Edgar Filing: Fortress Investment Group LLC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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

For the transition period from to

Commission File Number: 001-33294

Fortress Investment Group LLC

(Exact name of registrant as specified in its charter)

Delaware

20-5837959

(State or other jurisdiction of incorporation

or organization)

(I.R.S. Employer Identification No.)


1345 Avenue of the Americas, New York, NY		10105
(Address of principal executive offices)		(Zip Code)

(212) 798-6100

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes No ¨

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

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

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

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

Class A Shares: 140,651,044 outstanding as of August 4, 2009.

Class B Shares: 312,071,550 outstanding as of August 4, 2009.

FORTRESS INVESTMENT GROUP LLC

FORM 10-Q

INDEX


		PAGE
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008	1

	Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2009 and 2008	2

	Consolidated Statement of Equity (unaudited) for the six months ended June 30, 2009	3

	Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2009 and 2008	4

	Notes to Consolidated Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

Item 4.	Controls and Procedures	63

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	94

Item 3.	Defaults upon Senior Securities	94

Item 4.	Submission of Matters to a Vote of Security Holders	94

Item 5.	Other Information	94

Item 6.	Exhibits	95

SIGNATURES		96

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

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

(i)

the capital commitments or invested capital (or NAV, if lower) of our private equity funds and hybrid PE funds, depending on which measure management fees are being calculated upon at a given point in time, which in connection with funds raised after March 2006 includes the mark-to-market value of public securities held within the funds,

(ii)

the contributed capital of our publicly traded alternative investment vehicles, which we refer to as our “Castles,”

(iii)

the net asset value, or “NAV,” of our hedge funds, including the Value Recovery Funds which pay fees based on realizations (and on certain managed assets); and

(iv)

the NAV of our managed accounts, to the extent management fees are charged.

For each of the above, the amounts exclude assets under management for which we charge either no or nominal fees, generally related to our principal investments in funds as well as investments in funds by our principals, directors and employees.

Our calculation of AUM may differ from the calculations of other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. Our definition of AUM is not based on any definition of assets under management contained in our operating agreement or in any of our Fortress Fund management agreements.

“Fortress,” “we,” “us,” “our,” and the “company” refer, collectively, to Fortress Investment Group LLC and its subsidiaries, including the Fortress Operating Group and all of its subsidiaries.

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

“Fortress Operating Group” refers to the combined entities, which were wholly-owned by the principals prior to January 2007, and in each of which Fortress Investment Group LLC acquired an indirect controlling interest in January 2007.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

SPECIAL NOTE REGARDING EXHIBITS

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

•

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

•

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

•

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

•

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

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

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)


	June 30, 2009			December 31, 2008
	(Unaudited)
Assets
Cash and cash equivalents	$	90,506		$	263,337
Due from affiliates		70,709			38,504
Investments
Equity method investees		818,147			774,382
Options in affiliates		116			39
Deferred tax asset		429,794			408,066
Other assets		86,028			93,407

	$	1,495,300		$	1,577,735

Liabilities and Shareholders’ Equity
Liabilities
Accrued compensation and benefits	$	63,268		$	158,033
Due to affiliates		330,194			346,265
Deferred incentive income		163,635			163,635
Debt obligations payable		439,750			729,041
Other liabilities		23,484			26,741

		1,020,331			1,423,715

Commitments and Contingencies
Equity
Class A shares, no par value, 1,000,000,000 shares authorized, 140,651,044 and 94,609,525 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively.		—			—
Class B shares, no par value, 750,000,000 shares authorized, 312,071,550 shares issued and outstanding		—			—
Paid-in capital		830,447			596,803
Retained earnings (accumulated deficit)		(625,130	)		(513,379	)
Accumulated other comprehensive income (loss)		(1,135	)		(866	)

Total Fortress shareholders’ equity		204,182			82,558

Principals’ and others’ interests in equity of consolidated subsidiaries - Note 6		270,787			71,462

Total equity		474,969			154,020

	$	1,495,300		$	1,577,735

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(dollars in thousands, except share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenues
Management fees from affiliates	$	108,425		$	149,605		$	214,077		$	293,662
Incentive income from affiliates		6,958			18,300			6,958			55,444
Expense reimbursements from affiliates		20,661			15,950			33,708			30,221
Other revenues (affiliate portion disclosed in Note 6)		3,043			4,241			6,640			9,649

		139,087			188,096			261,383			388,976

Expenses
Interest expense		7,605			9,888			15,791			20,224
Compensation and benefits		113,456			137,460			222,692			264,479
Principals agreement compensation		237,367			237,367			472,126			474,734
General, administrative and other		21,034			19,746			38,219			36,316
Depreciation and amortization		2,761			2,436			5,402			4,872

		382,223			406,897			754,230			800,625

Other Income (Loss)
Gains (losses) from investments
Net realized gains (losses)		(376	)		61			(772	)		1,674
Net realized gains (losses) from affiliate investments		234			(92	)		(14	)		155
Net unrealized gains (losses)		—			—			—			—
Net unrealized gains (losses) from affiliate investments		19,583			(6,584	)		17,754			(36,401	)
Tax receivable agreement liability reduction		—			—			(55	)		—
Earnings (losses) from equity method investees		51,057			(26,500	)		16,208			(75,629	)

		70,498			(33,115	)		33,121			(110,201	)

Income (Loss) Before Income Taxes		(172,638	)		(251,916	)		(459,726	)		(521,850	)
Income tax benefit (expense)		1,308			1,949			1,715			(5,303	)

Net Income (Loss)	$	(171,330	)	$	(249,967	)	$	(458,011	)	$	(527,153	)

Principals’ and Others’ Interests in Income (Loss) of Consolidated Subsidiaries	$	(126,738	)	$	(194,411	)	$	(346,260	)	$	(402,680	)

Net Income (Loss) Attributable to Class A Shareholders - Note 6	$	(44,592	)	$	(55,556	)	$	(111,751	)	$	(124,473	)

Dividends declared per Class A share	$	—		$	0.225		$	—		$	0.450

Earnings Per Class A share - Fortress Investment Group
Net income (loss) per Class A share, basic	$	(0.40	)	$	(0.62	)	$	(1.10	)	$	(1.36	)

Net income (loss) per Class A share, diluted	$	(0.41	)	$	(0.67	)	$	(1.10	)	$	(1.37	)

Weighted average number of Class A shares outstanding, basic		115,547,744			94,913,677			105,447,324			94,904,157

Weighted average number of Class A shares outstanding, diluted		427,619,294			406,985,227			417,518,874			406,975,707

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2009

(dollars in thousands)


	Class A Shares	Class B Shares	Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Fortress Shareholders’ Equity			Principals’ and Others’ Interests in Equity of Consolidated Subsidiaries			Total Equity
Equity - December 31, 2008	94,609,525	312,071,550	$	596,803		$	(513,379	)	$	(866	)	$	82,558		$	71,462		$	154,020
Contributions from principals’ and others’ interests in equity	—	—		—			—			—			—			3,590			3,590
Distributions to principals’ and others’ interests in equity (net of tax)	—	—		(446	)		—			—			(446	)		(34,659	)		(35,105	)
Public offering of Class A shares, net of offering costs	46,000,000	—		219,500			—			—			219,500			—			219,500
Dilution impact of public offering	—	—		(144,572	)		—			—			(144,572	)		144,572			—
Net deferred tax effects resulting from acquisition of Fortress
Operating Group units	—	—		14,549			—			—			14,549			—			14,549
Director restricted share grant	41,519	—		169			—			—			169			222			391
Capital increase related to equity-based compensation	—	—		144,444			—			—			144,444			433,208			577,652
Comprehensive income (loss) (net of tax)
Net income (loss)	—	—		—			(111,751	)		—			(111,751	)		(346,260	)		(458,011	)
Foreign currency translation	—	—		—			—			172			172			584			756
Comprehensive income (loss) from equity method investees	—	—		—			—			(441	)		(441	)		(1,932	)		(2,373	)

Total comprehensive income (loss)																			(459,628	)

Equity - June 30, 2009	140,651,044	312,071,550	$	830,447		$	(625,130	)	$	(1,135	)	$	204,182		$	270,787		$	474,969

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands)


	Six Months Ended June 30,
	2009			2008
Cash Flows From Operating Activities
Net income (loss)	$	(458,011	)	$	(527,153	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation and amortization		5,402			4,872
Other amortization and accretion		6,887			1,420
(Earnings) losses from equity method investees		(16,208	)		75,629
Distributions of earnings from equity method investees		771			2,792
(Gains) losses from investments		(16,968	)		34,572
Deferred incentive income		—			(35,494	)
Deferred tax (benefit) expense		(7,160	)		(3,434	)
Tax receivable agreement liability reduction		55			—
Equity-based compensation		577,949			556,131
Cash flows due to changes in
Due from affiliates		(32,219	)		14,841
Other assets		1,551			902
Accrued compensation and benefits		(92,918	)		(124,550	)
Due to affiliates		(16,126	)		(1,066	)
Deferred incentive income		—			26,077
Other liabilities		(3,166	)		7,634

Net cash provided by (used in) operating activities		(50,161	)		33,173

Cash Flows From Investing Activities
Contributions to equity method investees		(39,261	)		(82,343	)
Distributions of capital from equity method investees		27,548			182,072
Purchase of fixed assets		(1,670	)		(3,906	)
Proceeds from disposal of fixed assets		6			53

Net cash provided by (used in) investing activities		(13,377	)		95,876

Cash Flows From Financing Activities
Borrowings under debt obligations		—			450,000
Repayments of debt obligations		(289,291	)		(185,000	)
Payment of deferred financing costs		(4,162	)		(5,060	)
Proceeds from public offering		230,000			—
Costs related to public offering		(10,500	)		—
Dividends and dividend equivalents paid		—			(52,821	)
Principals’ and others’ interests in equity of consolidated subsidiaries - contributions		67			145
Principals’ and others’ interests in equity of consolidated subsidiaries - distributions		(35,407	)		(181,567	)

Net cash provided by (used in) financing activities		(109,293	)		25,697

Net Increase (Decrease) in Cash and Cash Equivalents		(172,831	)		154,746
Cash and Cash Equivalents, Beginning of Period		263,337			100,409

Cash and Cash Equivalents, End of Period	$	90,506		$	255,155

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	8,095		$	16,790

Cash paid during the period for income taxes	$	5,952		$	5,637

Supplemental Schedule of Non-cash Investing and Financing Activities
Employee compensation invested directly in subsidiaries	$	1,847		$	24,716

Investments of receivable amounts into Fortress Funds	$	—		$	43,355

Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid	$	—		$	103,776

See notes to consolidated financial statements

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

1. ORGANIZATION AND BASIS OF PRESENTATION

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

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

Private equity:

Private equity funds which make significant, control-oriented investments in debt and equity securities of public or privately held entities in North America and Western Europe, with a focus on acquiring and building assets-based businesses with significant cash flows; and

Publicly traded alternative investment vehicles, which Fortress refers to as “Castles,” which are companies that invest primarily in real estate and real estate related debt investments.

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

Hybrid funds:

Hybrid hedge funds, which make highly diversified investments globally in assets, opportunistic lending situations and securities throughout the capital structure with a value orientation, as well as in investment funds managed by external managers, and which include non-Fortress originated funds for which Fortress has been retained as manager as part of an advisory business; and

Hybrid private equity (“PE”) funds which are comprised of a family of “credit opportunities” funds focused on investing in distressed and undervalued assets, a family of “long dated value” funds focused on investing in undervalued assets with limited current cash flows and long investment horizons, a family of “real assets” funds focused on investing in tangible and intangible assets in four principal categories (real estate, capital assets, natural resources and intellectual property), and an Asian fund.

Principal investments in the above described funds.

2007 Reorganization of Fortress Operating Group and Recent Offering

Fortress Investment Group LLC was formed on November 6, 2006 for the purpose of becoming the general partner of Fortress Operating Group, completing the Nomura Transaction (described below), and effecting a public offering of shares and related transactions (the “Transactions”) in order to carry on the business of its predecessor, Fortress Operating Group, as a publicly traded entity. The Registrant is a limited liability company and its members are not responsible for any of its liabilities beyond the equity they have invested. Fortress’s formation documents allow for an indefinite life.

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

In May 2009, Fortress sold 46 million Class A shares in a public offering at a price to the public of $5.00 per share, for net proceeds of approximately $219.5 million after deducting the underwriters’ discount and other offering expenses. The Principals purchased an aggregate of 3.6 million of these shares, a senior employee purchased 0.4 million of these shares, and Nomura purchased 5.4 million of these shares, at the public offering price. A portion of the proceeds were used to pay down amounts outstanding under the credit agreement (Note 4).

Financial Statement Guide


Selected Financial Statement Captions	Note Reference	Explanation
Balance Sheet

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

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)


Selected Financial Statement Captions	Note Reference	Explanation
Investments in Equity Method Investees	3	The carrying value of Fortress’s principal investments in the Fortress Funds.

Options in Affiliates	3	The fair value of common stock options received from the Castles.

Due to Affiliates	6	Generally, amounts due to the Principals related to their interests in Fortress Operating Group and the tax receivable agreement.

Deferred Incentive Income	2	Incentive income already received from certain Fortress Funds based on past performance, which is subject to contingent repayment based on future performance.

Debt Obligations Payable	4	The balance outstanding on the credit agreement.

Principals’ and Others’ Interests in Equity of Consolidated Subsidiaries	6	The GAAP basis of the Principals’ ownership interests in Fortress Operating Group as well as employees’ ownership interests in certain subsidiaries.

Income Statement

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

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

Compensation and Benefits	7	Includes equity-based, profit-sharing and other compensation to employees.

Principals Agreement Compensation	N/A	As a result of the principals agreement, the value of a significant portion of the Principals’ equity in Fortress prior to the Nomura Transaction is being recorded as an expense over a five year period. Fortress is not a party to this agreement. It is an agreement between the Principals to further incentivize them to remain with Fortress. This GAAP expense has no economic effect on Fortress or its shareholders.

Gains (Losses) from Other Investments	N/A	Subsequent to the IPO, the result of asset dispositions or changes in the fair value of assets which are marked to market (primarily the Castles and GAGFAH).

Tax Receivable Agreement Liability Reduction	5	Represents a change in the amount due to the Principals under the tax receivable agreement.

Earnings (Losses) from Equity Method Investees	3	Fortress’s share of the net earnings (losses) of Fortress Funds resulting from its principal investments.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)


Selected Financial Statement Captions	Note Reference	Explanation
Income Tax Benefit (Expense)	5	The net tax result related to the current period. Certain of Fortress’s revenues are not subject to taxes because they do not flow through taxable entities. Furthermore, Fortress has significant permanent differences between its GAAP and tax basis earnings.

Principals’ and Others’ Interests in (Income) Loss of Consolidated Subsidiaries	6	Primarily the Principals’ and employees’ share of Fortress’s earnings based on their ownership interests in subsidiaries, including Fortress Operating Group. This amount is disclosed in order to provide a net income (loss) which relates only to Fortress’s Class A shareholders.

Earnings Per Share	8	GAAP earnings per Class A share based on Fortress’s capital structure, which is comprised of outstanding and unvested equity interests, including interests which participate in Fortress’s earnings, at both the Fortress and subsidiary levels.

Other

Distributions	8	A summary of dividends and distributions, and the related outstanding shares and units, is provided.

Distributable Earnings	10	A presentation of our financial performance by segment (fund type) is provided, on the basis of the operating performance measure used by Fortress’s management committee.

The accompanying consolidated and combined financial statements and related notes of Fortress have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Fortress’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Fortress’s consolidated and combined financial statements for the year ended December 31, 2008 and notes thereto included in Fortress’s current report on Form 8-K filed with the Securities and Exchange Commission on May 12, 2009. Capitalized terms used herein, and not otherwise defined, are defined in Fortress’s consolidated and combined financial statements for the year ended December 31, 2008.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

2. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS

Management Fees, Incentive Income and Related Profit Sharing Expense

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

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

Fortress recognized management fees and incentive income as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Private Equity
Private Equity Funds
Management fees - affil.	$	38,921	$	40,410	$	76,590	$	80,218
Incentive income - affil.		—		3,535		—		38,175
Castles
Management fees - affil.		11,950		13,136		23,340		26,073
Incentive income - affil.		—		—		—		12
Management fees - non-affil. (A)		694		950		1,340		1,832
Liquid Hedge Funds
Management fees - affil.		19,893		57,542		42,497		110,189
Incentive income - affil.		144		14,346		144		16,838
Management fees - non-affil. (A)		—		63		25		135
Incentive income - non-affil. (A)		—		—		—		203
Hybrid Funds
Hybrid Hedge Funds
Management fees - affil.		29,307		36,339		57,215		72,995
Incentive income - affil.		—		419		—		419
Management fees - non-affil. (A)		194		272		408		461
Incentive income - non-affil. (A)		163		—		985		—
Hybrid PE Funds
Management fees - affil.		8,354		2,178		14,435		4,187
Incentive income - affil.		6,814		—		6,814		—
Total
Management fees - affil.	$	108,425	$	149,605	$	214,077	$	293,662
Incentive income - affil. (B)	$	6,958	$	18,300	$	6,958	$	55,444
Management fees - non-affil. (A)	$	888	$	1,285	$	1,773	$	2,428
Incentive income - non-affil. (A)	$	163	$	—	$	985	$	203

(A)	Included in Other Revenues on the statement of operations.

(B)	See “Deferred Incentive Income” below.

Deferred Incentive Income

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

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

Incentive income from certain Fortress Funds, primarily hybrid hedge funds, as well as certain liquid hedge funds beginning in the second quarter of 2009, is earned based on achieving annual performance criteria. Accordingly, this incentive income is recorded as revenue at year end (in the fourth quarter of each year), is generally received subsequent to year end, and has not been recognized for these funds during the six months ended June 30, 2009 and 2008. If the amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, $0.1 million and $0.0 million of additional incentive income from affiliates would have been recognized during the six months ended June 30, 2009 and 2008, respectively. Incentive income based on achieving annual performance criteria that has not yet been recognized, if any, is not recorded on the balance sheet and is included as “undistributed” deferred incentive income in the table below.

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


	Distributed- Gross		Distributed- Recognized (A)			Distributed- Unrecognized (B)		Undistributed net of intrinsic clawback (C)(D)
Deferred incentive income as of December 31, 2008	$	470,798	$	(307,163	)	$	163,635	$	(89,085	)
Share of income (loss) of Fortress Funds		—		—			—		37,731
Recognition of previously deferred incentive income		—		—			—		—

Deferred incentive income as of June 30, 2009	$	470,798	$	(307,163	)	$	163,635	$	(51,354	)

(A)	All related contingencies have been resolved.

(B)	Reflected on the balance sheet.

(C)

At June 30, 2009, the undistributed incentive income is comprised of $46.6 million of gross undistributed incentive income, net of $97.9 million of previously distributed incentive income that would be returned by Fortress to the related funds if such funds were liquidated on June 30, 2009 at their net asset values.

(D)

From inception to June 30, 2009, Fortress has paid $137.7 million of compensation expense under its employee profit sharing arrangements (Note 7) in connection with distributed incentive income, of which $19.5 million has not been expensed because management has determined that it is not probable of being incurred as an expense and will be recovered from the related employees. If the $46.6 million of gross undistributed incentive income were realized, Fortress would recognize and pay an additional $21.1 million of compensation expense.

Private Equity Funds and Hybrid PE Funds

During the six months ended June 30, 2009, Fortress formed new private equity funds or hybrid PE funds which had capital commitments as follows as of June 30, 2009 (based on June 30, 2009 foreign exchange rates):


Fortress’s commitments	$	1,384
Fortress’s affiliates’ commitments		—
Third party investors’ commitments		136,983

Total capital commitments	$	138,367

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

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

In March 2009, one of the private equity Fortress Funds which was formed as a coinvestment fund to invest solely in GAGFAH (XETRA: GFJ), was liquidated and distributed all of its shares in GAGFAH to its investors, including Fortress. As a result, Fortress received 5.7 million shares of GAGFAH. Fortress elected to account for these shares at fair value pursuant to SFAS 159 (Note 3).

In June 2009, one of the private equity Fortress Fund portfolio companies, Eurocastle, issued convertible securities in the amount of €75 million ($105 million). These securities bear interest at 20% per annum, payable annually (but deferrable), have no stated maturity, and are convertible into common shares of Eurocastle at an initial conversion price of €0.30 per share (subject to adjustment based on the occurrence of certain capital events within Eurocastle, including the payment of dividends). The Fortress Fund which had an equity investment in Eurocastle acquired €15.4 million ($21.6 million) of these securities. Fortress acquired €1.2 million ($1.7 million) of these securities, which were recorded as part of Fortress’s investment in such portfolio company. In addition, the Principals and certain employees of Fortress acquired €8.8 million ($12.3 million) and €0.2 million ($0.2 million) of these securities, respectively.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

Liquid Hedge Funds and Hybrid Hedge Funds

During the six months ended June 30, 2009, Fortress formed, or became the manager of, hedge funds with net asset values as follows as of June 30, 2009:


	Liquid		Hybrid
Fortress	$	—	$	—
Fortress’s affiliates		—		—
Third party investors		—		3,140,000

Total NAV (A)	$	—	$	3,140,000

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

In the second quarter of 2009, Fortress launched its new flagship liquid hedge fund, Fortress Macro Fund. Fortress will receive management fees of between 1.5% and 2% of NAV and incentive income of between 15% and 20% of profits, based on elections made by investors in Fortress Macro Fund. Investors in Fortress’s prior flagship liquid hedge, Drawbridge Global Macro Fund (“DBGM”), may transfer the liquid portion of their investment in that fund to Fortress Macro Fund and retain their “highwater mark” with respect to incentive income (no incentive income will be earned from these investors’ capital until losses incurred through DBGM are recovered). This fund is not considered a “new fund” for purposes of the above disclosure as it replaces an existing fund.

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


	Liquid Hedge Funds				Hybrid Hedge Funds
Six Months Ended June 30,	Redemption Notices Received		Redemptions Paid		Redemption Notices Received		Redemptions Paid
2009	$	1,017,045	$	3,427,641	$	142,586	$	292,884
2008	$	207,523	$	337,071	$	—	$	571,375

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

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

On May 5, 2009, consolidated affiliates of Fortress executed several agreements, effective June 1, 2009, to become the investment manager of certain investment funds currently managed by D.B. Zwirn & Co., L.P. (the “Value Recovery Funds”) and to effect other related transactions. Fortress will receive management fees from these funds equal to 1% of realized proceeds and up to 1% per annum on certain managed assets, and may receive limited incentive income if aggregate realizations exceed an agreed threshold. These funds are now included in the hybrid hedge funds segment. The Value Recovery Funds are reflected in the new fund table above based on the NAV of the funds plus the fee paying basis for certain other managed assets.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

3. INVESTMENTS IN EQUITY METHOD INVESTEES AND OTHER EQUITY INVESTMENTS

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

Investments in Equity Method Investees

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


	Fortress’s Investment				Fortress’s Equity in Net Income (Loss)
	June 30,		December 31,		Three Months Ended June 30,						Six Months Ended June 30,
	2009		2008		2009			2008			2009			2008
Private equity funds, excluding NIH (A)	$	496,358	$	455,691	$	28,477		$	(25,642	)	$	(3,831	)	$	(67,100	)
NIH		3,500		3,666		123			(178	)		(156	)		881
Castles (B)		2,827		1,171		N/A			N/A			N/A			N/A

Total private equity		502,685		460,528		28,600			(25,820	)		(3,987	)		(66,219	)
Liquid hedge funds		14,177		29,338		957			(412	)		1,969			551
Hybrid hedge funds		200,517		185,676		16,490			2,048			14,341			(8,775	)
Hybrid PE funds		96,615		96,610		5,027			(2,326	)		3,499			(1,197	)

Total hybrid funds		297,132		282,286		21,517			(278	)		17,840			(9,972	)
Other		4,153		2,230		(17	)		10			386			11

	$	818,147	$	774,382	$	51,057		$	(26,500	)	$	16,208		$	(75,629	)

(A)	Includes Fortress’s $47.6 million direct investment in GAGFAH (XETRA:GFJ) common stock (a private equity portfolio company).

(B)	Fortress elected to record these investments, as well as its direct investment in GAGFAH, at fair value pursuant to SFAS 159.

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


	Six Months Ended June 30, 2009
	Private Equity									Liquid			Hybrid
	NIH			Other Funds (A)			Castles (B)			Hedge Funds			Hedge Funds		PE Funds			Other			Total
Investment, beginning	$	3,666		$	455,691		$	1,171		$	29,338		$	185,676	$	96,610		$	2,230		$	774,382
Earnings from equity method investees		(156	)		(3,831	)		N/A			1,969			14,341		3,499			386			16,208
Other comprehensive income from equity method investees		(10	)		—			N/A			—			—		(2,544	)		—			(2,554	)
Contributions to equity method investees		—			29,104			1,664			5,881			500		9,881			1,603			48,633
Distributions of earnings from equity method investees		—			—			N/A			(724	)		—		(27	)		(20	)		(771	)
Distributions of capital from equity method investees		—			(2,300	)		N/A			(22,287	)		—		(10,804	)		(46	)		(35,437	)

Total distributions from equity method investees		—			(2,300	)		N/A			(23,011	)		—		(10,831	)		(66	)		(36,208	)

Mark to fair value - during period (C)		N/A			16,530			(35	)		N/A			N/A		N/A			N/A			16,495
Translation adjustment		—			1,164			27			—			—		—			—			1,191

Investment, ending	$	3,500		$	496,358		$	2,827		$	14,177		$	200,517	$	96,615		$	4,153		$	818,147

Ending balance of undistributed earnings	$	899		$	185			N/A		$	156		$	54		4,020		$	366		$	5,680

(A)	Includes Fortress’s $47.6 million direct investment in GAGFAH (XETRA:GFJ) common stock (a private equity portfolio company).

(B)	Fortress elected to record these investments, as well as its direct investment in GAGFAH, at fair value pursuant to SFAS 159.

(C)	Recorded to Other Investments – Net Unrealized Gains (Losses) from Affiliate Investments.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

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”)
	June 30, 2009			December 31, 2008			June 30, 2009			December 31, 2008
Assets	$	10,265,746		$	9,362,237		$	268,419		$	278,161
Liabilities		(900,313	)		(1,058,392	)		(209,141	)		(215,416	)

Equity	$	9,365,433		$	8,303,845		$	59,278		$	62,745

Fortress’s Investment (A)	$	496,358		$	455,691		$	3,500		$	3,666

Ownership (B)		5.3	%		5.5	%		4.8	%		4.8	%


	Six Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenues and gains (losses) on investments	$	824,989		$	(2,125,464	)	$	5,630		$	33,385
Expenses		(130,114	)		(202,808	)		(8,573	)		(14,225	)

Net Income (Loss)	$	694,875		$	(2,328,272	)	$	(2,943	)	$	19,160

Fortress’s equity in net income (loss)	$	(3,831	)	$	(67,100	)	$	(156	)	$	881

(A)	Includes Fortress’s $47.6 million direct investment in GAGFAH (XETRA:GFJ) common stock (a private equity portfolio company). GAGFAH’s summary financial information is not included in this table.

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


	*Liquid Hedge Funds*						*Hybrid Hedge Funds*						*Hybrid PE Funds (B)*
	June 30, 2009			December 31, 2008			June 30, 2009			December 31, 2008			June 30, 2009			December 31, 2008
Assets	$	10,172,131		$	7,819,859		$	10,911,466		$	10,803,738		$	5,748,878		$	4,103,809
Liabilities		(5,587,829	)		(540,204	)		(3,748,399	)		(4,407,170	)		(2,399,104	)		(1,517,607	)
Minority interest		—			—			(22,889	)		(29,922	)		—			—

Equity	$	4,584,302		$	7,279,655		$	7,140,178		$	6,366,646		$	3,349,774		$	2,586,202

Fortress’s Investment	$	14,177		$	29,338		$	200,517		$	185,676		$	96,615		$	96,610

Ownership (A)		0.3	%		0.4	%		2.8	%		2.9	%		2.9	%		3.7	%


	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008			2009			2008
Revenues and gains (losses) on investments	$	482,313		$	161,368		$	732,268		$	7,427		$	729,199		$	(516	)
Expenses		(91,392	)		(337,725	)		(143,270	)		(207,400	)		(65,007	)		(17,745	)

Net Income (Loss)	$	390,921		$	(176,357	)	$	588,998		$	(199,973	)	$	664,192		$	(18,261	)

Fortress’s equity in net income (loss)	$	1,969		$	551		$	14,341		$	(8,775	)	$	3,499		$	(1,197	)

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

(B)

Includes one entity which is recorded on a one quarter lag (i.e. the balances reflected for this entity are for the periods ended March 31, 2009 and 2008, respectively). It is recorded on a lag because it is a German entity and does not provide financial reports under U.S. GAAP within the reporting timeframe necessary for U.S. public entities.

Investments in Variable Interest Entities

Fortress is not considered the primary beneficiary of, and therefore does not consolidate, any of the variable interest entities in which it holds an interest. No reconsideration events occurred during the six months ended June 30, 2009 which caused a change in Fortress’s accounting.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

The following table presents information as of June 30, 2009 regarding entities formed during the six months ended June 30, 2009 that were determined to be VIEs in which Fortress holds a variable interest. The amounts presented below are included in, and not in addition to, the equity method investment tables above.


	Fortress is not Primary Beneficiary
Business Segment	Gross Assets		Financial Obligations (A)		Fortress Investment (B)		Notes
Hybrid PE Funds	$	106,377	$	—	$	1,344	(C) (D)
Liquid Hedge Funds	$	6,624,559	$	4,787,834	$	5,086	(C) (D)
Hybrid Hedge Funds	$	823,426	$	598,297	$	458	(D) (E)

(A)

Represents financial obligations at the fund level, which are not recourse to Fortress’s general credit. Financial obligations include financial borrowings, derivative liabilities and short securities. In many cases, these funds have additional debt within unconsolidated subsidiaries. Of the financial obligations represented herein, $598.3 million represent financial borrowings which have a weighted average maturity of 3.7 years for hybrid hedge funds.

(B)

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

(C)

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

(D)

Fortress’s investment includes $3.5 million and $0.5 million of management fees receivable from the liquid hedge funds and hybrid hedge funds, respectively. Fortress’s investment also includes $0.3 million and $1.5 million of other receivables from the hybrid PE funds and liquid hedge funds, respectively.

(E)

Fortress is not the primary beneficiary of these entities, which represent collateralized loan obligation (“CLO”) structures whose equity is owned by one of the Fortress hybrid hedge funds, because the related funds (which are not consolidated) are more closely associated with the CLO’s than Fortress based on both a quantitative and qualitative analysis.

Fair Value of Financial Instruments

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


	Fair Value				Valuation Method
	June 30, 2009		December 31, 2008
Assets - Carried at Fair Value
Newcastle, Eurocastle and GAGFAH common shares	$	48,769	$	1,171	Level 1 - Quoted prices in active markets for identical assets
Eurocastle convertible debt	$	1,684	$	—	Level 2 - Transaction completed at quarter end at market value
Newcastle and Eurocastle options	$	116	$	39	Level 2 - Lattice-based option valuation models using significant observable inputs

4. DEBT OBLIGATIONS

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


							June 30, 2009
	Face Amount and						Weighted		Weighted
	Carrying Value				Contractual	Final	Average		Average
Debt Obligation	June 30, 2009		December 31, 2008		Interest Rate	Stated Maturity	Funding Cost (A)		Maturity (Years)
Credit agreement (B)
Revolving debt (C)	$	—	$	104,041	LIBOR + 2.50%(D)	May 2012	—		—
Term loan		350,000		350,000	LIBOR + 2.50%	May 2012	4.14	%	1.86
Delayed term loan (C)		89,750		275,000	LIBOR + 2.50%	May 2012	3.39	%	0.40

Total	$	439,750	$	729,041			3.99	%	1.56

(A)	The weighted average funding cost is calculated based on the contractual interest rate (utilizing the most recently reset LIBOR rate) plus the amortization of deferred financing costs. The most recently reset LIBOR rate was 0.31%.

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

(C)

Approximately $65.5 million was undrawn on the revolving debt facility as of June 30, 2009. The revolving debt facility includes a $25 million letter of credit subfacility of which $9.5 million was utilized. Lehman Brothers Commercial Paper, Inc., which is committed to fund $7.2 million (including $0.9 million of the outstanding letters of credit) of the $75 million revolving credit facility, has filed for bankruptcy protection, did not fund its pro rata portion of the last borrowing under this facility, and it is reasonably possible that it will not fund its portion of the commitments. As a result, $59.3 million of the undrawn amount was available.

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

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

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

On June 11, 2009, Fortress entered into an amendment to its credit agreement. This amendment, among other things, (i) allows Fortress to repurchase outstanding loans made under the credit agreement subject to certain conditions, (ii) permits Fortress to make investments in Fortress Funds in any amount it deems appropriate, provided that investments in Fortress Funds created after June 11, 2009 in excess of 1.5% of such Fund’s aggregate called capital may not be deducted from Free Cash Flow (as defined in the credit agreement), (iii) excludes Managed Accounts (as defined in the credit agreement) from the definition of Material Fortress Funds, (iv) expands the term “Permitted Fund Termination” to include the termination, dissolution, liquidation or windup of a Fortress Fund either (a) after the last asset or investment is sold in the ordinary course of business or (b) after the date of dissolution as stated in the applicable fund document, and (v) revises the financial covenants by (a) reducing the percentage of Free Cash Flow that must be applied to prepay outstanding term loans from 75% to 50% if, on the applicable measurement dates, the amount of outstanding commitments and loans does not exceed $315 million, the amount of outstanding loans does not exceed $300 million and the Consolidated Leverage Ratio (as calculated according to the terms of the Credit Agreement) does not exceed 2.0 to 1.0, and (b) increasing the amount of restricted payments that can be made, with such increase specified according to formulas set forth in the Credit Agreement.

In connection with the repayment of a portion of the term loan from proceeds of our May 2009 capital raise (Note 1), $1.6 million of deferred loan coasts were written off to interest expense.

To management’s knowledge, there have not been any market transactions in Fortress’s debt obligations. However, management believes the fair value of this debt was between 75% and 80% of face value at June 30, 2009.

Fortress was in compliance with all of its debt covenants as of June 30, 2009. The following table sets forth the financial covenant requirements as of June 30, 2009 (dollars in millions).


	Requirement		Actual
AUM	>$	22,000	$	31,041
Consolidated Leverage Ratio	<	3.50		1.50
Required Investment Assets	>$	449	$	790
Fortress Fund Investments	>$	180	$	473
Total Investments	>$	270	$	605

5. INCOME TAXES AND TAX RELATED PAYMENTS

For the six months ended June 30, 2009, an estimated annual effective tax rate of 1.51% was used to compute the tax provision. Fortress incurred a loss before income taxes for financial reporting purposes, after deducting the compensation expense arising from the Principals’ forfeiture agreement. However, this compensation expense is not deductible for income tax purposes. Also, a portion of Fortress’s income is not subject to U.S. federal income tax, but is allocated directly to Fortress’s shareholders.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

The provision for income taxes consists of the following:


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Current
Federal income tax	$	(196	)	$	(660	)	$	619		$	1,994
Foreign income tax		580			562			992			1,199
State and local income tax		1,709			1,862			3,834			5,544

		2,093			1,764			5,445			8,737

Deferred
Federal income tax expense (benefit)		(1,752	)		(1,311	)		(3,271	)		(20	)
Foreign income tax expense (benefit)		443			22			347			180
State and local income tax expense (benefit)		(2,092	)		(2,424	)		(4,236	)		(3,594	)

		(3,401	)		(3,713	)		(7,160	)		(3,434	)

Total expense (benefit)	$	(1,308	)	$	(1,949	)	$	(1,715	)	$	5,303

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


	June 30, 2009			December 31, 2008
Total deferred tax assets	$	531,249		$	504,017
Valuation allowance		(101,455	)		(95,951	)

Net deferred tax assets	$	429,794		$	408,066

Total deferred tax liabilities (A)	$	525		$	592

(A)	Included in Other Liabilities

The equity offering during the second quarter increased FIG Corp’s ownership percentage in the underlying Fortress Operating Group entities. As a result of the increased ownership, the deferred tax asset was increased by $22.8 million with an offsetting increase of $8.3 million to the valuation allowance. The establishment of the net deferred tax asset of $14.5 million increased additional paid-in capital.

For the six months ended June 30, 2009, a deferred income tax provision of $0.18 million was credited to other comprehensive income, primarily related to the equity method investees. A current income tax benefit of $0.30 million was credited to additional paid in capital, related to (i) dividend equivalent payments on RSUs (Note 7), and (ii) distributions to Fortress Operating Group restricted partnership unit holders (Note 7), which are currently deductible for income tax purposes.

Tax Receivable Agreement

Although the tax receivable agreement payments are calculated based on annual tax savings, for the six months ended June 30, 2009, the payments which would have been made pursuant to the tax receivable agreement, if such period was calculated by itself, were estimated to be $7.8 million.

6. RELATED PARTY TRANSACTIONS AND INTERESTS IN CONSOLIDATED SUBSIDIARIES

Affiliate Receivables and Payables

Due from affiliates was comprised of the following:


	Private Equity						Hybrid
	Funds		Castles		Liquid Hedge Funds		Hedge Funds		PE Funds		Other		Total
June 30, 2009
Management fees and incentive income	$	29,235	$	4,068	$	3,625	$	2,208	$	8,280	$	—	$	47,416
Expense reimbursements		6,613		4,765		2,618		4,399		2,965		—		21,360
Dividends and distributions		—		—		—		—		—		—		—
Other		172		—		—		—		539		1,222		1,933

Total	$	36,020	$	8,833	$	6,243	$	6,607	$	11,784	$	1,222	$	70,709

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)


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

Total	$	14,123	$	6,917	$	1,540	$	3,400	$	10,443	$	2,081	$	38,504

Due to affiliates was comprised of the following:


	June 30, 2009		December 31, 2008
Principals
- Tax receivable agreement - Note 5	$	321,237	$	338,649
- Distributions payable on Fortress Operating Group units		—		—
Other		8,957		7,616

	$	330,194	$	346,265

As of June 30, 2009, Due from Affiliates included $27.9 million of past due management fees from, and $2.9 million of expenses funded on behalf of, certain Fortress Funds. Although such funds are currently experiencing liquidity issues, Fortress believes these fees will ultimately be collectable as the NAV’s of the funds exceed the amounts owed.

Other Related Party Transactions

For the six months ended June 30, 2009 and 2008, Other Revenues included approximately $3.3 million and $1.0 million, respectively, of revenues from affiliates.

Fortress has entered into cost sharing arrangements with the Fortress Funds, including market data services and subleases of certain of its office space. Expenses borne by the Fortress Funds under these agreements are generally paid directly by those entities (i.e. they are generally not paid by Fortress and reimbursed). For the six months ended June 30, 2009 and 2008, these expenses, mainly related to subscriptions to market data services, approximated $8.5 million and $9.4 million, respectively.

In February 2007, we entered into an agreement with two employees who were departing from Fortress to form their own investment management company. We received a minority ownership interest in the management company, which receives management fees and incentive income from all funds formed by such 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 (of which that Fortress Fund has invested approximately $100 million as of April 2009). In December 2008, the Fortress Fund agreed to eliminate its $100 million unfunded commitment and provide that fund with a $25 million revolving credit facility.

In March 2009, a private equity Fortress Fund repaid in full the remaining $14.4 million of non-dividend bearing preferred equity it had issued to three of the Principals.

