an aggregate €24.6 million ($33.5 million) loan to a subsidiary of one of the private equity Fortress Funds. The Principals assigned their right to receive interest on this loan to the fund. In October 2007, this fund conducted a rights offering in which it raised €150 million ($214.0 million) of equity in a private placement to investors in the fund, of which Fortress acquired €37.9 million ($54.1 million). The proceeds from this offering were used to pay down existing fund level debt, including the loan from the Principals. In October and November 2007, these Principals invested an aggregate of €34.9 million ($50.7 million) in preferred equity interests of subsidiaries of certain of the private equity Fortress Funds, of which €6.4 million ($9.1 million) has been repaid. The preferred equity does not pay a dividend.

In September 2007, six employees terminated their employment at Fortress in order to form a management company. A portfolio company owned by a Fortress Fund has contracted with this management company to perform services for one of its subsidiaries. These employees had received RSUs in connection with Fortress’s IPO in February 2007. In connection with the above transactions, Fortress has modified these awards, valued at approximately $5.9 million in the aggregate, such that each employee’s vesting continues on the original vesting schedule as long as both (i) such employee remains employed by the management company, and (ii) the management company continues to provide services to the subsidiary.

For the three and nine months ended September 30, 2007, other revenues included approximately $11.9 million and $32.3 million of revenues from affiliates, primarily expense reimbursements, respectively.

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

7.    EQUITY-BASED COMPENSATION

Fortress currently has several categories of equity-based compensation which are accounted for as described in the table below. A total of 115,000,000 Class A shares have been authorized for issuance under Fortress’s equity-based compensation plan. RSUs are Class A restricted share units which entitle the holder to receive Class A shares on various future dates if the applicable service conditions, if any, are met. LTIP means long-term incentive plan.


Granted To Type of
Award
Service
Conditions
Entitled to
Dividends
Accounting September 30,
2007
Shares/Units
Outstanding
Weighted
Average
Grant Date
Estimated
Value per
Share/Unit
Weighted
Average
September 30,
2007
Estimated
Value per
Share/Unit
    (A) (B)         Employees RSUs Yes Yes Fair value at grant date (D) expensed over service period. 23,730,308 $ 18.50 N/A   RSUs Yes No Fair value at grant date (D) discounted for the non-entitlement to dividends, expensed over service period. 16,359,661 14.92 N/A   RSUs No Yes Fair value at grant date (D) discounted for post-vesting restrictions (delivery of shares as described in (B)), expensed at grant date. 394,286 22.11 N/A   RSUs No No Fair value at grant date (D) discounted for the non-entitlement to dividends and further discounted for post-vesting restrictions (delivery of shares as described in (B)), expensed at grant date. 634,287 11.50 N/A   LTIP (C) Yes (C) (C) Fair value at grant date, based on a valuation model, expensed over service period. 2,857,143 12.04 N/A Directors Restricted
Shares
Yes Yes Fair value at grant date (D) expensed over service period. 97,296 18.50 N/A Employees of our Private Equity Funds RSUs Yes No Fair value at grant date (D) discounted for the non-entitlement to dividends, expensed over service period. Subsequent changes in fair value, through the vesting date, expensed over remaining service period with a cumulative catch-up adjustment in the period of change. 8,723,112 15.22 $ 15.87 Other Non- Employees RSUs Yes No Fair value at grant date (D) discounted for the non-entitlement to dividends, expensed over service period. Subsequent changes in fair value, through the vesting date, expensed over remaining service period with a cumulative catch-up adjustment in the period of change. 557,465 16.05 15.62
(A) Generally, such awards vest 25% at each of January 1, 2010, 2011, 2012, and 2013 (for employees) and 33-1/3% after each of our annual meetings in 2008, 2009 and 2010 (for directors). Certain employees (primarily those hired after the IPO) have different vesting schedules. Vesting of these awards may be accelerated if an employee is terminated without cause, or in the event of death or disability, or a change in control of Fortress. (B) Vested Class A shares will be delivered to employee grant recipients 25% at each of, or within no more than six months after, January 1, 2010, 2011, 2012, and 2013. Director restricted shares were delivered effective on the grant date. Certain awards entitle the recipient to receive dividend equivalent payments prior to such delivery dates.

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

(C) Represents a profits interest in respect of certain Fortress Operating Group units that have a maximum value that corresponds to 2.9 million Fortress Operating Group units, granted by one of the Principals to one of Fortress’s employees at the date of the IPO. The profits interests have a five-year cliff-vesting service condition. (D) For awards granted in connection with the IPO, the fair value is based on the IPO price. For awards granted subsequent to the IPO, the fair value is based on the closing price on the grant date of Fortress’s Class A shares.

The aggregate fair value of each of the RSU grants which are subject to service conditions is reduced by an estimated forfeiture factor (that is, the estimated amount of awards which will be forfeited prior to vesting). The estimated forfeiture factor is based upon historic turnover rates within Fortress, adjusted for the expected effects of the grants on turnover and other factors in the best judgment of management. The estimated forfeiture factor is updated at each reporting date. The estimated forfeiture factor as of the grant date and as of September 30, 2007 was 16% for unvested RSU awards that are entitled to dividends and 19% for unvested RSU awards that are not entitled to dividends. Since Fortress’s initial public offering in February 2007, neither the actual forfeiture rate nor any other factors have caused a change in managements forfeiture expectations or assumptions.