In April 2009, five employees terminated their employment with Fortress’s private equity funds’ operating subsidiary in order to become employees of GAGFAH, one of Fortress’s private equity portfolio companies. These employees had received RSUs from Fortress. Fortress has modified these awards, valued at approximately $0.9 million in the aggregate, such that each employee’s vesting continues on the original vesting schedule as long as such employee remains employed by GAGFAH.

In April 2009, Fortress advanced $0.7 million to one of its senior employees who is not an officer. This advance bears interest at LIBOR+3% and is payable on the earlier of (i) April 6, 2012, or (ii) the termination of employment.

In May 2009, in connection with the launch of a new Fortress Fund in Asia, Fortress entered into an agreement under which Nomura acted as a placement agent and assisted the fund in raising investor capital. Nomura raised a total of $95.5 million in committed capital for the fund and receives, from Fortress, a fee equal to 1% of all such capital.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

Principals’ and Others’ Interests in Consolidated Subsidiaries

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

This balance sheet caption was comprised of the following:


	June 30, 2009		December 31, 2008
Principals’ Fortress Operating Group units	$	240,388	$	47,305
Employee interests in majority owned and controlled fund advisor and general partner entities		29,562		23,981
Other		837		176

Total	$	270,787	$	71,462

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Principals’ Fortress Operating Group units	$	(128,926	)	$	(194,714	)	$	(348,549	)	$	(403,590	)
Employee interests in majority owned and controlled fund advisor and general partner entities		2,183			303			2,211			442
Other		5			—			78			468

Total	$	(126,738	)	$	(194,411	)	$	(346,260	)	$	(402,680	)

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Net income (loss) attributable to Fortress	$	(44,592	)	$	(55,556	)	$	(111,751	)	$	(124,473	)
Transfers (to) from the Principals’ and Others’ Interests:
Decrease in Fortress’s paid-in-capital for Purchase of 46,000,000 Fortress Operating Group Units		(144,572	)		—			(144,572	)		—

Change from net income (loss) attributable to Fortress and transfers (to) from Principals’ and Others’ Interests	$	(189,164	)	$	(55,556	)	$	(256,323	)	$	(124,473	)

As a result of the May 2009 capital raise (Note 1), the Principals’ recorded interests in FOG were increased by $151.3 million (the capital raise was accretive to the Principals’ interests).

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements.” SFAS 160 clarifies the classification of non-controlling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such non-controlling interests. SFAS 160 applies to reporting periods beginning after December 15, 2008. SFAS 160 had the following effects on Fortress’s financial statements: (i) reclassification of Principals’ and Others’ Interests in Equity of Consolidated Subsidiaries from the “mezzanine” section of the balance sheet (between liabilities and equity) to equity, (ii) removal of Principals’ and Others’ Interests in Income of Consolidated Subsidiaries from the calculation of Net Income (Loss) on the statement of operations, and disclosure thereof below Net Income (Loss), and (iii) with respect to potential future transactions in which Fortress could acquire Fortress Operating Group units from the Principals pursuant to their exchange (along with Class B shares) for Class A shares (or otherwise), these transactions would be accounted for as equity transactions rather than as a step acquisition of Fortress Operating Group (as would be required under prior accounting principles). There is no effect from adoption of SFAS 160 on the equity which pertains to Class A shareholders, or net income (loss) allocable to Class A shareholders, or on Fortress’s liquidity.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

7. EQUITY-BASED AND OTHER COMPENSATION

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Equity-based compensation, per below	$	52,779	$	52,972	$	105,823	$	81,397
Profit-sharing expense, per below		8,245		20,171		11,849		41,989
Discretionary bonuses		23,290		29,599		46,148		74,056
Other payroll, taxes and benefits		29,142		34,718		58,872		67,037

	$	113,456	$	137,460	$	222,692	$	264,479

Equity-Based Compensation

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


	RSUs								Restricted Shares			RPUs
	Employees				Non-Employees				Issued to Directors			Employees
	Number		Value (A)		Number		Value (A)		Number	Value (A)		Number	Value (A)
Outstanding as of December 31, 2008	40,865,316		$	16.53	8,600,867		$	14.84	109,174	$	17.76	31,000,000	$	13.75
Issued	—			—	352,162			2.58	37,662		2.52	—		—
Converted	(3,857	)		14.54	—			—	—		—	—		—
Forfeited	(1,031,094	)		13.37	(1,117,674	)		14.70	—		—	—		—

Outstanding as of June 30, 2009 (B)	39,830,365		$	16.61	7,835,355		$	14.31	146,836	$	13.85	31,000,000	$	13.75


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Expense incurred (B)
Employee RSUs	$	24,842	$	27,337	$	49,265	$	53,909
Non-Employee RSUs		3,509		5,421		7,970		5,411
Restricted Shares		149		150		297		299
LTIP		1,714		1,715		3,410		3,429
RPUs		22,565		18,349		44,881		18,349

Total equity-based compensation expense	$	52,779	$	52,972	$	105,823	$	81,397

(A)	Represents the weighted average grant date estimated fair value per share or unit. The weighted average estimated fair value per unit as of June 30, 2009 for awards granted to non-employees was $3.42, which is equal to the closing trading price per share of Fortress’s Class A shares on such date.

(B)	In future periods, Fortress will recognize compensation expense on its non-vested equity based awards of $746.0 million, with a weighted average recognition period of 3.61 years. This does not include amounts related to the Principals Agreement.

When Fortress records equity-based compensation expense, including that related to the Principals Agreement, it records a corresponding increase in capital.

Profit Sharing Expense

Recognized profit sharing compensation expense is summarized as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009			2008
Private equity funds (A)	$	—	$	1,146	$	(15	)	$	2,544
Castles (A)		—		1,029		(137	)		2,157
Liquid hedge funds		2,886		16,119		5,450			33,117
Hybrid hedge funds		1,765		1,651		2,957			3,706
Hybrid private equity funds		3,594		—		3,594			—
Other		—		226		—			465

Total	$	8,245	$	20,171	$	11,849		$	41,989

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

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

8. EARNINGS PER SHARE AND DISTRIBUTIONS


	Three Months Ended June 30, 2009						Six Months Ended June 30, 2009
	Basic			Diluted			Basic			Diluted
Weighted average shares outstanding
Class A shares outstanding		114,810,756			114,810,756			104,711,660			104,711,660
Fully vested restricted Class A share units with dividend equivalent rights		631,260			631,260			631,260			631,260
Fully vested restricted Class A shares		105,728			105,728			104,404			104,404
Fortress Operating Group units exchangeable into Fortress Investment
Group LLC Class A shares (1)		—			312,071,550			—			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		115,547,744			427,619,294			105,447,324			417,518,874

Basic and diluted net income (loss) per Class A share
Net income (loss)	$	(44,592	)	$	(44,592	)	$	(111,751	)	$	(111,751	)
Dilution in earnings due to RPUs treated as a participating security of Fortress Operating Group (4)		(2,052	)		(2,052	)		(3,729	)		(3,729	)
Dividend equivalents declared on non-vested restricted Class A shares and restricted Class A share units		—			—			—			—
Add back Principals’ and others’ interests in loss of Fortress Operating Group, net of assumed corporate income taxes at enacted rates, attributable to Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares (1)		—			(129,046	)		—			(345,672	)

Net income (loss) available to Class A shareholders	$	(46,644	)	$	(175,690	)	$	(115,480	)	$	(461,152	)

Weighted average shares outstanding		115,547,744			427,619,294			105,447,324			417,518,874

Basic and diluted net income (loss) per Class A share	$	(0.40	)	$	(0.41	)	$	(1.10	)	$	(1.10	)


	Three Months Ended June 30, 2008						Six Months Ended June 30, 2008
	Basic			Diluted			Basic			Diluted
Weighted average shares outstanding
Class A shares outstanding		94,500,351			94,500,351			94,500,351			94,500,351
Fully vested restricted Class A share units with dividend equivalent rights		394,286			394,286			394,286			394,286
Fully vested restricted Class A shares		19,040			19,040			9,520			9,520
Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares (1)		—			312,071,550			—			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		94,913,677			406,985,227			94,904,157			406,975,707

Basic and diluted net income (loss) per Class A share
Net income (loss)	$	(55,556	)	$	(55,556	)	$	(124,473	)	$	(124,473	)
Dilution in earnings due to RPUs treated as a participating security of Fortress Operating Group (4)		(2,040	)		(2,040	)		(1,987	)		(1,987	)
Dividend equivalents declared on non-vested restricted Class A shares and restricted Class A share units		(1,159	)		(1,159	)		(2,276	)		(2,276	)
Add back Principals’ and others’ interests in loss of Fortress Operating Group, net of assumed corporate income taxes at enacted rates, attributable to Fortress Operating Group units exchangeable into Fortress Investment Group LLC Class A shares (1)		—			(214,667	)		—			(429,829	)

Net income (loss) available to Class A shareholders	$	(58,755	)	$	(273,422	)	$	(128,736	)	$	(558,565	)

Weighted average shares outstanding		94,913,677			406,985,227			94,904,157			406,975,707

Basic and diluted net income (loss) per Class A share	$	(0.62	)	$	(0.67	)	$	(1.36	)	$	(1.37	)

(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. To the extent charges, particularly tax related charges, are incurred by the Registrant (i.e. not at the Fortress Operating Group level), the effect may be anti-dilutive.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

(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 Fortress’s Class A shares and therefore participate fully in the results of Fortress’s operations from the date they are granted. They are included in the computation of both basic and diluted earnings per Class A share using the two-class method for participating securities, except during periods of net losses.

(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 in the periods presented, the effect of the units on the calculation is anti-dilutive for each of the periods. The weighted average restricted Class A share units which are not entitled to receive dividend or dividend equivalent payments outstanding were:


	Three Months Ended June 30,		Six Months Ended June 30,
	2009	2008	2009	2008
Share Units	24,558,303	27,641,251	24,950,597	27,729,198

(4)

Fortress Operating Group RPUs are eligible to receive partnership distribution equivalent payments when distributions are declared and paid on Fortress Operating Group units. The RPUs represent a participating security of Fortress Operating Group and the resulting dilution in Fortress Operating Group earnings available to Fortress is reflected in the computation of both basic and diluted earnings per Class A share using the method prescribed for securities issued by a subsidiary. For purposes of the computation of basic and diluted earnings per Class A share, the fully vested restricted Class A share units with dividend equivalent rights are treated as outstanding Class A shares of Fortress and as outstanding partnership units of Fortress Operating Group.

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		Weighted Average
	Three Months Ended June 30,		Six Months Ended June 30,
	2009	2008	2009	2008
Class A shares (public shareholders)	114,810,756	94,500,351	104,711,660	94,500,351
Restricted Class A shares (directors)	138,160	104,219	136,836	100,757
Restricted Class A share units (employees) (A)	631,260	394,286	631,260	394,286
Restricted Class A share units (employees) (B)	22,955,132	23,652,206	22,955,132	23,708,849
Fortress Operating Group units (Principals)	312,071,550	312,071,550	312,071,550	312,071,550
Fortress Operating Group RPUs (senior employee)	31,000,000	25,208,791	31,000,000	12,604,396

Total	481,606,858	455,931,403	471,506,438	443,380,189


	As of June 30, 2009	As of December 31, 2008
Class A shares (public shareholders)	140,504,208	94,500,351
Restricted Class A shares (directors)	146,836	109,174
Restricted Class A share units (employees) (A)	631,260	631,260
Restricted Class A share units (employees) (B)	22,955,132	22,955,132
Fortress Operating Group units (Principals)	312,071,550	312,071,550
Fortress Operating Group RPUs (senior employee)	31,000,000	31,000,000

Total	507,308,986	461,267,467

(A)	Represents fully vested restricted Class A share units which are entitled to dividend equivalent payments.

(B)	Represents nonvested restricted Class A share units which are entitled to dividend equivalent payments.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

Dividends and distributions during the six months ended June 30, 2009 are summarized as follows:


			Current Year
	Declared in Prior Year, Paid Current Year		Declared and Paid		Declared but not yet Paid		Total
Dividends on Class A Shares	$	—	$	—	$	—	$	—
Dividend equivalents on restricted Class A share units (A)		—		—		—		—
Distributions to Fortress Operating Group unit holders (Principals) (B)		—		28,515		—		28,515
Distributions to Fortress Operating Group RPU holders (Note 7) (B)		—		2,832		—		2,832

Total distributions	$	—	$	31,347	$	—	$	31,347

(A)	A portion of these dividend equivalents, if any, related to RSUs expected to be forfeited, is included as compensation expense in the consolidated statement of operations and is therefore considered an operating cash flow.

(B)	Fortress Operating Group made distributions to the principals and RPU holders in connection with distributions made to FIG Corp. to pay Fortress’s income taxes.

The following table summarizes our comprehensive income (loss) (net of taxes) for the six months ended June 30, 2008:


	Impact to Total Fortress Shareholders’ Equity			Impact to Principals’ and Others’ Interests in Equity of Consolidated Subsidiaries			Impact to Total Equity
Net income (loss)	$	(124,473	)	$	(402,680	)	$	(527,153	)
Foreign currency translation		439			(344	)		95
Comprehensive income (loss) from equity method investees		282			(8	)		274

Total comprehensive income (loss)	$	(123,752	)	$	(403,032	)	$	(526,784	)

9. COMMITMENTS AND CONTINGENCIES

Other than as described below, Fortress’s commitments and contingencies remain materially unchanged from December 31, 2007.

Private Equity Fund and Hybrid PE Fund Capital Commitments – Fortress has remaining capital commitments to certain of the Fortress Funds which aggregated $131.0 million as of June 30, 2009. These commitments can be drawn by the funds on demand.

Minimum Future Rentals – Fortress is a lessee under a number of operating leases for office space.

Minimum future rent payments under these leases is as follows:


July 1, to December 31, 2009	$	9,428
2010		18,579
2011		11,981
2012		11,338
2013		11,085
2014		10,698
Thereafter		22,633

Total	$	95,742

Rent expense recognized on a straight-line basis during the six months ended June 30, 2009 and 2008 was $9.8 million and $9.3 million, respectively, and during the three months ended June 30, 2009 and 2008 was $4.9 million and $4.5 million, respectively, and was included in General, Administrative and Other Expense.

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 June 30, 2009, if any, will not materially affect Fortress’s results of operations, liquidity or financial position.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

10. SEGMENT REPORTING

Fortress conducts its management and investment business through the following six primary segments: (i) private equity funds, (ii) Castles, (iii) liquid hedge funds, (iv) hybrid hedge funds, (v) hybrid private equity (“PE”) funds, and (vi) principal investments in these funds as well as cash that is available to be invested. Due to the increased significance of the hybrid PE funds segment, it has been disaggregated from the private equity fund segment in this period and for all periods presented.

“Distributable earnings” is a measure of operating performance used by management in analyzing its segment and overall results. For the existing Fortress businesses it is equal to net income (loss) attributable to Fortress’s Class A shareholders adjusted as follows:

Incentive Income

(i) a.

for Fortress Funds which are private equity funds and hybrid PE 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 by Fortress’s chief operating decision maker as described below (net of the reversal of any prior such reserves that are no longer deemed necessary), minus (b) incentive income recorded in accordance with GAAP,

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:

for equity method investments in the private equity funds and hybrid PE 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,

subtracting gains (or adding losses) on stock options held in the Castles,

subtracting unrealized gains (or adding unrealized losses) from consolidated private equity funds and hybrid PE funds,

subtracting unrealized gains (or adding unrealized losses) on direct investments in publicly traded portfolio companies and in the Castles,

(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 and RPUs (including the portion of related dividend and distribution 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,

(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 benefit or expense and any expense recorded in connection with the tax receivable agreement (Note 5).

Total segment assets 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,

(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.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

Distributable Earnings Impairment

Investment Impairment for DE purposes

Fortress had the following direct and indirect investments in private equity funds, Castles and hybrid PE funds as of June 30, 2009:


Fund	Fortress Share of NAV		Fortress Current Cost Basis (A)		Deficit			% Below Current Cost Basis (A)	% Below Original Cost Basis (B)	Periods in Deficit	Six Months Ended Jun 30, 2009 DE Impairment Recorded			Notes
Main Funds
Fund I	$	190	$	—		N/A		N/A	N/A	N/A	$	—
Fund II		3,829		2,317		N/A		N/A	N/A	N/A		(248	)
Fund III and Fund III CO		7,166		5,286		N/A		N/A	(37%)	5 Quarters		(232	)
Fund IV and Fund IV CO		109,891		98,747		N/A		N/A	(28%)	7 Quarters		(6,184	)
Fund V and Fund V CO		50,769		34,926		N/A		N/A	(56%)	7 Quarters		(5,553	)
Mortgage Opportunities Funds		3,506		2,947		N/A		N/A	(62%)	5 Quarters		(518	)
Long Dated Value Funds		20,372		17,792		N/A		N/A	N/A	N/A		—
Real Assets Funds		16,881		12,581		N/A		N/A	N/A	N/A		—
Credit Opportunities Funds		19,982		13,353		N/A		N/A	(1%)	5 Quarters		(562	)
Japan Opportunity Fund		1,056		1,037		N/A		N/A	N/A	N/A		—
Yama 1 and 2 GK		2,081		2,042		N/A		N/A	N/A	N/A		—
Single Investment Funds and Investments (combined)
GAGFAH (XETRA: GFJ)		56,264		32,578		N/A		N/A	(43%)	5 Quarters		(6,588	)
Brookdale (NYSE: BKD)		14,142		8,200		N/A		N/A	(69%)	7 Quarters		(749	)
Aircastle (NYSE: ACT)		487		366		N/A		N/A	N/A	N/A		—
Private investment #1		43,751		43,115		N/A		N/A	(34%)	5 Quarters		(10,002	)
Private investment #2		440		590		(150	)	(25%)	(95%)	6 Quarters		(683	)
Private investment #3		232,989		275,708		(42,719	)	(15%)	(15%)	7 Quarters		—		(C	)
Private investment #4		37,025		31,525		N/A		N/A	N/A	N/A		—
Other, net		40,542		42,701		(2,159	)	(5%)	N/A	Various		(760	)	(D	)
Castles
Eurocastle (EURONEXT: ECT)		2,149		1,973		N/A		N/A	(83%)	5 Quarters		—
Newcastle (NYSE: NCT)		677		667		N/A		N/A	(96%)	4 Quarters		(195	)

Total	$	664,189	$	628,451	$	(45,028	)				$	(32,274	)

(A)	Current cost basis is net of any impairments taken in prior quarters but before impairment taken at June 30, 2009.

(B)	Original cost basis is before any impairment.

(C)

This fund is a single asset fund invested in a railroad and commercial real estate company. The net asset value of this investment is only 15% below Fortress’s basis and the fund’s life extends to 2017. Fortress anticipates that this value will recover during the fund’s life and has the intent and ability to hold its investment until recovery. As a result, Fortress’s CODM has determined that this decline in value does not meet the definition of other than temporary impairment at this time.

(D)

This primarily represents indirect investments in funds through hedge fund special investment accounts, including Fortress Funds not represented individually in the table as well as funds managed by third parties. Fortress’s CODM has analyzed each of these investments individually and recorded other than temporary impairment where it was deemed appropriate.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

Clawback Reserve on Incentive Income for DE Purposes

Fortress had recognized incentive income for DE purposes from the following private equity funds, which are subject to contingent clawback, as of June 30, 2009:


Fund	Incentive Income Received		No Longer Subject to Clawback		Subject to Clawback (A)		Intrinsic Clawback (B)		Employee Portion (C)		Net Clawback		Prior Net DE Reserves Taken (D)			Periods in Intrinsic Clawback	Six Months Ended June 30, 2009 Gross DE Reserve Recorded (D)		Notes
Fund I	$	308,633	$	296,882	$	11,751	$	—	$	—	$	—	$	—		N/A	$	—	(E	)
Fund II		254,688		113,872		140,816		14,835		5,494		9,341		(25,842	)	3 Quarters		—	(F	)
Fund III		72,483		—		72,483		72,483		27,375		45,108		(45,108	)	6 Quarters		—	(G	)
FRID		16,739		—		16,739		16,739		6,698		10,041		(10,041	)	8 Quarters		—	(G	)

Total	$	652,543	$	410,754	$	241,789	$	104,057	$	39,567	$	64,490	$	(80,991	)		$	—

(A)	Includes deferred incentive income from the consolidated balance sheet plus the maximum payment under the guarantee, in both cases gross of promote related to non-fee paying investors (affiliates).

(B)	Intrinsic clawback is the maximum amount of clawback that would be required to be repaid to the fund if the fund were liquidated at its NAV as of the reporting date. It has not been reduced for any tax related effects.

(C)

Employees who have received profit sharing payments in connection with private equity or hybrid PE incentive income are liable to repay Fortress for their share of any clawback. Fortress remains liable to the funds for these amounts even if it is unable to collect the amounts from employees (or former employees).

(D)	Net of promote related to non-fee paying investors (affiliates).

(E)	This fund had significant unrealized gains at June 30, 2009. As a result, the CODM determined that no reserve for clawback was required.

(F)	The net intrinsic clawback in this fund, after the employee portion, is less than previously recorded reserves. As a result, no further reserve was deemed necessary.

(G)	The potential clawback on these funds has been fully reserved in prior quarters.

Impairment Determination

Fortress has recorded a total of approximately $32.3 million of impairment and reserves for DE purposes on certain private equity funds and hybrid PE funds as described above for DE purposes during the six months ended June 30, 2009. Fortress expects aggregate returns on its other private equity funds and hybrid PE funds that are in an unrealized investment loss or intrinsic clawback position to ultimately exceed their carrying amount or breakeven point, as applicable. If such funds were liquidated at their June 30, 2009 NAV (although Fortress has no current intention of doing so), the result would be additional impairment losses and reserves for DE purposes of approximately $47.9 million.

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

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

June 30, 2009 and the Six Months Then Ended


					Liquid Hedge Funds		Hybrid				Principal Investments			Unallocated			Fortress Subtotal
	Private Equity						Hedge Funds		PE Funds
	Funds		Castles				Hedge Funds		PE Funds
Segment revenues
Management fees	$	76,515	$	24,430	$	42,522	$	57,624	$	14,435	$	—		$	—		$	215,526
Incentive income		—		—		247		1,013		6,814		—			—			8,074

Segment revenues - total	$	76,515	$	24,430	$	42,769	$	58,637	$	21,249	$	—		$	—		$	223,600

Pre-tax distributable earnings	$	56,856	$	10,714	$	12,706	$	10,371	$	6,823	$	(29,114	)	$	(294	)	$	68,062

Total segment assets	$	36,020	$	8,893	$	6,243	$	6,548	$	11,784	$	867,445		$	507,632		$	1,444,565

															(A	)


	Fortress Subtotal		Reconciliation to GAAP			Fortress Consolidated*			Principals and Others			GAAP Net Income (Loss)
Revenues	$	223,600	$	37,783		$	261,383

Pre-tax distributable earnings / net income (loss)	$	68,062	$	(179,813	)	$	(111,751	)	$	(346,260	)	$	(458,011	)

Total assets	$	1,444,565	$	50,735		$	1,495,300

(A)	Unallocated assets include deferred tax assets of $429.8 million.

Six Months Ended June 30, 2008


					Liquid Hedge Funds		Hybrid				Principal Investments			Unallocated		Fortress Subtotal
	Private Equity						Hedge Funds		PE Funds
	Funds		Castles				Hedge Funds		PE Funds
Segment revenues
Management fees	$	80,143	$	27,655	$	110,325	$	73,455	$	4,187	$	—		$	—	$	295,765
Incentive income		28,741		12		17,040		872		—		—			—		46,665

Segment revenues - total	$	108,884	$	27,667	$	127,365	$	74,327	$	4,187	$	—		$	—	$	342,430

Pre-tax distributable earnings	$	81,647	$	8,204	$	45,426	$	11,279	$	239	$	(30,656	)	$	7	$	116,146


	Fortress Subtotal		Reconciliation to GAAP			Fortress Consolidated*			Principals and Others			GAAP Net Income (Loss)
Revenues	$	342,430	$	46,546		$	388,976

Pre-tax distributable earnings / net income (loss)	$	116,146	$	(240,619	)	$	(124,473	)	$	(402,680	)	$	(527,153	)

*	Net income (loss) presented herein represents net income (loss) attributable to Fortress’s Class A shareholders.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

Reconciling items between segment measures and GAAP measures:


	June 30, 2009 and the Six Months then Ended			Six Months Ended June 30, 2008
Adjustments from segment revenues to GAAP revenues
Adjust management fees*	$	325		$	325
Adjust incentive income		(131	)		9,434
Adjust income from the receipt of options		—			—
Other revenues*
Adjust management fees from non-affiliates		(1,774	)		(2,428	)
Adjust incentive income from non-affiliates		(985	)		(655	)
Adjust other revenues (including expense reimbursements)		40,348			39,870

		37,589			36,787

Total adjustments	$	37,783		$	46,546


* Segment revenues do not include GAAP other revenues, except to the extent they represent management fees or incentive income; such revenues are included elsewhere in the calculation of distributable earnings.

Adjustments from pre-tax distributable earnings to GAAP net income (loss)**
Adjust incentive income
Incentive income received from private equity funds and hybrid PE funds, subject to contingent repayment	$	—		$	(26,077	)
Incentive income accrued from private equity funds and hybrid PE funds, no longer subject to contingent repayment		—			35,494
Incentive income received from private equity funds and hybrid PE funds, not subject to contingent repayment		—			17
Incentive income from hedge funds, subject to annual performance achievement		(131	)		—
Reserve for clawback, gross (see discussion above)		—			—

		(131	)		9,434
Adjust other income
Distributions of earnings from equity method investees***		—			(367	)
Earnings (losses) from equity method investees***		(1,918	)		(67,483	)
Gains (losses) on options in equity method investees		67			(15,426	)
Unrealized gains (losses) on publicly traded investments		17,687			(20,975	)
Impairment of investments (see discussion above)		32,274			9,507
Adjust income from the receipt of options		—			—

		48,110			(94,744	)
Adjust employee compensation
Adjust employee equity-based compensation expense (including Castle options assigned)		(105,823	)		(88,507	)
Adjust employee portion of incentive income from private equity funds, accrued prior to the realization of incentive income		—			9,648
Adjust employee portion of incentive income from one private equity fund, not subject to contingent repayment		—			(4	)

		(105,823	)		(78,863	)
Adjust Principals’ equity-based compensation expense		(472,126	)		(474,734	)
Adjust Principals’ interests related to Fortress Operating Group units		348,549			403,591
Adjust tax receivable agreement liability		(55	)		—
Adjust income taxes		1,663			(5,303	)

Total adjustments	$	(179,813	)	$	(240,619	)


** Net income (loss) presented herein represents net income (loss) attributable to Fortress’s Class A shareholders.

*** This adjustment relates to all of the Castles, private equity and hybrid PE Fortress Funds and hedge fund special investment accounts in which Fortress has an investment.

Adjustments from total segment assets to GAAP assets
Adjust equity investments from fair value	$	—
Adjust equity investments from cost		20,376
Adjust investments gross of employee portion		30,243
Adjust option investments from intrinsic value		116

Total adjustments	$	50,735

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

Three Months Ended June 30, 2009


					Liquid Hedge Funds		Hybrid				Principal Investments		Unallocated			Fortress Subtotal
	Private Equity						Hedge Funds		PE Funds
	Funds		Castles				Hedge Funds		PE Funds
Segment revenues
Management fees	$	38,884	$	12,519	$	19,893	$	29,501	$	8,354	$	—	$	—		$	109,151
Incentive income		—		—		247		191		6,814		—		—			7,252

Segment revenues - total	$	38,884	$	12,519	$	20,140	$	29,692	$	15,168	$	—	$	—		$	116,403

Pre-tax distributable earnings	$	27,567	$	6,725	$	6,731	$	7,467	$	4,590	$	5,920	$	(143	)	$	58,857


	Fortress Subtotal		Reconciliation to GAAP			Fortress Consolidated*			Principals and Others			GAAP Net Income (Loss)
Revenues	$	116,403	$	22,684		$	139,087

Pre-tax distributable earnings / net income (loss)	$	58,857	$	(103,449	)	$	(44,592	)	$	(126,738	)	$	(171,330	)

Three Months Ended June 30, 2008


					Liquid Hedge Funds		Hybrid				Principal Investments			Unallocated			Fortress Subtotal
	Private Equity						Hedge Funds		PE Funds
	Funds		Castles				Hedge Funds		PE Funds
Segment revenues
Management fees	$	40,372	$	13,961	$	57,606	$	36,611	$	2,178	$	—		$	—		$	150,728
Incentive income		—		—		14,345		447		—		—			—			14,792

Segment revenues - total	$	40,372	$	13,961	$	71,951	$	37,058	$	2,178	$	—		$	—		$	165,520

Pre-tax distributable earnings	$	31,591	$	3,928	$	30,695	$	9,231	$	351	$	(17,326	)	$	(31	)	$	58,439


	Fortress Subtotal		Reconciliation to GAAP			Fortress Consolidated*			Principals and Others			GAAP Net Income (Loss)
Revenues	$	165,520	$	22,576		$	188,096

Pre-tax distributable earnings / net income (loss)	$	58,439	$	(113,995	)	$	(55,556	)	$	(194,411	)	$	(249,967	)

*	Net income (loss) presented herein represents net income (loss) attributable to Fortress’s Class A shareholders.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

Reconciling items between segment measures and GAAP measures:


	Three Months Ended June 30, 2009			Three Months Ended June 30, 2008
Adjustments from segment revenues to GAAP revenues
Adjust management fees*	$	163		$	162
Adjust incentive income		(131	)		3,535
Adjust income from the receipt of options		—			—
Other revenues*
Adjust management fees from non-affiliates		(889	)		(1,285	)
Adjust incentive income from non-affiliates		(163	)		(27	)
Adjust other revenues (including expense reimbursements)		23,704			20,191

		22,652			18,879

Total adjustments	$	22,684		$	22,576


* Segment revenues do not include GAAP other revenues, except to the extent they represent management fees or incentive income; such revenues are included elsewhere in the calculation of distributable earnings.

Adjustments from pre-tax distributable earnings to GAAP net income (loss)**
Adjust incentive income
Incentive income received from private equity funds and hybrid PE funds, subject to contingent repayment	$	—		$	—
Incentive income accrued from private equity funds and hybrid PE funds, no longer subject to contingent repayment		—			3,535
Incentive income received from private equity funds and hybrid PE funds, not subject to contingent repayment		—			—
Incentive income from hedge funds, subject to annual performance achievement		(131	)		—
Reserve for clawback, gross (see discussion above)		—			—

		(131	)		3,535
Adjust other income
Distributions of earnings from equity method investees***		—			(2	)
Earnings (losses) from equity method investees***		37,004			(26,841	)
Gains (losses) on options in equity method investees		43			(2,933	)
Unrealized gains (losses) on publicly traded investments		19,540			(3,651	)
Impairment of investments (see discussion above)		—			9,507
Adjust income from the receipt of options		—			—

		56,587			(23,920	)
Adjust employee compensation
Adjust employee equity-based compensation expense (including Castle options assigned)		(52,779	)		(52,906	)
Adjust employee portion of incentive income from private equity funds, accrued prior to the realization of incentive income		—			—
Adjust employee portion of incentive income from one private equity fund, not subject to contingent repayment		—			—

		(52,779	)		(52,906	)
Adjust Principals’ equity-based compensation expense		(237,367	)		(237,367	)
Adjust Principals’ interests related to Fortress Operating Group units		128,926			194,714
Adjust tax receivable agreement liability		—			—
Adjust income taxes		1,315			1,949

Total adjustments	$	(103,449	)	$	(113,995	)

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

Fortress’s depreciation expense by segment was as follows:


					Liquid		Hybrid
	Private Equity				Hedge		Hedge		PE
	Funds		Castles		Funds		Funds		Funds		Unallocated		Total
Six Months Ended June 30,
2009	$	568	$	300	$	1,142	$	1,406	$	238	$	1,748	$	5,402
2008	$	478	$	374	$	1,495	$	1,486	$	68	$	971	$	4,872
Three Months Ended June 30,
2009	$	284	$	131	$	531	$	710	$	131	$	974	$	2,761
2008	$	250	$	182	$	767	$	714	$	37	$	486	$	2,436

11. SUBSEQUENT EVENTS

These financial statements include a discussion of material events which have occurred subsequent to June 30, 2009 (referred to as “subsequent events”) through the issuance of these consolidated financial statements on August 10, 2009. Events subsequent to that date have not been considered in these financial statements.

On July 19, 2009, Fortress entered into an employment offer letter with Daniel H. Mudd, pursuant to which Mr. Mudd will serve as the Chief Executive Officer of Fortress, commencing on August 11, 2009. Fortress will provide Mr. Mudd with an annual base salary of $200,000 for each of 2009 and 2010. Mr. Mudd will receive a cash bonus of $1.3 million for 2009 and $1.8 million for 2010.

Mr. Mudd will also receive a grant of 7,243,577 restricted stock units (the “RSU Grant”) with a value of $25,000,000. One-half of the RSU Grant will consist of dividend-paying restricted stock units. The RSU Grant will vest in equal annual installments on each of the first eight (8) anniversaries of Mr. Mudd’s start date, subject to Mr. Mudd’s continued employment on each such anniversary. Mr. Mudd will be granted restricted Class A Shares with a value of $500,000 on January 1, 2010, subject to his continued employment on such date.

Effective upon Mr. Mudd commencing employment as Chief Executive Officer, Wesley R. Edens will no longer hold the position of Chief Executive Officer of Fortress. Mr. Edens will continue to serve as a member of Fortress’s board of directors, and effective as of August 11, 2009, Wesley R. Edens and Peter L. Briger, Jr. will become co-chairmen of Fortress’s board of directors. Mr. Mudd will retain his seat on the board.

In August 2009, Fortress appointed a new director to its board and granted such director restricted Class A shares value at $300,000.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

NOTE 12 – CONSOLIDATING FINANCIAL INFORMATION

The consolidating financial information presents the balance sheet, statement of operations and statement of cash flows for Fortress Operating Group (on a combined basis) and Fortress Investment Group LLC (including its consolidated subsidiaries other than those within Fortress Operating Group) on a deconsolidated basis, as well as the related eliminating entries for intercompany balances and transactions, which sum to Fortress Investment Group’s consolidated financial statements as of, and for the six months ended, June 30, 2009.

Fortress Operating Group includes all of Fortress’s operating and investing entities. The upper tier Fortress Operating Group entities are the obligors on Fortress’s credit agreement (Note 4). Segregating the financial results of this group of entities provides a more transparent view of the capital deployed in Fortress’s businesses and the relevant ratios for borrowing entities.

The consolidating balance sheet information is as follows:


	As of June 30, 2009
	Fortress Operating Group Combined			Fortress Investment Group LLC Consolidated (A)			Intercompany Eliminations			Fortress Investment Group LLC Consolidated
Assets
Cash and cash equivalents	$	90,138		$	368		$	—		$	90,506
Due from affiliates		78,182			—			(7,473	)		70,709
Investments
Equity method investees		818,147			108,840			(108,840	)		818,147
Options in affiliates		116			—			—			116
Deferred tax asset		11,253			418,541			—			429,794
Other assets		80,881			5,147			—			86,028

	$	1,078,717		$	532,896		$	(116,313	)	$	1,495,300

Liabilities and Shareholders’ Equity
Liabilities
Accrued compensation and benefits	$	63,268		$	—		$	—		$	63,268
Due to affiliates		8,953			328,714			(7,473	)		330,194
Deferred incentive income		163,635			—			—			163,635
Debt obligations payable		439,750			—			—			439,750
Other liabilities		23,484			—			—			23,484

		699,090			328,714			(7,473	)		1,020,331
Commitments and Contingencies
Equity
Paid-in capital		2,423,994			830,447			(2,423,994	)		830,447
Retained earnings (accumulated deficit)		(2,066,957	)		(625,130	)		2,066,957			(625,130	)
Accumulated other comprehensive income (loss)		(7,809	)		(1,135	)		7,809			(1,135	)

Total Fortress shareholders’ equity (B)		349,228			204,182			(349,228	)		204,182

Principals’ and others’ interests in equity of consolidated subsidiaries		30,399			—			240,388			270,787

Total Equity		379,627			204,182			(108,840	)		474,969

	$	1,078,717		$	532,896		$	(116,313	)	$	1,495,300

(A)	Other than Fortress Operating Group.

(B)	Includes the Principals’ members’ equity in the Fortress Operating Group column, which is eliminated in consolidation.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

The consolidating statement of operations information is as follows:


	Six Months Ended June 30, 2009
	Fortress Operating Group Consolidated			Fortress Investment Group LLC Consolidated (A)			Intercompany Eliminations			Fortress Investment Group LLC Consolidated
Revenues
Management fees from affiliates	$	214,077		$	—		$	—		$	214,077
Incentive income from affiliates		6,958			—			—			6,958
Expense reimbursements from affiliates		33,708			—			—			33,708
Other revenues		6,636			4			—			6,640

		261,379			4			—			261,383

Expenses
Interest expense		15,738			53			—			15,791
Compensation and benefits		222,692			—			—			222,692
Principals agreement compensation		472,126			—			—			472,126
General, administrative and other		38,219			—			—			38,219
Depreciation and amortization		5,402			—			—			5,402

		754,177			53			—			754,230

Other Income (Loss)
Gains (losses) from investments
Net realized gains (losses)		(772	)		—			—			(772	)
Net realized gains (losses) from affiliate investments		(14	)		—			—			(14	)
Net unrealized gains (losses)		—			—			—			—
Net unrealized gains (losses) from affiliate investees		17,754			—			—			17,754
Tax receivable agreements liability reduction		—			(55	)		—			(55	)
Earnings (losses) from equity method investees		16,208			(113,633	)		113,633			16,208

		33,176			(113,688	)		113,633			33,121

Income (Loss) Before Income Taxes		(459,622	)		(113,737	)		113,633			(459,726	)
Income tax benefit (expense)		(271	)		1,986			—			1,715

Net Income (Loss)	$	(459,893	)	$	(111,751	)	$	113,633		$	(458,011	)

Principals’ and Others’ Interests in Income (Loss) of Consolidated Subsidiaries	$	2,289		$	—		$	(348,549	)	$	(346,260	)

Net Income (Loss) Attributable to Class A Shareholders (B)	$	(462,182	)	$	(111,751	)	$	462,182		$	(111,751	)

(A)	Other than Fortress Operating Group.

(B)	Includes net income (loss) attributable to the Principals’ interests in the Fortress Operating Group column, which is eliminated in consolidation.