The volatility assumption used in valuing certain awards, as described below, was based on five-year historical stock price volatilities observed for a group of comparable companies, since Fortress does not have sufficient historical share performance to use its own historical volatility, adjusted for management’s judgment regarding expected volatility. Since Fortress’s IPO in February 2007, its actual volatility has exceeded the volatility assumption used. To the extent that this trend continues, and management’s judgment concerning volatility is changed, Fortress would adjust the volatility assumption used. The risk-free discount rate assumptions used in valuing certain awards were based on the applicable U.S. treasury rate of like term. The dividend yield assumptions used in valuing certain awards were based on Fortress’s actual dividend rate at the time of the award; the dividend growth rate used with respect to one type of award was based on management’s judgment and expectations.

The discount related to RSUs which do not entitle the recipients to dividend equivalents prior to the delivery of Class A shares was based on the estimated present value of dividends to be paid during the vesting period, which in turn was based on an estimated initial dividend rate (between 2.25% and 5.27% based on the actual dividend rate on the grant date), an estimated dividend growth rate (20%) and a risk-free discount rate (between 3.85% and 5.17% based on grant date and term).

The discount related to RSUs with no service conditions which are subject to the delayed delivery of Class A shares, which occurs in periods subsequent to the grant date, was based on the estimated value of a put option on such shares over the delayed delivery period since essentially this would be the value of owning, and being able to trade, those shares during the delayed delivery period rather than having to wait for delivery. This estimated value was in turn derived from a binomial option pricing model based on the following assumptions: volatility (35%), term (equal to delayed delivery period), dividend rate (between 2.96% and 3.68% based on grant date) and risk-free discount rate (between 4.54% and 4.79% based on grant date and term).

The estimated fair value of the LTIP award was estimated using a Monte Carlo simulation valuation model with the following assumptions: volatility (35%), term (equal to vesting period), and risk-free discount rate (4.79%) of like term.

Each of these elements, particularly the forfeiture factor and the volatility assumptions used in valuing certain awards, are subject to significant judgment and variability and the impact of changes in such elements on equity-based compensation expense could be material.

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

The following table sets forth information regarding equity-based compensation activities during the nine months ended September 30, 2007.


      
RSUs
Restricted
Shares
LTIP Total
Equity-Based
Compensation
Expense
  Employees Non-Employees Issued at IPO 42,212,312 8,521,070 97,296     Issued subsequent to IPO 1,221,429 947,643     Forfeited (2,315,199 )  (188,136 )      Outstanding at September 30, 2007 (A) 41,118,542 9,280,577 97,296     Expense incurred during the nine months ended September 30, 2007 $ 82,280 $ 13,778 $ 385 $ 4,427 $ 100,870 Expense incurred during the three months ended September 30, 2007 $ 28,265 $ 5,300 $ 152 $ 2,853 $ 36,570
(A) Fortress will further recognize, in the future, compensation expense on its non-vested equity-based awards of $750.1 million, with a weighted average recognition period of 5.27 years.

The Principals entered into an agreement among themselves (the ‘‘Principals Agreement’’) which provides that, in the event a Principal voluntarily terminates his employment with Fortress Operating Group for any reason prior to the fifth anniversary of the IPO, a portion of the equity interests held by that Principal as of the completion of the IPO will be forfeited to the Principals who are employed by Fortress Operating Group generally as of the date that is six months after the date of such termination of employment. As a result of the service requirement, the fair value of Fortress Operating Group units subject to the risk of forfeiture of $4,763 million will be charged to compensation expense on a straight-line basis over the five year service period, including $232.0 million and $613.0 million during the three and nine months ended September 30, 2007, respectively.

When Fortress records equity-based compensation expense, including that related to the Principals Agreement, it records a corresponding increase in capital. Of the total increase in capital during the nine months ended September 30, 2007 from equity-based compensation arrangements of $713.9 million, $166.0 million increased Fortress’s paid-in capital, as reflected in the Statement of Members’ and Shareholders’ Equity, and $547.9 million increased Principals’ interests in equity of consolidated subsidiaries corresponding to the Principals’ interest in the equity-based compensation expense.

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

8.    EARNINGS PER SHARE

As a result of Fortress’s reorganization in January 2007 (Note 1), Fortress has calculated its earnings per share for two different periods within the nine months ended September 30, 2007. For the first period, prior to the reorganization on January 17, 2007, the calculation is based on the income and outstanding units of Fortress Operating Group, which was owned by the Principals as described in Note 1, as if such units had been outstanding from the beginning of the period. For the second period, subsequent to the reorganization and commencement of operations of the Registrant, the calculation is based on the consolidated income of Fortress from January 17, 2007 through September 30, 2007 and the Class A shares outstanding for such period.

The computations of net income per Fortress Operating Group unit are set forth below:


  January 1 through January 16, 2007   Basic Diluted Weighted average units outstanding     Fortress Operating Group units outstanding 367,143,000 367,143,000 Total weighted average units outstanding 367,143,000 367,143,000 Net income per unit is calculated as follows:     Net income $ 133,397 $ 133,397 Dilution in earnings of certain equity method investees Net income available to Fortress Operating Group unitholders $ 133,397 $ 133,397 Weighted average units outstanding 367,143,000 367,143,000 Net income per unit $ 0.36 $ 0.36

The computations of basic and diluted net income (loss) per Class A share are set forth below:


  January 17 through September 30, 2007   Basic Diluted Weighted average shares outstanding     Class A shares outstanding 90,971,694 90,971,694 Fully vested restricted Class A share units with dividend equivalent rights 283,825 283,825 Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares(1) 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) Total weighted average shares outstanding 91,255,519 91,255,519

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


  January 17 through September 30, 2007   Basic Diluted Basic and diluted net income (loss) per Class A share     Net income (loss) $ (163,942 )  $ (163,942 )  Dividend equivalents declared on non-vested restricted Class A share units (2,742 )  (2,742 )  Dilution in earnings of certain equity method investees Add back Principals’ and others’ interests in loss of Fortress Operating Group, net of assumed corporate income tax at enacted rates, attributable to Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares(1) Net income (loss) available to Class A shareholders $ (166,684 )  $ (166,684 )  Weighted average shares outstanding 91,255,519 91,255,519 Basic and diluted net income (loss) per Class A share $ (1.83 )  $ (1.83 ) 

  Three Months Ended September 30, 2007   Basic Diluted Weighted average shares outstanding     Class A shares outstanding 94,500,350 94,500,350 Fully vested restricted Class A share units with dividend equivalent rights 394,286 394,286 Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares(1) 312,071,550 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) Total weighted average shares outstanding 94,894,636 406,966,186

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


  Three Months Ended September 30, 2007   Basic Diluted Basic and diluted net income (loss) per Class A share     Net income (loss) $ (37,557 )  $ (37,557 )  Dividend equivalents declared on non-vested restricted Class A share units (1,125 )  (1,125 )  Dilution in earnings of certain equity method investees Add back Principals’ and others’ interests in loss of Fortress Operating Group, net of assumed corporate income tax at enacted rates, attributable to Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares(1) (173,093 )  Net income (loss) available to Class A shareholders $ (38,682 )  $ (211,775 )  Weighted average shares outstanding 94,894,636 406,966,186 Basic and diluted net income (loss) per Class A share $ (0.41 )  $ (0.52 ) 
(1) The Fortress Operating Group units not held by Fortress (that is, those held by the Principals) are exchangeable into Class A shares on a one-to-one basis. These units are not included in the computation of basic earnings per share. These units enter into the computation of diluted net income (loss) per Class A share when the effect is dilutive using the if-converted method. Under the if-converted method the Principals’ and others’ interests in income (loss) of Fortress Operating Group attributable to the units, net of assumed corporate income tax, is added to the net loss in the numerator of the computation and the Class A shares available from the assumed conversion of the Fortress Operating Group units, as if it had occurred at the beginning of the period, is added to the denominator. For the year-to-date period, the effect of including the units would have been antidilutive. The weighted average number of Fortress Operating Group units outstanding for the periods from January 17, 2007 through September 30, 2007 and the three months ended September 30, 2007 were 312,071,550 units. (2) Restricted Class A shares granted to directors and certain restricted Class A share units granted to employees are eligible to receive dividend or dividend equivalent payments when dividends are declared and paid on our Class A shares and therefore participate fully in the results of our operations from the date they are granted. They are included in the computation of both basic and diluted pro forma earnings per Class A share using the two-class method for participating securities, except during periods of net losses in accordance with EITF 03-6, ‘‘Participating Securities and the Two-Class Method under FASB Statement No. 128.’’ The weighted average restricted Class A shares and share units eligible to receive dividend or dividend equivalent payments outstanding for the periods from January 17, 2007 through September 30, 2007 and the three months ended September 30, 2007 were 88,588 and 97,296 shares, respectively, and 21,702,604 and 23,730,308 share units, respectively. (3) Certain restricted Class A share units granted to employees are not entitled to dividend or dividend equivalent payments until they are vested and are therefore non-participating securities. These units are not included in the computation of basic earnings per share. They are included in the computation of diluted earnings per share when the effect is dilutive using the treasury stock method. As a result of the net loss incurred for the period, the effect of the units on the calculation is anti-dilutive for the periods. The weighted average restricted Class A share units

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

which are not entitled to receive dividend or dividend equivalent payments outstanding for the periods from January 17, 2007 through September 30, 2007 and the three months ended September 30, 2007 were 23,462,014 and 26,087,366 share units, respectively.

The Class B shares have no net income (loss) per share as they do not participate in Fortress’s earnings (losses) or distributions. The Class B shares have no dividend or liquidation rights. Each Class B share, along with one Fortress Operating Group unit, can be exchanged for one Class A share, subject to certain limitations. The Class B shares have voting rights on a pari passu basis with the Class A shares. The number of Class B shares outstanding did not change subsequent to the IPO.

Fortress’s dividend paying shares and units were as follows:


  Weighted Average     Three Months
Ended
September 30,
2007
Nine Months
Ended
September 30,
2007
September 30,
2007
Class A shares 94,500,350 85,640,019 94,500,350 Restricted Class A share units (A) 394,286 267,190 394,286 Restricted Class A shares 97,296 83,396 97,296 Restricted Class A share units 23,730,308 20,430,657 23,730,308 Fortress Operating Group units 312,071,550 315,299,181 312,071,550 Total 430,793,790 421,720,443 430,793,790
(A) Represents fully vested restricted Class A share units which are entitled to dividend equivalent payments.