FORTRESS INVESTMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2009

(dollars in tables in thousands, except share data)

The consolidating statement of cash flows information is as follows:


	Six Months Ended June 30, 2009
	Fortress Operating Group Consolidated			Fortress Investment Group LLC Consolidated (A)			Intercompany Eliminations			Fortress Investment Group LLC Consolidated
Cash Flows From Operating Activities
Net income (loss)	$	(459,893	)	$	(111,751	)	$	113,633		$	(458,011	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation and amortization		5,402			—			—			5,402
Other amortization and accretion		6,887			—			—			6,887
(Earnings) losses from equity method investees		(16,208	)		113,633			(113,633	)		(16,208	)
Distributions of earnings from equity method investees		771			—			—			771
(Gains) losses from investments		(16,968	)		—			—			(16,968	)
Deferred incentive income		—			—			—			—
Deferred tax (benefit) expense		(3,800	)		(3,360	)		—			(7,160	)
Tax receivable agreement liability reduction		—			55			—			55
Equity-based compensation		577,949			—			—			577,949
Cash flows due to changes in
Due from affiliates		(39,692	)		—			7,473			(32,219	)
Other assets		(221	)		1,772			—			1,551
Accrued compensation and benefits		(92,918	)		—			—			(92,918	)
Due to affiliates		1,338			(9,991	)		(7,473	)		(16,126	)
Deferred incentive income		—			—			—			—
Other liabilities		(1,966	)		(1,200	)		—			(3,166	)

Net cash provided by (used in) operating activities		(39,319	)		(10,842	)		—			(50,161	)

Cash Flows From Investing Activities
Contributions to equity method investees		(39,261	)		(219,500	)		219,500			(39,261	)
Distributions of capital from equity method investees		27,548			10,336			(10,336	)		27,548
Purchase of fixed assets		(1,670	)		—			—			(1,670	)
Proceeds from disposal of fixed assets		6			—			—			6

Net cash provided by (used in) investing activities		(13,377	)		(209,164	)		209,164			(13,377	)

Cash Flows From Financing Activities
Borrowings under debt obligations		—			—			—			—
Repayments of debt obligations		(289,291	)		—			—			(289,291	)
Payment of deferred financing costs		(4,162	)		—			—			(4,162	)
Proceeds from public offering		—			230,000			—			230,000
Costs related to public offering		—			(10,500	)		—			(10,500	)
Capital contributions		219,500			—			(219,500	)		—
Dividends and dividend equivalents paid		(41,684	)		—			41,684			—
Principals’ and others’ interests in equity of consolidated subsidiaries - contributions		67			—			—			67
Principals’ and others’ interests in equity of consolidated subsidiaries - distributions		(4,059	)		—			(31,348	)		(35,407	)

Net cash provided by (used in) financing activities		(119,629	)		219,500			(209,164	)		(109,293	)

Net Increase (Decrease) in Cash and Cash Equivalents		(172,325	)		(506	)		—			(172,831	)
Cash and Cash Equivalents, Beginning of Period		262,463			874			—			263,337

Cash and Cash Equivalents, End of Period	$	90,138		$	368		$	—		$	90,506

(A)	Other than Fortress Operating Group.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(tables in thousands except as otherwise indicated and per share data)

The following discussion should be read in conjunction with Fortress Investment Group's consolidated financial statements and the related notes (referred to as “consolidated financial statements” or “historical consolidated financial statements”) included within this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

General

Our Business

Fortress is a leading global alternative asset manager with approximately $31.0 billion in AUM as of June 30, 2009. We raise, invest and manage private equity funds, liquid hedge funds and hybrid funds. We earn management fees based on the size of our funds, incentive income based on the performance of our funds, and investment income from our principal investments in those funds. We invest capital in each of our businesses.

As of June 30, 2009, we managed alternative assets in three core businesses:

Private Equity — a business that manages approximately $13.8 billion of AUM comprised of two business segments: (i) private equity funds that primarily make significant, control-oriented investments in debt and equity securities of public or privately held entities in North America and Western Europe, with a focus on acquiring and building asset-based businesses with significant cash flows; and (ii) publicly traded alternative investment vehicles, which we refer to as “Castles,” that invest primarily in real estate and real estate related debt investments.

Liquid Hedge Funds — a business that manages approximately $4.5 billion of AUM. These funds invest globally in fixed income, currency, equity and commodity markets and related derivatives to capitalize on imbalances in the financial markets.

Hybrid Funds — a business that manages approximately $12.7 billion of AUM comprised of two business segments: (i) hybrid hedge funds which make highly diversified investments globally in assets, opportunistic lending situations and securities throughout the capital structure with a value orientation, as well as in investment funds managed by external managers, and which include non-Fortress originated funds for which Fortress has been retained as manager as part of an advisory business; and (ii) hybrid private equity (“PE”) funds which are comprised of a family of “credit opportunities” funds focused on investing in distressed and undervalued assets, a family of “long dated value” funds focused on investing in undervalued assets with limited current cash flows and long investment horizons, a family of “real assets” funds focused on investing in tangible and intangible assets in four principal categories (real estate, capital assets, natural resources and intellectual property), and an Asian fund.

In addition, we treat our principal investments in these funds as a distinct business segment.

Managing Business Performance

We conduct our management and investment business through the following six primary segments: (i) private equity funds, (ii) Castles (iii) liquid hedge funds, (iv) hybrid hedge funds, (v) hybrid private equity (“PE”) funds, and (vi) principal investments in those funds as well as cash that is available to be invested. These segments are differentiated based on the varying investment strategies of the funds we manage in each segment.

The amounts not allocated to a segment consist primarily of certain general and administrative expenses. Where applicable, portions of the general and administrative expenses have been allocated between the segments.

Management assesses our 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 operating performance used by management in analyzing its segment and overall results. Distributable earnings should not be considered as an alternative to cash flow in accordance with GAAP or as a measure of our liquidity, and is not necessarily indicative of cash available to fund cash needs (including dividends and distributions).

We believe that the presentation of distributable earnings enhances a reader's understanding of the economic operating performance of our segments. For a more detailed discussion of distributable earnings and how it reconciles to our GAAP net income (loss), see “— Results of Operations — Segments Analysis” below.

Market Considerations

Our revenues consist primarily of (i) management fees based generally on the size of our funds, (ii) incentive income based on the performance of our funds and (iii) investment income from our investments in those funds. Our ability to maintain and grow our revenues – both at Fortress and within our funds – depends on our ability to attract new capital and investors, secure investment opportunities, obtain financing for transactions, consummate investments and deliver attractive risk-adjusted returns. Our ability to execute this investment strategy depends upon a number of market conditions, including:

The strength and liquidity of U.S. and global financial institutions and the financial system.

Many market participants remain uncertain about the health of a number of financial institutions as well as the financial system in general. Continuing write-downs and capital related issues in the financial services industry have contributed to the recent wave of significant events affecting financial institutions, including the insolvency of Lehman Brothers, the government’s placing of Fannie Mae, Freddie Mac and AIG under its supervision, the government’s increasing its equity investment in Citigroup, and the announced distressed sales of all or portions of Bear Stearns, Merrill Lynch, Wachovia and Washington Mutual. These events have impacted the credit and equity markets and global economy in a number of ways (some of which are discussed in more detail below under “–The strength and liquidity of the U.S. and global equity and debt markets”). In addition, certain of these institutions serve as key counterparties for a tremendous number of derivatives and other financial instruments held by Fortress and our funds. The consolidation and elimination of counterparties has increased our concentration of counterparty risk, decreased the universe of potential counterparties and reduced our ability to obtain competitive financing rates. Moreover, the insolvency of Lehman Brothers affected some of our funds in various ways. For example, some of our hedge funds had prime brokerage accounts with Lehman Brothers, and Lehman Brothers was the counterparty on a number of these funds’ derivatives, repurchase agreements and other financial instruments. These funds are working to close out such arrangements, and we do not currently expect losses as a result of the Lehman insolvency to have a material effect on the net asset value of any Fortress Fund or on Fortress. However, due to the sudden nature of Lehman’s insolvency, the complexity and ambiguity of both the contractual arrangements and applicable regulations, this process will take time, may be expensive and may result in one or more funds receiving only a portion of the amount they are owed (or potentially receiving nothing at all). Additional failures of financial institutions, particularly those who serve as counterparties to our financing arrangements, would have a meaningfully negative impact on the financial markets in which we operate and could have a meaningfully negative impact on Fortress and one or more of our funds.

The strength and liquidity of the U.S. and global equity and debt markets.

Strong equity market conditions enable our private equity funds and hybrid PE funds to increase the value, and effect realizations, of their portfolio company investments. In addition, strong equity markets make it generally easier for our funds that invest in equities to generate positive investment returns. The condition of debt markets also has a meaningful impact on our business. Several of our funds make investments in debt instruments, which are assisted by a strong and liquid debt market. In addition, our funds borrow money to make investments. Our funds utilize leverage in order to increase investment returns, which ultimately drive the performance of our funds. Furthermore, we utilize debt to finance our investments in our funds and for working capital purposes.

Although equity and debt market conditions had been favorable for a number of years, the debt market conditions began to deteriorate in mid-2007, as the United States experienced considerable turbulence in the housing and sub-prime mortgage markets, which negatively affected other fixed income markets. The difficult conditions in the fixed income markets prompted lenders to cease committing to new senior loans and other debt, which, in turn, made it extremely difficult to finance new and pending private equity acquisitions or to refinance existing debt. Private equity-led acquisitions announced since mid-2007 have generally been smaller, less levered, and subject to more restrictive debt covenants than acquisitions done prior to the disruption.

As the turbulence continued and its intensity increased, equity market conditions also began to deteriorate in the latter part of 2007 as concerns of an economic slowdown began to affect equity valuations. The resulting reduction in liquidity and increase in volatility caused several commercial and investment banks, hedge funds and other financial institutions to reduce the carrying value of a significant amount of their fixed income holdings, which further reduced the liquidity of debt and, to a lesser extent, equity instruments. Although the United States and other governments took a number of significant steps to improve market conditions, such efforts to date have not brought stability or liquidity to the capital markets, and we cannot predict the future conditions of these markets or the impact of such conditions on our business. That said, market conditions showed initial signs of stabilizing in the second quarter of 2009.

The current market conditions have negatively impacted our business in several ways:

•

While conditions in the U.S. capital markets have begun to recently improve, there currently is less debt and equity capital available in the market relative to the levels available in recent years, which, coupled with additional margin collateral requirements imposed by lenders on some types of investments, debt and derivatives, has increased the importance of maintaining sufficient liquidity without relying upon additional infusions of capital from the debt and equity markets. Based on cash balances, committed financing and short-term operating cash flows, in the judgment of management we have sufficient liquidity in the current market environment. However, maintaining this liquidity rather

than investing available capital, and the reduced availability of attractive financing, has reduced our returns. Furthermore, we believe that our ability to access liquidity through the raising of equity capital or the issuance of debt obligations has been reduced by the current market environment, although it appears to have improved somewhat recently. This, in turn, may limit our ability to make investments, distributions, or engage in other strategic transactions. The dislocation of values and associated decreased liquidity in the global equity and debt markets have caused a material depreciation in equity and fixed income asset values, greater price volatility and weaker economic conditions around the globe. This has resulted in a significant reduction in the value of our investments, which in turn impacts our management fees, incentive income and investment income as described below.

•

There has been a prolonged reduction in market trading activity. This reduction and concern over market conditions have resulted in significant reductions in valuations by third party brokers and pricing agents.

•

The per share market prices of the investments held by our private equity funds in public companies have decreased substantially from their high points, but have rebounded meaningfully in 2009. However, the aggregate decrease in market prices has contributed to a significant decrease in our public company surplus. A decrease in this surplus hinders our ability to realize gains within these funds and therefore our ability to earn incentive income. Furthermore, the disruptions in the debt and equity markets have made exit strategies for private investments more difficult to execute as potential buyers have difficulty obtaining attractive financing and the demand for IPOs has been greatly reduced.

•

These conditions have made it more difficult to generate positive investment returns and have contributed to increased redemption requests from investors throughout the hedge fund industry. A number of our funds have been affected by this trend in prior periods, but this trend decelerated somewhat in 2009.

•

As a result of the above factors:

•

We did not pay a dividend on our Class A shares for the third quarter of 2008 through the second quarter of 2009. The decision to pay a dividend, as well as the amount of any dividends paid, is subject to change at the discretion of our board of directors based upon a number of factors, including actual and projected distributable earnings. If current conditions persist or deteriorate, we may be unable to pay any dividends.

•

Our share of the NAV of certain fund investments, including certain investments on which we have received incentive returns, has declined below their related carrying amounts for distributable earnings purposes. During the six months ended June 30, 2009, we have taken $32.3 million of impairments and reserves related to such funds for distributable earnings purposes. While we expect aggregate returns on our other private equity fund and hybrid PE fund investments to ultimately exceed their carrying amount, if such funds were liquidated at their current NAV (although we have no present intention of doing so), the result would be additional impairment and reserves of approximately $47.9 million. Declines in the NAV of our fund investments have also caused us to record GAAP losses from equity method investees in prior periods, although we have recorded net GAAP income from such investments in 2009. Furthermore, such declines impact our future management fees, generally at an annual rate of between 1% - 3% of the decline in aggregate fund NAV. See “– Fee Paying Assets Under Management” below for a table summarizing our AUM.

•

Our liquid hedge funds received a total of $1.0 billion in redemption requests, including affiliates, for the six months ended June 30, 2009. These redemptions will directly impact the management fees we receive in 2009 from such funds (which pay management fees of between 1.5% - 3% of AUM). Investors in our hybrid hedge funds are permitted to request that their capital be returned on an annual basis, and such returns of capital are paid over time as the underlying investments are liquidated, in accordance with the governing documents of the applicable funds. During this period, such amounts continue to be subject to management fees and, as applicable, incentive income. The 2009 notice date for the flagship hybrid hedge fund has not yet occurred.

•

As a result of not meeting the incentive income thresholds with respect to such funds’ current investors, the incentive income from substantially all of our liquid and hybrid hedge funds has been discontinued for an indefinite period of time. Returns earned on capital from new investors continue to be incentive income eligible. Unrealized losses in substantially all of our private equity funds and certain hybrid PE funds have resulted in higher future returns being required before we earn incentive income from such funds. The returns required are subject to a number of variables including: the amount of loss incurred, the amount of outstanding capital in the fund, the amount and timing of future capital draws and distributions, the rate of preferential return earned by investors, and others. We do not expect to earn a substantial amount of incentive income in 2009.

•

The current ratio of our distributable earnings to our AUM is lower than it has been historically, and it is reasonably likely that the future ratios may also be below historic levels for an indeterminate period of time.

•

Decreases in revenues and in the value of our principal investments could potentially affect our ability to comply with our debt covenants in the future. See “– Covenants” below.

•

The public company has recently been more focused on preserving capital and liquidity at the public-company level than on making investments. Our funds continue to make investments on an opportunistic basis, and we continue to raise new funds as illustrated in the AUM table below.

The strength of, and competitive dynamics within, the alternative asset management industry, including the amount of capital invested in, and withdrawn from, alternative investments.

The strength of the alternative asset management industry, and our competitive strength relative to our peers, are dependent upon several factors, including, among other things, (1) the investment returns alternative asset managers can provide relative to other investment options, (2) the amount of capital investors allocate to alternative asset managers and (3) our performance relative to our competitors and the related impact on our ability to attract new capital.

First, the strength of the alternative asset management industry is dependent upon the investment returns alternative asset managers can provide relative to other investment options. This factor depends, in part, on the interest rate and credit spreads (which represent the yield demanded on financial instruments by the market in comparison to a benchmark rate, such as the relevant U.S. treasury rate or LIBOR) available on other investment products because as interest rates rise and/or spreads widen, returns available on such investments would tend to increase and, therefore, become more attractive relative to the returns offered by investment products offered by alternative asset managers. We have benefited in the past from relatively tight spreads, which have allowed us and the funds we manage to obtain financing for investments at attractive rates and made our investment products attractive relative to many other products. Over the past two years, spreads have widened significantly. In addition to potentially reducing the relative attractiveness of our investment products, this widening will typically increase our costs when financing our investments using debt, which, in turn, reduces the net return we can earn on those investments. Furthermore, wider spreads reduce the value of investments currently owned by our funds. A reduction in the value of our funds’ investments directly impacts our management fees and incentive income from such funds. As a result, this dynamic could slow capital flow to the alternative investment sector.

A second and related factor is the amount of capital invested with such managers. Over the past several years, institutions, high net worth individuals and other investors (including sovereign wealth funds) have increased their allocations of capital to the alternative investment sector. However, investors have recently begun reducing the amount of capital they are allocating to certain alternative asset investment products, particularly hedge funds, for three reasons. First, as discussed above, challenging market conditions have reduced the returns generated by hedge funds, with many funds posting negative returns in 2008. Second, the lack of available credit has prompted many investors to maximize their cash holdings. Because the terms of many hedge funds allow investors to redeem their capital periodically (as opposed to most private equity funds, which do not allow redemptions), investors have begun redeeming their investments at rates that are generally higher than redemptions rates in previous years. This wave of redemptions may affect the investment decisions, and impair the viability, of many hedge funds who may not have sufficient cash on hand to satisfy redemption requests and may thus be forced either to sell assets at distressed prices in order to generate cash or take other measures. Certain of our hedge funds have recently received higher levels of redemption requests than those received in previous years. Third, negative investment performance has significantly reduced the amount of capital held by university endowments, pension funds, insurance companies and other traditionally significant investors in the alternative assets sector. As a result, many of these investors are decreasing the amount of capital they will allocate to alternative assets.

The third factor, which most directly impacts our results, is our investment performance relative to other investment alternatives, including products offered by other alternative asset managers. As a historical leader in the alternative asset management sector based on the size, diversity and historical performance of our funds, we have been able to attract a significant amount of new capital both at the public company and within our funds, even during the recent challenging market conditions. For example, in April 2009, the public company successfully raised approximately $220 million in net proceeds from an offering of its Class A shares. Moreover, during 2009, we have been able to raise additional capital in various funds.

Market Considerations Summary

While short-term disruptions in the markets, with respect to equity prices, interest rates, credit spreads or other market factors, including market liquidity, may adversely affect our existing positions, we believe such disruptions generally present significant new opportunities for investment, particularly in distressed asset classes. Our ability to take advantage of these opportunities will depend on our ability to access debt and equity capital, both at Fortress and within the funds. No assurance can be given that future trends will not be disadvantageous to us, particularly if current challenging conditions persist or intensify.

We do not currently know the full extent to which this disruption will affect us or the markets in which we operate. If the disruption continues, or results in a permanent, fundamental change in the credit markets, we and the funds we manage may experience further tightening of liquidity, reduced earnings and cash flow, impairment charges, increased margin requirements, as well as challenges in maintaining our reputation, raising additional capital, maintaining compliance with debt covenants, obtaining investment financing and making investments on attractive terms, and may need to make corresponding fundamental changes in our investment practices. However, to date we have been able to continue raising capital for our funds, on a net basis, both through new and existing funds, which serves both to increase our AUM and our management fee income and to give us a significant amount of capital available to be invested at a time when we believe attractive returns in distressed and other asset classes are available.

Results of Operations

The following is a discussion of our results of operations as reported under GAAP. For a detailed discussion of distributable earnings and revenues from each of our segments, see “— Segment Analysis” below.


	Six Months Ended June 30,									Three Months Ended June 30,
	2009			2008			Variance			2009			2008			Variance
Revenues
Management fees from affiliates	$	214,077		$	293,662		$	(79,585	)	$	108,425		$	149,605		$	(41,180	)
Incentive income from affiliates		6,958			55,444			(48,486	)		6,958			18,300			(11,342	)
Expense reimbursements from affiliates		33,708			30,221			3,487			20,661			15,950			4,711
Other revenues		6,640			9,649			(3,009	)		3,043			4,241			(1,198	)

		261,383			388,976			(127,593	)		139,087			188,096			(49,009	)

Expenses
Interest expense		15,791			20,224			(4,433	)		7,605			9,888			(2,283	)
Compensation and benefits		222,692			264,479			(41,787	)		113,456			137,460			(24,004	)
Principals agreement compensation		472,126			474,734			(2,608	)		237,367			237,367			—
General, administrative and other expense (including depreciation and amortization)		43,621			41,188			2,433			23,795			22,182			1,613

		754,230			800,625			(46,395	)		382,223			406,897			(24,674	)

Other Income (Loss)
Net gains (losses) - other investments		16,968			(34,572	)		51,540			19,441			(6,615	)		26,056
Tax receivable agreement liability reduction		(55	)		—			(55	)		—			—			—
Earnings (losses) from equity method investees		16,208			(75,629	)		91,837			51,057			(26,500	)		77,557

		33,121			(110,201	)		143,322			70,498			(33,115	)		103,613

Income (Loss) Before Income Taxes		(459,726	)		(521,850	)		62,124			(172,638	)		(251,916	)		79,278
Income tax benefit (expense)		1,715			(5,303	)		7,018			1,308			1,949			(641	)

Net Income (Loss)	$	(458,011	)	$	(527,153	)	$	69,142		$	(171,330	)	$	(249,967	)	$	78,637

Factors Affecting Our Business

During the periods discussed herein, the following are significant factors which have affected our business and materially impacted our results of operations:

•

changes in our AUM;

•

level of performance of our funds; and

•

growth of our fund management and investment platform and our compensation structure to sustain that growth.

Fee Paying Assets Under Management

We measure AUM by reference to the fee paying assets we manage, including the capital we have the right to call from our investors due to their capital commitments. As a result of raising new funds and increases in the NAVs of our hedge funds from new investor capital, our AUM has increased over the periods discussed. Recently, lower performance in our funds, coupled with redemptions in our liquid hedge funds, have caused offsetting reductions in our AUM.

Our AUM has changed for the six months ended June 30, 2009 as follows (in millions):


	Private Equity								Hybrid Funds
2009	Funds			Castles		Liquid Hedge Funds			Hedge Funds			PE Style Funds			Total
AUM December 31, 2008	$	10,307		$	3,182	$	7,169		$	6,494		$	2,302		$	29,454
Capital raised (A)		—			—		108			3,140			134			3,382
Increase in invested capital		70			—		—			2			691			763
Redemptions (B)		—			—		(3,079	)		(303	)		—			(3,382	)
Return of capital distributions		(93	)		—		—			(8	)		(644	)		(745	)
Adjustment for reset date (C)		—			—		—			—			—			—
Crystallized incentive income (D)		—			—		—			—			—			—
Income (loss) and foreign exchange (E)		318			11		373			593			274			1,569

AUM June 30, 2009	$	10,602		$	3,193	$	4,571		$	9,918		$	2,757		$	31,041

(A)	Includes offerings of shares by the Castles, if any, and capital acquired through the acquisition of management of third party funds.

(B)	Excludes redemptions which reduced AUM subsequent to June 30, 2009. See “– Market Considerations” above.

(C)	The reset date is the date on which a private equity fund or hybrid PE fund stops paying management fees based on commitments and starts paying such fees based on invested capital, which therefore changes fee paying AUM.

(D)	Represents the transfer of value from investors (fee paying) to Fortress (non-fee paying) related to realized hedge fund incentive income.

(E)	Represents the change in fee-paying NAV resulting from realized and unrealized changes in the reported value of the fund.

Average Fee Paying AUM

Average fee paying AUM represents the reference amounts upon which our management fees are based. The reference amounts for management fee purposes are: (i) capital commitments or invested capital (or NAV, on an investment by investment basis, if lower) for the private equity funds and hybrid PE funds, which in connection with funds raised after March 2006 includes the mark-to-market value on public securities held within the fund, (ii) contributed capital for the Castles, or (iii) the NAV for hedge funds.

Management Fees

Changes in our average AUM have an effect on our management fee revenues. Depending on the timing of capital contributions in a given period, the full economic benefits of a change in AUM may not be recognized until the following period.

Performance of Our Funds

The performance of our funds has been as follows (dollars in millions):


			AUM
			June 30,				Returns (A)
Name of Fund	Inception Date		2009		2008		Inception to June 30, 2009
Private Equity Funds
Fund I	Nov-99		$	36	$	36	25.8	%
Fund II	Jul-02			328		143	35.9	%
Fund III	Sep-04			1,015		929	(6.8	)%
Fund III Coinvestment	Nov-04			119		151	(3.3	)%
Fund IV	Mar-06			1,932		2,534	(14.9	)%
Fund IV Coinvestment	Apr-06			442		632	(14.7	)%
Fund V	May-07			3,961		4,000	(C	)
Fund V Coinvestment	Jun-07			935		553	(C	)
FRID	Mar-05			449		860	(16.0	)%
FECI	Jun-07			532		532	(9.3	)%
GAGACQ Fund	Sep-04			—		—	(0.6	)%
GAGACQ Coinvestment Fund	Sep-04			9		13	21.2	%
RIC Coinvestment Fund LP	May-06			59		122	(32.1	)%
FICO	Aug-06			59		547	(75.4	)%
FHIF	Dec-06			638		922	(16.9	)%

							Returns (A)
							Six Months Ended June 30,				Inception to June 30, 2009 (B)
							2009		2008		Inception to June 30, 2009 (B)
Other Private Equity Funds
Mortgage Opportunities Funds I, II and III	Apr-08			88		545	(C	)	(C	)	(C	)

Castles
Newcastle Investment Corp.	Jun-98			1,165		1,192	N/A		(34.9	)%	N/A
Eurocastle Investment Limited	Oct-03			2,028		2,306	(7.5	)%	8.9	%	N/A

Liquid Hedge Funds
Drawbridge Global Macro Funds	Jul-02			2,484		8,770	11.3	%	(2.8	)%	9.1	%
Fortress Macro Funds	May-09			1,174		—	3.2	%	(C	)	20.8	%
Fortress Commodities Fund	Jan-08			913		908	1.3	%	(C	)	5.4	%

Hybrid Hedge Funds
Drawbridge Special Opportunities Fund LP (D)	Aug-02			4,542		5,736	10.7	%	(0.6	)%	7.2	%
Drawbridge Special Opportunities Fund LTD (D)	Aug-02			476		630	9.7	%	(2.2	)%	6.3	%
Fortress Partners Fund LP	Jul-06			942		1,167	6.4	%	(4.1	)%	(4.5	)%
Fortress Partners Offshore Fund LP	Nov-06			739		625	7.8	%	(2.5	)%	(4.4	)%
Value Recovery Funds and related assets	(E	)		3,140		—	(E	)	(E	)	(E	)

							Returns (A)
							Inception to June 30, 2009
Hybrid PE Funds
Credit Opportunities Fund	Jan-08			1,429		232	(C	)
Long Dated Value Fund I	Apr-05			201		193	5.1	%
Long Dated Value Fund II	Nov-05			207		202	3.1	%
Long Dated Value Fund III	Feb-07			115		103	(C	)
LDVF Patent Fund	Nov-07			14		21	(C	)
Real Assets Fund	Jun-07			126		107	(C	)
Assets Overflow Fund	Jul-08			82		—	(C	)
Japan Opportunity Fund	Jun-09			137		—	(C	)

Subtotal - all funds				30,516		34,711
Managed accounts				525		255

Total			$	31,041	$	34,966

(A)	Represents the following:

For private equity funds, other than the Mortgage Opportunities Funds, and hybrid PE funds, returns represent net internal rates of return to limited partners after management fees and incentive allocations, and are computed on an inception to date basis consistent with industry standards. Incentive allocations are computed based on a hypothetical liquidation of net assets of each fund as of the balance sheet date. Returns are calculated for the investors as a whole. The computation of such returns for an individual investor may vary from these returns based on different management fee and incentive arrangements, and the timing of capital transactions.

For Castles, returns represent the return on invested equity (ROE) as reported by such entities. ROE is not reported on an inception to date basis. Newcastle’s 2009 ROE is not meaningful because Newcastle incurred a loss and had negative book equity. Eurocastle’s 2009 ROE is estimated as they have not yet finalized their results.

For liquid and hybrid hedge funds, as well as the Mortgage Opportunities Funds, returns represent net returns after taking into account any fees borne by the funds for a “new issue eligible,” single investor class as of the close of business on the last date of the relevant period. Specific performance may vary based on, among other things, whether fund investors are invested in one or more special investments.

(B)	For liquid hedge funds, hybrid hedge funds and the Mortgage Opportunities Funds, reflects a composite of monthly returns presented on an annualized net return basis.

(C)	These funds were in their investment periods, or less than one year had elapsed from their inception, through the end of these years. In some cases, particularly the Mortgage Opportunities Funds, Fund V and Fund V Coinvestment, returns during these periods were significantly negative.

(D)	The returns for the Drawbridge Special Opportunities Funds reflect the performance of each fund excluding the performance of the redeeming capital accounts which relate to December 31, 2008 redemptions.

(E)	Fortress began managing the third party originated Value Recovery Funds in June 2009. Their returns are not comparable since we are only managing the realization of existing investments within these funds which were acquired prior to Fortress becoming their manager.

Incentive Income

Incentive income is calculated as a percentage of profits (or in some cases taxable income) earned by the Fortress Funds. Incentive income that is not subject to contingent repayment is recorded as earned. Incentive income received from funds that continue to be subject to contingent repayment is deferred and recorded as a deferred incentive income liability until the related contingency is resolved. The contingencies related to a portion of the incentive income we have received from certain private equity Fortress Funds have been resolved.

Fund Management and Investment Platform

In order to accommodate the demands of our funds’ growing investment portfolios, we have created investment platforms, which are comprised primarily of our people, financial and operating systems and supporting infrastructure. Expansion of our investment platform historically required increases in headcount, consisting of newly hired investment professionals and support staff, as well as leases and associated improvements to corporate offices to house the increased number of employees, and related augmentation of systems and infrastructure. Our headcount decreased from 880 employees as of June 30, 2008 to 826 employees as of June 30, 2009. This resulted in net decreases in our compensation, office related and other personnel related expenses, although there were increases in certain businesses.

Revenues


	Six Months Ended June 30,							Three Months Ended June 30,
	2009		2008		Variance			2009		2008		Variance
Management fees from affiliates	$	214,077	$	293,662	$	(79,585	)	$	108,425	$	149,605	$	(41,180	)
Incentive income from affiliates		6,958		55,444		(48,486	)		6,958		18,300		(11,342	)
Expense reimbursements from affiliates		33,708		30,221		3,487			20,661		15,950		4,711
Other revenues		6,640		9,649		(3,009	)		3,043		4,241		(1,198	)

Total Revenues	$	261,383	$	388,976	$	(127,593	)	$	139,087	$	188,096	$	(49,009	)

Six months ended June 30

For the six months ended June 30, 2009 compared with the six months ended June 30, 2008, total revenues decreased as a result of the following:

Management fees from affiliates decreased by $79.6 million primarily due to the net effect of increases (decreases) in average AUM of ($0.8) billion, ($0.1) billion, ($4.4) billion, ($0.3) billion and $1.5 billion in our private equity funds, our Castles, our liquid hedge funds, our hybrid hedge funds, and our hybrid PE funds, respectively. The combined net decrease to average AUM generated a reduction in the amount of $75.5 million in management fees. In addition, management fees from affiliates decreased by $2.2 million as a result of a decrease in the average management fee percentage earned and by $2.3 million as a result of changes in foreign currency exchange rates.

Incentive income from affiliates decreased by $48.5 million primarily as a result of (i) no incentive income being recognized from our private equity funds for the six months ended June 30, 2009 as compared to the recognition of $38.2 million of incentive income for the six months ended June 30, 2008, as contingencies for repayment had been resolved in certain private equity funds allowing for income recognition at that time, and (ii) a decrease of $17.1 million in incentive income from our liquid hedge funds primarily due to prior period losses (i.e. – the “highwater mark”) not being completely recovered during the six months ended June 30, 2009. These decreases were partially offset by $6.8 million in incentive income recognized from our hyprid PE funds for the six months ended June 30, 2009 as compared to no incentive income recognized for the prior comparative period.

Expense reimbursements from affiliates increased by $3.5 million primarily due to an increase in operating expenses eligible for reimbursement from our funds for the six months ended June 30, 2009, primarily attributable to the hybrid hedge funds, as compared to the six months ended June 30, 2008.

Other revenues decreased by $3.0 million primarily due to a decrease in interest income of $4.6 million and a decrease of $0.5 million in fees from non-affiliates, offset by a net increase of $2.1 million in dividend income earned primarily from our direct investment in GAGFAH common stock compared to dividends earned from the Castles in the prior comparative period.

Three months ended June 30

For the three months ended June 30, 2009 compared with the three months ended June 30, 2008, total revenues decreased as a result of the following:

Management fees from affiliates decreased by $41.2 million primarily due to the net effect of increases (decreases) in average AUM of ($0.9) billion, ($0.1) billion, ($5.3) billion, ($0.2) billion and $1.7 billion in our private equity funds, our Castles, our liquid hedge funds, our hybrid hedge funds, and our hybrid PE funds, respectively. The combined net decrease to average AUM generated a reduction in the amount of $40.2 million in management fees. In addition, management fees from affiliates decreased by $1.0 million as s result of changes in foreign currency exchange rates.

Incentive income from affiliates decreased by $11.3 million primarily as a result of (i) no incentive income being recognized from our private equity funds for the three months ended June 30, 2009 as compared to the recognition of $3.5 million of incentive income for the three months ended June 30, 2008, as contingencies for repayment had been resolved in certain private equity funds allowing for income recognition at that time, and (ii) a decrease of $14.6 million in incentive income from our liquid hedge funds primarily due to prior period losses (i.e. – the “highwater mark”) not being completely recovered during the three months ended June 30, 2009. These decreases were partially offset by $6.8 million in incentive income recognized from our hyprid PE funds for the three months ended June 30, 2009 as compared to no incentive income recognized for the prior comparative period.

Expense reimbursements from affiliates increased by $4.7 million primarily due to an increase in operating expenses eligible for reimbursement from our funds for the three months ended June 30, 2009, primarily attributable to hybrid hedge funds, as compared to the three months ended June 30, 2008.

Other revenues decreased by $1.2 million primarily due to a decrease in interest income of $2.1 million and a net decrease of $0.4 million in fees from non-affiliates, which was partially offset by a net increase of $1.3 million in dividend income earned primarily from our direct investment in GAGFAH common stock as compared to dividends earned from the Castles in the prior comparative period.

Expenses


	Six Months Ended June 30,							Three Months Ended June 30,
	2009		2008		Variance			2009		2008		Variance
Interest expense	$	15,791	$	20,224	$	(4,433	)	$	7,605	$	9,888	$	(2,283	)
Compensation and benefits		222,692		264,479		(41,787	)		113,456		137,460		(24,004	)
Principals agreement compensation		472,126		474,734		(2,608	)		237,367		237,367		—
General, administrative and other (including depreciation and amortization)		43,621		41,188		2,433			23,795		22,182		1,613

Total Expenses	$	754,230	$	800,625	$	(46,395	)	$	382,223	$	406,897	$	(24,674	)

Six months ended June 30

For the six months ended June 30, 2009 compared with the six months ended June 30, 2008, total expenses decreased as a result of the following:

Interest expense decreased by $4.4 million primarily due to (i) a decrease of $9.5 million due to a decrease in average interest rates and a decrease in average borrowings from the first six months of 2008, offset by (ii) an increase of $5.5 million due to write-offs and increased amortization of deferred financing costs. The increase in write-offs and amortization of deferred financing costs is primarily due to the partial prepayment of our term loans as a result of our May 2009 capital raise and our March 2009 amendment to our credit agreement.

Compensation and benefits decreased by $41.8 million primarily due to a decrease in profit sharing compensation of $30.0 million, a decrease in our employee population and discretionary bonuses resulting in a decrease of $29.2 million, a $7.0 million one-time discretionary bonus declared during the first quarter of 2008 to one senior employee and a net decrease of $2.1 million primarily due to the forfeiture of RSU’s for employees that are no longer with the company. These decreases were partially offset by an increase of $26.5 million in equity based compensation primarily due to the 31 million FOG RPUs granted in April 2008 (see discussion below). Profit sharing compensation decreased largely due to decreased profit from our liquid and hybrid hedge funds. Our average headcount for the six months ended June 30, 2009 decreased 2% compared to the six months ended June 30, 2008.

Principals agreement compensation is being amortized on a straight-line basis over the term of the agreement.

General, administrative and other expenses increased by $2.4 million primarily as a result of an increase in professional fees of $3.7 million, which was primarily attributed to write-offs of legal fees previously capitalized for funds which have not launched, an increase of $1.0 million for fees paid to Nomura in connection with raising investor capital for a new fund in Asia, and partially offset by a net decrease of $2.3 million in recruiting and other general expenses.

Three months ended June 30

For the three months ended June 30, 2009 compared with the three months ended June 30, 2008, total expenses decreased as a result of the following:

Interest expense decreased by $2.3 million primarily due to (i) a decrease of $4.8 million due to a decrease in average interest rates and a decrease in average borrowings from the second quarter of 2008, partially offset by (ii) an increase of $2.7 million due to write-offs and increased amortization of deferred financing costs. The increase in write-offs and amortization of deferred financing costs is primarily due to the partial prepayment of our term loans as a result of our May 2009 capital raise.

Compensation and benefits decreased by $24.0 million primarily due to a decrease in profit sharing of $11.7 million, a decrease in our employee population resulting in lower expenses of $11.6 million, a decrease of $4.4 million due to forfeiture of RSUs for employees that are no longer with the company, offset by an increase of $4.2 million in equity based compensation primarily for the 31 million FOG RPUs granted in April 2008 (see discussion below). Profit sharing compensation decreased largely due to decreased profit from our liquid and hybrid hedge funds. Our average headcount for the three months ended June 30, 2009 decreased 7% compared to the three months ended June 30, 2008.

Principals agreement compensation is being amortized on a straight-line basis over the term of the agreement.

General, administrative and other expenses increased by $1.6 million primarily as a result of an increase in professional fees and consulting fees of $1.2 million, which was primarily attributed to write-offs of legal fees previously capitalized for funds which have not launched, an increase of $1.0 million for fees paid to Nomura in connection with raising investor capital for a new fund in Asia, and partially offset by a net decrease of $0.6 million in recruiting and other general expenses.

Future Compensation Expense

In future periods, we will further recognize non-cash compensation expense on our non-vested equity-based awards of $746.0 million with a weighted average recognition period of 3.61 years. This does not include amounts related to the Principals Agreement, which is discussed above.

In April 2008, we granted 31 million Fortress Operating Group (“FOG”) restricted partnership units (“RPUs”) to a senior employee. In connection with the grant of these interests, the employee receives partnership distribution equivalent payments on such units with economic effect as from January 1, 2008. The interests will vest into full capital interests in FOG units in three equal portions on the first business day of 2011, 2012 and 2013, respectively, subject to continued employment with Fortress. In connection with this grant, we have reduced the employee’s profit sharing interests in various Fortress Funds.

Other Income (Loss)


	Six Months Ended June 30,									Three Months Ended June 30,
	2009			2008			Variance			2009		2008			Variance
Net gains (losses) - other investments	$	16,968		$	(34,572	)	$	51,540		$	19,441	$	(6,615	)	$	26,056
Tax receivable agreement liability reduction		(55	)		—			(55	)		—		—			—
Earnings (losses) from equity method investees		16,208			(75,629	)		91,837			51,057		(26,500	)		77,557

Total Other Income (Loss)	$	33,121		$	(110,201	)	$	143,322		$	70,498	$	(33,115	)	$	103,613

Six months ended June 30

For the six months ended June 30, 2009 compared with the six months ended June 30, 2008, total other income (loss) increased as a result of the following:

Net gains (losses) – other investments increased by $51.5 million primarily due to the recognition of an unrealized gain of $17.7 million for the six months ended June 30, 2009 on our investments in GAGFAH and in our Castles, as compared to the recognition of an unrealized loss of $21.0 million on our investments in our Castles and other securities and an unrealized loss of $15.4 million on our options in our Castles as a result of a decline in the relative performance of their underlying stock price for the six months ended June 30, 2008. Our investments in GAGFAH and the Castles are held at fair value pursuant to the provisions of SFAS 159.

Earnings (losses) from equity method investees increased by $91.8 million primarily due to the net effect of (i) the recognition of $16.2 million in net income from equity method investees in 2009 as a result of an increase in income attributable to investments in our private equity funds, liquid hedge funds, hybrid hedge funds and hybrid PE funds, compared to (ii) the recognition of a $75.6 million loss on our equity method investments for the six months ended June 30, 2008. The overall increase in income was primarily a result of improved returns within the funds.