Dividends and distributions during the nine months ended September 30, 2007 are summarized as follows:


  Declared in
Prior Year, Paid
Current Year
Current Year   Declared and
Paid
Declared but
not yet Paid
Total Dividends on Class A Shares $   — $ 35,348 $ 21,285 $ 56,633 Dividend equivalents on restricted Class A share units (A) 8,383 5,428 13,811 Distributions to Fortress Operating Group unit holders (Principals) 204,117 16,616 220,733 Predecessor distributions (prior to January 17, 2007) 415,876 415,876 Total distributions $ $ 663,724 $ 43,329 $ 707,053
(A) A portion of these dividend equivalents, related to RSUs expected to be forfeited, is included as compensation expense in the statement of operations and is therefore considered an operating cash flow.

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

9.    COMMITMENTS AND CONTINGENCIES

Indemnifications   —   In the normal course of business, Fortress and its subsidiaries enter into operating contracts that contain a variety of representations and warranties and that provide general indemnifications. In addition, subsidiaries of Fortress that act as general partners (or in similar capacities) of Fortress Funds enter into guarantees of certain obligations of such funds in the case of fraud by Fortress employees or under similar circumstances. Fortress’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against Fortress that have not yet occurred. However, based on experience, Fortress expects the risk of material loss to be remote.

Debt Covenants —   Fortress’s debt obligations contain various customary loan covenants. These covenants do not, in management’s opinion, materially restrict Fortress’s investment or financing strategy at this time. Fortress was in compliance with all of its loan covenants as of September 30, 2007.

Litigation —   Fortress is, from time to time, a defendant in legal actions from transactions conducted in the ordinary course of business. Management, after consultation with legal counsel, believes the ultimate liability arising from such actions that existed as of September 30, 2007, if any, will not materially affect Fortress’s results of operations, liquidity or financial position.

On September 15, 2005, a lawsuit captioned David T. Atkins et al. v. Apollo Real Estate Advisors, L.P. et al. was brought on behalf of current and former limited partners in certain investing partnerships related to the sale of certain facilities to Ventas Realty Limited Partnership (‘‘Ventas’’) against a number of defendants, including one of the Portfolio Companies and a subsidiary of Fortress (‘‘FIG’’). FIG was the investment manager of consolidated Fortress Funds that were controlling shareholders of the Portfolio Company during the relevant time periods. The suit alleges that the defendants improperly obtained certain rights with respect to such facilities from the investing partnerships. The plaintiffs have asked for damages in excess of $100 million on each of nine counts, as to which FIG is a defendant on seven counts, including treble damages with respect to certain counts. Fortress has filed an action to have itself removed as a named defendant in this case. The Portfolio Company has filed a motion to dismiss the claims and continues to vigorously defend this action. Fortress believes that the resolution of this action will not have a material adverse effect on its financial condition, liquidity or results of operations.

In addition, in the ordinary course of business, the Fortress Funds are and can be both the defendant and the plaintiff in numerous actions with respect to bankruptcy, insolvency and other types of proceedings. Such lawsuits may involve claims that adversely affect the value of certain financial instruments owned by the Fortress Funds. Although the ultimate outcome of actions cannot be ascertained with certainty, Fortress believes that the resolution of any such actions will not have a material adverse effect on its financial condition, liquidity or results of operations.

Regulatory Matters   —   In the ordinary course of business, Fortress ands its subsidiaries and equity method investees may be subject to regulatory examinations, information gathering requests, inquiries or investigations. Management, after consultation with legal counsel, does not believe these matters will ultimately have a material effect on Fortress.

Private Equity Fund and Other Capital Commitments — Fortress has remaining capital commitments to certain of the Fortress Funds which aggregated $181.1 million at September 30, 2007. These commitments can be drawn by the funds on demand. In addition, Fortress is contingently liable for certain general and administrative expenses of the private equity Fortress Funds, to the extent they exceed approved limits. Management does not expect to make any material payments under this obligation.

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

Incentive Income Contingent Repayment — Incentive income received from certain Fortress Funds, primarily private equity funds, is subject to contingent repayment and is therefore recorded as deferred incentive income, a liability, until all related contingencies have been resolved. The Principals guaranteed the contingent repayments to certain funds and Fortress has indemnified the Principals for any payments to be made under such guarantees. Furthermore, one of the private equity funds (NIH) is entitled to 50% of the incentive income from another private equity fund (Fund I). Fortress is contingently liable under a guarantee for any contingent repayment of incentive income from Fund I to NIH. Fortress expects the risk of loss on each of these indemnifications and guarantees to be remote.

Minimum Future Rentals   —   Fortress is a lessee under operating leases for office space located in New York, Dallas, San Diego, Los Angeles, San Francisco, Atlanta, Toronto, Geneva, Sydney, Hong Kong, Tokyo, Frankfurt, Munich and London.