Three months ended June 30

For the three months ended June 30, 2009 compared with the three months ended June 30, 2008, total other income (loss) increased as a result of the following:

Net gains (losses) – other investments increased by $26.1 million primarily due to the recognition of an unrealized gain of $19.5 million for the three months ended June 30, 2009 on our investments in GAGFAH and in our Castles, as compared to the recognition of an unrealized loss of $3.7 million on our investments in our Castles and other securities and an unrealized loss of $2.9 million on our options in our Castles as a result of a decline in the relative performance of their underlying stock price for the three months ended June 30, 2008. Our investments in GAGFAH and the Castles are held at fair value pursuant to the provisions of SFAS 159.

Earnings (losses) from equity method investees increased by $77.6 million primarily due to the net effect of (i) the recognition of $51.1 million in net income from equity method investees in 2009 as a result of an increase in income attributable to investments in our private equity funds, liquid hedge funds, hybrid hedge funds and hybrid PE funds, compared to (ii) the recognition of a $26.5 million net loss on our equity method investments for the three months ended June 30, 2008. The overall increase in income was primarily a result of improved returns within the funds.

Income Tax Benefit (Expense)

Fortress has recorded a significant deferred tax asset, primarily in connection with the Nomura Transaction and IPO. A substantial portion of this asset is offset by a liability associated with the tax receivable agreement with our Principals. This deferred tax asset is further discussed under “– Critical Accounting Policies” below.

For the six and three months ended June 30, 2009, Fortress recognized income tax expense (benefit) of ($1.7 million) and ($1.3 million), respectively. For the six and three months ended June 30, 2008, Fortress recognized income tax expense (benefit) of $5.3 million and ($1.9 million), respectively. The primary reasons for the changes in income tax expense (benefit) for the six and three months ended June 30, 2009 compared to the six and three months ended June 30, 2008 are (i) changes in the mix of business segments producing income, which may be subject to tax at different rates, and (ii) changes in the forecasts of annual taxable income which are used to calculate the tax provision.

Segment Analysis

Fortress conducts its management and investment business through the following six primary segments: (i) private equity funds, (ii) Castles, (iii) liquid hedge funds, (iv) hybrid hedge funds, (v) hybrid private equity (“PE”) funds, and (vi) principal investments in these funds as well as cash that is available to be invested. These segments are differentiated based on their varying investment strategies. Due to the increased significance of the hybrid PE funds segment, it has been disaggregated from the private equity funds segment in this period and for all periods presented.

Discussed below are our results of operations for each of our reportable segments. They represent the separate segment information available and utilized by our management committee, which consists of our principals and certain key officers, and which functions as our chief operating decision maker to assess performance and to allocate resources. Management evaluates the performance of each segment based on its distributable earnings.

Management assesses our segments on a Fortress Operating Group and pre-tax basis, and therefore adds back the non-controlling interests in consolidated subsidiaries related to Fortress Operating Group units (held by the principals) and income tax expense.

Distributable earnings is defined in Note 10 to Part I, Item 1, “Financial Statements – Segment Reporting.” Furthermore, a complete discussion of distributable earnings basis impairment and reserves, including the methodology used in estimating the amounts as well as the amounts incurred in the relevant periods, is disclosed therein.

Private Equity Funds


	Six Months Ended June 30,							Three Months Ended June 30,
	2009		2008		Variance			2009		2008		Variance
Management Fees	$	76,515	$	80,143	$	(3,628	)	$	38,884	$	40,372	$	(1,488	)
Incentive Income		—		28,741		(28,741	)		—		—		—

Segment revenues - total	$	76,515	$	108,884	$	(32,369	)	$	38,884	$	40,372	$	(1,488	)

Pre-tax distributable earnings	$	56,856	$	81,647	$	(24,791	)	$	27,567	$	31,591	$	(4,024	)

Six months ended June 30

Pre-tax distributable earnings decreased by $24.8 million primarily due to:

•

a $1.2 million net decrease in management fees. Management fees decreased by $3.6 million due to a decrease of $8.2 million primarily as a result of the net asset value of certain portfolio companies of Fund III, Fund IV, FRID, and special investments declining below their invested capital, partially offset by an increase of $5.0 million primarily generated by capital called for Fund V Coinvestment, Mortgage Opportunities Fund III, and Fund II after June 30, 2008. The management fee decrease of $3.6 million was partially offset by a corresponding reduction of $2.4 million in the employees’ percentage share of management fees;

•

an $18.4 million net decrease in incentive income. The decrease in incentive income is primarily attributable to a decrease in performance in the private equity funds that resulted in no incentive income (and no employee’s share of incentive income) recognized for the six months ended June 30, 2009 as compared to $28.7 million in incentive income (reduced by the employees’ share of incentive income of $10.3 million) for the six months ended June 30, 2008; and

•

a $5.3 million net increase in operating expenses primarily related to an increase in general and administrative expenses.

Three months ended June 30

Pre-tax distributable earnings decreased by $4.0 million primarily due to:

•

a $0.3 million net decrease in management fees. Management fees decreased by $1.5 million due to a decrease of $4.1 million primarily as a result of the net asset value of certain portfolio companies of Fund III, Fund IV, FRID, and special investments declining below their invested capital, partially offset by an increase of $2.8 million primarily generated by capital called for Fund V Coinvestment and Fund II after June 30, 2008. The management fee decrease of $1.5 million was partially offset by a corresponding reduction of $1.2 million in the employees’ percentage share of management fees; and

•

a $3.7 million net increase in operating expenses primarily related to an increase in general and administrative expenses.

Publicly Traded Alternative Investment Vehicles (“Castles”)


	Six Months Ended June 30,							Three Months Ended June 30,
	2009		2008		Variance			2009		2008		Variance
Management Fees	$	24,430	$	27,655	$	(3,225	)	$	12,519	$	13,961	$	(1,442	)
Incentive Income		—		12		(12	)		—		—		—

Segment revenues - total	$	24,430	$	27,667	$	(3,237	)	$	12,519	$	13,961	$	(1,442	)

Pre-tax distributable earnings	$	10,714	$	8,204	$	2,510		$	6,725	$	3,928	$	2,797

Six months ended June 30

Pre-tax distributable earnings increased by $2.5 million primarily due to:

•

a $0.7 million net decrease in management fees. Management fees decreased by $3.2 million primarily due to a $2.3 million decrease as a result of changes in foreign currency exchange rates, a $0.5 million decrease in management fees from non-affiliates, and a $0.4 million decrease as a result of a decrease in average AUM. These decreases to management fees were partially offset by a decrease in the employees’ share of management fees of $2.5 million; and

•

a $3.3 million net decrease in operating expenses primarily due to lower compensation expenses.

Three months ended June 30

Pre-tax distributable earnings increased by $2.8 million primarily due to:

•

a $0.3 million net decrease in management fees. Management fees decreased by $1.4 million primarily due to a $1.0 million decrease as a result of changes in foreign currency exchange rates, a $0.3 million decrease in management fees from non-affiliates, and a $0.2 million decrease as a result of an decrease in average AUM. These decreases to management fees were partially offset by a decrease in the employees’ share of management fees of $1.2 million; and

•

a $3.0 million net decrease in operating expenses primarily due to lower compensation expenses.

Liquid Hedge Funds


	Six Months Ended June 30,							Three Months Ended June 30,
	2009		2008		Variance			2009		2008		Variance
Management Fees	$	42,522	$	110,325	$	(67,803	)	$	19,893	$	57,606	$	(37,713	)
Incentive Income		247		17,040		(16,793	)		247		14,345		(14,098	)

Segment revenues - total	$	42,769	$	127,365	$	(84,596	)	$	20,140	$	71,951	$	(51,811	)

Pre-tax distributable earnings	$	12,706	$	45,426	$	(32,720	)	$	6,731	$	30,695	$	(23,964	)

Six months ended June 30

Pre-tax distributable earnings decreased by $32.7 million primarily due to:

•

a $57.6 million net decrease in management fees. Management fees decreased $67.8 million primarily due to (i) a $72.9 million decrease resulting from a decline in average AUM due to lower cumulative returns and investor redemptions from the Drawbridge Global Macro Funds subsequent to June 30, 2008 and (ii) a $2.2 million decrease due to a reduction in the average management fee percentage earned, partially offset by (iii) $3.7 million generated by the growth in the average AUM of Fortress Commodities Fund and (iv) $3.5 million due to management fees generated by the new Fortress Macro Funds which were launched in May 2009. The management fee decrease of $67.8 million was offset by a $10.2 million reduction in the employees’ share of management fees;

•

a $0.6 million net increase in incentive income. Incentive income decreased $16.8 million primarily due to incentive income generated by special investments and the Fortress Commodities Fund of $2.0 million and $15.0 million, respectively, for the six months ended June 30, 2008 as compared to $0.2 million of incentive income recognized for the six months ended June 30, 2009. The $16.8 million decrease was offset by a $17.4 million net decrease in the employees’ share of incentive income primarily as a result of (i) a $17.8 million decrease in the accrual of the employees’ share of incentive income due to prior period losses (i.e. the “highwater mark”) in the Drawbridge Global Macro Funds and Fortress Commodities Fund partially offset by (ii) a $0.4 million increase in the employees’ share of incentive income earned on the Fortress Macro Funds;

•

a $24.2 million net decrease in operating expenses primarily due to a decrease in average headcount.

Three months ended June 30

Pre-tax distributable earnings decreased by $24.0 million primarily due to:

•

a $30.8 million net decrease in management fees. Management fees decreased $37.7 million primarily due to (i) a $40.9 million decrease resulting from a decline in average AUM due to lower cumulative returns and investor redemptions from the Drawbridge Global Macro Funds subsequent to June 30, 2008 and (ii) a $1.1 million decrease due to a reduction in the average management fee percentage earned, partially offset by (iii) $0.7 million generated by the growth in the average AUM of Fortress Commodities Fund and (iv) $3.5 million due to management fees generated by the new Fortress Macro Funds which were launched in May 2009. The management fee decrease of $37.7 million was offset by a $6.9 million reduction in the employees’ share of management fees;

•

an $7.7 million net decrease in incentive income. Incentive income decreased $14.1 million primarily due to incentive income generated by the Fortress Commodities Fund of $14.4 million for the three months ended June 30, 2008 as compared to $0.2 million of incentive income recognized for the three months ended June 30, 2009. The $14.1 million decrease was offset by a $6.4 million net decrease in the employees’ share of incentive income primarily as a result of (i) a $7.6 million decrease in the employee’s share of incentive income earned on the Fortress Commodities Fund partially offset by (ii) a $1.2 million increase in the accrual of the employees’ share of incentive income earned on the Fortress Macro Funds;

•

a $14.6 million net decrease in operating expenses primarily due to a decrease in average headcount.

Hybrid Hedge Funds


	Six Months Ended June 30,							Three Months Ended June 30,
	2009		2008		Variance			2009		2008		Variance
Management Fees	$	57,624	$	73,455	$	(15,831	)	$	29,501	$	36,611	$	(7,110	)
Incentive Income		1,013		872		141			191		447		(256	)

Segment revenues - total	$	58,637	$	74,327	$	(15,690	)	$	29,692	$	37,058	$	(7,366	)

Pre-tax distributable earnings	$	10,371	$	11,279	$	(908	)	$	7,467	$	9,231	$	(1,764	)

Six months ended June 30

Pre-tax distributable earnings decreased by $0.9 million primarily due to:

•

a $15.8 million net decrease in management fees. Management fees decreased by $17.2 million primarily as a result of a decrease in average AUM, primarily due to negative fund returns in 2008, offset by an increase of $1.4 million in management fees from a new hybrid hedge fund;

•

a $0.9 million net increase in incentive income. Incentive income increased by $0.1 million and the employees’ share of incentive income, reflected as profit sharing compensation expense, decreased by $0.8 million. The $0.1 million increase in incentive income was primarily attributable to a net increase of $1.0 million in incentive income primarily from third party accounts we manage offset by a $0.9 million decrease in incentive income primarily from our hybrid hedge funds. The decrease of $0.8 million in profit sharing compensation expense was primarily a result of a decline in the returns of our hybrid hedge funds; and

•

a $14.0 million decrease in compensation and operating expenses primarily related to a decrease in average headcount.

Three months ended June 30

Pre-tax distributable earnings decreased by $1.8 million primarily due to:

•

a $7.1 million net decrease in management fees. Management fees decreased by $8.5 million primarily as a result of a decrease in average AUM, primarily due to negative fund returns in 2008, offset by an increase of $1.4 million in management fees from a new hybrid hedge fund;

•

a $0.5 million net decrease in incentive income. Incentive income decreased by $0.3 million and the employees’ share of incentive income, reflected as profit sharing compensation expense, increased by $0.2 million. The $0.3 million decrease in incentive income was primarily attributable to a $0.5 million decrease in incentive income primarily as a result of decreased performance of our hybrid hedge funds, offset by a net increase of $0.2 million in incentive income primarily from third party accounts we manage; and

•

a $5.8 million decrease in compensation and operating expenses primarily related to a decrease in average headcount.

Hybrid PE Funds


	Six Months Ended June 30,						Three Months Ended June 30,
	2009		2008		Variance		2009		2008		Variance
Management Fees	$	14,435	$	4,187	$	10,248	$	8,354	$	2,178	$	6,176
Incentive Income		6,814		—		6,814		6,814		—		6,814

Segment revenues - total	$	21,249	$	4,187	$	17,062	$	15,168	$	2,178	$	12,990

Pre-tax distributable earnings	$	6,823	$	239	$	6,584	$	4,590	$	351	$	4,239

Six months ended June 30

Pre-tax distributable earnings increased by $6.6 million primarily due to:

•

a $10.2 million net increase in management fees primarily due to $3.4 million of management fees generated by the creation of new hybrid PE funds, most notably the Assets Overflow Fund and a managed account, and an increase of $6.8 million in management fees primarily as a result of growth in average AUM due to capital calls;

•

a $3.2 million increase in net incentive income primarily due to $6.8 million of incentive income generated from distributions not subject to clawback offset by $3.6 million of profit sharing expense; and

•

a $6.8 million increase in operating expenses primarily related to an increase in average headcount primarily from new funds.

Three months ended June 30

Pre-tax distributable earnings increased by $4.2 million primarily due to:

•

a $6.2 million net increase in management fees primarily due to $1.9 million of management fees generated by the creation of new hybrid PE funds, most notably the Assets Overflow Fund and a managed account, and an increase of $4.3 million in management fees primarily as a result of growth in average AUM due to capital calls;

•

a $5.2 million increase in operating expenses primarily related to an increase in average headcount primarily due to new funds.

Principal Investments


	Six Months Ended June 30,								Three Months Ended June 30,
	2009			2008			Variance		2009		2008			Variance
Pre-tax distributable earnings (loss)	$	(29,114	)	$	(30,656	)	$	1,542	$	5,920	$	(17,326	)	$	23,246

Six months ended June 30

Pre-tax distributable loss decreased by $1.5 million primarily due to:

•

a $26.1 million increase in net investment income due to higher returns on our investments, primarily in our liquid hedge funds and hybrid hedge funds, for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008;

•

a $2.2 million increase in net investment income due to dividend income earned primarily from our direct investment in GAGFAH common stock;

•

a $22.8 million decrease in net investment income primarily as a result of impairments of $28.4 million, $0.2 million, $0.1 million, $3.0 million and $0.6 million in our investments in our private equity funds, Castles, liquid hedge funds, hybrid hedge funds and hybrid PE funds, respectively, during the six months ended June 30, 2009, as compared to an impairment of $9.5 million in our investment in our Castles during the six months ended June 30, 2008; and

•

a $3.9 million decrease in net investment income primarily due to (i) a $4.5 million decrease in interest income as a result of lower interest rates and lower average cash balances, (ii) a $2.3 million decrease due to foreign currency translation adjustments, (iii) a $1.8 million decrease relating to non-controlling interests in net investment income, offset by (iv) a net increase of $0.2 million due to a decrease in investment related expenses and (v) a decrease of $4.5 million in interest expense primarily due to a decrease in average interest rates and a decrease in average borrowings during the six months ended June 30, 2009.

Three months ended June 30

Pre-tax distributable earnings (loss) increased by $23.2 million primarily due to:

•

a $13.5 million increase in net investment income due to higher returns on our investments, primarily in our liquid hedge funds and hybrid hedge funds, for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008;

•

a $1.4 million increase in net investment income due to dividend income earned primarily from our direct investment in GAGFAH common stock;

•

a $9.5 million increase in net investment income primarily as a result of an impairment of $9.5 million in our investments in our Castles that was recognized during the three months ended June 30, 2008; and

•

a $1.2 million decrease in net investment income primarily due to (i) a $2.1 million decrease in interest income as a result of lower interest rates and lower average cash balances, (ii) a $0.2 million decrease due to foreign currency translation adjustments, (iii) a $1.9 million decrease relating to non-controlling interests in net investment income, offset by (iv) a net increase of $0.8 million due to a decrease in investment related expenses, and (v) a decrease of $2.3 million in interest expense primarily due to a decrease in average interest rates and a decrease in average borrowings during the three months ended June 30, 2009.

Unallocated


	Six Months Ended June 30,								Three Months Ended June 30,
	2009			2008		Variance			2009			2008			Variance
Pre-tax distributable earnings (loss)	$	(294	)	$	7	$	(301	)	$	(143	)	$	(31	)	$	(112	)

Six months ended June 30

Pre-tax distributable earnings (loss) decreased by $0.3 million. The decrease in earnings is primarily due to an increase in general corporate expense.

Three months ended June 30

Pre-tax distributable loss increased by $0.1 million. The increase in loss is primarily due to an increase in general corporate expense.

Sensitivity

For an analysis of the sensitivity of segment revenues to changes in the estimated fair value of the Fortress Fund investments, see Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, including our capital commitments to our funds, pay compensation, and satisfy our other general business needs including our obligation to pay U.S. federal income tax. In addition, we may require cash to make distributions. Our primary sources of funds for liquidity consist of cash flows provided by operating activities, primarily the management fees and incentive income paid to us from the Fortress Funds, borrowings under loans, and the potential issuance of debt and equity securities, as well as the investment returns on our principal investments in these funds. Our primary uses of liquidity include operating expenses (which include compensation, rent and interest among others), working capital expenses, amortization payments under our credit agreement, capital commitments to our funds, and tax and tax-related payments.

The receipt of management fees generally occurs on a fixed and fairly predictable schedule, subject to changes in the NAV of the Fortress Funds (due to performance or capital transactions). From time to time, we may elect, in our discretion, to defer the receipt of management or other fees, to which we are legally entitled, in order to optimize the operations of the underlying managed funds. As of June 30, 2009, the receipt of approximately $27.9 million of management fees had been deferred and the ultimate timing of their payment is currently uncertain. Since quarter end, the amount of deferred management fees has increased significantly and may continue to increase in the future. Also, while we still believe that we will receive these fees, we now expect to receive payment at a later date than we previously anticipated. Currently, these developments do not meaningfully impact our liquidity, but if they continue or worsen, they could meaningfully constrain our liquidity in the future.

The timing of receipt of cash flows from other operating activities is in large part dependent on the timing of distributions from our private equity funds and hybrid PE funds, which are subject to restrictions and to management’s judgment regarding the optimal timing of the monetization of underlying investments, as well as dates specified in our hedge funds’ operating documents, which outline the determination and payment of our incentive income, if any. The timing of capital requirements to cover fund commitments is subject to management’s judgment regarding the acquisition of new investments by the funds, as well as the ongoing liquidity requirements of the respective funds. The timing of capital requirements and the availability of liquidity from operating activities may not always coincide, and we may make short-term, lower-yielding investments with excess liquidity or fund shortfalls with short-term debt or other sources of capital.

We expect that our cash on hand and our cash flows from operating activities, capital receipts from balance sheet investments and available financing will be sufficient to satisfy our liquidity needs with respect to expected current commitments relating to investments and with respect to our debt obligations over the next twelve months. We estimate that our expected management fee receipts over the next twelve months, a portion of which may be deferred, will be sufficient (along with our cash on hand of $90.5 million at June 30, 2009 and expected capital receipts from our balance sheet investments) to meet our operating expenses (including compensation and lease obligations), required debt amortization payments, and fund capital commitments, in each case expected to be funded during the next twelve months (see obligation tables below). These uses of cash would not (barring changes in other relevant variables) cause us to violate any of our debt covenants. We believe that the compensation we will be able to pay from these available sources will be sufficient to retain key employees and maintain an effective workforce. We may elect, if we deem it appropriate, to defer certain payments due to our principals and affiliates or raise capital to enable us to satisfy the amortization payments required under our credit agreement.

We expect to meet our long-term liquidity requirements, including the repayment of our debt obligations and any new commitments or increases in our existing commitments relating to principal investments, through the generation of operating income (including management fees, a portion of which may be deferred), capital receipts from balance sheet investments and, potentially, additional borrowings and equity offerings. As discussed above, we believe that we will generate adequate operating cash flows to service our periodic debt payments, which will result in a gradual reduction in our debt level. Our ability to execute our business strategy, particularly our ability to form new funds and increase our AUM, depends on our ability to raise additional investor capital within our funds and on our ability to monetize our balance sheet investments, each of which is more challenging given current market conditions. Furthermore, strategic initiatives and the ability to make principal investments in funds may be dependent on our ability to raise capital at the Fortress level. Decisions by counterparties to enter into transactions with us will depend upon a number of factors, such as our historical and projected financial performance and condition, compliance with the terms of our current credit arrangements, industry and market trends and performance, the availability of capital and our counterparties’ policies and rates applicable thereto, the rates at which we are willing to borrow, and the relative attractiveness of alternative investment or lending opportunities. Furthermore, given the current, depressed level of the market price of our Class A shares as well as the illiquidity in the credit market (as described above under “– Market Considerations), raising equity capital could be highly dilutive to our current shareholders and issuing debt obligations could result in significant increases to operating costs, if either were achieved in this market. The level of our share price also limits our ability to use our equity as currency in the potential acquisition of businesses, other companies or assets.

On February 8, 2007, we completed an initial public offering of our Class A shares. We are a publicly traded partnership and have established a wholly owned corporate subsidiary (“FIG Corp.”). Accordingly, a substantial portion of our income earned by the corporate subsidiary is subject to U.S. federal income taxation and taxed at prevailing rates. The remainder of our income is allocated directly to our shareholders and is not subject to any corporate level of taxation.

As of June 30, 2009, our material cash commitments and contractual cash requirements were related to our capital commitments to our funds, lease obligations and debt obligations. Our potential liability for the contingent repayment of incentive income is discussed under “– Contractual Obligations” below.

Capital Commitments

We determine whether to make capital commitments to our private equity funds and hybrid PE funds in excess of the minimum required amounts based on a variety of factors, including estimates regarding our liquidity over the estimated time period during which commitments will have to be funded, estimates regarding the amounts of capital that may be appropriate for other funds which we are in the process of raising or are considering raising, and our general working capital requirements.

We generally fund our principal investments in the Fortress Funds with cash, either from working capital or borrowings, and not with carried interest. We do not hold any principal investments in the funds other than through the Fortress Operating Group entities. Our principals do not own any portion of the carried interest in any fund personally. Accordingly, their personal investments in the funds are funded directly with cash.

Our capital commitments to our funds with outstanding commitments as of June 30, 2009 consisted of the following (in thousands):


	Outstanding Commitment
Private Equity Funds
Fund I	$	12
Fund II		566
Fund III Coinvestment		2
Fund IV		4,053
Fund IV Coinvestment		3
Fund V		45,292
Fund V Coinvestment		4
Fund VI		15,000
FRID		795
FHIF		11,446
FECI		1,551

Hybrid PE Funds
Credit Opportunities Fund		5,342
Long Dated Value Fund I		460
Long Dated Value Fund II		2,081
Long Dated Value Fund III		453
LDVF Patent Fund		19
Real Assets Fund		37,521
Assets Overflow Fund		24
Karols Development Co		5,457
FTS SIP L.P.		524
Japan Opportunity Fund		325
Yama 1 and 2 GK		99

Total	$	131,029

Lease Obligations

Minimum future rental payments under our operating leases are as follows (in thousands):


July 1 to December 31, 2009	$	9,428
2010		18,579
2011		11,981
2012		11,338
2013		11,085
2014		10,698
Thereafter		22,633

Total	$	95,742

Debt Obligations

As of June 30, 2009, our debt obligations consisted of the amount outstanding under our credit agreement, as described below.

In May 2007, we entered into a new $1 billion credit agreement (as amended, the “2007 Credit Agreement” or “our credit agreement”) in order to refinance our then existing credit agreement, reduce the amount of interest and other fees payable under our credit facilities and increase the amount of funds available for investments. The credit facilities available under the 2007 Credit Agreement include a $200 million revolving credit facility (including a $25 million letter of credit subfacility) and an $800 million term loan facility. Borrowings and letters of credit issued under the 2007 Credit Agreement bore interest at a rate equal to (i) with respect to LIBOR loans, LIBOR plus 1.20%, or (ii) with respect to base rate loans, the base rate, as defined in the agreement, plus 0.20%. On February 1, 2008, the rate on LIBOR loans was reduced to LIBOR + 0.65% pursuant to the terms of the agreement. In addition, we were required to pay a commitment fee of 0.20% per annum on the unused portion of amounts available under our revolving credit facility.

On April 17, 2008, we entered into an amendment to the 2007 Credit Agreement. The amendment, among other things, (i) permits us to issue an unlimited amount of subordinated indebtedness with specified terms so long as 40% of the net proceeds are used to repay amounts outstanding under the 2007 Credit Agreement, (ii) increased the applicable rate on Eurodollar loans and letters of credit by 20 basis points (making the current rate LIBOR plus 0.85%) and the undrawn commitment fee by 5 basis points (making the current fee 0.25%), (iii) added an amortization schedule requiring us to repay $100 million of amounts outstanding under the agreement each year during the next three years (with the first payment due on January 15, 2009), (iv) modified the financial covenants by (a) replacing the EBITDA-based financial covenant with a Consolidated Leverage Ratio covenant, (b) increasing the minimum amount of management fee earning assets by $3 billion to $21.5 billion (which minimum amount increases annually by $500 million) and (c) eliminating the annual $50 million increase in required minimum investment assets, and (v) revised various definitions and clarified terms with respect to swap providers who are lenders under the agreement. In addition, on May 29, 2008, we entered into an amendment of our credit agreement to change from a co-borrower structure to a single borrower structure.

On November 12, 2008, we entered into an additional amendment to the 2007 Credit Agreement. The amendment, among other things: (i) modified the definition of EBITDA, which is used to calculate our Consolidated Leverage Ratio, to exclude any realized or unrealized gains and losses on investments and to reflect private equity fund and hybrid PE fund incentive income clawbacks on a cash basis; (ii) modified the financial covenants by (a) reducing the amount of required investment assets to $975 million (less any future term loan repayments) and (b) changing the required Consolidated Leverage Ratios for the quarters ending June 30 and September 30, 2009 from 2.5 to 1.0 to 2.75 to 1.0; (iii) increased the rate on LIBOR loans to LIBOR + 2.00% (and Base Rate loans to the prime rate + 1.00%) – this rate is no longer subject to change pursuant to a ratings-based pricing grid; (iv) established the commitment fee for the unused portion of the revolving credit facility at 0.25% – this rate is also no longer subject to change pursuant to a ratings-based pricing grid; (v) reduced the revolving credit facility commitments to $125 million; (vi) established a requirement that outstanding term loans be prepaid with 25% of the amount by which EBITDA for any twelve-month period exceeds $370 million (unless and until the amount of outstanding term loans equals or is less than $250 million); (vii) required $50 million of additional term loan repayments ($25 million in July of 2009 and 2010); (viii) established a requirement that the borrower cash collateralize the letter of credit obligations of distressed lenders under certain circumstances, including lender non-funding or bankruptcy; and (ix) established an event of default under certain circumstances if the borrower, any guarantor or certain of their subsidiaries are required to make incentive income clawback payments in excess of $20 million during any calendar year. In connection with the amendment, we prepaid $75 million of the outstanding term loans.

On March 12 and March 13, 2009, we entered into additional amendments to the 2007 Credit Agreement. The amendments, among other things: (i) modified the financial covenants by (a) amending the amount of required management fee earning assets to $22 billion as of the end of each fiscal quarter through December 31, 2009 and $20 billion as of the end of each fiscal quarter thereafter; (b) reducing the amount of investment assets required as of any point in time to an amount equal to the term loans and revolving loans (including outstanding letters of credit) then outstanding; (c) changing the required Consolidated Leverage Ratio to 3.5 to 1.0 for the remainder of the term of the credit agreement; (ii) increased the rate on LIBOR loans to LIBOR + 2.50 (and Base Rate loans to the prime rate plus 1.50%); (iii) reduced the revolving credit facility commitments to $75 million; (iv) established an annual requirement, beginning in 2010, that outstanding loans be prepaid in an amount equal to 75% of Free Cash Flow (as defined in the agreement) generated during the previous year; (v) increased the amount of our scheduled amortization payments (the amortization schedule now requires the following payments: $50 million in July 2009, $25 million in each of October 2009 and January, April, July and October 2010, and $75 million in January 2011); (vi) established a requirement that 50% of the net proceeds from any equity issuance by the Fortress Operating Group be applied to prepay outstanding term loans; (vii) reduced the amount of certain types of distributions we can make to equity holders of the Fortress Operating Group and, in turn, our Class A shareholders, and (viii) provided that the dissolution or termination of specified material funds would not constitute an event of default. In connection with the amendment, we prepaid $75 million of outstanding term loans and $50 million of outstanding revolving facility loans.

On June 11, 2009, we entered into an amendment to our credit agreement. This amendment, among other things, (i) allows us to repurchase outstanding loans made under the credit agreement subject to certain conditions, (ii) permits us to make investments in Fortress Funds in any amount we deem appropriate, provided that investments in Fortress Funds created after June 11, 2009 in excess of 1.5% of such Fund’s aggregate called capital may not be deducted from Free Cash Flow (as defined in the credit agreement), (iii) excludes Managed Accounts (as defined in the credit agreement) from the definition of Material Fortress Funds, (iv) expands the term “Permitted Fund Termination” to include the termination, dissolution, liquidation or windup of a Fortress Fund either (a) after the last asset or investment is sold in the ordinary course of business or (b) after the date of dissolution as stated in the applicable fund document, and (v) revises the financial covenants by (a) reducing the percentage of Free Cash Flow that must be applied to prepay outstanding term loans from 75% to 50% if, on the applicable measurement dates, the amount of outstanding commitments and loans does not exceed $315 million, the amount of outstanding loans does not exceed $300 million and the Consolidated Leverage Ratio (as calculated according to the terms of the Credit Agreement) does not exceed 2.0 to 1.0, and (b) increasing the amount of restricted payments that can be made, with such increase specified according to formulas set forth in the Credit Agreement.

The foregoing description of the terms of the amendments is not complete and is qualified in its entirety by the full text of both the amendments, and the 2007 Credit Agreement (including other amendments thereto), each of which has been filed with the Securities and Exchange Commission.

Increases in the interest rate on our debt obligations, whether through amendments, refinancings, or increases in LIBOR, result in a direct reduction in our earnings and cash flow from operations and, therefore, our liquidity.

The following table presents information regarding our debt obligations (dollars in thousands):


						June 30, 2009
						Weighted		Weighted
					Final	Average		Average
	Face Amount and Carrying Value				Stated	Funding		Maturity
Debt Obligation	June 30, 2009		December 31, 2008		Maturity	Cost ⁽¹⁾		(Years)
Credit Agreement ⁽²⁾
Revolving debt ⁽³⁾	$	—	$	104,041	May 2012	—		—
Term loan		350,000		350,000	May 2012	4.14	%	1.86
Delayed term loan		89,750		275,000	May 2012	3.39	%	0.40

Total	$	439,750	$	729,041		3.99	%	1.56

(1)	The weighted average funding cost is calculated based on the contractual interest rate (utilizing the most recently reset LIBOR rate) plus the amortization of deferred financing costs. The most recently reset LIBOR rate was 0.31%.

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

(3)

Approximately $65.5 million was undrawn under the revolving debt facility as of June 30, 2009. The revolving debt facility included a $25 million letter of credit subfacility of which $9.5 million was utilized. Lehman Brothers Commercial Paper, Inc., which is committed to fund $7.2 million (including $0.9 million of the outstanding letters of credit) of the $75 million revolving credit facility, has filed for bankruptcy protection, did not fund its portion of the last borrowing under this facility, and it is reasonably possible that it will not fund its portion of the commitments. As a result, $59.3 million of the undrawn amount was available.

Assuming no EBITDA–based required prepayments, our outstanding debt matures as follows as of June 30, 2009 (in thousands).


July 1 - December 31, 2009	$	41,925
2010		55,900
2011		41,925
2012		300,000

Total	$	439,750

As a result of the Nomura transaction and our initial and secondary public offerings, FIG Asset Co. LLC lent excess proceeds of $320.5 million to FIG Corp. pursuant to a demand note. As of June 30, 2009, the outstanding balance was $230.8 million. This intercompany debt is eliminated in consolidation.

Covenants

Fortress Operating Group is required to prepay the 2007 Credit Agreement upon the occurrence of certain events, including certain asset sales and other dispositions.

The events of default under the 2007 Credit Agreement are typical of such agreements and include payment defaults, failure to comply with credit agreement covenants, cross-defaults to material indebtedness, bankruptcy and insolvency, change of

control, and adverse events (as defined in the 2007 Credit Agreement) with respect to our material funds. A default under this agreement would likely have a material, adverse impact on our liquidity and, given the current lack of available credit for refinancing in the market, could threaten our ability to continue as a going concern.

The 2007 Credit Agreement includes customary covenants. We were in compliance with all of these covenants as of June 30, 2009. Among other things, we are prohibited from incurring additional unsubordinated indebtedness or further encumbering our assets, subject to certain exceptions. In addition, Fortress Operating Group must not:

•

Permit AUM to be less than $22.0 billion as of the end of each fiscal quarter through December 31, 2009 and $20.0 billion as of the end of each fiscal quarter thereafter;

•

Permit the Consolidated Leverage Ratio, as defined in the 2007 Credit Agreement, to be greater than 3.5 to 1.0 for the remainder of the term of the credit agreement;

•

Permit the aggregate value of investments held, including certain cash, as of any point in time, to be less than the amount equal to the sum of the term loans and the revolving loans (including outstanding letters of credit) then outstanding (the “Required Investment Assets”);

•

Permit the aggregate value of Fortress Fund Investments (generally defined in the 2007 Credit Agreement as the stock of Newcastle, Eurocastle and any other publicly traded company pledged as collateral (and any options in respect of such stock), and Fortress Operating Group’s interest in the Fortress private equity funds, liquid hedge funds and hybrid funds and certain other investment funds) to be less than 40% of the Required Investment Assets;

•

Permit the aggregate value of the sum of (i) the Fortress Fund Investments plus (ii) certain investments in co-investment funds (in the aggregate, “Total Investments”) to be less than 60% of the Required Investment Assets (with no single co-investment fund investment exceeding $75 million).

•

Make incentive income clawback payments in excess of $20 million during a calendar year. To date, no clawback payments have been required. See Note 10 to Part I, Item 1 “Financial Statements and Supplementary Data – Segment Reporting” for a further discussion of clawback.

The following table sets forth the financial covenant requirements as of June 30, 2009.


	June 30, 2009 (dollars in millions)
	Requirement		Actual		Notes
AUM	>$	22,000	$	31,041	(A)
Consolidated Leverage Ratio	<	3.50		1.50	(B)
Required Investment Assets	>$	449	$	790	(C)
Fortress Fund Investments	>$	180	$	473	(C)
Total Investments	>$	270	$	605	(C)

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

(B)	Impacted by EBITDA, as defined, which is impacted by the same factors as distributable earnings, except EBITDA is not impacted by clawback reserves or the impairment of investments.

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

Fortress expects to comply with these covenants as of the applicable testing dates. However, as a result of recent market conditions and their impact on Fortress, it is possible that we may not be able to comply with one or more of these covenants if conditions continue to worsen over time. As a result of the amortization requirements, we may take steps to ensure that we are able to make the required periodic cash amortization payments, including (i) deferring payments to our Principals and affiliates in order to preserve cash, including payments to our Principals under the tax receivable agreement, and (ii) considering potential capital raise transactions in order to increase investments, reduce debt, or a combination of the two options.

This summary is qualified by reference to our credit agreement, a copy of which, including all amendments thereto, has been filed with the SEC.

Dividends / Distributions

During the six months ended June 30, 2009, Fortress Operating Group made distributions of $31.3 million to the principals and RPU holders in connection with distributions made to FIG Corp. to pay Fortress’s income taxes.

Cash Flows

Our historical consolidated statements of cash flows reflect the cash flows of Fortress Operating Group, for the six months ended June 30, 2009.

The primary cash flow activities of Fortress Operating Group are: (i) generating cash flow from operations, (ii) making investments in Fortress Funds, (iii) meeting financing needs through, and making required amortization payments under, our credit agreement, and (iv) distributing cash flow to equity holders.

As described above in “— Results of Operations,” our AUM has changed throughout the periods reflected in our financial statements included in this Quarterly Report on Form 10-Q. This change is a result of the Fortress Funds raising and investing capital, and generating gains from investments, offset by redemptions and losses.

Our dividend policy has certain risks and limitations, particularly with respect to liquidity. Although we may pay dividends in accordance with our stated dividend policy, we may not pay the amount of dividends suggested by our policy, or at all, if, among other things, we do not have the cash necessary to pay the intended dividends, or if our board of directors determines it would be prudent to reduce or eliminate future dividend payments. To the extent we do not have cash on hand sufficient to pay dividends, we may borrow funds to pay dividends, but we are not obligated to do so. By paying cash dividends rather than investing that cash in our future growth, we risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations or unanticipated capital expenditures, should the need arise.

Operating Activities

Our net cash flow provided by (used in) operating activities was ($50.2) million and $33.2 million during the six months ended June 30, 2009 and 2008, respectively.

Operating Activities – Comparative (Six Months Ended June 30, 2009 vs. June 30, 2008)

Cash received for management fees decreased by $95.0 million from $286.7 million in 2008 to $191.7 million in 2009. Management fees are based on average fee paying AUM, which decreased from 2008 to 2009 (private equity funds decreased by ($0.8) billion, Castles decreased by ($0.1) billion, liquid hedge funds decreased by ($4.4) billion, hybrid hedge funds decreased by ($0.3) billion, and hybrid PE funds increased by $1.5 billion) as a result of capital raising, including new fund formation, offset by redemptions and losses. In addition, approximately $27.9 million of management fees were past due at June 30, 2009 as discussed in “– Liquidity and Capital Resources” above.

Incentive income is calculated as a percentage of profits earned by the Fortress Funds or is based on profitable realization events within private equity funds and hybrid PE funds. Severe market conditions have resulted in lower fund performance and reduced realizations and thus a decrease of $26.1 million in cash received for incentive income from 2008 to 2009.

Despite an increase in average headcount from June 31, 2008 to June 30, 2009, cash paid for compensation decreased by $48.4 million for the six month periods ended June 30, 2008 compared to June 30, 2009. This decrease is mainly attributable to reduced profit sharing compensation, as a result of lower performance within our funds.

Cash paid for interest decreased approximately $8.7 million due to a lower average debt balance of $620.4 million in 2009 compared to $761.2 million in 2008. The weighted average interest rate also decreased to 2.74% in 2009 as compared to 4.72% in 2008.

Investing Activities

Our net cash flow provided by (used in) investing activities was ($13.4) million and $95.9 million during the six months ended June 30, 2009 and 2008, respectively. Our investing activities primarily included: (i) contributions to equity method investees of ($39.3) million and ($82.3) million during the six months ended June 30, 2009 and 2008, respectively, (ii) distributions of capital from equity method investees of $27.5 million and $182.1 million during the six months ended June 30, 2009 and 2008, respectively, and (iii) purchases of fixed assets, net of proceeds from the disposal of fixed assets, of ($1.7) million and ($3.9) million during these periods, respectively.

Financing Activities

Our net cash flow provided by (used in) financing activities was ($109.3) million and $25.7 million during the six months ended June 30, 2009 and 2008, respectively. Our financing activities primarily included the capital raise described below and (i) distributions made to principals, including those classified within “principals’ and others’ interests in consolidated subsidiaries,” of ($30.6) million and ($133.4) million during these periods, respectively, (ii) distributions to employees related to their interests in consolidated subsidiaries of ($4.1) million and ($48.1) million during these periods, respectively, (iii) dividends to our shareholders, and (iv) our net borrowing and repayment activity.

Critical Accounting Policies

Consolidation

The analysis as to whether to consolidate an entity is subject to a significant amount of judgment. Some of the criteria considered are the determination as to the degree of control over an entity by its various equity holders, the design of the entity, how closely related the entity is to each of its equity holders, the relation of the equity holders to each other and a determination of the primary beneficiary in entities in which we have a variable interest. These analyses involve estimates, probability weighting of subjectively determined cash flow scenarios, and other estimates based on the assumptions of management.

Revenue Recognition on Incentive Income

Incentive income is calculated as a percentage of the profits earned by the Fortress Funds subject to the achievement of performance criteria. Incentive income from certain of the private equity funds and hybrid PE funds we manage is subject to contingent repayment (or clawback) and may be paid to us as particular investments made by the funds are realized. If, however, upon liquidation of a fund the aggregate amount paid to us as incentive income exceeds the amount actually due to us based upon the aggregate performance of the fund, the excess is required to be returned by us (i.e. “clawed back”) to that fund. We have elected to adopt the preferred method of recording incentive income subject to contingencies, Method 1 of Emerging Issues Task Force Topic D-96 “Accounting for Management Fees Based on a Formula.” Under this method, we do not recognize incentive income subject to contingent repayment until all of the related contingencies have been resolved. Deferred incentive income related to a particular private equity fund or hybrid PE fund, each of which has a limited life, would be recognized upon the termination of such fund, or when distributions from the fund exceed the point at which a clawback of a portion or all of the historic incentive income distributions could no longer occur. Recognition of incentive income allocated to us prior to that date is deferred and recorded as a deferred incentive income liability. For GAAP purposes, the determination of when incentive income is recognized as income is formulaic in nature, resulting directly from each fund’s governing documents.

Profit Sharing Arrangements

Pursuant to employment arrangements, certain of Fortress’s employees are granted profit sharing interests and are thereby entitled to a portion of the incentive income realized from certain Fortress Funds, which is payable upon a realization event within the respective funds. Accordingly, incentive income resulting from a realization event within a fund gives rise to the incurrence of a profit sharing obligation. Amounts payable under these profit sharing plans are recorded as compensation expense when they become probable and reasonably estimable.

For profit sharing plans related to hedge funds, where incentive income is received on a quarterly or annual basis, the related compensation expense is accrued during the period for which the related payment is made.

For profit sharing plans related to private equity funds and hybrid PE funds, where incentive income is received as investments are realized but is subject to clawback (see “Revenue Recognition on Incentive Income” above), although Fortress defers the recognition of incentive income until all contingencies are resolved, accruing expense for employee profit sharing is based upon when it becomes probable and reasonably estimable that incentive income has been earned and therefore a profit sharing liability has been incurred. Based upon this policy, the recording of an accrual for profit sharing expense to employees generally precedes the recognition of the related incentive income revenue. Furthermore, such profit sharing expense may be reversed upon determination that the expense is no longer probable of being incurred based on the performance of the fund.

Our determination of the point at which it becomes probable and reasonably estimable that incentive income will be earned and therefore a corresponding profit sharing expense should be recorded is based upon a number of factors, the most significant of which is the level of realized gains generated by the underlying funds that may ultimately give rise to incentive income payments. Accordingly, profit sharing expense is generally recorded upon realization events within the underlying funds. A realization event has occurred when an investment within a fund generates proceeds in excess of its related invested capital, such as when an investment is sold at a gain. Changes in the judgments and estimates made in arriving at the appropriate amount of profit sharing expense accrual could materially impact net income.

For further information on amounts paid and payable in the future under our profit sharing arrangements, please see Note 2 to Part I, Item 1, “Financial Statements – Management Agreements and Fortress Funds.”

Valuation of Investments

Our investments in the Fortress Funds are recorded based on the equity method of accounting. The Fortress Funds themselves apply specialized accounting principles specified by the AICPA Audit and Accounting Guide – Investment Companies. As such, our results are based on the reported fair value of the investments held by the funds as of the reporting date with our pro rata ownership interest (based on our principal investment) in the changes in each fund’s NAV reflected in our results of operations. Fair value generally represents the amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We are the manager of these funds and in certain cases participate in the valuation of underlying investments, many of which are illiquid and/or without a public market. The fair value of these investments is generally estimated based on either values provided by independent valuation agents, who use their own proprietary valuation models, or proprietary models developed by us, which include discounted cash flow analyses, public market comparables, and other techniques and may be based, at least in part, on independently sourced market parameters. The material estimates and assumptions used in these models include the timing and expected amount of cash flows, the appropriateness of discount rates used, and, in some cases, the ability to execute, timing of, and estimated proceeds from expected financings. Significant judgment and estimation goes into the selection of an appropriate valuation methodology as well as the assumptions which generate these models, and the actual values realized with respect to investments could be materially different from values obtained based on the use of those estimates. The valuation methodologies applied impact the reported value of our investments in the Fortress Funds in our consolidated financial statements.

Private Equity Funds

Under the valuation policies and guidelines of our private equity funds, investments are categorized into two types of securities: those for which there is a market quotation and those for which there is no market quotation. Securities for which there is a market quotation are valued at their quoted market price. A discount may be applied to those securities with sale restrictions. Securities for which there is no market quotation are referred to as private securities and are valued at fair value. Our guidelines state that the fair values of private securities are generally based on the following methods:

Public market transactions of similar securities

Private market transactions of similar or identical securities

Analytical methods

Our private equity funds have never based a valuation of a private security upon public or private market transactions in a similar security. There have been no circumstances to date in which a security in a public market transaction, or a private market transaction of which we were aware, has been considered to be sufficiently similar to a private security owned by one of our private equity funds to be used as a measure of valuation for such private security investment.

Our private equity funds have used the price of private market transactions in identical securities as a valuation method for investments. In cases in which there has been a significant private transaction in a private security held by our private equity funds, the value of private equity fund investments in the private security are based upon the price of such recent private transaction in that security and no sensitivity analysis is used.

If the fair value of private security investments held by our private equity funds cannot be valued by reference to a public or private market transaction, then the primary analytical methods used to estimate the fair value of such private securities are the discounted cash flow method, by reference to performance statistics of similar public companies (for example, EBITDA multiples) or the use of third party valuations. Sensitivity analysis is applied to the estimated future cash flows using various factors depending on the investment, including assumed growth rates (in cash flows), capitalization rates (for determining terminal values) and appropriate discount rates based on the investment to determine a range of reasonable values. The valuation based on the inputs determined to be the most probable is used as the fair value of the investment.

Liquid Hedge Funds

The majority of the investments in our liquid hedge funds are valued based on quoted market prices, including broker quotations in illiquid or inactive markets which include disclaimers stating they are not “actionable” and are therefore included in level 3A as described below. Investments valued based on other observable market parameters in our liquid hedge funds include (i) interest rate swaps and swaptions, equity swaps and foreign exchange swaps which are valued by the independent fund administrator using models with significant observable market parameters, and (ii) funds managed by third parties for which we receive value information from the fund managers. The fair value of interest rate swaps and swaptions is calculated using the current market yield of the relevant interest rate durations and an appropriate discount rate to determine a present value. The fair value of equity swaps and foreign exchange swaps is calculated using the market price of the underlying stock or foreign exchange pair, plus the financing cost of carrying the transaction. The fair value of these investments is also confirmed independently with the counterparty to the transaction. Investments valued using methods, including internal models, with significant unobservable market parameters consist primarily of investments in other funds and certain illiquid securities. Counterparty risk is also considered.

Hybrid Hedge Funds

In our hybrid hedge funds, investments are valued using quoted market prices, to the extent available. Independent valuation agents are used by our hybrid hedge funds to provide estimates of the fair value of investments, other than investments in other funds, for which quoted market prices are not available. For these investments, we understand that the independent valuation agents use some or all of the following methods and techniques to estimate the fair value of the relevant type of investments:

Private loans - The most common method used to value private loans is a discounted cash flow analysis. In this method, the estimated future payments to be made by the borrower under the loan agreement are discounted to the present using a discount rate appropriate to the risk level of the borrower and current market interest rates.

If it is likely that a borrower will not be able to repay a loan in full, the loan may be valued by estimating how much the borrower will be able to repay based on obtaining refinancing from a new lender. Under this method, the borrower’s business must be examined in detail, and then compared to known loans in the market to estimate how much the borrower will likely be able to borrow, and therefore repay under the existing loan. If the amount likely to be able to be refinanced is less than the total payments due under the loan, the fair value of the loan will be reduced.

Another method used to value loans that may not be repaid in full is to value the total amount of assets of the borrower that might be sold to raise proceeds to repay the loan (and debt, if any, that has a higher claim against assets) if necessary. Under this method, all assets of the borrower must be analyzed and valued. If the total value is less than the total payments due under the loan (and debt, if any, that has a higher claim against assets), the fair value of the loan will be reduced.

Asset-backed securities and collateralized debt obligations for which there are no quoted market prices are valued using a discounted cash flow analysis based on the estimated cash flows to be generated by the relevant underlying assets and the appropriate interest rate based on the nature of the underlying assets.

Real estate is usually valued based on sales of comparable property. The value of real estate which is net leased is also influenced by the credit quality of major tenants, as their ability to make lease payments is relevant to the value of the property under lease.

Investments in other funds are valued primarily based on the net asset values provided by the fund managers of those funds. Adjustments to such net asset values are made for liquidity or to other factors if deemed material and necessary.

Investments valued using methods, including internal models, with significant unobservable market parameters consist primarily of investments in other funds and certain illiquid investments.

Hybrid PE Funds

Investments held within these funds are valued in a consistent manner with either the private equity funds or hybrid hedge funds, as applicable depending on the nature of the investment.

Sensitivity

Changes in the fair value of our funds’ investments would impact our results of operations as described in Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”

As discussed above, the determination of investment fair values involves management’s judgments and estimates. The degree of judgment involved is dependent upon the availability of quoted market prices or observable market parameters. The following table summarizes the investments held by the Fortress Funds by valuation methodology as of June 30, 2009.

The categories displayed below correspond directly with the disclosures which are required under SFAS 157. Note that negative percentages represent net short positions.


		Private Equity Funds		Liquid Hedge Funds				Hybrid Hedge Funds		Hybrid PE Funds		Total Investment Company Holdings
	Basis for Determining Fair Value	Private Equity Funds		Long		Short		Hybrid Hedge Funds		Hybrid PE Funds		Total Investment Company Holdings
1.	Quoted market prices	8	%	45	%	95	%	1	%	1	%	(4	%)
2.	Other observable market parameters	5	%	25	%	5	%	(1	%)	0	%	5	%
3A.	Third party pricing sources with significant unobservable market parameters (A)	8	%	29	%	0	%	98	%	86	%	63	%
3B.	Internal models with significant unobservable market parameters	79	%	1	%	0	%	2	%	13	%	36	%

Total		100	%	100	%	100	%	100	%	100	%	100	%

(A)	Primarily represents valuations based on third party pricing services, certain broker quotes, and third party fund managers.

As of June 30, 2009, $7.5 billion of investments in our private equity funds, $0.04 billion of investments in our liquid hedge funds, $0.2 billion of investments in our hybrid hedge funds, and $0.7 billion of investments in our hybrid PE funds are valued by internal models with significant unobservable market parameters. A 10% increase or decrease in the value of investments held by the Fortress Funds valued at level 3 (A or B) would have had the following effects on our results of operations on an unconsolidated basis for the six months ended June 30, 2009, consistent with the table above:


	Private Equity Funds	Liquid Hedge Funds	Hybrid Hedge Funds	Hybrid PE Funds
Management fees, per annum on a prospective basis	$3.3 million or ($3.3 million) (A)	$1.7 million	$15.3 million	$0.3 million or ($1.9 million) (A)
Incentive income	N/A (B)	$0.0 million or ($0.1 million)	N/A (C)	N/A (B)
Earnings from equity method investees	$42.6 million	$0.7 million	$23.2 million	$8.4 million

Note: The tables above exclude non-investment assets and liabilities of the funds, which are not classified in the fair value hierarchy. Such net assets may be material, particularly within the hedge funds.

(A)

Private equity fund and hybrid PE fund management fees would be generally unchanged as, for investments in non-publicly traded securities, they are not based on the value of the funds, but rather on the amount of capital invested in the funds. However, if the NAV of a portfolio company of certain private equity funds or hybrid PE funds is reduced below its invested capital, there would be a reduction in management fees. As of June 30, 2009, $3.0 billion of such private equity fund or hybrid PE fund portfolio companies valued at level 3 (A or B) were carried at or below their invested capital and are in funds which are no longer in their commitment period. Management fees are generally calculated as of certain reset dates. The amounts disclosed show what the estimated effects would be to management fees over the next year assuming June 30, 2009 is the current reset date.

(B)	Private equity fund and hybrid PE fund incentive income would be unchanged as it is not recognized until received and all contingencies are resolved. Furthermore, incentive income would be based on the actual price realized in a transaction, not based on a valuation.

(C)

Hybrid hedge fund incentive income would be unchanged as it is not recognized until all contingencies are resolved in the fourth quarter (and Value Recovery Funds do not pay any current incentive income). Incentive income is generally not charged on amounts invested by hybrid hedge funds in funds managed by external managers.

Income Taxes

FIG Corp. has recorded a significant deferred tax asset, primarily in connection with the Nomura transaction and the IPO. These transactions resulted in the basis of Fortress Operating Group’s net assets being in excess of its book basis, which will result in future tax deductions. A substantial portion of this asset is offset by a liability associated with the tax receivable agreement with our Principals.

The realization of the deferred tax assets is dependent on the amount of our future taxable income before deductions related to the establishment of the deferred tax asset. The deferred tax asset is comprised of a portion that would be realized in connection with future ordinary income and a portion that would be realized in connection with future capital gains.

We project that we will have sufficient future taxable ordinary income in the normal course of business without any projected significant change in circumstances to fully realize the portion of the deferred tax asset that would be realized in connection with future ordinary income. Our projections do not include material changes in AUM or incentive income from the current levels which, due to the market crisis, have declined from historical levels. However, the projections do contain an estimated marginal growth assumption in years beyond 2009. Based on our historical and projected taxable income, we have concluded that the realization of the portion of the deferred tax asset that would be realized in connection with future taxable ordinary income is more likely than not. If our estimates change in the future and it is determined that it is more likely than not that some portion, or all, of this portion of the deferred tax asset will not be realized, a valuation allowance would be recorded for that portion. However, in most cases, any tax expense recorded in connection with the establishment of a valuation allowance or the reversal of a deferred tax asset would be partially offset by other income recorded in connection with a corresponding reduction of a portion of the tax receivable agreement liability (see below). The following table sets forth our estimated federal taxable ordinary income for 2007 and 2008 before deductions relating to the establishment of the deferred tax assets, excluding deferred tax assets arising from equity-based compensation, as well as the average of such amount needed over the approximate period of the deductibility (approximately 15 years from the date of establishment, based on the amortization period of the tax basis intangible assets recorded) in order to fully realize the portion of the deferred tax asset that would be realized in connection with future ordinary income (in millions):


2007	$	74.9
2008: Estimated	$	47.9
2009 - 2015: Average Required	$	55.4
2016 - 2021: Average Required	$	79.1

As of December 31, 2008, based on the effects of the continuing credit crisis, particularly the fourth quarter declines in equity investment values, we revised our assessment of the realizability of the portion of the deferred tax asset that would only be realized in connection with future capital gains. We have established a full valuation allowance for this portion of the deferred tax asset as management does not believe that the projected generation of material taxable capital gains is sufficiently assured in the foreseeable future. In addition, the establishment of the valuation allowance resulted in a reduction of the obligations associated with the tax receivable agreement and a corresponding reduction of the deferred tax asset.

For further information on our effective tax rate, and the tax receivable agreement, see Note 5 to our financial statements in Part I, Item 1, “Financial Statements – Income Taxes and Tax Related Payments.”

Our effective tax rate for GAAP reporting purposes may be subject to significant variation from period to period.

The amount of income taxes that we may be required to pay could increase significantly if legislation introduced in Congress is passed in its proposed form. For more information on the proposed legislation, see Part II, Item 1A, “Risk Factors –Risks Related to Taxation – Legislation has been introduced that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. Our structure also is subject to potential judicial or administrative change and differing interpretations, possibly on a retroactive basis.”

Equity-Based Compensation

We currently have several categories of equity-based compensation which are described in Note 7 to Part I, Item 1, “Financial Statements – Equity-Based Compensation.” The aggregate fair value of each of the RSU grants that 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 our company adjusted for the expected effects of the grants on turnover, if any, and other factors in the judgment of management. The estimated forfeiture factor is updated at each reporting date.

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 we do not have sufficient historical share performance to use our own historical volatility, adjusted for management’s judgment regarding our expected volatility. Since our IPO in February 2007, our actual volatility has exceeded the volatility assumption used. To the extent that this trend continues, and management’s judgment concerning volatility is changed, we 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 our 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 following elements of the accounting for equity-based compensation are subject to significant judgment and estimation:

•

the estimated forfeiture factor;

•

the discount related to RSUs which do not entitle the recipients to dividend equivalents prior to the delivery of Class A shares. This discount was based on the estimated present value of dividends to be paid during the service period, which in turn was based on an estimated initial dividend rate, an estimated dividend growth rate and a risk-free discount rate of like 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. This discount 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, term, dividend rate and risk-free discount rate; and

•

the estimated fair value of the LTIP awards, which was estimated using a Monte Carlo simulation valuation model, with the following assumptions: volatility, term, dividend rate, and risk-free discount rate.

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. Increases in the assumed forfeiture factor would decrease compensation expense. Increases in the volatility assumption would (i) decrease compensation expense related to RSUs with no service conditions since the discount for delayed delivery would have increased, and (ii) increase compensation expense related to the LTIP since the value of the LTIP would have increased. Increases in the assumed risk-free rate would (i) decrease compensation expense related to RSUs which do not entitle recipients to dividend equivalents since the estimated value of the foregone dividends would have increased, thereby increasing the discount related to their non-receipt, (ii) decrease compensation expense related to RSUs with no service conditions since the discount for delayed delivery would have increased, and (iii) increase compensation expense related to the LTIP since the value of the LTIP would have increased. Except for the forfeiture factor, changes in these assumptions will only affect awards made in the future and awards whose accounting is impacted by changes in their fair value (generally those to non-employees, known as “liability awards”).

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements.” SFAS 160 clarifies the classification of non-controlling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such non-controlling interests. SFAS 160 applies to reporting periods beginning after December 15, 2008. SFAS 160 had the following effects on Fortress’s financial statements: (i) reclassification of Principals’ and Others’ Interests in Equity of Consolidated Subsidiaries from the “mezzanine” section of the balance sheet (between liabilities and equity) to equity, (ii) removal of Principals’ and Others’ Interests in Income of Consolidated Subsidiaries from the calculation of Net Income (Loss) on the statement of operations, and disclosure thereof below Net Income (Loss), and (iii) with respect to potential future transactions in which Fortress could acquire Fortress Operating Group units from the Principals pursuant to their exchange (along with Class B shares) for Class A shares (or otherwise), these transactions would be accounted for as equity transactions rather than as a step acquisition of Fortress Operating Group (as would be required under prior accounting principles). There is no effect from the adoption of SFAS 160 on the equity which pertains to Class A shareholders, or net income (loss) allocable to Class A shareholders, or on Fortress’s liquidity.

In April 2009, the FASB issued three FSPs related to fair value and impairment, FSP FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments,” FSP FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments,” and FSP FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” These FSPs (i) require disclosures about the fair value of financial instruments on an interim basis, (ii) change the guidance for determining, recording and disclosing other-than-temporary impairment, and (iii) provide additional guidance for estimating fair value when the volume or level of activity for an asset or liability have significantly decreased. These FSPs are effective for Fortress in the second quarter of 2009. They have had a small impact on our disclosures, a potential impact on future impairment determinations for distributable earnings purposes (if any), but no material impact on our financial condition, liquidity, or results of operations upon adoption.

In June 2009, the FASB issued SFAS No. 167 “Amendment to FASB Interpretation No. 46(R).” SFAS 167 changes the definition of a variable interest entity (“VIE”) and changes the methodology to determine who is the primary beneficiary of, or in other words who consolidates, a VIE. Generally, the changes are expected to cause more entities to be defined as VIE’s and to shift consolidation to those entities that exercise day-to-day control over the VIE’s, such as investment managers. We are currently evaluating the potential impact of SFAS 167 on us. To the extent it results in changes to the entities included in our consolidated financial statements, the impact could be material to our gross assets, liabilities, revenues and expenses but would not be material to the net income or equity attributable to our Class A shareholders.

Market Risks

Our predominant exposure to market risk is related to our role as investment manager for the Fortress Funds and the sensitivities to movements in the fair value of their investments on management fee and incentive income revenue, as well as on returns on our principal investments in such funds. For a discussion of the impact of market risk factors on our financial instruments refer to Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” and “— Critical Accounting Policies — Valuation of Investments” above.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

As of June 30, 2009, our material contractual obligations are our capital commitments to our funds, our lease obligations and our debt obligations as described above. Furthermore, we have potential clawback obligations with respect to our private equity deferred incentive income received to date.

Our future contractual obligations decreased from $1.5 billion as of December 31, 2008 to $1.2 billion as of June 30, 2009.

Our debt obligations payable decreased from $777.7 million as of December 31, 2008 to $468.9 million as of June 30, 2009, including estimates for interest payments. This decrease was primarily attributable to the repayment of the revolving debt and a portion of the delayed term loan from proceeds of our May 2009 capital raise in the amounts of $54.0 million and $110.3 million, respectively. In addition, this decrease was also attributable to our March 13, 2009 amendment to our credit agreement. In connection with this amendment, we repaid (i) $50.0 million of outstanding revolving debt and (ii) $75.0 million of the outstanding delayed term loan.

Our outstanding capital commitments, including our commitments to our funds, have decreased from $140.9 million as of December 31, 2008 to $131.0 million as of June 30, 2009. This decrease is primarily attributable to a $14.4 million contribution we made to Fund V during the six months ended June 30, 2009, partially offset by the net effect of recallable capital distributions from the Real Assets Fund and the Credit Opportunities Fund, which increased our outstanding commitments by $4.5 million.

The amount of clawback that would be due based on a liquidation of the related Fortress Funds at their net recorded asset value as of June 30, 2009, which we refer to as intrinsic clawback, was $104.1 million as compared to $130.3 million at December 31, 2008. This decrease is primarily a result of the net returns earned by the related Fortress Funds during the six months ended June 30, 2009.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The fair value of the financial assets and liabilities of the Fortress Funds may fluctuate in response to changes in the value of securities, foreign exchange, commodities and interest rates. Fluctuations in the fair value of the Fortress Funds will continue to directly affect the carrying value of our investments in the Fortress Funds and thereby our earnings (losses) from equity method investees, as well as the management fees and incentive income we record, to the extent that they are earned based on fair value or NAV.

Risks are analyzed across funds from the “bottom up” and from the “top down” with a particular focus on asymmetric risk. Management gathers and analyzes data, monitors investments and markets in detail, and constantly strives to better quantify, qualify and circumscribe relevant risks.

Although the Fortress Funds share many common themes, each segment within the investment companies runs their own investment and risk management process subject to the company’s overall risk tolerance and philosophy:

•

the investment process of our private equity funds involves a detailed analysis of potential acquisitions, and asset management teams assigned to oversee the strategic development, financing and capital deployment decisions of each portfolio investment;

•

our hybrid funds and Castles perform credit and cash-flow analysis of borrowers, tenants and credit-based assets, and have asset management teams that monitor covenant compliance by, and relevant financial data of, borrowers, tenants and other obligors, asset pool performance statistics, tracking of cash payments relating to investments, and ongoing analysis of the credit status of investments; and

•

our liquid hedge funds continuously monitor a variety of markets for attractive trading opportunities, applying a number of traditional and customized risk management metrics to analyze risk related to specific assets or portfolios, as well as fund-wide risks.

Each segment has an institutional risk management process and related infrastructure to address these risks. The following table summarizes our financial assets and liabilities that may be impacted by various market risks such as equity prices, interest rates and exchange rates as of June 30, 2009 (in thousands):


Assets
Equity method investees	$	818,147
Options in affiliates		116

	$	818,263

Liabilities
Debt obligations payable	$	439,750

Since Fortress’s investments in the various Fortress Funds are not equal, Fortress’s risks from a management fee and incentive income perspective (which mirror the funds’ investments) and its risks from an investment perspective are not proportional.

Fortress Funds’ Market Risk Impact on GAAP Management Fees

Our management fees are based on either: (i) capital commitments to a Fortress Fund, (ii) capital invested in a Fortress Fund, or (iii) the NAV of a Fortress Fund, as described in our historical consolidated financial statements. Management fees will only be impacted by changes in market risk factors to the extent they are based on NAV. These management fees will be increased (or reduced) in direct proportion to the impact of changes in market risk factors on our investments in the related funds and would occur only in periods subsequent to the change, as opposed to having an immediate impact. The proportion of our management fees that are based on NAV is dependent on the number and types of Fortress Funds in existence and the current stage of each fund’s life cycle. As of June 30, 2009, approximately 47% of our management fees earned were based on the NAV of the applicable funds.

•

For private equity funds and certain hybrid PE funds, management fees are charged on committed capital during the investment period of a new fund, and then generally on invested capital after the investment period, with the exception of funds formed after March 2006. For funds formed after March 2006 that are no longer in the investment period, management fees are earned on the NAV of investments in publicly traded entities. Reductions in net asset value below invested capital for any fund investment will also cause reductions in management fees.

•

For Castles, management fees are not calculated based on NAV but instead a fee is charged based on the funds' contributed capital.

•

For hedge funds, other than the Value Recovery Funds, management fees are based on their NAV, which in turn is dependent on the estimated fair values of their investments. For the Value Recovery Funds, management fees are based on realizations which are not dependent on current estimated fair value; for certain managed assets within the Value Recovery Funds management fees are dependent on a defined gross asset value which is not directly dependent on current estimated fair value.

Changes in values of investments could indirectly affect future management fees by, among other things, reducing the funds' access to capital or liquidity and their ability to currently pay the management fees.

Fortress Funds’ Market Risk Impact on GAAP Incentive Income

Our incentive income is generally based on a percentage of profits of the various Fortress Funds subject to the achievement of performance criteria. Our incentive income will be impacted by changes in market risk factors. However, several major factors will influence the degree of impact: (i) the performance criteria for each individual fund in relation to how that fund’s results of operations are impacted by changes in market risk factors, (ii) whether such performance criteria are annual or over the life of the fund, (iii) to the extent applicable, the previous performance of each fund in relation to its performance criteria, and (iv) whether each fund’s incentive income is subject to contingent repayment. As a result, the impact of changes in market risk factors on incentive income will vary widely from fund to fund, as summarized below, and is heavily dependent on the prior performance of each fund, and is therefore not readily predicted or estimated.

•

Incentive income from our private equity funds and hybrid PE funds is not recorded as revenue but instead is deferred under GAAP until the related clawback contingency is resolved. Deferred incentive income, which is subject to contingencies, will be recognized as revenue to the extent it is received and all the associated contingencies are resolved. Assuming that the deferred incentive income earned to date would be equal to what would be recognized when all contingencies are resolved, a 10% increase or decrease in the fair values of investments held by all of the private equity funds and hybrid PE funds where incentive income is subject to contingencies at June 30, 2009 would increase or decrease future incentive income by $99.1 million or ($26.6 million), respectively; however, this would have no effect on our current reported financial condition or results of operations.

•

Incentive income from the Castles is not impacted by changes in the fair values of their investments, except to the extent they represent impairment, since these changes do not impact the measure of current operating results (i.e. FFO in excess of specified returns to the company’s shareholders) upon which the incentive income is calculated. The definition of FFO excludes unrealized changes in the values of the Castles' investments (primarily real estate, loans and securities), except for minor items (for example, the unrealized gain or loss on non-hedge derivatives which make up only an immaterial portion of their assets).

•

Incentive income from our hedge funds is directly impacted by changes in the fair value of their investments. Incentive income from certain of our hedge funds is earned based on achieving quarterly or annual performance criteria. For the hedge funds with quarterly performance criteria, a 10% decrease to the NAV of the fund on June 30, 2009 would have resulted in a loss to investors for the quarter. In future quarters, this loss would create or cause the fund to fall further below a “high water mark” (minimum future return to recover the loss to the investors) for our funds’ performance which would need to be achieved prior to any incentive income being earned by us. For the hedge funds with annual performance criteria, a 10% decrease to the NAV of the fund on June 30, 2009, assuming that NAV is constant for the rest of the current year, would result in no incentive income recorded as revenue at year end (in the fourth quarter of the year). The Value Recovery Funds only pay incentive income if aggregate realizations exceed a certain threshold and, therefore, this potential incentive income (none of which has been recorded to date) is not impacted by changes in fair value.

Fortress Funds’ Market Risk Impact on GAAP Investment Income

Our investments in the Fortress Funds, other than the Castles, are accounted for under the equity method. To the extent they are investment companies, our investments are directly affected by the impact of changes in market risk factors on the investments held by such funds, which could vary significantly from fund to fund.

Market Risk – Quantitative Analysis

The following table presents information on the impact to Fortress of a 10% change in the fair values of all of the investments held by the Fortress Funds at June 30, 2009 (in millions).


	10% Positive Change
	GAAP Revenues									Segment Revenues (A)
	Management Fees (B)			Incentive Income			Earnings from Equity Method Investees (C)			Management Fees (B)			Incentive Income			Investment Income
Private Equity
Funds	$	4.2		$	N/A	(E)	$	45.2		$	4.2		$	N/A	(E)	$	N/A
Castles (D)		N/A			N/A			N/A			N/A			N/A			N/A
Liquid Hedge Funds		6.5			5.7			1.0			6.5			5.7			0.3
Hybrid
Hedge Funds		11.7			N/A	(G)		19.1			11.7			0.0			10.0
PE Funds		0.3			N/A	(E)		6.0			0.3			N/A	(E)		N/A

Total	$	22.7		$	5.7		$	71.3		$	22.7		$	5.7		$	10.3


	10% Negative Change
	GAAP Revenues									Segment Revenues (A)
	Management Fees (B)			Incentive Income			Earnings from Equity Method Investees (C)			Management Fees (B)			Incentive Income			Investment Income
Private Equity
Funds	$	(4.2	)	$	N/A	(E)	$	(45.2	)	$	(4.2	)	$	N/A	(E) (F)	$	N/A	(F)
Castles (D)		N/A			N/A			N/A			N/A			N/A			N/A	(F)
Liquid Hedge Funds		(6.5	)		(0.1	)		(1.0	)		(6.5	)		(0.1	)		(0.3	)
Hybrid
Hedge Funds		(11.7	)		N/A	(G)		(19.1	)		(11.7	)		0.0			(10.0	)
PE Funds		(1.9	)		N/A	(E)		(6.0	)		(1.9	)		N/A	(E) (F)		N/A	(F)

Total	$	(24.3	)	$	(0.1	)	$	(71.3	)	$	(24.3	)	$	(0.1	)	$	(10.3	)

(A)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Segment Analysis” for a discussion of the differences between GAAP and segment basis revenues.

(B)

Changes in management fees represent an annual change for the one year period following the measurement date assuming there is no change to the investments held by the funds during that period. For private equity funds and hybrid PE funds, it assumes that the management fees reset as of the reporting date. Private equity fund and hybrid PE fund management fees would be generally unchanged as, for investments in non-publicly traded securities, they are not based on the value of the funds, but rather on the amount of capital invested in the funds. However, if the NAV of a portfolio company of certain private equity funds or hybrid PE funds is reduced below its invested capital, there would be a reduction in management fees. As of the reporting date, $3.5 billion of such private equity fund or hybrid PE fund portfolio companies were carried at or below their invested capital and are in funds which are no longer in their commitment period.

(C)

Presented on a gross basis, before Principals’ and others’ interests in income of consolidated subsidiaries. The changes presented do not include any effect related to our direct investment in GAGFAH common stock. A 10% increase (decrease) in the equity price of GAGFAH’s common shares would affect our unrealized gains and losses by $4.8 million.

(D)

Our investments in the Castles are held at fair value, based on the market value of the shares we own. Gains (losses) on our shares in the Castles and options granted to us by the Castles are affected by movements in the equity price of the shares. A 10% increase (decrease) in the equity price of the shares would affect unrealized gains and losses by $0.1 million. A 10% increase (decrease) in the market value of our investment in Eurocastle convertible debt would affect unrealized gains and losses by $0.2 million. Furthermore, the Castles’ management fees and incentive income are not directly impacted by changes in the fair value of their investments (unless the changes are deemed to be impairment, which would impact incentive income).

(E)

For GAAP Revenues, private equity fund and hybrid PE fund incentive income would be unchanged as it is not recognized until received and all contingencies are resolved. Furthermore, incentive income would be based on the actual price realized in a transaction, not based on a valuation. For Segment Revenues, private equity fund and hybrid PE fund incentive income is based on realizations.

(F)	A reduction in the fair value of investments could impact our conclusion regarding the potential impairment of our investments or a potential segment basis incentive income reserve for funds which are subject to clawback.

(G)

For GAAP Revenues, hybrid hedge fund incentive income would be unchanged as it is not recognized until all contingencies are resolved in the fourth quarter (and Value Recovery Funds do not pay any current incentive income). Incentive income is generally not charged on amounts invested by hybrid hedge funds in funds managed by external managers.

Interest Rate Risk

Fortress Operating Group has debt obligations payable that accrue interest at variable rates. Interest rate changes may therefore impact the amount of interest payments, future earnings and cash flows. Based on debt obligations payable as of June 30, 2009, we estimate that interest expense relating to variable rate debt obligations payable would increase $4.4 million on an annual basis in the event interest rates were to increase by one percentage point.

Exchange Rate Risk

Our investments in Eurocastle and GAGFAH are directly exposed to foreign exchange risk. As of June 30, 2009, we had a $2.2 million investment in Eurocastle and a $47.6 million investment in GAGFAH which are accounted for at fair value. In the event of a 10% change in the applicable foreign exchange rate against the U.S. dollar on June 30, 2009, we estimate the gains and losses for the six months ended June 30, 2009 in relation to the value of the shares and options would increase or decrease by $5.0 million.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and on a timely basis. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

We may from time to time be involved in litigation and claims incidental to the conduct of our business. Our industry is always subject to scrutiny by government regulators, which could result in litigation related to regulatory compliance matters. As a result, we maintain insurance policies in amounts and with the coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards. We believe that the cost of defending any pending or future litigation or challenging any pending or future regulatory compliance matter will not have a material adverse effect on our business. However, increased regulatory scrutiny of hedge fund trading activities combined with extensive trading in our liquid hedge funds may cause us to re-examine our beliefs regarding the likelihood that potential investigation and defense-related costs could have a material adverse effect on our business.

Item 1A.

Risk Factors

We face a variety of significant and diverse risks, many of which are inherent in our business. Described below are certain risks that we currently believe could materially affect us. Other risks and uncertainties that we do not presently consider to be material or of which we are not presently aware may become important factors that affect us in the future. The occurrence of any of the risks discussed below could materially and adversely affect our business, prospects, financial condition, results of operations or cash flow.

Risks Related to the Financial Services Industry and Financial Markets

We do not know what impact the U.S. government’s various plans to attempt to stabilize the economy and the financial markets will have on our business.

In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the U.S. government enacted the Emergency Economic Stabilization Act of 2008, or EESA, on October 3, 2008. Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of mortgage-backed and other securities from financial institutions for the purpose of stabilizing the financial markets. In addition, the U.S. government also made preferred equity investments in a number of the largest financial institutions, including Citigroup, Bank of America and AIG. In addition, on March 3, 2009, the U.S. Department of the Treasury and the Federal Reserve announced the launch of the Term Asset-Backed Securities Loan Facility, or TALF, which provides up to $200 billion (which may be increased to up to $1 trillion) of financing to certain U.S. entities to purchase qualifying AAA-rated asset-backed securities. Such financing is subject to various conditions, has a term of three years and accrues interest at specified rates. It is not clear what impact the various plans to attempt to stabilize the economy and the financial markets will have on our business.

In March 2009, the US Treasury announced plans for the Public Private Investment Partnership Program (or “PPIP”) for legacy assets, which is intended to generate purchasing power to help facilitate the purchase of various loans and securities held by financial institutions. As part of the PPIP, the Treasury accepted applications from investment managers to become pre-qualified to manage assets of to-be-formed investment funds that would invest in legacy securities on behalf of the government and private investors. We were not selected in the initial round of announcements to be pre-qualified as an investment manager under this program. As we stated prior to the announcement of pre-qualified managers, we do not currently anticipate that the PPIP will have a material impact on our business. The details of the TALF, PPIP and other initiatives are subject to change, and it is unclear whether we and/or our funds will be eligible to participate directly in these programs (whether as an investment manager, as a recipient of financing or otherwise) and, therefore, these initiatives may not directly benefit us. If any of our competitors are able to benefit from these programs, they may gain a competitive advantage over us. In addition, the government may decide to implement these programs in unanticipated ways that have a more direct impact on our funds or our businesses. For example, the government may decide that it will not purchase or finance certain types of loans or securities, which may adversely affect the price of those securities. If we own such securities in our funds, such price impacts may have an adverse impact on the liquidity and/or performance of such funds.

Risks Related To Our Business

The terms of our credit agreement may restrict our current and future operations, particularly our ability to respond to certain changes or to take future actions.

Our credit agreement contains a number of restrictive covenants and requires significant amortization payments over the next several years, which collectively impose significant operating and financial restrictions on us, including restrictions that may limit our ability to engage in acts that may be in our long-term best interests. Although we recently amended our credit agreement to, among other things, make the financial covenants less restrictive, the terms of our credit agreement still impose significant operating and financial restrictions on us. Our credit agreement includes financial covenants that we:

•

not exceed a total leverage ratio;

•

maintain a minimum AUM; and

•

maintain a minimum amount of investment assets (and maintain specific amounts of certain types of investments).