The following is a summary of major lease terms:


  New York Leases Other Leases Lease end date Dec-2016 Various dates through Apr-2012 Current annual rent $6,725 $6,129 Scheduled rent changes Year 5 to $6,840;
Year 9 to $5,725
Varies by lease Escalations Generally, a fixed percentage of the landlord’s annual operating expenses and tax expense. Generally, a fixed percentage of the landlord’s annual operating expenses and tax expense. Free rent periods 6 – 9 months 4 – 12 months Leasehold improvement incentives $3,186 $505 Renewal periods None 5-year option on one lease, remainder have none

Minimum future rental expense under these leases is as follows:


October 1 to December 31, 2007 $ 3,414 2008 13,676 2009 12,909 2010 12,455 2011 9,346 2012 6,206 Thereafter 22,857 Total $ 80,863

Rent expense recognized on a straight-line basis during the nine months ended September 30, 2007 and 2006 was $11.0 million and $6.7 million, respectively, and during the three months ended September 30, 2007 and 2006 was $3.6 million and $3.0 million, respectively, and was included in General, Administrative and Other Expense.

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

10.    SEGMENT REPORTING

Fortress conducts its management and investment business through the following four primary segments: (i) private equity funds, (ii) liquid hedge funds, (iii) hybrid hedge funds, and (iv) Castles. These segments are differentiated based on their varying investment strategies.

The amounts not allocated to a segment consist primarily of interest income earned on short term investments, certain general and administrative expenses and all interest expense incurred with respect to corporate borrowings. Where applicable, portions of the general and administrative expenses have been allocated between the segments.

Management makes operating decisions and assesses performance with regard to each of Fortress’s primary segments based on financial data that is presented without the consolidation of any Fortress Funds. Accordingly, segment data for these segments is reflected on an unconsolidated basis, even for periods prior to the deconsolidation (Note 1). Management also assesses Fortress’s segments on a Fortress Operating Group and pre-tax basis and therefore adds back the interests in consolidated subsidiaries related to Fortress Operating Group units (held by the Principals) and income tax expense.

Management assesses the net performance of each segment based on its ‘‘distributable earnings.’’ Distributable earnings is not a measure of cash generated by operations which is available for distribution. Rather, distributable earnings is a supplemental measure of the value created during any period which management uses in its determination of its periodic distributions to its dividend paying share and unit holders (Note 8). Distributable earnings should not be considered as an alternative to cash flow, in accordance with GAAP, as a measure of Fortress’s liquidity, and is not necessarily indicative of cash available to fund cash needs (including distributions).

‘‘Distributable earnings’’ for the existing Fortress businesses is equal to net income adjusted as follows:

Incentive Income

(i)  a.  for Fortress Funds which are private equity funds, adding (a) incentive income paid (or declared as a distribution) to Fortress, less an applicable reserve for potential future clawbacks if the likelihood of a clawback is deemed greater than remote (net of the reversal of any prior such reserves that are no longer deemed necessary), minus (b) incentive income recorded in accordance with GAAP, b.  for other Fortress Funds, at interim periods, adding (a) incentive income on an accrual basis as if the incentive income from these funds were payable on a quarterly basis, minus (b) incentive income recorded in accordance with GAAP,

Other Income

(ii)  with respect to income from certain principal investments and certain other interests that cannot be readily transferred or redeemed: a.  for equity method investments in the Castles and private equity funds as well as indirect equity method investments in hedge fund special investment accounts (which generally have investment profiles similar to private equity funds), treating these investments as cost basis investments by adding (a) realizations of income, primarily dividends, from these funds, minus (b) impairment with respect to these funds, if necessary, minus (c) equity method earnings (or losses) recorded in accordance with GAAP, b.  subtracting gains (or adding losses) on stock options held in the Castles,

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

c.  subtracting unrealized gains (or adding unrealized losses) from consolidated private equity funds, (iii)  adding (a) proceeds from the sale of shares received pursuant to the exercise of stock options in certain of the Castles, in excess of their strike price, minus (b) management fee income recorded in accordance with GAAP in connection with the receipt of these options,

Expenses

(iv)  adding or subtracting, as necessary, the employee profit sharing in incentive income described in (i) above to match the timing of the expense with the revenue, (v)  adding back equity-based compensation expense (including Castle options assigned to employees, RSUs (including the portion of related dividend equivalents recorded as compensation expense), restricted shares and the LTIP), (vi)  adding back compensation expense recorded in connection with the forfeiture arrangements entered into among the principals (Note 7), (vii)  adding the income (or subtracting the loss) allocable to the interests in consolidated subsidiaries attributable to Fortress Operating Group units, and (viii)  adding back income tax expense and any expense recorded in connection with the tax receivable agreement (Note 5).

Management believes only the incentive income related to realized fund income should be considered available for distribution, subject to a possible reserve, determined on a fund by fund basis, as necessary, for potential future clawbacks deemed to have more than a remote likelihood of occurring. As such, distributable earnings generally includes incentive income to the extent it relates to paid or declared distributions from Fortress Funds’ investments that have been monetized through sale or financing.

The computation of the clawback reserve, if any, takes into account, among other factors, the amount of unrealized incentive income within a given fund since, on an overall fund basis, this unrealized incentive income would have to suffer a complete loss before the realized portion becomes subject to contingent repayment. This type of incentive income is not recorded as revenue for GAAP purposes, under the revenue recognition method Fortress has selected, until the possibility of a clawback is resolved. This GAAP method is not completely reflective of value created during the period which is available for distribution as it disregards the likelihood that any contingent repayment will in fact occur.