The leverage ratio covenant is tested as of the end of each fiscal quarter while the AUM and investment asset covenants are applicable at all times. We have amended these and other covenants several times in the last year in order to provide sufficient flexibility to ensure compliance with the terms of our credit agreement. Our ability to comply with these and other covenants is dependent upon a number of factors, some of which are beyond our control but could nonetheless result in noncompliance. For example, our leverage ratio fluctuates depending upon the amount of cash flow that we generate, and the value of our AUM and investment assets fluctuates due to a variety of factors, including mark-to-market valuations of certain assets and other market factors. The ongoing global economic recession has negatively impacted the cash flow that we have generated and expect to generate in the future as well as the current and expected value of our investment assets and current and expected AUM. These negative conditions, in turn, negatively affect our ability to comply with these covenants. For example, the

investment assets on our balance sheet include a limited number of concentrated positions in companies or other ventures whose liquidity, operating results and financial condition have been adversely affected by the ongoing recession. For example, we have a significant on-balance sheet investment (indirectly through a fund) in a portfolio company that has a large amount of debt that must be refinanced in the second half of 2009. The failure of the portfolio company to successfully refinance its debt (or a material default by any other portfolio company in which we have a material direct or indirect investment) could cause us to lose all, or a significant portion, of the value of our investment attributable to such portfolio company, or any amounts due from the applicable fund, which would, in turn, decrease the amount of our investment assets and could result in our failure to comply with the investment asset covenant in our credit agreement or make compliance more difficult. Our credit agreement also contains other covenants that restrict our operations as well as a number of events that, if they occurred, would constitute an event of default under the agreement.

In addition, our credit agreement requires that we make the following amortization payments during the following time periods: $14 million in October 2009, an additional $56 million during 2010, an additional $42 million by January 2011, and the remaining balance at the maturity of the facilities in May 2012. Making these payments will require a significant amount of our available cash flow that could otherwise be applied to other purposes such as making investments or paying dividends.

A failure by us to comply with the covenants or amortization requirements – or upon default – specified in our credit agreement could result in an event of default under the agreement, which would give the lenders under the agreement the right to terminate their commitments to provide additional loans under our revolving credit facility, to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, the lenders would have the right to proceed against the collateral we granted to them, which consists of substantially all our assets. If the debt under our credit agreement were to be accelerated, we may not have sufficient cash on hand or be able to sell sufficient collateral to repay this debt, which would have an immediate material adverse affect on our business, results of operations and financial condition. For more detail regarding our credit agreement, its terms and the current status of our compliance with the agreement, please see Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and “–Debt Obligations,” and “–Covenants.”

We depend on Messrs. Briger, Edens, Kauffman, Nardone and Novogratz, and the loss of any of their services would have a material adverse effect on us.

The success of our business depends on the efforts, judgment and personal reputations of our principals, Peter Briger, Wesley Edens, Robert Kauffman, Randal Nardone and Michael Novogratz. Our principals’ reputations, expertise in investing, relationships with our investors and relationships with members of the business community on whom our funds depend for investment opportunities and financing, are each critical elements in operating and expanding our businesses. We believe our performance is strongly correlated to the performance of these individuals. Accordingly, the retention of our principals is crucial to our success. In addition, if any of our principals were to join or form a competitor, some of our investors could choose to invest with that competitor rather than in our funds. The loss of the services of any of our principals would have a material adverse effect on us, including our ability to retain and attract investors and raise new funds, and the performance of our funds. Two or more of our principals occasionally fly together, which concentrates the potential impact of an accident on our company. We do not carry any “key man” insurance that would provide us with proceeds in the event of the death or disability of any of our principals.

Each of our principals has entered into an employment agreement with us. The initial term of these agreements is five years from the date of our initial public offering in February 2007, with automatic one-year renewals until a non-renewal notice is given by us or the principal. If a principal terminates his employment voluntarily or we terminate his employment for cause (as defined in the agreement), the principal will be subject to eighteen-month post-employment covenants requiring him not to compete with us. However, if we terminate a principal’s employment without cause, the principal will not be subject to the non-competition provisions.

The principals have also entered into an agreement among themselves, which provides that, in the event a principal voluntarily terminates his employment with us for any reason prior to the fifth anniversary of the consummation of our initial public offering, the principal may be required to forfeit a portion of his Fortress Operating Group units (and the corresponding Class B shares) to the other principals who continue to be employed by the Fortress Operating Group. However, this agreement may be amended by the principals who are then employed by the Fortress Operating Group. We, our shareholders and the Fortress Operating Group have no ability to enforce any provision of this agreement or to prevent the principals from amending the agreement or waiving any of its obligations.

There is no guarantee that our principals will not resign, join our competitors or form a competing company, or that the non-competition provisions in the employment agreements would be upheld by a court. If any of these events were to occur, our business, prospects, financial condition and results of operation would be materially adversely affected.

Several of our funds have “key person” provisions pursuant to which the failure of one or more of our senior employees to be actively involved in the business provides investors with the right to redeem from the funds or otherwise limits our rights to manage the funds. The loss of the services of any one of such senior employees could have a material adverse effect on certain of our funds to which such key person provisions relate and in some circumstances on us.

Investors in most of our hedge funds may generally redeem their investment without paying redemption fees if the relevant key person ceases to perform his functions with respect to the fund for 90 consecutive days. In addition, the terms of certain of our hedge funds’ financing arrangements contain “key person” provisions, which may result, under certain circumstances, in the acceleration of such funds’ debt or the inability to continue funding certain investments if the relevant employee ceases to perform his functions with respect to the fund and a replacement has not been approved.

The loss or inability of Mr. Novogratz to perform his services for 90 days could result in substantial withdrawal requests from investors in our Global Macro funds and, in the event that a replacement is not approved, the termination of a substantial portion of the funds’ financing arrangements. Such withdrawals and terminations would have a material adverse effect on the Global Macro funds by reducing our management fees from those funds. Further, such withdrawals and terminations could lead possibly to the liquidation of the funds and a corresponding elimination of our management fees and potential to earn incentive income from those funds. The loss of Mr. Novogratz could, therefore, ultimately result in a loss of a material portion of our earnings attributable to our liquid hedge fund business segment.

The loss or inability of Mr. Briger to perform his services for 90 days could result in substantial withdrawal requests from investors in our Drawbridge Special Opportunities funds and, in the event that a replacement for him is not approved, the termination of a substantial portion of the funds’ financing arrangements. Such withdrawals and terminations would have a material adverse effect on the Drawbridge Special Opportunities funds by reducing our management fees from those funds. Further, such withdrawals and terminations could lead possibly to the eventual liquidation of the funds and a corresponding elimination of our management fees and potential to earn incentive income from those funds. The loss or inability of Mr. Briger to perform his services or devote an appropriate portion of his business time to the long dated value funds for 90 days would (unless approved by a majority of fund investors) prevent some of the Drawbridge long dated value funds from making additional investments. This could have a material adverse effect on such long dated value funds, resulting in us receiving reduced management fees. The loss of Mr. Briger could, therefore, ultimately result in a loss of a material portion of our earnings attributable to our hybrid hedge fund and hybrid PE fund business segments.

If either Mr. Edens or both of Mr. Kauffman and Mr. Nardone cease to devote certain minimum portions of their business time to the affairs of certain of our private equity funds, the funds will not be permitted to make further investments, and then-existing investments may be liquidated if investors vote to do so. Our ability to earn management fees and realize incentive income from our private equity funds therefore would be adversely affected if we cannot make further investments or if we are required to liquidate fund investments at a time when market conditions result in our obtaining less for investments than could be obtained at later times. In addition, we may be unable to raise additional private equity funds if existing private equity fund key-man provisions are triggered. The loss of either Mr. Edens or both of Mr. Kauffman and Mr. Nardone could, therefore, ultimately result in a loss of substantially all of our earnings attributable to our private equity funds.

Certain of our existing funds have key person provisions relating to senior employees other than the named principals of Fortress, and the resignation or termination of any such senior employee could result in a material adverse effect on the applicable fund or funds. In addition, the terms of certain of our existing funds may be amended over time to add additional key persons, and senior employees (including but not limited to Fortress principals) may also be deemed as key persons for funds that are formed in the future.

Any such events would potentially have a direct material adverse effect on our revenues and earnings (depending on the size of the particular fund to which a key person event relates), and would likely harm our ability to maintain or grow management fee paying assets under management in existing funds or raise additional funds in the future.

Our ability to retain our managing directors is critical to our success and our ability to grow depends on our ability to attract additional key personnel.

Our success depends on our ability to retain our managing directors and the other members of our investment management team and recruit additional qualified personnel. We collectively refer to these key employees (other than our principals) as our investment professionals. Our investment professionals possess substantial experience and expertise in investing, are responsible for locating and executing our funds’ investments, have significant relationships with the institutions which are the source of many of our funds’ investment opportunities, and in certain cases have strong relationships with our investors. Therefore, if our investment professionals join competitors or form competing companies it could result in the loss of significant investment opportunities and certain existing investors. As a result, the loss of even a small number of our investment professionals could jeopardize the performance of our funds, which could have a material adverse effect on our results of operations as well as our ability to retain and attract investors and raise new funds. Also, while we have non-competition and non-solicitation agreements with certain investment professionals, there is no guarantee that the agreements to which our investment professionals are subject, together with our other arrangements with them, will prevent them from leaving us, joining our competitors or otherwise competing with us or that these agreements will be enforceable in all cases. In addition, these agreements will expire after a certain period of time, at which point each of our investment professionals would be free to compete against us and solicit investors in our funds, clients and employees.

Efforts to retain or attract investment professionals may result in significant additional expenses, which could adversely affect our profitability, and changes in law could hamper our recruitment and retention efforts. For example, we might not be able, or may elect not, to provide future investment professionals with equity interests in our business to the same extent or with the

same tax consequences as our existing investment professionals. Therefore, in order to recruit and retain existing and future investment professionals, we may need to increase the level of cash compensation that we pay to them. Accordingly, as we promote or hire new investment professionals over time, we may increase the level of cash compensation we pay to our investment professionals, which would cause our total employee compensation and benefits expense as a percentage of our total revenue to increase and adversely affect our profitability. In addition, we may deem it necessary to maintain compensation levels to retain employees even during periods when we generate less revenues than in previous periods, which would reduce our profit margins. Also, if proposed legislation were to be enacted by the U.S. Congress to treat carried interest as ordinary income rather than as capital gain for U.S. federal income tax purposes, such legislation would materially increase the amount of taxes that we and our investment professionals that are compensated in part with carried interest would be required to pay, thereby adversely affecting our ability to recruit, retain and motivate our current and future professionals. See “—Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.” Lastly, issuance of certain equity interests in our business to current or future investment professionals would dilute Class A shareholders.

Certain of our funds face particular retention issues with respect to investment professionals whose compensation is tied, often in large part, to performance thresholds, or “high water marks.” For example, several investment professionals receive performance-based compensation at the end of each year based upon their annual investment performance, and this performance-based compensation represents substantially all of the compensation the professional is entitled to receive during the year. If the investment professional’s annual performance is negative, the professional will not be entitled to receive any performance-based compensation for the year. Alternatively, certain other investment professionals are compensated in part based upon the performance fees earned by the fund during each quarter. The fund’s positive quarterly investment performance represents a high water mark, and neither the fund nor the investment professional is entitled to receive future performance-based compensation until the fund’s cumulative performance at the end of a subsequent quarter is greater than the previously set mark. In either compensation scenario, if the investment professional or fund, as the case may be, does not produce investment results sufficient to merit performance-based compensation, any affected investment professional may be incentivized to join a competitor because doing so would allow the professional to eliminate the burden of having to satisfy the high water mark before earning performance-based compensation. Similarly, many of our investment professionals in our private equity and hybrid PE fund businesses are compensated with grants of carried interest in our funds. During periods of economic volatility such as what we are currently experiencing, realization events in our private equity and hybrid PE fund businesses may be delayed, and it may therefore take significantly longer for investments to result in payments to such professionals. In addition, in the event that overall returns for any of our private equity funds or hybrid PE funds result in the generation of less incentive income than might have otherwise been anticipated, such professionals’ grants of carried interest in such fund will have similarly decreased value. To retain such professionals, the fund’s manager may elect to compensate the professional using a portion of the management fees earned by the manager, which would, in turn, reduce the amount of cash available to the public company, thereby reducing the amount available for distribution to our Class A shareholders or other liquidity needs. This retention risk is heightened during periods similar to those we are currently experiencing where market conditions make it more difficult to generate positive investment returns.

We have experienced rapid growth, which may be difficult to sustain and which may place significant demands on our administrative, operational and financial resources.

Our rapid growth in recent years has created significant demands on our legal, accounting and operational infrastructure, and increased expenses. The complexity of these demands, and the expense required to address them, is a function not simply of the amount by which our fee paying assets under management have grown, but of significant differences in the investing strategies of our different funds. In addition, we are required to continuously develop our systems and infrastructure in response to the increasing sophistication of the investment management market and legal, accounting and regulatory developments. Moreover, the strains upon our resources caused by our growth are compounded by the additional demands imposed upon us as a public company with shares listed on the New York Stock Exchange and, thus, subject to an extensive body of regulations that did not apply to us prior to our initial public offering.

Our future growth will depend, among other things, on our ability to maintain an operating platform and management system sufficient to address our growth and will require us to incur significant additional expenses and to commit additional senior management and operational resources. As a result, we face significant challenges:

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in maintaining adequate accounting, financial, compliance, trading and other business controls,

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implementing new or updated information, financial and disclosure systems and procedures, and

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in recruiting, training, managing and appropriately sizing our work force and other components of our business on a timely and cost-effective basis.

On July 19, 2009, the Company announced that Daniel Mudd will be appointed to the position of Chief Executive Officer, effective August 11, 2009. Mr. Mudd will be responsible for Fortress’s day-to-day operations, while the Fortress principals will each continue to lead their respective investment businesses and serve on the Board of Directors. Since our founding, the CEO role has been played by one of the founding principals. With our recent realignment of responsibilities, the integration of a new individual into that role will present various managerial, logistical and administrative risks to our daily operations, and there can be no assurance that we will manage this transition successfully.

There can be no assurance that we will be able to manage our expanding operations effectively or that we will be able to continue to grow, and any failure to do so could adversely affect our ability to generate revenue and control our expenses.

Operational risks may disrupt our businesses, result in losses or limit our growth.

We face operational risk from errors made in the negotiation, execution, confirmation or settlement of transactions. We also face operational risk from transactions not being properly recorded, evaluated or accounted for in our funds. In particular, our liquid hedge and hybrid fund businesses are highly dependent on our ability to process and evaluate, on a daily basis, transactions across markets and geographies in a time-sensitive, efficient and accurate manner. Consequently, we rely heavily on our financial, accounting and other data processing systems. In addition, new investment products we introduce create (and recently introduced products created) a significant risk that our existing systems may not be adequate to identify or control the relevant risks in the investment strategies employed by such new investment products. If any of these systems do not operate properly, are inadequately designed or are disabled, we could suffer financial loss, a disruption of our businesses, liability to our funds, regulatory intervention and reputational damage.

In addition, we operate in an industry that is highly dependent on its information systems and technology. We believe that we have designed, purchased and installed high-quality information systems to support our business. There can be no assurance, however, that our information systems and technology will continue to be able to accommodate our operations, or that the cost of maintaining such systems will not increase from its current level. Such a failure to accommodate our operations, or a material increase in costs related to such information systems, could have a material adverse effect on us.

Furthermore, we depend on our headquarters, which is located in New York City, for the operation of our business. A disaster or a disruption in the infrastructure that supports our businesses, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, may have an adverse impact on our ability to continue to operate our business without interruption, which could have a material adverse effect on us. Although we have disaster recovery programs in place, there can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses.

Finally, we rely on third party service providers for certain aspects of our business, including certain financial operations of our hedge funds. In particular, we rely heavily on the services of third party administrators in our hedge fund businesses and on the general ledger software provider for a number of our funds. Any interruption or deterioration in the performance of these third parties could impair the quality of the funds’ operations and could impact our reputation and adversely affect our business and limit our ability to grow.

Our removal as the investment manager, or the liquidation, of one or more of our funds could have a material negative effect on our business, results of operations and financial condition.

We derive a substantial portion of our revenues from funds managed pursuant to management agreements that may be terminated or fund partnership agreements that permit investors to request liquidation of investments in our funds on short notice. The termination of certain management agreements or commencement of the dissolution of certain funds would constitute an event of default under our credit agreement.

The terms of our funds generally give either the general partner of the fund or the fund’s board of directors the right to terminate our investment management agreement with the fund. However, insofar as we control the general partner of our funds which are limited partnerships, the risk of termination of investment management agreement for such funds is limited, subject to our fiduciary or contractual duties as general partner. This risk is more significant for our offshore hedge funds where we do not serve as the general partner, which represent a significant portion of our hedge fund AUM.

With respect to our private equity funds formed as registered investment companies, each fund’s investment management agreement must be approved annually by the independent members of such fund’s board of directors and, in certain cases, by its members, as required by law. Termination of these agreements would reduce the fees we earn from the relevant funds, which could have a material adverse effect on our results of operations.

In addition, investors in any private equity fund or hybrid PE fund and certain hedge funds have the ability to act, without cause, to accelerate the date on which the fund must be wound down. We will cease earning management fees on the assets of any such fund that is wound down. In addition, the winding down of a material fund or group of funds within a short period of time could trigger an event of default under certain debt covenants in our credit facility. Our ability to realize incentive income from such funds therefore would be adversely affected if we are required to liquidate fund investments at a time when market conditions result in our obtaining less for investments than could be obtained at later times.

In addition, management agreements of our funds that are registered investment companies under the Investment Company Act of 1940 would terminate if we were to experience a change of control without obtaining investor consent. Such a change of control could be deemed to occur in the event our principals exchange enough of their interests in the Fortress Operating Group

into our Class A shares such that our principals no longer own a controlling interest in us. We cannot be certain that consents required for the assignment of our investment management agreements will be obtained if such a deemed change of control occurs. In addition, the board of directors of certain hedge funds have the right under certain circumstances to terminate the investment management agreements with the applicable fund. Termination of these agreements would affect the fees we earn from the relevant funds, which could have a material adverse effect on our results of operations.

Under the terms of our credit agreement, if, subject to certain exceptions, we cease to serve as the investment manager of any fund that generates management and incentive fees during the previous twelve months – or which we expect to generate such fees within the next twelve months – in an aggregate amount of at least $25 million, such termination would constitute an event of default under our credit agreement. In addition, if any such fund commenced a process to dissolve, liquidate or otherwise wind-up the fund outside the ordinary course of business, such commencement would also constitute an event of default under our credit agreement. If either event of default occurred, it would give our lenders the right to terminate their commitments to lend us funds under our revolving credit facility and to require us to repay all outstanding term loans immediately (in addition to other remedies available under the credit agreement). If our lenders exercised their rights upon the occurrence of an event of default, doing so would likely have an immediate material adverse effect on our business, results of operations and financial condition.

We are subject to third-party litigation risk that could result in significant liabilities and reputational harm, which could materially adversely affect our results of operations, financial condition and liquidity.

In general, we will be exposed to risk of litigation by our fund investors if our management of any fund is alleged to constitute gross negligence or willful misconduct. Investors could sue us to recover amounts lost by our funds due to our alleged misconduct, up to the entire amount of loss. Further, we may be subject to litigation arising from investor dissatisfaction with the performance of our funds or from allegations that we improperly exercised control or influence over companies in which our funds have large investments. By way of example, we, our funds and certain of our employees, are each exposed to the risks of litigation relating to investment activities in our funds and actions taken by the officers and directors (some of whom may be Fortress employees) of portfolio companies, such as risks relating to a portfolio company’s mortgage servicing activities and the risk of shareholder litigation by other shareholders of public companies in which our funds have large investments. The stock prices of several of our publicly traded portfolio companies and Castles have decreased significantly over the past two years (resulting in the delisting of one of our portfolio companies from the NYSE), which decreases may lead to securities class action claims or other suits against us. In addition, we are exposed to risks of litigation or investigation relating to transactions that presented conflicts of interest that were not properly addressed. In such actions we would be obligated to bear legal, settlement and other costs (which may be in excess of available insurance coverage). In addition, although we are indemnified by the funds we manage, our rights to indemnification may be challenged. If we are required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds or failure to obtain indemnification from our funds, our results of operations, financial condition and liquidity could be materially adversely affected. As a general matter, the litigation environment in the investment management business tends to become worse in times of extreme market volatility such as what we are currently experiencing. We have experienced negative performance during various periods over the past year in several of our investment funds, which increases the likelihood that we will be sued by one or more of our investors.

In our liquid hedge funds, we are exposed to the risk of litigation if the funds suffer catastrophic losses due to the failure of a particular investment strategy or due to the trading activity of an employee who has violated market rules and regulations. Any litigation arising in such circumstances is likely to be protracted, expensive and surrounded by circumstances which are materially damaging to our reputation and our business. In addition, we face the risk of litigation from investors in our private equity funds, hybrid hedge funds and hybrid PE funds if we violate restrictions in such funds’ organizational documents (for example, by failing to seek approval for related party transactions requiring approval or by exceeding the mandate of such funds).

Our liquid hedge funds, our offshore hybrid hedge fund and many of our private equity funds and hybrid PE funds are incorporated or formed under the laws of the Cayman Islands. Cayman Islands laws, particularly with respect to shareholder rights, partner rights and bankruptcy, may differ from the laws of the United States. Cayman Islands laws could change, possibly to the detriment of our funds and investment management subsidiaries. In November 2008, our flagship liquid hedge funds, the Drawbridge Global Macro Funds, temporarily suspended redemptions from the funds due to the heavy volume of redemption requests received during the fourth quarter of 2008. The suspensions were based, in large part, on the need to renegotiate the terms of various financing arrangements to which one or more of the funds were party. In addition, the Drawbridge Global Macro Funds announced their intention to engage in a significant restructuring of their business, including the planned bifurcation of the funds’ assets into “liquid” and “illiquid” pools, revisions to certain of the fees charged to the funds’ investors, payment of redemption proceeds in a combination of cash and in-kind distributions in the form of interests in an entity that holds interests in the illiquid pool and a plan to allow non-redeeming investors to exchange their interests in the liquid pool of assets into a newly-formed fund. Since the time of such announcements, the Drawbridge Global Macro Funds have successfully renegotiated the terms of their financing arrangements, lifted the suspension of redemptions and paid cash redemptions for the liquid portion of the redeemed investments (in the amount of $2.1 billion), and have also proceeded with the formation and launch of the new fund (Fortress Macro Fund) as of May 1, 2009. On May 7, 2009, a suit was filed in the Grand Court Cayman Islands by an investor in the Drawbridge Global Macro Fund Ltd challenging the payment of

redemption proceeds partially in-kind as described above; however, the fund believes that the suit is without merit. There can be no assurances that Fortress will successfully defend this suit or that additional investors will not file similar or other litigation at a later date based on claims stemming from the transactions.

Also, as a public company, we are subject to the risk of investigation or litigation by regulators or our public shareholders arising from an array of possible claims, including investor dissatisfaction with the performance of our businesses or our share price, allegations of misconduct by our officers and directors or claims that we have inappropriately dealt with conflicts of interest or investment allocations. It is also likely that the public company would be brought into any lawsuit that is filed involving any of the fund-related litigation risks described above. As with the funds, while the public company maintains insurance, there can be no assurance that its insurance will prove to be adequate. If the public company is required to incur all or a portion of the costs arising out of litigation or investigations, our results of operations could be materially adversely affected. Furthermore, any such litigation or investigation could be protracted, expensive and highly damaging to the public company’s reputation, even if the underlying claims are without merit. In addition, we may participate in transactions that involve litigation (including the enforcement of property rights) from time to time, and such transactions may expose us to reputational risk and increased risk from countersuits.

In addition, with a workforce consisting of many very highly paid investment professionals, we face the risk of lawsuits relating to claims for compensation, which may individually or in the aggregate be significant in amount. Such claims are more likely to occur in the current environment where individual employees may experience significant volatility in their year-to-year compensation due to trading performance or other issues and in situations where previously highly compensated employees were terminated for performance or efficiency reasons, as has occurred over the past year in a number of instances. The cost of settling such claims could adversely affect our results of operations.

Our reputation, business and operations could be adversely affected by regulatory compliance failures, the potential adverse effect of changes in laws and regulations applicable to our business and effects of negative publicity surrounding the alternative asset management industry in general.

Potential regulatory action poses a significant risk to our reputation and thereby to our business. Our business is subject to extensive regulation in the United States and in the other countries in which our investment activities occur. The Securities and Exchange Commission, or SEC, oversees our activities as a registered investment adviser under the Investment Advisers Act of 1940. In addition, we are subject to regulation under the Investment Company Act of 1940, the Securities Exchange Act of 1934, and various other statutes. We are subject to regulation by the Department of Labor under the Employee Retirement Income Security Act of 1974 or ERISA. We and our Castles, as public companies, are subject to applicable stock exchange regulations, and both we and Newcastle are subject to the Sarbanes-Oxley Act of 2002. A number of portfolio companies in our private equity funds are also publicly traded and/or are subject to significant regulatory oversight (such as our senior living and railroad investments). A number of our investing activities, such as our lending business, are subject to regulation by various U.S. state regulators. In the United Kingdom, we are subject to regulation by the U.K. Financial Services Authority. Our other European operations, and our investment activities around the globe, are subject to a variety of regulatory regimes that vary country by country.

Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services, including the authority to grant, and in specific circumstances to cancel, permissions to carry on particular businesses. A failure to comply with the obligations imposed by the Investment Advisers Act of 1940 on investment advisers, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, or by the Investment Company Act of 1940, could result in investigations, sanctions and reputational damage. Our liquid hedge fund business, and, to a lesser degree, our hybrid fund business, are involved regularly in trading activities which implicate a broad number of U.S. and foreign securities law regimes, including laws governing trading on inside information, market manipulation and a broad number of technical trading requirements that implicate fundamental market regulation policies. Violation of such laws could result in severe restrictions on our activities and in damage to our reputation.

Some of our private equity funds currently qualify as venture capital operating companies, or VCOC, and therefore are not subject to the fiduciary requirements of ERISA with respect to their assets. However, it is possible that the U.S. Department of Labor may amend the relevant regulations or the characteristics of our funds may change. If these funds fail to qualify as VCOCs or otherwise satisfy the requirements of ERISA, including the requirement of investment prudence and diversification or the prohibited transaction rules, it could materially interfere with our activities in relation to these funds or expose us to risks related to our failure to comply with such requirements.

Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or investing activities or other sanctions, including revocation of our registration as an investment adviser. The regulations to which our businesses are subject are designed primarily to protect investors in our funds and to ensure the integrity of the financial markets. They are not designed to protect our Class A shareholders. Even if a sanction imposed against us or our personnel by a regulator is for a small monetary amount, the adverse publicity related to such sanction against us by regulators could harm our reputation, result in redemptions by investors from our funds and impede our ability to raise additional capital or new funds.

As a result of recent highly-publicized financial scandals as well as the ongoing financial turmoil and related recently enacted government bailout measures, investors, regulators and the general public have exhibited concerns over the integrity of both the U.S. financial markets and the regulatory oversight of these markets. As a result, the regulatory environment in which we operate is subject to heightened scrutiny. With respect to alternative asset management funds, in recent years, there has been debate in both the U.S. and foreign governments about new rules or regulations to be applicable to hedge funds or other alternative investment products. Moreover, as calls for additional regulation have increased, there may be a related increase in regulatory investigations of the trading and other investment activities of alternative asset management funds, including our funds. Such investigations may impose additional expenses on us, may require the attention of senior management and may result in fines if any of our funds are deemed to have violated any regulations.

We believe that the financial industry will likely become more highly regulated in the near future in response to such recent events. On June 17, 2009, the Obama Administration issued a “white paper” containing a series of proposals to reform the financial industry, which, if enacted, would significantly alter both how financial services and asset management firms are regulated and how they conduct their business. For example, the proposals would require advisors of most hedge funds, private equity funds and other pools of capital to register with the SEC as investment advisors under the Investment Advisors Act of 1940 and would impose new record-keeping and reporting requirements on these funds (which may be similar to those requirements proposed in the Hedge Fund Transparency Act, which is discussed below). The proposals would also require all OTC derivatives markets, including credit default swap markets, to be subject to increased regulation. We do not know whether some or all of these proposals will be enacted or, if enacted, what impact the final regulations will have on us.

We may be adversely affected if new or revised legislation or regulations are enacted, or by changes in the interpretation or enforcement of existing rules and regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. Such changes could place limitations on the type of investor that can invest in alternative asset funds or on the conditions under which such investors may invest. Further, such changes may limit the scope of investing activities that may be undertaken by alternative asset managers as well as their funds and portfolio companies. For example, the SEC recently instituted a permanent ban on “naked” short sales. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

Our results of operations may also be negatively impacted if certain proposed tax legislation is enacted. If legislation were to be enacted by the U.S. Congress to treat carried interest as ordinary income rather than as capital gain for U.S. federal income tax purposes, such legislation would materially increase the amount of taxes that we and possibly our equityholders are required to pay, thereby reducing the value of our Class A shares and adversely affecting our ability to recruit, retain and motivate our current and future professionals. President Obama has publicly stated that he supports similar changes to the tax code. See “—Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis” and “—Legislation has been introduced that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. Our structure also is subject to potential judicial or administrative change and differing interpretations, possibly on a retroactive basis. Any such changes could increase our costs of doing business or materially adversely affect our profitability.”

Congress and foreign regulators have proposed legislation that would require essentially all of our funds to register with the SEC and become subject to full SEC oversight and additional requirements (or in the case of foreign jurisdictions would impose a number of other new regulatory requirements), which would increase our costs.

Members of the Senate recently proposed the Hedge Fund Transparency Act, which would apply to private equity funds, venture capital funds, real estate funds and other private investment vehicles with at least $50 million in assets under management. If enacted, the bill would require that such funds – in order to remain exempt from the substantive provisions of the Investment Company Act – to register with the SEC, maintain books and records in accordance with SEC requirements, and become subject to SEC examinations and information requests. In addition, the Act would require each fund to file annual disclosures, which would be made public, containing detailed information about the fund, most notably including the names of all beneficial owners of the fund, an explanation of the fund’s ownership structure and the current value of the fund’s assets under management. Also, the Act would require each fund to establish anti-money laundering programs. We cannot predict whether this Act will be enacted or, if enacted, what the final terms of the Act would require or the impact of such new regulations on our funds. If enacted, this Act would likely negatively impact our funds in a number of ways, including increasing the funds’ regulatory costs, imposing additional burdens on the funds’ staff, and potentially requiring the disclosure of sensitive information.

In July 2009, the U.S. House of Representatives passed legislation that would empower federal regulators to prescribe regulations to prohibit any incentive-based payment arrangements that the regulators determine encourage financial institutions to take risks that could threaten the soundness of the financial institutions or adversely affect economic conditions and financial stability. At this time, we cannot predict whether this legislation will be enacted and, if enacted, what form it would take, what affect, if any, that it may have on our business or the markets in which we operate.

On April 30, 2009, the European Commission published the draft of a proposed EU Directive on Alternative Investment Fund Managers. The Directive, if adopted in the form proposed, would impose significant new regulatory requirements on investment managers operating within the EU, including with respect to conduct of business, regulatory capital, valuations, disclosures and marketing. Such rules could potentially impose significant additional costs on the operation of our business in the EU and could limit our operating flexibility within that jurisdiction.

Our failure to deal appropriately with conflicts of interest could damage our reputation and adversely affect our business.

As we have expanded the number and scope of our businesses, we increasingly confront potential conflicts of interest relating to our funds’ investment activities. Certain of our funds have overlapping investment objectives, including funds which have different fee structures, and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among those funds. For example, a decision to acquire material non-public information about a company while pursuing an investment opportunity for a particular fund gives rise to a potential conflict of interest when it results in our having to restrict the ability of other funds to take any action. In addition, holders of Class A shares may perceive conflicts of interest regarding investment decisions for funds in which our principals, who have and may continue to make significant personal investments in a variety of Fortress Funds, are personally invested. Similarly, conflicts of interest may exist or develop regarding decisions about the allocation of specific investment opportunities between Fortress and the Fortress Funds or in situations where multiple funds are making investments in one portfolio company at the same or different levels of the investee’s capital structure. In addition, because the Operating Entities are held, in part, by FIG Corp., which is subject to tax, conflicts of interest may exist regarding decisions about which of Fortress’s holdings should be held by Operating Entities and which by Principal Holdings. We have historically extended loans and other forms of credit support from time to time to various of our investment funds in order to support funding and liquidity needs. In addition, our principals have sometimes extended similar credit support to our funds in their individual capacities. The existence and the repayment of such obligations by the funds to us and our principals creates the potential for claims of conflicts of interest by our fund investors.

Pursuant to the terms of our operating agreement, whenever a potential conflict of interest exists or arises between any of the principals, one or more directors or their respective affiliates, on the one hand, and the company, any subsidiary of the company or any member other than a principal, on the other, any resolution or course of action by our board of directors shall be permitted and deemed approved by all shareholders if the resolution or course of action (i) has been specifically approved by a majority of the members of a committee composed entirely of two or more independent directors, or it is deemed approved because it complies with rules or guidelines established by such committee, (ii) has been approved by a majority of the total votes that may be cast in the election of directors that are held by disinterested parties, (iii) is on terms no less favorable to the company or shareholders (other than a principal) than those generally being provided to or available from unrelated third parties or (iv) is fair and reasonable to the company taking into account the totality of the relationships between the parties involved. Notwithstanding the foregoing, it is possible that potential or perceived conflicts could give rise to investor dissatisfaction or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest would have a material adverse effect on our reputation, which would materially adversely affect our business in a number of ways, including as a result of redemptions by our investors from our hedge funds, an inability to raise additional funds and a reluctance of counterparties to do business with us.

Employee misconduct could harm us by impairing our ability to attract and retain investors and by subjecting us to significant legal liability, regulatory scrutiny and reputational harm.

Our reputation is critical to maintaining and developing relationships with the investors in our funds, potential investors and third-parties with whom we do business. In recent years, there have been a number of highly-publicized cases involving fraud, conflicts of interest or other misconduct by individuals in the financial services industry in general and the hedge fund industry in particular. There is a risk that our employees could engage in misconduct that adversely affects our business. For example, if an employee were to engage in illegal or suspicious activities (such as improper trading, disclosure of confidential information or breach of fiduciary duties), we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial position, investor relationships and ability to attract future investors. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. Misconduct by our employees, or even unsubstantiated allegations, could result in a material adverse effect on our reputation and our business.

The alternate investment management business is intensely competitive, and the industry is in a state of flux.

Due to the global economic recession, the general state of distress in the financial markets and the generally poor returns in the alternative asset management business over the last 21 months, the alternative asset management industry is generally perceived to be in a state of transition. The industry has been marked over this period by increasing anxiety on the part of institutional fund investors as those investors have suffered from decreasing returns, liquidity pressure, significant volatility and difficulty maintaining targeted asset allocations, and a significant number of investors have materially decreased or temporarily stopped making new fund investments during this period. Market commentators and analysts have expressed the belief that as the economy begins to recover and such investors begin to increase the pace of new investments, those investors

are likely to concentrate their holdings in a smaller overall group of managers that have relatively long-term track records, and that such factors are likely to result in a period of significant industry consolidation, especially in the hedge fund sector. In addition, it is possible that such investors may elect to reduce their overall portfolio allocations to alternative investments such as private equity and hedge funds, resulting in a smaller overall pool of available capital in our sector.

In the event all or part of this analysis proves true, when trying to raise new capital the Company will be competing for fewer total available assets in an increasingly competitive environment, and there can be no assurance that we will be successful in continuing to raise capital at our historical growth rates. Depending on industry dynamics, we and our competitors may be compelled to offer investors improved terms (such as lower fees or improved liquidity) in order to continue to attract significant amounts of fresh investment capital. Such changes would adversely affect our revenues and profitability. As has historically been the case, competition in our industry is based on a number of factors, including:

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investment performance;

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investors liquidity and willingness to invest;

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investor perception of investment managers’ drive, focus and alignment of interest;

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actual or perceived financial condition, liquidity and stability of the Company;

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quality of service provided to and duration of relationship with investors;

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business reputation; and

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level of fees and expenses charged for services.

We compete in all aspects of our business with a large number of investment management firms, private equity fund sponsors, hedge fund sponsors and other financial institutions. A number of factors serve to increase our competitive risks:

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investors may develop concerns that we will allow a business to grow to the detriment of its performance;

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investors may reduce their investments with us or not make additional investments with us based upon current market conditions, their available capital or their perception of the health of our business;

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some of our competitors have greater capital, a lower cost of capital, better access to financing, lower targeted returns or greater sector or investment strategy specific expertise than we do, which creates competitive disadvantages with respect to investment opportunities;

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some of our competitors may have greater technical, marketing and other resources than we possess;

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some of our competitors may perceive risk differently than we do, which could allow them either to outbid us for investments in particular sectors or, generally, to consider a wider variety of investments;

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some of our funds may not perform as well as competitor funds or other available investment products;

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our competitors that are corporate buyers may be able to achieve synergistic cost savings in respect of an investment, which may provide them with a competitive advantage in bidding for an investment, particularly if conditions in the debt markets increase our financing costs or make debt financing generally unavailable or cost prohibitive;

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some investors may prefer to invest with an investment manager that is not publicly traded; and

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other industry participants continuously seek to recruit our investment professionals, particularly our best and brightest, away from us.

These and other factors could reduce our earnings and revenues and materially adversely affect our business. In addition, if we are forced to compete with other alternative asset managers on the basis of price, we may not be able to maintain our current management and performance fee structures. We have historically competed primarily on the performance of our funds, and not on the level of our fees relative to those of our competitors.

The due diligence process that we undertake in connection with investments by our investment funds may not reveal all facts that may be relevant in connection with an investment.

Before making investments, we conduct due diligence that we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, we may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an investment, we rely on the resources available to us, including information provided by the target of the investment and, in some circumstances, third-party investigations. In addition, if investment opportunities are scarce or the process for selecting bidders is competitive, our ability to conduct a due diligence investigation may be limited, and we would be required to make investment decisions based upon imperfect information. The due diligence investigation that we will carry out with respect to any investment opportunity may

not reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity, including, among other things, the existence of fraud or other illegal or improper behavior. Moreover, such an investigation will not necessarily result in the investment being successful.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

As a public company, we are required to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. While management has certified that our internal controls over financial reporting were effective as of December 31, 2008 and 2007, because internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules, we cannot assure you that our internal control over financial reporting will be effective in the future. For example, the FASB recently proposed changes to the rules for consolidating entities in financial statements, which, if enacted, would require us to consolidate entities that we do not currently consolidate, and therefore to document and test effective internal controls over the financial reporting of these entities in accordance with Section 404, which we may be unable to do. If we are not able to maintain effective internal control over financial reporting, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal control over financial reporting as of the required dates. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules, and result in a breach of the covenants under our credit agreement. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could materially adversely affect us and lead to a decline in our share price and impair our ability to raise capital.

Our organizational documents do not limit our ability to enter into new lines of businesses, and we may enter into new businesses, make future strategic investments or acquisitions or enter into joint ventures, each of which may result in additional risks and uncertainties in our business.

We intend, to the extent that market conditions warrant, to grow our business by increasing management fee paying assets under management in existing businesses and creating new investment products. Our organizational documents, however, do not limit us to the investment management business. Accordingly, we may pursue growth through strategic investments, acquisitions or joint ventures, which may include entering into new lines of business, such as the banking, insurance, broker-dealer or financial advisory industries, and which may involve assuming responsibility for the actual operation of assets or entire companies. In addition, we expect opportunities will arise to acquire other alternative or traditional asset managers. To the extent we make strategic investments or acquisitions, enter into joint ventures, or enter into a new line of business, we will face numerous risks and uncertainties, including risks associated with (i) the required investment of capital and other resources, (ii) the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk, and (iii) combining or integrating operational and management systems and controls. Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk and negative publicity. If a new business generates insufficient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected. In the case of joint ventures, we are subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control.