Distributable earnings is limited in its usefulness in measuring earnings because it recognizes as revenues amounts which are subject to contingent repayment, it ignores significant unrealized gains and it does not fully reflect the economic costs to Fortress by ignoring certain equity-based compensation expenses. Management utilizes distributable earnings as well as net income in its analysis of the overall performance of Fortress and notes that the two measures are each useful for different purposes.

Total segment assets after consolidation are equal to total GAAP assets adjusted for:

(i)  the difference between the GAAP carrying amount of equity method investments and their carrying amount for segment reporting purposes, which is generally fair value for publicly traded investments and cost for nonpublic investments,

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

(ii)  employee portions of investments, which are reported gross for GAAP purposes (as assets offset by Principals’ and others’ interests in equity of consolidated subsidiaries) but net for segment reporting purposes, and (iii)  the difference between the GAAP carrying amount for options owned in certain of the Castles and their carrying amount for segment reporting purposes, which is intrinsic value.

Summary financial data on Fortress’s segments is presented on the following pages, together with a reconciliation to revenues, assets and net income for Fortress as a whole. Fortress’s investments in, and earnings from, its equity method investees by segment are presented in Note 3.

Note that distributable earnings for the periods presented includes earnings (losses) on deferred fee arrangements (Note 3), net of any employee share, as presented in the table below. All of these deferred fees have been collected. The deferred fee arrangements were terminated in 2007 (Note 2) and therefore these earnings (losses) are not reflective of ongoing operations and will not contribute to distributable earnings subsequent to the termination date.


  Nine Months Ended September 30,   2007 2006 Liquid hedge funds $ 1,926 $ 49,660 Hybrid hedge funds 9,467 Total $ 1,926 $ 59,127

  Private Equity
Funds
Liquid
Hedge
Funds
Hybrid
Hedge
Funds
Castles Unallocated Fortress
Unconsolidated
Subtotal
September 30, 2007 and the Nine Months Then Ended             Segment revenues             Management fees $ 97,749 $ 113,692 $ 94,096 $ 34,877 $ $ 340,414 Incentive income 273,890 157,989 93,832 18,596 544,307 Segment revenues – total $ 371,639 $ 271,681 $ 187,928 $ 53,473 $ $ 884,721 Pre-tax distributable earnings $ 258,507 $ 131,637 $ 81,710 $ 25,315 $ (23,580 )  $ 473,589 Total segment assets $ 509,218 $ 57,719 $ 331,598 $ 120,618 $ 720,860 $ 1,740,013           (A )   

  Fortress
Unconsolidated
Subtotal
Consolidation
of Fortress
Funds
Eliminations Reconciliation
to GAAP
Fortress
Consolidated
Revenues $ 884,721 $ 317,114 $ (269,607 )  $ (497 )  $ 931,731 Pre-tax distributable earnings/net income $ 473,589 $ (326,375 )  $ 326,375 $ (504,134 )  $ (30,545 )  Total assets $ 1,740,013 $ $ $ 67,569 $ 1,807,582
(A) Unallocated assets include cash of $169 million and deferred tax assets of $490 million.

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

September 30, 2007 and the Nine Months Then Ended
Reconciling items between segment measures and GAAP measures:


Adjustments from segment revenues to GAAP revenues   Adjust management fees* $ 488 Adjust incentive income (48,316 )  Adjust income from the receipt of options 2,006 Other revenues* 45,325 Total adjustments $ (497 ) 
* Segment revenues do not include GAAP other revenues; GAAP other revenues are included elsewhere in the calculation of distributable earnings.
Adjustments from pre-tax distributable earnings to GAAP net income     Adjust incentive income     Incentive income received from private equity funds, subject to contingent repayment $ (191,948 )    Incentive income received from private equity funds, not subject to contingent repayment (73,644 )    Incentive income accrued from private equity funds, no longer subject to contingent repayment 309,275   Incentive income received from hedge funds, subject to annual performance achievement (91,999 )    Reserve for clawback       (48,316 )  Adjust other income     Distributions of earnings from equity method investees** (13,741 )    Earnings (losses) from equity method investees** (49,762 )    Unrealized gains (losses) on options in equity method investees, treated as derivatives (82,810 )    Adjust income from the receipt of options 2,006       (144,307 )  Adjust employee compensation     Adjust employee equity-based compensation expense (including Castle options assigned) (99,014 )    Adjust employee portion of incentive income from one private equity fund, not subject to contingent repayment 5,427       (93,587 )  Adjust Principals’ equity-based compensation expense   (612,981 )  Adjust non-controlling interests related to Fortress Operating Group units   402,294 Adjust income taxes   (7,237 )  Total adjustments   $ (504,134 ) 
** This adjustment relates to all of the Castles, private equity Fortress Funds and hedge fund special investment accounts in which Fortress has an investment. On an unconsolidated basis, each of these funds is accounted for under the equity method.
Adjustments from total segment assets to GAAP assets   Adjust equity investments from fair value $ (36,946 )  Adjust equity investments from cost 24,190 Adjust investments gross of employee portion 72,702 Adjust option investments to intrinsic value 7,623 Total adjustments $ 67,569

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


  Private
Equity
Funds
Liquid
Hedge
Funds
Hybrid
Hedge
Funds
Castles Unallocated Fortress
Unconsolidated
Subtotal
Three Months Ended September 30, 2007             Segment revenues             Management fees $ 35,133 $ 44,351 $ 33,376 $ 12,131 $ $ 124,991 Incentive income 83,592 (210 )  9,463 691 93,536 Segment revenues – total $ 118,725 $ 44,141 $ 42,839 $ 12,822 $ $ 218,527 Pre-tax distributable earnings $ 82,303 $ 19,535 $ 9,994 $ 4,609 $ (5,689 )  $ 110,752

  Fortress
Unconsolidated
Subtotal
Reconciliation
to GAAP
Fortress
Consolidated
Revenues $ 218,527 $ 28,755 $ 247,282 Pre-tax distributable earnings/net income $ 110,752 $ (148,309 )  $ (37,557 ) 

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

Three Months Ended September 30, 2007
Reconciling items between segment measures and GAAP measures:


Adjustments from segment revenues to GAAP revenues   Adjust management fees* $ 163 Adjust incentive income 13,477 Adjust income from the receipt of options Other revenues* 15,115 Total adjustments $ 28,755
* Segment revenues do not include GAAP other revenues; GAAP other revenues are included elsewhere in the calculation of distributable earnings.
Adjustments from pre-tax distributable earnings to GAAP net income     Adjust incentive income     Incentive income received from private equity funds, subject to contingent repayment $ (53,126 )    Incentive income received from private equity funds, not subject to contingent repayment (22,168 )    Incentive income accrued from private equity funds, no longer subject to contingent repayment 97,333   Incentive income received from hedge funds, subject to annual performance achievement (8,562 )    Reserve for clawback       13,477 Adjust other income     Distributions of earnings from equity method investees** (1,415 )    Earnings (losses) from equity method investees** (30,514 )    Unrealized gains (losses) on options in equity method investees, treated as derivatives (58,354 )    Adjust income from the receipt of options       (90,283 )  Adjust employee compensation     Adjust employee equity-based compensation expense (including Castle options assigned) (31,651 )    Adjust employee portion of incentive income from private equity funds, accrued prior to the realization of incentive income 19,657   Adjust employee portion of incentive income from one private equity fund, not subject to contingent repayment 5,427       (6,567 )  Adjust Principals’ equity-based compensation expense   (232,048 )  Adjust non-controlling interests related to Fortress Operating Group units   154,893 Adjust income taxes   12,219 Total adjustments   $ (148,309 ) 
** This adjustment relates to all of the Castles, private equity Fortress Funds and hedge fund special investment accounts in which Fortress has an investment. On an unconsolidated basis, each of these funds is accounted for under the equity method.

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


  Private
Equity
Funds
Liquid
Hedge
Funds
Hybrid
Hedge
Funds
Castles Unallocated Fortress
Unconsolidated
Subtotal
Nine Months Ended September 30, 2006             Segment revenues             Management fees $ 59,605 $ 63,919 $ 57,240 $ 23,116 $ $ 203,880 Incentive income 96,176 80,135 86,644 11,567 274,522 Segment revenues – total $ 155,781 $ 144,054 $ 143,884 $ 34,683 $ $ 478,402 Pre-tax distributable earnings $ 112,433 $ 109,457 $ 66,236 $ 8,966 $ (37,919 )  $ 259,173

  Fortress
Unconsolidated
Subtotal
Consolidation
of Fortress
Funds
Eliminations Reconciliation
to GAAP
Fortress
Consolidated
Revenues $ 478,402 $ 913,548 $ (207,747 )  $ (150,735 )  $ 1,033,468 Pre-tax distributable earnings/ net income $ 259,173 $ 3,057,107 $ (3,057,107 )  $ (106,463 )  $ 152,710

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

Nine Months Ended September 30, 2006
Reconciling items between segment measures and GAAP measures:


Adjustments from segment revenues to GAAP revenues   Adjust management fees* $ (120 )  Adjust incentive income (173,132 )  Adjust income from the receipt of options 18,692 Other revenues* 3,825 Total adjustments $ (150,735 ) 
* Segment revenues do not include GAAP other revenues; GAAP other revenues are included elsewhere in the calculation of distributable earnings.
Adjustments from pre-tax distributable earnings to GAAP net income     Adjust incentive income     Incentive income received from private equity funds, subject to contingent repayment $ (96,176 )    Incentive income accrued from private equity funds, no longer subject to contingent repayment 8,613   Incentive income accrued from hedge funds, subject to annual performance achievment (85,569 )    Reserve for clawback       (173,132 )  Adjust other income     Distributions of earnings from equity method investees** (6,223 )    Earnings (losses) from equity method investees** 35,800   Unrealized gains (losses) on options in equity method investees, treated as derivatives 36,897   Adjust income from the receipt of options 18,692       85,166 Adjust employee compensation     Adjust compensation expense for assigned Castle options (7,577 )    Adjust employee portion of incentive income from one private equity fund, not subject to contingent payment (2,109 )        (9,686 )  Adjust income taxes   (8,811 )  Total adjustments   $ (106,463 ) 
** This adjustment relates to all of the Castles, private equity Fortress Funds and hedge fund special investment accounts in which Fortress has an investment. On an unconsolidated basis, each of these funds is accounted for under the equity method.