Our revenue and profitability fluctuate, particularly inasmuch as we cannot predict the timing of realization events in our private equity and hybrid PE businesses, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and may cause volatility in the price of our Class A shares.

We experience significant variations in revenues and profitability during the year and among years because we are paid incentive income from certain funds only when investments are realized, rather than periodically on the basis of increases in the funds’ net asset values. The timing and receipt of incentive income generated by our private equity funds and hybrid PE funds is event driven and thus highly variable, which contributes to the volatility of our segment revenue, and our ability to realize incentive income from our private equity funds and hybrid PE funds may be limited. It takes a substantial period of time to identify attractive investment opportunities, to raise all the funds needed to make an investment and then to realize the cash value (or other proceeds) of an investment through a sale, public offering, recapitalization or other exit. Even if an investment proves to be profitable, it may be several years before any profits can be realized. We cannot predict when, or if, any realization of investments will occur, and the current challenging conditions in the financing markets have made it more difficult for potential buyers to finance purchases with third-party funds on favorable terms, thereby reducing the likelihood of investment realizations at favorable prices in the near term. If we were to have a realization event in a particular quarter, it may have a significant impact on our segment revenues and profits for that particular quarter which may not be replicated in subsequent quarters. In addition, our private equity fund and hybrid PE fund investments are adjusted for accounting purposes to fair value at the end of each quarter, resulting in revenue (loss) attributable to our principal investments, even though we receive no cash distributions from our private equity funds and hybrid PE funds, which could increase the volatility of our quarterly earnings. The terms of the operating documents of our private equity funds and hybrid PE funds generally require that if any investment in a particular fund has been marked down below its initial cost basis, the aggregate amount of any such

markdowns (plus the amount of the accrued preferred return on the capital used to make such investments) be factored into the computation of the amount of any incentive income we would otherwise collect on the realization of other investments within the same fund. This provision generally will result in an overall lower level of incentive income being collected by the Company in the near term for any private equity fund or hybrid PE fund that has investments that are carried both above and below their cost basis. To the extent that our principal investments in our private equity funds or hybrid PE funds (or direct investments in private equity transactions) are marked down, such mark downs will flow through our statements of operations as a GAAP loss, even in circumstances where we have a long investment horizon and have no present intention of selling the investment.

With respect to our hedge funds, our incentive income is paid annually or quarterly if the net asset value of a fund has increased for the period. The amount (if any) of the incentive income we earn from our hedge funds depends on the increase in the net asset value of the funds, which is subject to market volatility. Our liquid hedge funds have historically experienced significant fluctuations in net asset value from month to month. Certain of our hedge funds also have “high water marks” whereby we do not earn incentive income for a particular period even though the fund had positive returns in such period if the fund had greater losses in prior periods. Therefore, if a hedge fund experiences losses in a period, we will likely not be able to earn incentive income from that fund until it surpasses the previous high water mark.

The investment performance of our flagship liquid hedge fund and our flagship hybrid hedge fund are down approximately 13.1% and 19.0%, respectively, as of June 30, 2009, from the date on which such funds last earned incentive income. The related percentage for investors in Drawbridge Global Macro who elected to transfer their investments to the Fortress Macro Funds would be slightly different, based on the relative performance of the funds subsequent to transfer. Each fund must generate earnings, on an investor by investor basis, equal to the amount lost as a result of negative performance before it will generate additional incentive income for Fortress from existing fund investors. In addition, no private equity fund or hybrid PE fund will earn incentive income on any particular investment in the event that the aggregate carrying value of the other investments contained in the same fund is lower than the invested and unreturned capital in such fund plus any preferred return relating to such fund, which amount is referred to as a fund’s “high water mark.” The net asset values of some of these funds as of June 30, 2009, were below the funds’ applicable high water mark and, thus, these funds will not be able to earn incentive income until their respective net asset value exceeds their high water marks. The aggregate amount by which the high water marks for all such funds exceeded the funds’ respective net asset values as of June 30, 2009 was approximately $9.1 billion.

These quarterly fluctuations in our revenues and profits in any of our businesses could lead to significant volatility in the price of our Class A shares.

An increase in our borrowing costs may adversely affect our earnings and liquidity.

Under our credit agreement, we have a $75 million revolving credit facility and a $550 million term loan facility. As of June 30, 2009, we had a $440 million term loan outstanding and nothing outstanding under our revolving credit facility ($9.5 million of letters of credit were outstanding under a letter of credit subfacility). One of the lenders under this facility, representing approximately $7.2 million of outstanding commitments, has filed for bankruptcy protection and thus is unlikely to fulfill any borrowing requests. Borrowings under the credit agreement mature on May 10, 2012. As our facilities mature, we will be required to either refinance them by entering into new facilities or issuing new debt, which could result in higher borrowing costs, or issuing equity, which would dilute existing shareholders. We could also repay them by using cash on hand (if available) or cash from the sale of our assets. No assurance can be given that we will be able to enter into new facilities, issue new debt or issue equity in the future on attractive terms, or at all.

Our credit facility loans are typically LIBOR-based floating-rate obligations and the interest expense we incur will vary with changes in the applicable LIBOR reference rate. As a result, an increase in short-term interest rates will increase our interest costs and will reduce the spread between the returns on our investments and the cost of our borrowings. An increase in interest rates would adversely affect the market value of any fixed-rate debt investments and/or subject them to prepayment or extension risk, which may adversely affect our earnings and liquidity.

We have previously participated in large-sized investments, which involve certain complexities and risks that are not encountered in small- and medium-sized investments.

Our private equity funds have previously participated in several large transactions. The increased size of these investments involves certain complexities and risks that may not be encountered in small- and medium-sized investments. For example, larger transactions may be more difficult to finance and complete, and exiting larger deals may present challenges in many cases. In addition, larger transactions may entail greater scrutiny by regulators, labor unions, political bodies and other third parties and greater risk of litigation. Recently, labor unions and members of Congress have been more active in opposing and investigating certain larger investments by private equity firms generally.

Larger transactions may be structured as “consortium transactions” due to the size of the investment and the amount of capital required to be invested. A consortium transaction involves an equity investment in which two or more private equity firms serve together or collectively as equity sponsors. We may participate in a meaningful number of consortium transactions in the future. Consortium transactions generally entail a reduced level of control by Fortress over the investment because governance rights must be shared with the other private equity investors. Accordingly, we may not be able to control decisions relating to

the investment, including decisions relating to the management and operation of the company and the timing and nature of any exit, which could result in the risks described in “—Our investment funds make investments in companies that we do not control.”

Any of these factors could increase the risk that our larger investments could be unsuccessful. The consequences to our investment funds of an unsuccessful larger investment could be more severe than a small investment given the size of the investment.

Our investment funds often make investments in companies that we do not control.

Investments by most of our investment funds will include debt instruments and equity securities of companies that we do not control. Such instruments and securities may be acquired by our investment funds through trading activities or through purchases of securities from the issuer. In addition, our private equity funds and hybrid PE funds may acquire debt investments or minority equity interests (particularly in consortium transactions, as described in “—We have recently participated in large-sized investments, which involve certain complexities and risks that are not encountered in small- and medium-sized investments”) and may also dispose of a portion of their majority equity investments in portfolio companies over time in a manner that results in the investment funds retaining a minority investment. Those investments will be subject to the risk that the company in which the investment is made may make business, financial or management decisions with which we do not agree or that the majority stakeholders or the management of the company may take risks or otherwise act in a manner that does not serve our interests. If any of the foregoing were to occur, the values of investments by our investment funds could decrease and our financial condition, results of operations and cash flow could suffer as a result.

Risks Related to Our Funds

Our results of operations are dependent on the performance of our funds. Poor fund performance will result in reduced revenues, reduced returns on our principal investments in the funds and reduced earnings. Poor performance of our funds will also make it difficult for us to retain or attract investors to our funds and to grow our business. The performance of each fund we manage is subject to some or all of the following risks.

The historical performance of our funds should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on our Class A shares.

The historical and potential future returns of the funds we manage are not directly linked to returns on our Class A shares. Therefore, readers should not conclude that positive performance of the funds we manage will necessarily result in positive returns on our Class A shares. However, poor performance of the funds we manage will cause a decline in our revenue from such funds, and will therefore have a negative effect on our performance and the returns on our Class A shares.

Moreover, with respect to the historical performance of our funds:

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the historical performance of our funds should not be considered indicative of the future results that should be expected from such funds or from any future funds we may raise, in part because the market conditions during previous periods were significantly more favorable for generating positive performance, particularly in our private equity business, than the market conditions we have experienced for the last year and may continue to experience for the foreseeable future;

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the performance of a number of our funds which is calculated on the basis of net asset value of the funds’ investments, reflect unrealized gains that may never be realized;

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our funds’ returns have benefited from investment opportunities and general market conditions that currently do not exist and may not repeat themselves, and there can be no assurance that our current or future funds will be able to avail themselves of profitable investment opportunities; and

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several of our private equity portfolio companies have become public companies and have experienced significant subsequent decreases in their public market value. There can be no assurance that we will be able to realize such investments at profitable sale prices, particularly if market conditions are weak or the market perceives that the companies will perform less well when Fortress reduces its investment in them.

Poor performance of our funds will cause a decline in our revenue and results of operations, may obligate us to repay incentive income previously paid to us, and could adversely affect our ability to raise capital for future funds.

Our revenue from the Fortress Funds is derived principally from three sources: (1) management fees, based on the size of our funds; (2) incentive income, based on the performance of our funds; and (3) investment income (loss) from our investments in the funds, which we refer to as our “principal investments.” Our investors and potential investors continually assess our funds’ performance and our ability to raise capital. In the event that any of our funds perform poorly or suffer from liquidity constraints due to operational or market forces, our funds may be unable to pay all or part of the management fees that we are owed for an indeterminate period of time or may require advances to cover expenses which would negatively impact our revenues, liquidity and results of operations and potentially make it more difficult for us to raise new capital. In situations where we have deferred the receipt of management or other fees in order to provide liquidity to one or more of our managed funds, amounts that we have advanced to those funds may be difficult to collect in the future (or may take longer than

anticipated to collect) if such funds have continued liquidity problems or if fund investors raise objections to such collections. As of June 30, 2009, the aggregate amount of management fees that various of our managed funds currently owe but have not yet paid was approximately $27.9 million, and the aggregate amount of advances made by the public company to various of our managed funds to cover expenses was approximately $2.9 million. In addition, hedge fund investors may redeem their investments in our funds, while investors in private equity funds and hybrid PE funds may decline to invest in future funds we raise, as a result of poor performance of our funds or otherwise. Our liquid hedge funds received redemption requests for a total of $5.4 billion during 2008 and a total of approximately $1.0 billion year to date in 2009, and our hybrid hedge funds received redemption requests for $1.5 billion during 2008 and a total of $0.1 billion year to date in 2009. Losses in our funds also directly impact our operating performance by decreasing the size of our assets under management, which results in lower management fee revenues. Furthermore, if, as a result of poor performance of investments in a private equity fund’s or hybrid PE fund’s life, the fund does not achieve total investment returns that exceed a specified investment return threshold for the life of the fund, we will be obligated to repay the amount by which incentive income that was previously distributed to us and our Principals exceeds the amounts to which we are ultimately entitled. We have contractually agreed to guarantee the payment in certain circumstances of such “clawback” obligations for our managed investment funds that are structured as private equity funds and hybrid PE funds. If all of our existing private equity funds and hybrid PE funds were liquidated at their NAV as of June 30, 2009, the cumulative clawback obligation to investors in these funds would be approximately $64.5 million (net of amounts that would be due back from employees pursuant to profit sharing arrangements, and without regard to potential tax adjustments that would decrease our total liability).

Difficult market conditions can adversely affect our funds in many ways, including by reducing the value or performance of the investments made by our funds and reducing the ability of our funds to raise or deploy capital, which could materially reduce our revenue and adversely affect results of operations.

If economic and market conditions continue to be unfavorable, our funds may not perform well, and we may not be able to raise money in existing or new funds. Our funds are materially affected by conditions in the global financial markets and economic conditions throughout the world. The global market and economic climate have deteriorated and may continue to deteriorate because of many factors beyond our control, including rising interest rates or accelerating asset deflation or inflation, further deterioration in the credit and finance markets, terrorism or political uncertainty. In the event of a continued market downturn, each of our businesses could be affected in different ways. Our private equity funds have faced reduced opportunities to sell and realize value from their existing investments, a continued lack of financing on acceptable terms, the need to invest additional capital into existing investments or to satisfy the terms of financing agreements and a lack of suitable investments for the funds to make. In addition, adverse market or economic conditions as well as the slowdown of activities in particular sectors in which portfolio companies of these funds operate (including real estate, gaming and senior living) have had an adverse effect on the earnings and liquidity of such portfolio companies, which in some cases has negatively impacted the valuations of our funds’ investments and, therefore, our actual and potential earnings from management and incentive fees. A significant number of our portfolio companies in our private equity funds have material indebtedness which needs to be periodically paid down or refinanced (including some which have maturity dates within the next 12 months) and some of which contains financial covenants. If the credit markets continue to experience material stress for a prolonged period, such companies may have difficulty refinancing such indebtedness or may breach financial or operating covenants in their credit agreements, which could result in an event of default or bankruptcy at the portfolio company level. Such events would result in a material diminution in value of our funds’ investment in such company and would likely have a reputational impact on us as an investment manager. In some cases our private equity funds have guaranteed debt of their portfolio companies, and if such guarantees are called upon in the event that the applicable portfolio company defaults on its debt, payment of amounts due under the guarantee could have a material negative impact on the fund’s financial condition.

The general market downturn that we have been experiencing has adversely affected our operating performance in a number of ways, and if the downturn continues, it may cause our revenue, results of operations and financial condition to further decline by causing:

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AUM to decrease, lowering management fees;

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increases in costs of financial instruments;

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adverse conditions for our portfolio companies (e.g., decreased revenues, liquidity pressures, increased difficulty in obtaining access to financing and complying with the terms of existing financings as well as increased financing costs);

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lower investment returns, reducing incentive income or eliminating incentive income for a period of time;

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reduced demand to purchase assets held by our funds, which would negatively affect the funds’ ability to realize value from such assets;

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material reductions in the value of our private equity fund investments in portfolio companies which reduce our ability to realize incentive income from these investments;

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difficulty raising additional capital;

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investor redemptions, resulting in lower fees and potential increased difficulty in raising new capital; and

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decreases in the carrying value of our principal investments.

Furthermore, while difficult market conditions may increase opportunities to make certain distressed asset investments, such conditions also increase the risk of default with respect to investments held by our funds with debt investments, in particular the hybrid funds and the Castles. Our liquid hedge funds may also be adversely affected by difficult market conditions if they fail to predict the adverse effect of such conditions on particular investments, resulting in a significant reduction in the value of those investments. Lastly, the decrease in the price of our Class A shares over the past year and the amounts outstanding under, and terms of, our credit facility have made capital raising more challenging for some of our funds.

Changes in the debt financing markets may negatively impact the ability of our investment funds and their portfolio companies to obtain attractive financing for their investments, and may increase the cost of such financing if it is obtained, leading to lower-yielding investments and potentially decreasing our incentive income.

Over the past two years, the markets for debt financing have contracted significantly, particularly in the area of acquisition financings for private equity and leveraged buyout transactions as well as real estate–related financings. Large commercial banks, which have traditionally provided such financing, have demanded higher rates, more restrictive covenants and generally more onerous terms (including posting additional margin) in order to provide such financing, and in some cases will not provide any financing for acquisitions which would have been readily financed under credit conditions present for the past several years.

In the event that Fortress private equity funds or hybrid PE funds are unable to obtain committed debt financing for potential acquisitions (including as a result of a default by our lenders on financing commitments they have provided to us) or can only obtain debt at an increased rate, this may prevent those funds from completing otherwise profitable acquisitions or may lower the profit that the funds would otherwise have achieved from such transactions, either of which could lead to a decrease in the incentive income earned by us. Similarly, the portfolio companies owned by the Fortress private equity funds regularly utilize the debt markets in order to obtain efficient financing for their operations. To the extent that the current credit markets have rendered such financing difficult or more expensive to obtain, this may negatively impact the operating performance of those portfolio companies and therefore the investment returns on our funds. In addition, to the extent that the current markets make it difficult or impossible to refinance debt that is maturing in the near term, the relevant portfolio company may face substantial doubt as to its status as a going concern (which may result in an event of default under various agreements) or be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection.

Our Castles have historically relied on the structured finance and mortgage markets in order to obtain leverage and thereby increase the yield on substantially all of their investments. To the extent that volatility in those credit markets leads to a situation where financing of that type is unavailable or limited (as has been the case for Newcastle since mid 2007 and is currently the case for both Castles), our Castles may be unable to make new investments on a basis that is as profitable as during periods when such financing was available. Furthermore, it could significantly reduce the yield available for reinvesting capital received from prior investments, thereby reducing profits. As a result of impairments recorded in connection with this market disruption, we do not expect to earn incentive income from the Castles for an indeterminate period of time.

Our hedge funds have historically relied on the structured finance markets in order to obtain leverage and thereby increase the yield on certain of their investments. To the extent that financing of that type continues to be unavailable or limited, our hedge funds may be unable to make certain types of investments as the yield on those investments will be outside of the funds’ target range without leverage. This could reduce the overall rate of return such funds obtain in their investments and could lead to those hedge funds making fewer overall investments and slowing the rate of growth of the fee paying assets under management in those funds, and a commensurate decrease in the rate of growth of our management fees.

We and our funds are subject to counterparty default and concentration risks.

Our funds enter into numerous types of financing arrangements with a wide array of counterparties around the world, including loans, hedge contracts, swaps, repurchase agreements and other derivative and non-derivative contracts. The terms of these contracts are often customized and complex, and many of these arrangements occur in markets or relate to products that are not subject to regulatory oversight. In particular, some of our funds utilize prime brokerage arrangements with a relatively limited number of counterparties, which has the effect of concentrating the transaction volume (and related counterparty default risk) of these funds with these counterparties.

Our funds are subject to the risk that the counterparty to one or more of these contracts defaults, either voluntarily or involuntarily, on its performance under the contract. Any such default may occur rapidly and without notice to us. Moreover, if a counterparty defaults, we may be unable to take action to cover our exposure, either because we lack the contractual ability or because market conditions make it difficult to take effective action. This inability could occur in times of market stress consistent with the conditions we are currently experiencing, which are precisely the times when defaults may be most likely to occur.

In addition, our risk-management models may not accurately anticipate the impact of market stress or counterparty financial condition, and as a result, we may not take sufficient action to reduce our risks effectively. Although each of our funds monitors its credit exposures, default risk may arise from events or circumstances that are difficult to detect, foresee or evaluate. In addition, concerns about, or a default by, one large participant could lead to significant liquidity problems for other participants, which may in turn expose us to significant losses.

In the event of a counterparty default, particularly a default by a major investment bank, one or more of our funds could incur material losses, and the resulting market impact of a major counterparty default could harm our business, results of operation and financial condition. In the event that one of our counterparties becomes insolvent or files for bankruptcy, our ability to eventually recover any losses suffered as a result of that counterparty’s default may be limited by the liquidity of the counterparty or the applicable legal regime governing the bankruptcy proceeding.

The counterparty risks that we face have increased in complexity and magnitude as a result of the significant deterioration of conditions in the financial markets and weakening or insolvency of a number of major financial institutions (such as Lehman Brothers and AIG) who serve as counterparties for derivative contracts, insurance policies and other financial instruments with us, our funds and our portfolio companies. For example, the consolidation and elimination of counterparties has increased our concentration of counterparty risk and decreased the universe of potential counterparties, and our funds are generally not restricted from dealing with any particular counterparty or from concentrating any or all of their transactions with one counterparty. In addition, counterparties have generally reacted to the ongoing market volatility by tightening their underwriting standards and increasing their margin requirements for all categories of financing, which has the result of decreasing the overall amount of leverage available to our funds and increasing the costs of borrowing. For additional detail on counterparty risks, please see “—We are subject to risks in using prime brokers and custodians.”

Because the public company is dependent on receiving cash from our funds, any loss suffered by a fund as a result of a counterparty default would also affect the results of the public company. In addition, the board of directors of the public company has no ability to influence any fund’s choice of, or the amount of a fund’s exposure to, any given counterparty. As a result, our funds may have concentrated exposure to one or more counterparties and thus be exposed to a heightened risk of loss if that counterparty defaults. This may mean that the Company has a significant concentration of risk with one or more particular counterparties at any particular time when aggregate counterparty risk is measured across all of the various Fortress Funds.

Investors in our hedge funds may redeem their investments, and investors in our private equity funds and hybrid PE funds may elect to dissolve the funds, at any time without cause. These events would lead to a decrease in our assets under management (and, therefore, our revenues), which could be substantial and could lead to a material adverse effect on our business.

Investors in our hedge funds may generally redeem their investments on an annual or quarterly basis, subject to the applicable fund’s specific redemption provisions. Investors may decide to move their capital away from us to other investments for any number of reasons in addition to poor investment performance. Factors that could result in investors leaving our funds include the need to increase available cash reserves or to fund other capital commitments, changes in interest rates that make other investments more attractive, the publicly traded nature of the indirect parent of their manager, changes in investor perception regarding our focus or alignment of interest, unhappiness with changes in or broadening of a fund’s investment strategy, changes in our reputation, and departures or changes in responsibilities of key investment professionals. In a declining financial market, the pace of redemptions and consequent reduction in our fee paying assets under management could accelerate. The decrease in our revenues that would result from significant redemptions in our hedge fund business would have a material adverse effect on our business.

The recent decline in the financial markets, together with reduced liquidity in the credit markets and negative performance of many hedge funds have led to an increase in redemption requests from investors throughout the hedge fund industry, and a number of our funds have been affected by this trend. Our liquid hedge funds received a total of $5.4 billion in redemption requests, including affiliates, for the fiscal year ended December 31, 2008. Our flagship liquid hedge fund temporarily suspended redemptions. Shares representing the fund’s interests in illiquid investments were placed in special purpose entities whose interests were distributed to both redeemers and non-redeemers. In 2009, the redeemers’ portion, including affiliates, of the liquid investments of $2.4 billion was paid. In comparison, the same liquid hedge funds received redemption requests, including affiliates, for a total of $0.3 billion related to the fiscal year ended December 31, 2007. Investors in our hybrid hedge funds are permitted to request that their capital be returned on an annual basis, and such returns of capital are paid over time as the underlying investments are liquidated, in accordance with the governing documents of the applicable funds. Return of capital requests, including affiliates, for those hybrid hedge funds totaled approximately $1.5 billion for the 2008 notice date. In comparison, the same hybrid hedge fund received return of capital requests, including from affiliates, for a total of $0.6 billion for the 2007 notice date.

In addition, the investors in our private equity, hybrid PE and domestic hedge funds may, subject to certain conditions, act at any time to accelerate the liquidation date of the fund without cause, resulting in a reduction in management fees we earn from such funds, and a significant reduction in the amounts of total incentive income we could earn from those funds. See “Our removal as the investment manager, or the liquidation, of one or more of our funds could have a material negative effect on our business, results of operations and financial condition.” Incentive income could be significantly reduced as a result of our inability to maximize the value of a fund’s investments in a liquidation. The occurrence of such an event with respect to any of our funds would, in addition to the significant negative impact on our revenue and earnings, likely result in significant reputational damage as well.

The hedge fund industry has been especially volatile over the past year, and many hedge funds may face significant redemptions and liquidity issues.

As several press and industry reports have indicated over the last year, market conditions have negatively affected the hedge fund industry. Challenging market conditions have made it difficult to produce positive returns, and a significant number of hedge funds have posted negative results during that period. Poor investment performance, together with investors’ increased need for liquidity given the state of the credit markets, has prompted relatively high levels of investor redemptions at a time when many funds may not have sufficient liquidity to satisfy some or all of their investor redemption requests. Our funds have various agreements that create debt or debt-like obligations (such as repurchase arrangements, ISDAs, credit default swaps and total return swaps, among others) with a material number of counterparties. Such agreements in many instances contain covenants or “triggers” that require our funds to maintain specified amounts of assets under management. Decreases in such funds’ AUM (whether due to performance, redemption, or both) that breach such covenants may result in defaults under such agreements, and such defaults could permit the counterparties to take various actions that would be adverse to the funds, including terminating the financing arrangements, increasing the amount of margin or collateral that the funds are required to post (so-called “supercollateralization” requirements) or decreasing the aggregate amount of leverage that such counterparty is willing to provide to our funds. In particular, many such covenants to which our hedge funds are party are designed to protect against sudden and pronounced drops in AUM over specified periods, so if our funds were to receive larger-than-anticipated redemption requests during a period of poor performance, such covenants may be breached. Defaults under any such covenants would be likely to result in the affected funds being forced to sell financed assets (which sales would presumably occur in suboptimal or distressed market conditions) or otherwise raise cash by reducing other leverage, which would reduce the funds’ returns and our opportunities to produce incentive income from the affected funds.

If conditions continue or deteriorate, many funds may face additional redemption requests throughout the remainder of 2009, which would exacerbate the liquidity pressures on the affected funds. If they cannot satisfy their current and future redemption requests, they may be forced to sell assets at distressed prices or cease operations. Various measures taken by funds to improve their liquidity profile (such as the implementation of “gates” or the suspension of redemptions) that reduce the amounts that would otherwise be paid out in response to redemption requests may have the affect of incentivizing investors to “gross up” or increase the size of the future redemption request they make, thereby exacerbating the cycle of redemptions. The liquidity issues for such funds are often further exacerbated by their fee structures, as a decrease in AUM decreases their management fees. We cannot predict the effect that any conditions affecting the hedge fund industry may have on our funds. For additional information on the impact of market conditions on our hedge funds, see “Risks Related to Our Funds.”

Many of our funds invest in relatively high-risk, illiquid assets that often have significantly leveraged capital structures, and we may fail to realize any profits from these activities for a considerable period of time or lose some or all of the principal amount we invest in these activities.

Many of our funds invest in securities that are not publicly traded. In many cases, our funds may be prohibited by contract or by applicable securities laws from selling such securities for a period of time. Our funds will generally not be able to sell these securities publicly unless their sale is registered under applicable securities laws, or unless an exemption from such registration requirements is available. Accordingly, our funds may be forced to sell securities at a loss under certain conditions. The ability of many of our funds, particularly our private equity funds, to dispose of investments is heavily dependent on the public equity markets, inasmuch as our ability to realize any value from an investment may depend upon our ability to sell equity of the portfolio company in the public equity markets through an initial public offering or secondary public offering of shares of the portfolio company in which such investment is held.

Furthermore, large holdings even of publicly traded equity securities can often be disposed of only over a substantial period of time, exposing the investment returns to risks of downward movement in market prices during the disposition period. The illiquid nature of many of our funds’ assets may negatively affect a fund’s ability to retain sufficient liquidity to satisfy its obligations as they become due. As a result, a fund with illiquid assets may be unable, for example, to generate sufficient liquidity to pay the management fees or other amounts due to the manager, which would, in turn, reduce the amounts we receive from our funds, thereby reducing the amount of funds available to us to satisfy our obligations, including our obligations under our credit agreement.

In addition, many of our funds invest in businesses with capital structures that have significant leverage. The large amount of borrowing in the leveraged capital structure of such businesses increases the risk of losses due to factors such as rising interest rates, downturns in the economy or deteriorations in the condition of the investment or its industry. In the event of defaults under borrowings, the assets being financed would be at risk of foreclosure, and the fund could lose its entire investment.

Our funds are subject to risks due to potential illiquidity of assets.

Our funds may make investments or hold trading positions in markets that are volatile and which may become illiquid. Timely divestiture or sale of trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to transfer positions in highly specialized or structured transactions to which we may be a party, and changes in industry and government regulations. When a fund holds a security or position it is vulnerable to price and value fluctuations and may experience losses to the extent the value of the position decreases and it is unable to

timely sell, hedge or transfer the position. Therefore, it may be impossible or costly for our funds to liquidate positions rapidly, particularly if the relevant market is moving against a position or in the event of trading halts or daily price movement limits on the market or otherwise. Alternatively, it may not be possible in certain circumstances for a position to be purchased or sold promptly, particularly if there is insufficient trading activity in the relevant market or otherwise.

The funds we manage may operate with a substantial degree of leverage. They may borrow, invest in derivative instruments and purchase securities using borrowed money, so that the positions held by the funds may in aggregate value exceed the net asset value of the funds. This leverage creates the potential for higher returns, but also increases the volatility of a fund, including the risk of a total loss of the amount invested. In addition, our private equity funds have historically leveraged some of their investments in order to return capital to investors earlier than would have otherwise been possible without a sale of the asset. In many such cases, such debt was secured by publicly-traded stock of portfolio companies. To the extent that the value of such collateral decreases due to decreases in the share price of such portfolio companies, our funds may be subject to margin calls that require them to call additional capital from investors, sell assets or otherwise take actions that decrease the overall return of the impacted funds. Such actions would result in overall decreased revenues for us and a lower likelihood of generating incentive income from the affected investments.

The risks identified above will be increased if a fund is required to rapidly liquidate positions to meet redemption requests, margin requests, margin calls or other funding requirements on that position or otherwise. The inability to rapidly sell positions due to a lack of liquidity has historically been the cause of substantial losses in the hedge fund industry. The ability of counterparties to force liquidations following losses or a failure to meet a margin call can result in the rapid sale of highly leveraged positions in declining markets, which would likely subject our hedge funds to substantial losses. We may fail to adequately predict the liquidity that our funds require to address counterparty requirements due to falling values of fund investments being financed by such counterparties, which could result not only in losses related to such investments, but in losses related to the need to liquidate unrelated investments in order to meet the fund’s obligations. Our funds may incur substantial losses in the event significant capital is invested in highly leveraged investments or investment strategies. Such losses would result in a decline in AUM, lead to investor requests to redeem remaining AUM (in the case of our hedge funds), and damage our reputation, each of which would materially and adversely impact our earnings.

Valuation methodologies for certain assets in our funds can be subject to significant subjectivity and the values of assets established pursuant to such methodologies may never be realized, which could result in significant losses for our funds.

There are no readily-ascertainable market prices for a very large number of illiquid investments in our private equity and, to a lesser extent, hybrid funds as well as a small number of so-called “sidepocket” investments in our liquid hedge funds. The fair value of such investments of our funds is determined periodically by us based on the methodologies described in the funds’ valuation policies. These policies are based on a number of factors, including the nature of the investment, the expected cash flows from the investment, bid or ask prices provided by third parties for the investment, the length of time the investment has been held, the trading price of securities (in the case of publicly traded securities), restrictions on transfer and other recognized valuation methodologies. The methodologies we use in valuing individual investments are based on a variety of estimates and assumptions specific to the particular investments, and actual results related to the investment therefore often vary materially as a result of the inaccuracy of such assumptions or estimates. In addition, because many of the illiquid investments held by our funds are in industries or sectors which are unstable, in distress, or undergoing some uncertainty, such investments are subject to rapid changes in value caused by sudden company-specific or industry-wide developments. In addition, in many markets, transaction flow is limited due to uncertainty about accurate asset valuations which may cause hedge fund investors to become concerned about valuations of funds that have illiquid or hard-to-value assets. This concern may lead to increased redemptions by investors irrespective of the performance of the funds. In addition, uncertainty about asset values on redemptions from our investments in our hedge funds may lead to an increased risk of litigation by investors over net asset values.

Because there is significant uncertainty in the valuation of, or in the stability of the value of, illiquid investments, the fair values of such investments as reflected in a fund’s net asset value do not necessarily reflect the prices that would actually be obtained by us on behalf of the fund when such investments are sold. Realizations at values significantly lower than the values at which investments have been reflected in fund net asset values would result in losses for the applicable fund, a decline in asset management fees and the loss of potential incentive income. Also, a situation where asset values turn out to be materially different than values reflected in fund net asset values could cause investors to lose confidence in us which would, in turn, result in redemptions from our hedge funds or difficulties in raising additional private equity funds and hybrid PE funds.

In some cases, the Fortress Funds realize value from an illiquid portfolio company when the portfolio company is able to sell equity in the public markets through an IPO. An IPO of a portfolio company increases the liquidity of the funds’ investment in the company and can create significant value when the dividend yield on the company’s shares after the IPO is lower than the return being generated by the company’s net assets, thereby increasing the value of its equity.

Certain of our funds utilize special situation, distressed debt and mortgage-backed investment strategies that involve significant risks.

Our private equity and hybrid funds invest in obligors and issuers with weak financial conditions, poor operating results, substantial financial needs, negative net worth, and/or special competitive problems. These funds also invest in obligors and issuers that are involved in bankruptcy or reorganization proceedings. With such investments, it may be difficult to obtain full

information as to the exact financial and operating conditions of these obligors and issuers. Additionally, the fair values of such investments are subject to abrupt and erratic market movements and significant price volatility if they are widely traded securities, and are subject to significant uncertainty in general if they are not widely traded securities or may have no recognized market. A fund’s exposure to such investments may be substantial in relation to the market for those investments, and the assets are likely to be illiquid and difficult to sell or transfer. As a result, it may take a number of years for the fair value of such investments to ultimately reflect their intrinsic value as perceived by us. For example, several of our funds have significant investments in mortgage backed securities and other investments that are directly or indirectly related to the value of real estate in various locations around the world, particularly in the United States. Several funds have increased their investments in this sector to take advantage of perceived investment opportunities over the past few quarters, and we have recently raised and invested a number of funds targeted specifically toward residential mortgage backed securities and similar investments. As a result, the results of a number of our funds have been and may continue to be affected, in some cases materially, by fluctuations in the value of real estate and real estate related investments. Such fluctuations could have a meaningful impact on the performance of the applicable fund and potentially on the operating results of the public company.

A central feature of our distressed investment strategy is our ability to successfully predict the occurrence of events such as mortgage default rates, mortgage prepayment rates, the amounts of any prepayments, maturity extensions, interest rates for mortgage-backed securities and similar instruments as well as corporate events such as capital raises, restructurings, reorganizations, mergers and other transactions. Predicting any of these data points is difficult, and if our analyses are inaccurate, the actual results of such investments could be materially lower than expected and the applicable fund’s investment results could decline sharply.

The U.S. government is evaluating a proposal by the current administration to modify the terms of a significant number of residential and other loans to provide relief to borrowers. We cannot predict whether any such proposals will be enacted into law or what the potential terms of any such law would be. If instituted, it is possible that loan modifications could change the terms of a tremendous number of mortgage-backed securities and other investments, including investments held by a number of our funds. Any such modifications could lower the outstanding principal, reduce the interest rate, extend the maturity or otherwise change the terms of the loan in ways that could significantly impair or eliminate the value of the loan or cause the loan to become a loss to the fund. As a result, any such loan modifications could have a significantly negative impact on the affected fund’s business, results of operations and financial condition. Similarly, legislative proposals that would permit judges to “cram-down” principal amounts on mortgage loans or would indemnify servicers for actions to modify loans in ways that could otherwise breach the applicable loan or securitization documentation have the potential to create significant value losses in our funds’ investments in various mortgage-backed securities.

In addition, these investments could subject our private equity, hybrid and hedge funds to certain potential additional liabilities that may exceed the value of their original investment. Under certain circumstances, payments or distributions on certain investments may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, a preferential payment or similar transaction under applicable bankruptcy and insolvency laws. In addition, under certain circumstances, a lender that has inappropriately exercised control of the management and policies of a debtor may have its claims subordinated or disallowed, or may be found liable for damages suffered by parties as a result of such actions. In the case where the investment in securities of troubled companies is made in connection with an attempt to influence a restructuring proposal or plan of reorganization in bankruptcy, our funds may become involved in substantial litigation.

If our risk management systems for our hedge fund business are ineffective, we may be exposed to material unanticipated losses.

In our hedge fund business, we continue to refine our risk management techniques, strategies and assessment methods. However, our risk management techniques and strategies do not fully mitigate the risk exposure of our funds in all economic or market environments, or against all types of risk, including risks that we might fail to identify or anticipate. Some of our strategies for managing risk in our funds are based upon our use of historical market behavior statistics. We apply statistical and other tools to these observations to measure and analyze the risks to which our funds are exposed. Any failures in our risk management techniques and strategies to accurately quantify such risk exposure could limit our ability to manage risks in the funds or to seek adequate risk-adjusted returns. In addition, any risk management failures could cause fund losses to be significantly greater than the historical measures predict. Further, our mathematical modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses.

Some of our funds invest in foreign countries and securities of issuers located outside of the United States, which may involve foreign exchange, political, social and economic uncertainties and risks.

Some of our funds invest a portion of their assets in the equity, debt, loans or other securities of issuers located outside the United States. In addition to business uncertainties, such investments may be affected by changes in exchange values as well as political, social and economic uncertainty affecting a country or region. Many financial markets are not as developed or as efficient as those in the U.S., and as a result, liquidity may be reduced and price volatility may be higher. The legal and regulatory environment may also be different, particularly with respect to bankruptcy and reorganization, and may afford us less protection as a creditor than we may be entitled to under U.S. law. Financial accounting standards and practices may differ, and there may be less publicly available information in respect of such companies.

Restrictions imposed or actions taken by foreign governments may adversely impact the value of our fund investments. Such restrictions or actions could include exchange controls, seizure or nationalization of foreign deposits and adoption of other governmental restrictions which adversely affect the prices of securities or the ability to repatriate profits on investments or the capital invested itself. Income received by our funds from sources in some countries may be reduced by withholding and other taxes. Any such taxes paid by a fund will reduce the net income or return from such investments. While our funds will take these factors into consideration in making investment decisions, including when hedging positions, no assurance can be given that the funds will be able to fully avoid these risks or generate sufficient risk-adjusted returns.

Investments by our hedge funds will frequently rank junior to investments made by others in the same company.

In most cases, the companies in which our investment funds invest will have indebtedness or equity securities, or may be permitted to incur indebtedness or to issue equity securities, that rank senior to our investment. By their terms, such instruments may provide that their holders are entitled to receive payments of dividends, interest or principal on or before the dates on which payments are to be made in respect of our investment. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a company in which an investment is made, holders of securities ranking senior to our investment would typically be entitled to receive payment in full before distributions could be made in respect of our investment. After repaying senior security holders, the company may not have any remaining assets to use for repaying amounts owed in respect of our fund’s investment. To the extent that any assets remain, holders of claims that rank equally with our investment would be entitled to share on an equal and ratable basis in distributions that are made out of those assets. Also, during periods of financial distress or following an insolvency, the ability of our investment funds to influence a company’s affairs and to take actions to protect their investments may be substantially less than that of the senior creditors.

Our fund investments are subject to numerous additional risks.

Our fund investments, including investments by our funds of hedge funds in other hedge funds, are subject to numerous additional risks, including the following:

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Certain of the funds are newly established funds without any operating history or are managed by management companies or general partners who do not have a significant track record as an independent manager.

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Generally, there are few limitations on the execution of our funds’ investment strategies, which are, in some cases, subject to the sole discretion of the management company or the general partner of such funds. The execution of a particular fund’s strategy – for example a strategy involving the enforcement of property rights through litigation – may negatively impact one or more other Fortress funds.

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Our funds may engage in short-selling, which is subject to the theoretically unlimited risk of loss because there is no limit on how much the price of a security may appreciate before the short position is closed out. A fund may be subject to losses if a security lender demands return of the lent securities and an alternative lending source cannot be found or if the fund is otherwise unable to borrow securities that are necessary to hedge its positions.