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


  Private
Equity
Funds
Liquid
Hedge
Funds
Hybrid
Hedge
Funds
Castles Unallocated Fortress
Unconsolidated
Subtotal
Three Months Ended September 30, 2006             Segment revenues             Management fees $ 21,958 $ 23,496 $ 21,208 $ 8,106 $ $ 74,768 Incentive income 9,226 33,137 5,098 47,461 Segment revenues – total $ 21,958 $ 32,722 $ 54,345 $ 13,204 $ $ 122,229 Pre-tax distributable earnings $ 17,353 $ 31,831 $ 28,148 $ 6,894 $ (17,212 )  $ 67,014

  Fortress
Unconsolidated
Subtotal
Consolidation
of Fortress
Funds
Eliminations Reconciliation
to GAAP
Fortress
Consolidated
Revenues $ 122,229 $ 301,647 $ (60,803 )  $ (27,905 )  $ 335,168 Pre-tax distributable earnings/ net income $ 67,014 $ 1,592,772 $ (1,592,772 )  $ (2,309 )  $ 64,705

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

Three Months Ended September 30, 2006
Reconciling items between segment measures and GAAP measures:


Adjustments from segment revenues to GAAP revenues   Agjust management fees* $ (450 )  Adjust incentive income (29,245 )  Adjust income from the receipt of options Other revenues* 1,790 Total adjustments $ (27,905 ) 
* Segment revenues do not include GAAP other revenues; GAAP other revenues are included elsewhere in the calculation of distributable earnings.
Adjustments from pre-tax distributable earnings to GAAP net income     Adjust incentive income     Incentive income received from private equity funds, subject to contingent repayment $   Incentive income accrued from private equity funds, no longer subject to contingent repayment 3,153   Incentive income accrued from hedge funds, subject to annual performance achievment (32,398 )    Reserve for clawback       (29,245 )  Adjust other income   Distributions of earnings from equity method investees** (1,154 )    Earnings (losses) from equity method investees** 25,175   Unrealized gains (losses) on options in equity method investees, treated as derivatives 12,893   Adjust income from the receipt of options       36,914 Adjust employee compensation   Adjust compensation expense for assigned Castle options (7,642 )    Adjust employee portion of incentive income from one private equity fund, not subject to contingent payment (772 )        (8,414 )  Adjust income taxes (1,564 )  Total adjustments $ (2,309 ) 
** This adjustment relates to all of the Castles, private equity Fortress Funds and hedge fund special investment accounts in which Fortress has an investment. On an unconsolidated basis, each of these funds is accounted for under the equity method.

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

Fortress’s depreciation expense by segment was as follows:


  Private Equity
Funds
Liquid
Hedge
Funds
Hybrid Hedge
Funds
Castles Unallocated Total Nine Months Ended September 30,             2007 $ 747 $ 1,860 $ 1,926 $ 633 $ 1,257 $ 6,423 2006 $ 510 $ 1,317 $ 1,590 $ 481 $ 946 $ 4,844 Three Months Ended September 30,             2007 $ 265 $ 649 $ 697 $ 207 $ 412 $ 2,230 2006 $ 173 $ 451 $ 550 $ 162 $ 322 $ 1,658

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

11.    SUBSEQUENT EVENTS

In October 2007, Fortress made an additional €37.9 million ($54.1 million) investment in one of its private equity funds, beyond its prior commitment. See Note 6 for more information on this transaction.

In October 2007, Fortress committed to invest, alongside certain of Fortress’s private equity funds known as the Drawbridge Long Dated Value Funds (including a newly formed Drawbridge Long Dated Value Co-Invest Fund), in companies that recently acquired a portfolio of intellectual property. In connection with this, Fortress, its affiliates and employees committed approximately €80 million ($114 million) of the total commitments to this investment. The transaction is subject to regulatory clearance and is expected to close in the fourth quarter.

12.    PRO FORMA FINANCIAL INFORMATION

The unaudited pro forma financial information presented below was derived from the application of pro forma adjustments to the combined and consolidated financial statements of Fortress, as applicable, to give effect to the deconsolidation of the consolidated Fortress Funds. The deconsolidation transaction occurred effective March 31, 2007 as described in Note 1. The unaudited pro forma balance sheet information as of December 31, 2006 has been prepared as if this transaction had occurred on December 31, 2006. The unaudited pro forma statement of operations and statement of cash flows information for the nine months September 30, 2007 have been prepared as if this transaction had occurred on January 1, 2007.

The primary effects of the deconsolidation transaction on Fortress’s financial position, results of operations and liquidity are the following:

  Fortress no longer records on its balance sheet and statement of operations the gross assets, liabilities, revenues, expenses and other income of the deconsolidated Fortress Funds, along with the related interests of the fund investors in the equity and net income of these funds.   Fortress reflects its investment in these funds on its balance sheet using the equity method of accounting, rather than eliminating the investment in consolidation.   Fortress will include the management fees and incentive income earned from these funds on its statement of operations rather than eliminating the revenue in consolidation.   Fortress will record its equity in the income of these funds using the equity method of accounting. However, it will not record any equity in income arising from incentive income arrangements to the extent that the incentive income is subject to contingent repayment until the contingency is resolved. Therefore, Fortress no longer needs to record deferred incentive income with respect to these funds for incentive income that it is not yet distributed.   Fortress will also remove the cash flow activities of the deconsolidated funds fr