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Our funds are exposed to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the fund to suffer a loss. Counterparty risk is increased for contracts with longer maturities where events may intervene to prevent settlement, or where the fund has concentrated its transactions with a single or small group of counterparties. Generally, funds are not restricted from dealing with any particular counterparty or from concentrating any or all of their transactions with one counterparty. Moreover, the funds’ internal consideration of the creditworthiness of their counterparties may prove insufficient. The absence of a regulated market to facilitate settlement may increase the potential for losses.

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Credit risk may arise through a default by one of several large institutions that are dependent on one another to meet their liquidity or operational needs, so that a default by one institution causes a series of defaults by the other institutions. This “systemic risk” may adversely affect the financial intermediaries (such as clearing agencies, clearing houses, banks, investment banks, securities firms and exchanges) with which the funds interact on a daily basis.

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The efficacy of investment and trading strategies depend largely on the ability to establish and maintain an overall market position in a combination of financial instruments. A fund’s trading orders may not be executed in a timely and efficient manner due to various circumstances, including systems failures or human error. In such event, the funds might only be able to acquire some but not all of the components of the position, or if the overall position were to need adjustment, the funds might not be able to make such adjustment. As a result, the funds would not be able to achieve the market position selected by the management company or general partner of such funds, and might incur a loss in liquidating their position.

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Fund investments are subject to risks relating to investments in commodities, futures, options and other derivatives, the prices of which are highly volatile and may be subject to the theoretically unlimited risk of loss in certain circumstances, including if the fund writes a call option. Price movements of commodities, futures and options contracts and payments pursuant to swap agreements are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of

governments and national and international political and economic events and policies. The value of futures, options and swap agreements also depends upon the price of the commodities underlying them. In addition, hedge funds’ assets are subject to the risk of the failure of any of the exchanges on which their positions trade or of their clearinghouses or counterparties. Most U.S. commodities exchanges limit fluctuations in certain commodity interest prices during a single day by imposing “daily price fluctuation limits” or “daily limits,” the existence of which may reduce liquidity or effectively curtail trading in particular markets.

We have been engaged as the investment manager of a third-party investment fund, and we may be engaged as the investment manager of third-party investment funds or managed accounts in the future, and each such engagement exposes us to a number of potential risks.

Changes within the alternative asset management industry may cause investors of some funds to replace their existing fund or managed account managers or may cause certain such managers to resign. In such instances, we may seek to be engaged as investment manager of these funds or accounts. For example, in May 2009, we became the investment manager of certain investment funds and accounts previously managed by D.B. Zwirn & Co., L.P., which had approximately $2 billion of assets as of that date.

While being engaged as investment manager of existing third-party funds or accounts potentially enables us to grow our business, it also entails a number of risks that could harm our reputation, results of operations and financial condition. For example, we may choose not to, or be unable to, conduct significant due diligence of the fund and its investments, and any diligence we undertake may not reveal all relevant facts that may be necessary or helpful in evaluating such investment opportunity. We may be unable to complete such transactions, which could harm our reputation and subject us to costly litigation. We may willingly or unknowingly assume actual or contingent liability for significant expenses, we may become subject to new laws and regulations with which we are not familiar, and we may become subject to increased risk of litigation, regulatory investigation or negative publicity. Being engaged as investment manager may require us to invest significant capital and other resources, which could detract from our existing funds or our ability to capitalize on future opportunities. In addition, being engaged as investment manager may require us to integrate complex technological, accounting and management systems, which may be difficult, expensive and time-consuming and which we may not be successful in integrating into our current systems. The occurrence of any of these problems could negatively affect our reputation, financial condition and results of operations.

We are subject to risks in using prime brokers and custodians.

The funds in our hedge fund business depend on the services of prime brokers and custodians to carry out certain securities transactions. In the event of the insolvency of a prime broker and/or custodian, the funds might not be able to recover equivalent assets in full as they will rank among the prime broker and custodian’s unsecured creditors in relation to assets which the prime broker or custodian borrows, lends or otherwise uses. In addition, the funds’ cash held with a prime broker or custodian will not be segregated from the prime broker’s or custodian’s own cash, and the funds will therefore rank as unsecured creditors in relation to the cash they have deposited.

Some of our funds had prime brokerage accounts with Lehman Brothers at the time it declared insolvency. These funds are currently working to obtain any assets or funds that are owed by Lehman Brothers to the fund. However, due to the sudden nature of Lehman’s insolvency, the complexity and ambiguity of both the contractual arrangements and applicable regulations, this process will take time, may be expensive and may result in one or more funds receiving only a portion of the amount they are owed (or potentially receiving nothing at all). Moreover, the suddenness of Lehman’s failure and resulting lack of complete information about the status of certain trades made by our funds created uncertainty as to whether certain trades were appropriately hedged. As our funds were forced to make investment decisions with imperfect information, investment decisions may have resulted in certain positions being imperfectly hedged or otherwise hedged in a manner that is inconsistent with the fund’s general investment guidelines.

Risks Related to Our Organization and Structure

Control by our principals of the combined voting power of our shares and holding their economic interest through Fortress Operating Group may give rise to conflicts of interests.

Our principals control a majority of the combined voting power of our Class A and Class B shares. Accordingly, our principals have the ability to elect all of the members of our board of directors, subject to Nomura’s right to nominate one designee, and thereby to control our management and affairs. In addition, they are able to determine the outcome of all matters requiring shareholder approval and are able to cause or prevent a change of control of our company or a change in the composition of our board of directors, and could preclude any unsolicited acquisition of our company. The control of voting power by our principals could deprive Class A shareholders of an opportunity to receive a premium for their Class A shares as part of a sale of our company, and might ultimately affect the market price of the Class A shares.

In addition, the shareholders agreement among us and the principals provides the principals who are then employed by the Fortress Operating Group holding shares greater than 50% of the total combined voting power of all shares held by such principals, so long as the principals and their permitted transferees continue to hold more than 40% of the total combined voting power of our outstanding Class A and Class B shares, with approval rights over a variety of significant corporate actions, including:

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ten percent indebtedness: any incurrence of indebtedness, in one transaction or a series of related transactions, by us or any of our subsidiaries in an amount in excess of approximately 10% of the then existing long-term indebtedness of us and our subsidiaries;

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ten percent share issuance: any issuance by us, in any transaction or series of related transactions, of equity or equity-related securities which would represent, after such issuance, or upon conversion, exchange or exercise, as the case may be, at least 10% of the total combined voting power of our outstanding Class A and Class B shares other than (1) pursuant to transactions solely among us and our wholly-owned subsidiaries, or (2) upon conversion of convertible securities or upon exercise of warrants or options, which convertible securities, warrants or options are either outstanding on the date of, or issued in compliance with, the shareholders agreement;

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investment of $250 million or greater: any equity or debt commitment or investment or series of related equity or debt commitments or investments in an entity or related group of entities in an amount greater than $250 million;

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new business requiring investment in excess of $100 million: any entry by us or any of our controlled affiliates into a new line of business that does not involve investment management and that requires a principal investment in excess of $100 million;

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the adoption of a shareholder rights plan;

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any appointment of a chief executive officer or co-chief executive officer; or

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the termination of the employment of a principal with us or any of our material subsidiaries without cause.

Furthermore, the principals have certain consent rights with respect to structural changes involving our company.

In addition, our principals are entitled to a majority of our economic returns through their holdings of Fortress Operating Group units. Because they hold their economic interest in our business directly through Fortress Operating Group, rather than through the public company, our principals may have conflicting interests with holders of Class A shares. For example, our principals may have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets, and whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreement. In addition, the structuring of future transactions may take into consideration the principals’ tax considerations even where no similar benefit would accrue to us. Moreover, any distribution by the Fortress Operating Group to us to satisfy our tax obligations will result in a corresponding pro rata distribution to our principals.

Our ability to pay regular dividends may be limited by our holding company structure; we are dependent on distributions from the Fortress Operating Group to pay dividends, taxes and other expenses. Our ability to pay dividends is significantly restricted by, and is also subject to not defaulting on, our credit agreement.

As a holding company, our ability to pay dividends is subject to the ability of our subsidiaries to provide cash to us. When we declare a dividend on our Class A shares, we expect to cause the Fortress Operating Group to make distributions to its unitholders, including our wholly-owned subsidiaries, pro rata in an amount sufficient to enable us to pay such dividends to our Class A shareholders. However, no assurance can be given that such distributions will or can be made. Our board can reduce or eliminate our dividend at any time, in its discretion, and our board determined not to pay any dividend to our Class A shareholders from the third quarter of 2008 through the second quarter of 2009. In addition, Fortress Operating Group is required to make minimum tax distributions to its unitholders. See also “—Risks Related to Taxation—There can be no assurance that amounts paid as dividends on Class A shares will be sufficient to cover the tax liability arising from ownership of Class A shares.” If Fortress Operating Group has insufficient funds, we may have to borrow additional funds or sell assets, which could materially adversely affect our liquidity and financial condition. In addition, Fortress Operating Group’s earnings may be insufficient to enable it to make required minimum tax distributions to unitholders.

We are also subject to certain contingent repayment obligations that may affect our ability to pay dividends. We earn incentive income — generally 20% of the profits — from each of our private equity funds and hybrid PE funds based on a percentage of the profits earned by the fund as a whole, provided that the fund achieves specified performance criteria. We generally receive, however, our percentage share of the profits on each investment in the fund as it is realized, before it is known with certainty that the fund as a whole will meet the specified criteria. As a result, the incentive income paid to us as a particular investment made by the funds is realized is subject to contingent repayment (or “clawback”) if, upon liquidation of the fund, the aggregate amount paid to us as incentive income exceeds the amount actually due to us based upon the aggregate performance of the fund. If we are required to repay amounts to a fund in order to satisfy a clawback obligation, any such repayment will reduce the amount of cash available to distribute as a dividend to our Class A shareholders. While the principals have personally guaranteed, subject to certain limitations, this “clawback” obligation, our shareholders agreement with them contains our agreement to indemnify the principals for all amounts which the principals pay pursuant to any of these personal guarantees in favor of our private equity funds and hybrid PE funds. Consequently, any requirement to satisfy a clawback obligation could impair our ability to pay dividends on our Class A shares.

There may also be circumstances under which we are restricted from paying dividends under applicable law or regulation (for example due to Delaware limited partnership or limited liability company act limitations on making distributions if liabilities of the entity after the distribution would exceed the value of the entity’s assets). In addition, under our credit agreement, our ability to pay dividends is restricted by the amortization requirements in our credit agreement and the requirement that we use 75%, or, in certain circumstances, 50%, of our free cash flow (as defined in the agreement) to make amortization payments. Under our credit agreement, we are permitted to make cash distributions subject to the following additional restrictions: (a) no event of default exists immediately prior to or subsequent to the distribution and (b) after giving effect to the distribution, we have cash on hand of not less than accrued but unpaid taxes (based on estimated entity level taxes due and payable by the Fortress Operating Group entities, primarily New York City unincorporated business tax) and amortization obligations (including scheduled principal payments) under the credit agreement which are required in the next 90 days. The events of default under the credit agreement are typical of such agreements and include payment defaults, failure to comply with credit agreement covenants (including a leverage covenant that is negatively affected by realized losses), cross-defaults to material indebtedness, bankruptcy and insolvency, change of control, and adverse events with respect to our material funds. Our lenders may also attempt to exercise their security interests over substantially all of the assets of the Fortress Operating Group upon the occurrence of an event of default.

Tax consequences to the principals may give rise to conflicts of interests.

As a result of unrealized built-in gain attributable to the value of our assets held by the Fortress Operating Group entities at the time of our initial public offering, upon the sale or, refinancing or disposition of the assets owned by the Fortress Operating Group entities, our principals will incur different and significantly greater tax liabilities as a result of the disproportionately greater allocations of items of taxable income and gain to the principals upon a realization event. As the principals will not receive a corresponding greater distribution of cash proceeds, they may, subject to applicable fiduciary or contractual duties, have different objectives regarding the appropriate pricing, timing and other material terms of any sale, refinancing, or disposition, or whether to sell such assets at all. Decisions made with respect to an acceleration or deferral of income or deductions or the sale or disposition of assets may also influence the timing and amount of payments that are received by an exchanging or selling principal under the tax receivable agreement. All other factors being equal, earlier disposition of assets following a transaction will tend to accelerate such payments and increase the present value of the tax receivable agreement, and disposition of assets before a transaction will increase a principal’s tax liability without giving rise to any rights to receive payments under the tax receivable agreement. Decisions made regarding a change of control also could have a material influence on the timing and amount of payments received by the principals pursuant to the tax receivable agreement.

We are required to pay our principals for most of the tax benefits we realize as a result of the tax basis step-up we receive in connection with taxable exchanges by our principals of units held in the Fortress Operating Group entities or our acquisitions of units from our principals.

At any time and from time to time, each principal has the right to exchange his Fortress Operating Group units for our Class A shares in a taxable transaction. These taxable exchanges, as well as our acquisitions of units from our principals, may result in increases in the tax depreciation and amortization deductions, as well as an increase in the tax basis of other assets, of the

Fortress Operating Group that otherwise would not have been available. These increases in tax depreciation and amortization deductions, as well as the tax basis of other assets, may reduce the amount of tax that FIG Corp. or FIG Asset Co. LLC and any other corporate taxpayers would otherwise be required to pay in the future, although the IRS may challenge all or part of increased deductions and tax basis increase, and a court could sustain such a challenge.

We have entered into a tax receivable agreement with our principals that provides for the payment by the corporate taxpayers to our principals of 85% of the amount of tax savings, if any, 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 discussed below) as a result of these increases in tax deductions and tax basis of the Fortress Operating Group. The payments that the corporate taxpayers may make to our principals could be material in amount.

Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase, our principals will not reimburse the corporate taxpayers for any payments that have been previously made under the tax receivable agreement. As a result, in certain circumstances, payments could be made to our principals under the tax receivable agreement in excess of the corporate taxpayers’ cash tax savings. The corporate taxpayers’ ability to achieve benefits from any tax basis increase, and the payments to be made under this agreement, will depend upon a number of factors, including the timing and amount of our future income.

In addition, the tax receivable agreement provides that, upon a merger, asset sale or other form of business combination or certain other changes of control, the corporate taxpayers’ (or their successors’) obligations with respect to exchanged or acquired units (whether exchanged or acquired before or after such change of control) would be based on certain assumptions, including that the corporate taxpayers would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement.

If we were deemed an investment company under the Investment Company Act of 1940, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business and the price of our Class A shares.

We do not believe that we are an “investment company” under the Investment Company Act of 1940 because the nature of our assets and the sources of our income exclude us from the definition of an investment company pursuant to Rule 3a-1 under the Investment Company Act of 1940. In addition, we believe the company is not an investment company under Section 3(b)(1) of the Investment Company Act because it is primarily engaged in a non-investment company business. If one or more of the Fortress Operating Group entities ceased to be a wholly-owned subsidiary of ours, our interests in those subsidiaries could be deemed an “investment security” for purposes of the Investment Company Act of 1940. Generally, a person is an “investment company” if it owns investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the Investment Company Act of 1940, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and would have a material adverse effect on our business and the price of our Class A shares.

Risks Related To Our Class A Shares

An active market for our Class A shares may not be sustained.

Our Class A shares are listed on the New York Stock Exchange under the symbol “FIG.” We are required to comply with the NYSE’s listing standards in order to maintain the listing of our Class A shares on the exchange. The NYSE has the authority to delist our Class A shares if, during any period of 30 consecutive trading days, the average closing share price falls below $1.00 or the average market capitalization of our Class A shares falls below $75 million and we are unable to satisfy these standards within the time periods specified under NYSE regulations. In addition, the NYSE has the authority to delist our Class A shares immediately if, during any period of 30 consecutive trading days, the average market capitalization of such shares falls below $15 million or if the NYSE determines that the trading price of our shares is abnormally low or if the NYSE otherwise believes the Class A shares should no longer be listed. As of August 4, 2009, during the previous 30 consecutive trading days, the average closing share price of our Class A shares was $3.38 per share and the average market capitalization of our Class A shares was $475 million. The average price of our Class A shares and related market capitalization has fallen significantly over recent quarters. If this decline continues, our Class A shares could be delisted from the NYSE. We cannot predict whether our Class A shares will be delisted. Accordingly, we cannot provide any assurance that a regular trading market of our Class A shares will be sustained on that exchange or elsewhere. Moreover, if our Class A shares are delisted from the NYSE, this event would likely decrease the trading volume and price of our Class A shares.

Accordingly, we cannot provide any assurance of the liquidity of any trading market, holders’ ability to sell their Class A shares when desired, or at all, or the prices that they may obtain for their Class A shares.

The market price and trading volume of our Class A shares may be volatile, which could result in rapid and substantial losses for our shareholders.

The market price of our Class A shares recently has been, and in the future, may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our Class A shares may fluctuate and cause significant price variations to occur, which may limit or prevent investors from readily selling their Class A shares and may otherwise negatively affect the liquidity of our Class A shares. If the market price of our Class A shares declines significantly, holders may be unable to resell their Class A shares at or above their purchase price, if at all. We cannot provide any assurance that the market price of our Class A shares will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our Class A shares or result in fluctuations in the price or trading volume of our Class A shares include:

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variations in our quarterly operating results or dividends, or a decision to continue not paying a regular dividend;

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failure to meet analysts’ earnings estimates;

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sales by the company, key executives or other shareholders of a significant amount of our equity securities;

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difficulty in complying with the provisions in our credit agreement such as financial covenants and amortization requirements;

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publication of research reports or press reports about us, our investments or the investment management industry or the failure of securities analysts to cover our Class A shares;

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additions or departures of our principals and other key management personnel;

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adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

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actions by shareholders;

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changes in market valuations of similar companies;

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speculation in the press or investment community;

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changes or proposed changes in laws or regulations or differing interpretations thereof affecting our business or enforcement of these laws and regulations, or announcements relating to these matters;

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litigation or governmental investigations;

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fluctuations in the performance or share price of other alternative asset managers;

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poor performance or other complications affecting our funds or current or proposed investments;

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adverse publicity about the asset management industry generally or individual scandals, specifically; and

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general market and economic conditions.

In addition, when the market price of a stock has been volatile in the past, holders of that stock have, at times, instituted securities class action litigation against the issuer of the stock. If any of our shareholders brought a lawsuit against us, we may be required to incur substantial costs defending any such suit, even those without merit. Such a lawsuit could also divert the time and attention of our management from our business and lower our Class A share price.

Our Class A share price may decline due to the large number of shares eligible for future sale and for exchange into Class A shares.

The market price of our Class A shares could decline as a result of sales of a large number of our Class A shares or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. As of June 30, 2009, we had 452,575,758 outstanding Class A shares on a fully diluted basis, 47,665,720 restricted Class A share units granted to employees and affiliates (net of forfeitures and excluding the 7,243,577 restricted units granted to our new CEO in July 2009), 146,836 restricted Class A shares granted to directors pursuant to our equity incentive plan, and 67,187,444 Class A shares and Fortress Operating Group units that remain available for future grant under our equity incentive plan. Approximately 24% of the 47,665,720 restricted Class A share units granted to Fortress employees and affiliates will vest on January 1, 2010, and become eligible for resale by the holders, with a similar percentage vesting on each of the three succeeding anniversaries of that date. We anticipate that approximately 35% of such shares will be sold into the market during the six-month period ending June 30, 2010 in order to fund tax withholding obligations. Beginning in 2008, the Class A shares reserved under our equity incentive plan will be increased on the first day of each fiscal year during the plan’s term by the lesser of (x) the excess of (i) 15% of the number of outstanding Class A and Class B shares of the company on the last day of the immediately preceding fiscal year over (ii) the number of shares reserved and available for issuance under our equity incentive plan as of such date or (y) 60,000,000 shares. In 2008 and 2009, this computation did not result in an increase. We may issue and sell in the future additional Class A shares or any securities issuable upon conversion of, or exchange or exercise for, Class A shares (including Fortress Operating Group units) at any time.

Our principals directly own an aggregate of 312,071,550 Fortress Operating Group units and also own an aggregate of 3,600,000 Class A shares. Each principal has the right to exchange each of his directly owned Fortress Operating Group units for one of our Class A shares at any time, subject to the Principals Agreement. These Class A shares and Fortress Operating Group units are eligible for resale from time to time, subject to certain contractual restrictions and Securities Act limitations.

In addition, in April 2008, Fortress granted 31,000,000 Fortress Operating Group restricted partnership units (“RPUs”) to a senior employee. The RPUs will vest into full capital interests in Fortress Operating Group units in three equal portions on the first business day of 2011, 2012 and 2013, respectively, subject to continued employment with Fortress. If and when vested, these 31,000,000 Fortress Operating Group units will be exchangeable into Class A shares on a one-for-one basis. In addition, such units will have the same resale terms and restrictions as those applicable to the principals’ Fortress Operating Group units.

Our principals and Nomura are parties to shareholders agreements with us. The principals have the ability to cause us to register the Class A shares they acquire upon exchange for their Fortress Operating Group units. Nomura has the ability to cause us to register any of the 55,071,450 Class A shares it purchased prior to our initial public offering. Nomura also purchased 5,400,000 Class A shares in our May 2009 offering.

Our principals’ beneficial ownership of Class B shares and anti-takeover provisions in our charter documents and Delaware law could delay or prevent a change in control.

Our principals beneficially own all of our Class B shares. The principals’ Class B shares will represent a majority of the total combined voting power of our outstanding Class A and Class B shares. As a result, if they vote all of their shares in the same manner, they will be able to exercise control over all matters requiring the approval of shareholders and will be able to prevent a change in control of our company. In addition, provisions in our operating agreement may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our shareholders. For example, our operating agreement provides for a staggered board, requires advance notice for proposals by shareholders and nominations, places limitations on convening shareholder meetings, and authorizes the issuance of preferred shares that could be issued by our board of directors to thwart a takeover attempt. In addition, certain provisions of Delaware law may delay or prevent a transaction that could cause a change in our control. The market price of our Class A shares could be adversely affected to the extent that our principals’ control over us, as well as provisions of our operating agreement, discourage potential takeover attempts that our shareholders may favor.

There are certain provisions in our operating agreement regarding exculpation and indemnification of our officers and directors that differ from the Delaware General Corporation Law (DGCL) in a manner that may be less protective of the interests of our Class A shareholders.

Our operating agreement provides that to the fullest extent permitted by applicable law our directors or officers will not be liable to us. However, under the DGCL, a director or officer would be liable to us for (i) breach of duty of loyalty to us or our shareholders, (ii) intentional misconduct or knowing violations of the law that are not done in good faith, (iii) improper redemption of shares or declaration of dividend, or (iv) a transaction from which the director or officer derived an improper personal benefit. In addition, our operating agreement provides that we indemnify our directors and officers for acts or omissions to the fullest extent provided by law. However, under the DGCL, a corporation can only indemnify directors and officers for acts or omissions if the director or officer acted in good faith, in a manner he reasonably believed to be in the best interests of the corporation, and, in a criminal action, if the officer or director had no reasonable cause to believe his conduct was unlawful. Accordingly, our operating agreement may be less protective of the interests of our Class A shareholders, when compared to the DGCL, insofar as it relates to the exculpation and indemnification of our officers and directors.

We have elected to become a “controlled company” within the meaning of the New York Stock Exchange rules and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements.

A company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” within the meaning of the New York Stock Exchange rules and may elect not to comply with certain corporate governance requirements of the New York Stock Exchange, including:

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the requirement that a majority of our board of directors consist of independent directors;

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the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors; and

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the requirement that we have a compensation committee that is composed entirely of independent directors.

We have elected to become a “controlled company” within the meaning of the New York Stock Exchange rules, and we intend to rely on one or more of the exemptions listed above. For example, our board is not currently, and likely in the future will not be, comprised of a majority of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.

Risks Related to Taxation

Class A shareholders may be subject to U.S. federal income tax on their share of our taxable income, regardless of whether they receive any cash dividends from us.

So long as we are not required to register as an investment company under the Investment Company Act of 1940 and 90% of our gross income for each taxable year constitutes “qualifying income” within the meaning of the Internal Revenue Code of 1986, as amended (the “Code”), on a continuing basis, we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. Class A shareholders may be subject to U.S. federal, state, local and possibly, in some cases, foreign income taxation on their allocable share of our items of income, gain, loss, deduction and credit (including our allocable share of those items of any entity in which we invest that is treated as a partnership or is otherwise subject to tax on a flow through basis) for each of our taxable years ending with or within their taxable year, regardless of whether or not they receive cash dividends from us. They may not receive cash dividends equal to their allocable share of our net taxable income or even the tax liability that results from that income. In addition, certain of our holdings, including holdings, if any, in a Controlled Foreign Corporation (“CFC”) and a Passive Foreign Investment Company (“PFIC”), may produce taxable income prior to the receipt of cash relating to such income, and holders of our Class A shares will be required to take such income into account in determining their taxable income. Under our operating agreement, in the event of an inadvertent partnership termination in which the Internal Revenue Service (“IRS”) has granted us limited relief, each holder of our Class A shares also is obligated to make such adjustments as are required by the IRS to maintain our status as a partnership. Such adjustments may require persons who hold our Class A shares to recognize additional amounts in income during the years in which they hold such shares. We may also be required to make payments to the IRS.

Our intermediate holding company, FIG Corp., is subject to corporate income taxation in the United States, and we may be subject to additional taxation in the future.

A significant portion of our investments and activities may be made or conducted through FIG Corp. Dividends paid by FIG Corp. from time to time will, as is usual in the case of a U.S. corporation, then be included in our income. Income received as a result of investments made or activities conducted through FIG Asset Co. LLC (but excluding through its taxable corporate affiliates) is not subject to corporate income taxation in our structure, but we cannot provide any assurance that it will not become subject to additional taxation in the future, which would negatively impact our results of operations.

There can be no assurance that amounts paid as dividends on Class A shares will be sufficient to cover the tax liability arising from ownership of Class A shares.

Any dividends paid on Class A shares will not take into account a shareholder’s particular tax situation (including the possible application of the alternative minimum tax) and, therefore, because of the foregoing as well as other possible reasons, may not be sufficient to pay their full amount of tax based upon their share of our net taxable income. In addition, the actual amount and timing of dividends will always be subject to the discretion of our board of directors. In particular, the amount and timing of dividends will depend upon a number of factors, including, among others:

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our actual results of operations and financial condition;

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restrictions imposed by our operating agreement or applicable law;

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restrictions imposed by our credit agreements;

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reinvestment of our capital;

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the timing of the investment of our capital;

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the amount of cash that is generated by our investments or to fund liquidity needs;

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levels of operating and other expenses;

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contingent liabilities; or

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factors that our board of directors deems relevant.

Even if we do not distribute cash in an amount that is sufficient to fund a shareholder’s tax liabilities, they will still be required to pay income taxes on their share of our taxable income.

Tax gain or loss on disposition of our common units could be more or less than expected.

If a Class A shareholder sells common units, such shareholder will recognize a gain or loss equal to the difference between the amount realized and the adjusted tax basis in those common units. Prior distributions to such common shareholder in excess of the total net taxable income allocated to such shareholder, which decreased the tax basis in its common units, will increase the gain recognized upon a sale when the common units are sold at a price greater than such shareholder’s tax basis in those common units, even if the price is less than the original cost. A portion of the amount realized, whether or not representing gain, may be ordinary income to such shareholder.

We currently do not intend to make an election under Section 754 of the Internal Revenue Code to adjust our asset basis, so a holder of common units could be allocated more taxable income in respect of those common units prior to disposition than if such an election were made.

We currently do not intend to make an election under Section 754 of the Internal Revenue Code to adjust our asset basis. If no Section 754 election is made, there will generally be no adjustment to the basis of our assets in connection with our initial public offering, or upon a subsequent transferee’s acquisition of common units from a prior holder of such common units, even if the purchase price for those interests or units, as applicable, is greater than the share of the aggregate tax basis of our assets attributable to those interests or units immediately prior to the acquisition. Consequently, upon our sale of an asset, gain allocable to a holder of common units could include built-in gain in the asset existing at the time such holder acquired such units, which built-in gain would otherwise generally be eliminated if a Section 754 election had been made.

If we are treated as a corporation for U.S. federal income tax purposes, the value of the Class A shares would be adversely affected.

We have not requested, and do not plan to request, a ruling from the IRS on our treatment as a partnership for U.S. federal income tax purposes, or on any other matter affecting us. As of the date of the consummation of our initial public offering, under then current law and assuming full compliance with the terms of our operating agreement (and other relevant documents) and based upon factual statements and representations made by us, our outside counsel opined, as of that date, that we would be treated as a partnership, and not as an association or a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes. However, opinions of counsel are not binding upon the IRS or any court, and the IRS may challenge this conclusion and a court may sustain such a challenge. The factual representations made by us upon which our outside counsel relied related to our organization, operation, assets, activities, income, and present and future conduct of our operations. In general, if an entity that would otherwise be classified as a partnership for U.S. federal income tax purposes is a “publicly traded partnership” (as defined in the Code) it will be nonetheless treated as a corporation for U.S. federal income tax purposes, unless the exception described below, and upon which we intend to rely, applies. A publicly traded partnership will, however, be treated as a partnership, and not as a corporation for U.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes “qualifying income” within the meaning of the Code and it is not required to register as an investment company under the Investment Company Act of 1940. We refer to this exception as the “qualifying income exception.”

Qualifying income generally includes dividends, interest, capital gains from the sale or other disposition of stocks and securities and certain other forms of investment income. We expect that our income generally will consist of interest, dividends, capital gains and other types of qualifying income, including dividends from FIG Corp. and interest on indebtedness from FIG Corp. No assurance can be given as to the types of income that will be earned in any given year. If we fail to satisfy the qualifying income exception described above, items of income and deduction would not pass through to holders of the Class A shares and holders of the Class A shares would be treated for U.S. federal (and certain state and local) income tax purposes as shareholders in a corporation. In such a case, we would be required to pay income tax at regular corporate rates on all of our income. In addition, we would likely be liable for state and local income and/or franchise taxes on all of such income. Dividends to holders of the Class A shares would constitute ordinary dividend income taxable to such holders to the extent of our earnings and profits, and the payment of these dividends would not be deductible by us. Taxation of us as a publicly traded partnership taxable as a corporation could result in a material adverse effect on our cash flow and the after-tax returns for holders of Class A shares and thus could result in a substantial reduction in the value of the Class A shares.

Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.

The U.S. federal income tax treatment of holders of the Class A shares depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Readers should be aware that the U.S. federal income tax rules are constantly under review by persons involved in the legislative process, the IRS, and the U.S. Treasury Department, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The IRS pays close attention to the proper application of tax laws to partnerships. The present U.S. federal income tax treatment of an investment in the Class A shares may be modified by administrative, legislative or judicial interpretation at any time, possibly on a retroactive basis, and any such action may affect investments and commitments previously made. For example, changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or impossible to meet the qualifying income exception for us to be treated as a partnership for U.S. federal income tax purposes that is not taxable as a corporation, affect or cause us to change our investments and commitments, change the character or treatment of portions of our income (including, for instance, treating carried interest as ordinary fee income rather than capital gain) affect the tax considerations of an investment in us and adversely affect an investment in our Class A shares.

Our organizational documents and agreements permit the board of directors to modify our operating agreement from time to time, without the consent of the holders of Class A shares, in order to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all of the holders of our Class A shares. Moreover, we will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to holders in a manner that reflects such holders’ beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. However, these assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will assert successfully that the conventions and assumptions used by us do not satisfy the technical requirements of the Code and/or Treasury regulations and could require that items of income, gain, deductions, loss or credit, including interest deductions, be adjusted, reallocated, or disallowed, in a manner that adversely affects holders of the Class A shares.

We cannot match transferors and transferees of common units, and we have therefore adopted certain income tax accounting positions that may not conform with all aspects of applicable tax requirements. The IRS may challenge this treatment, which could adversely affect the value of our common units.

Because we cannot match transferors and transferees of common units, we have adopted depreciation, amortization and other tax accounting positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our common unitholders. It also could affect the timing of these tax benefits or the amount of gain on the sale of common units and could have a negative impact on the value of our common units or result in audits of and adjustments to our common unitholders’ tax returns.

The sale or exchange of 50% or more of our capital and profit interests will result in the termination of our partnership for U.S. federal income tax purposes. We will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. Our termination would, among other things, result in the closing of our taxable year for all common unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income.

FIG Asset Co. LLC may not be able to invest in certain assets, other than through a taxable corporation.

In certain circumstances, FIG Asset Co. LLC or one of its subsidiaries may have an opportunity to invest in certain assets through an entity that is characterized as a partnership for U.S. federal income tax purposes, where the income of such entity may not be “qualifying income” for purposes of the publicly traded partnership rules. In order to manage our affairs so that we will meet the qualifying income exception, we may either refrain from investing in such entities or, alternatively, we may structure our investment through an entity classified as a corporation for U.S. federal income tax purposes. If the entity were a

U.S. corporation, it would be subject to U.S. federal income tax on its operating income, including any gain recognized on its disposal of its interest in the entity in which the opportunistic investment has been made, as the case may be, and such income taxes would reduce the return on that investment.

Complying with certain tax-related requirements may cause us to forego otherwise attractive business or investment opportunities or enter into acquisitions, borrowings, financings or arrangements we may not have otherwise entered into.

In order for us to be treated as a partnership for U.S. federal income tax purposes, and not as an association or publicly traded partnership taxable as a corporation, we must meet the qualifying income exception discussed above on a continuing basis and we must not be required to register as an investment company under the Investment Company Act of 1940. In order to effect such treatment we (or our subsidiaries) may be required to invest through foreign or domestic corporations, forego attractive business or investment opportunities or enter into borrowings or financings we may not have otherwise entered into. This may adversely affect our ability to operate solely to maximize our cash flow. Our structure also may impede our ability to engage in certain corporate acquisitive transactions because we generally intend to hold all of our assets through the Fortress Operating Group. In addition, we may be unable to participate in certain corporate reorganization transactions that would be tax free to our holders if we were a corporation. To the extent we hold assets other than through the Fortress Operating Group, we will make appropriate adjustments to the Fortress Operating Group agreements so that distributions to principals and us would be the same as if such assets were held at that level.

The IRS could assert that we are engaged in a U.S. trade or business, with the result that some portion of our income is properly treated as effectively connected income with respect to non-U.S. holders. Moreover, certain REIT dividends and other stock gains may be treated as effectively connected income with respect to non-U.S. holders.

While we expect that our method of operation will not result in a determination that we are engaged in a U.S. trade or business, there can be no assurance that the IRS will not assert successfully that we are engaged in a U.S. trade or business, with the result that some portion of our income is properly treated as effectively connected income with respect to non-U.S. holders.

Moreover, dividends paid by an investment that we make in a REIT that is attributable to gains from the sale of U.S. real property interests will, and sales of certain investments in the stock of U.S. corporations owning significant U.S. real property may, be treated as effectively connected income with respect to non-U.S. holders. To the extent our income is treated as effectively connected income, non-U.S. holders generally would be subject to withholding tax on their allocable shares of such income, would be required to file a U.S. federal income tax return for such year reporting their allocable shares of income effectively connected with such trade or business, and would be subject to U.S. federal income tax at regular U.S. tax rates on any such income. Non-U.S. holders may also be subject to a 30% branch profits tax on such income in the hands of non-U.S. holders that are corporations.

An investment in Class A shares will give rise to UBTI to certain tax-exempt holders.

We will not make investments through taxable U.S. corporations solely for the purpose of limiting unrelated business taxable income, or UBTI, from “debt-financed” property and, thus, an investment in Class A shares will give rise to UBTI to certain tax-exempt holders. For example, FIG Asset Co. LLC will invest in or hold interests in entities that are treated as partnerships, or are otherwise subject to tax on a flow-through basis, that will incur indebtedness. FIG Asset Co. LLC may borrow funds from FIG Corp. or third parties from time to time to make investments. These investments will give rise to UBTI from “debt-financed” property. However, we expect to manage our activities to avoid a determination that we are engaged in a trade or business, thereby limiting the amount of UBTI that is realized by tax-exempt holders of our Class A shares.

We may hold or acquire certain investments through an entity classified as a PFIC or CFC for U.S. federal income tax purposes.

Certain of our investments may be in foreign corporations or may be acquired through a foreign subsidiary that would be classified as a corporation for U.S. federal income tax purposes. Such an entity may be a PFIC or a CFC for U.S. federal income tax purposes. U.S. holders of Class A shares indirectly owning an interest in a PFIC or a CFC may experience adverse U.S. tax consequences.

Several items of tax legislation have recently been introduced, which, if enacted, could materially affect us, including by preventing us from continuing to qualify as a partnership for U.S. federal income tax purposes. Our structure also is subject to potential judicial or administrative change and differing interpretations, possibly on a retroactive basis.

On June 14, 2007, legislation was introduced in the Senate that would tax as corporations publicly traded partnerships that directly or indirectly derive income from investment adviser or asset management services. In addition, the Chairman and the Ranking Republican Member of the Senate Committee on Finance concurrently issued a press release stating that they do not believe that proposed public offerings of private equity and hedge fund management firms are consistent with the intent of the existing rules regarding publicly traded partnerships because the majority of their income is from the active provision of services to investment funds and limited partner investors in such funds. As explained in the technical explanation accompanying the proposed legislation:

Under the bill, the exception from corporate treatment for a publicly traded partnership does not apply to any partnership that, directly or indirectly, has any item of income or gain (including capital gains or dividends), the rights to which are derived from services provided by any person as an investment adviser, as defined in the Investment Advisers Act of 1940, or as a person associated with an investment adviser, as defined in that Act. Further, the exception from corporate treatment does not apply to a partnership that, directly or indirectly, has any item of income or gain (including capital gains or dividends), the rights to which are derived from asset management services provided by an investment adviser, a person associated with an investment adviser, or any person related to either, in connection with the management of assets with respect to which investment adviser services were provided. If enacted in its proposed form, the transition rules of the proposed legislation would delay the application of these rules for five years.

In addition, on June 25, 2008, legislation was passed in the House, but not the Senate, that would have the effect of treating income recognized from “carried interests” as ordinary fee income, thereby effectively causing such income to be treated as nonqualifying income under the publicly traded partnership rules, which would have precluded us from qualifying for treatment as a partnership for U.S. federal income tax purposes. President Obama has indicated during the recent presidential campaign that he would support changing the tax treatment of “carried interests,” and on February 26, 2009, President Obama’s staff released an outline of his fiscal year 2010 budget proposal which includes a proposal to tax “carried interests” as ordinary income.

On April 2, 2009, Congressman Sander Levin introduced new legislation in the House that would have the effect of treating income recognized from “carried interests” as ordinary fee income. While the legislation, if enacted in its current form, would explicitly treat such income as nonqualifying income under the publicly traded partnership rules, thereby precluding us from qualifying for treatment as a partnership for U.S. federal income tax purposes, the proposed legislation provides for a 10 year transition period before these rules are applicable.

On March 2, 2009, Senator Carl Levin introduced the Stop Tax Haven Abuse Act in the United States Senate, similar to a prior legislative proposal from 2007. Among other effects, this proposal would, if enacted in its current form, subject our offshore funds to significant U.S. federal income taxes and potentially state and local taxes, which would adversely affect our ability to raise capital from foreign investors and certain tax-exempt investors.

As a result of widespread budget deficits, several states are evaluating proposals to subject partnerships to U.S federal or state entity level taxation through the imposition of state income, franchise or other forms of taxation. If any version of any of these legislative proposals were to be enacted into law in the form in which it was introduced, or if other similar legislation were enacted or any other change in the tax laws, rules, regulations or interpretations were to preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly-traded partnership rules or otherwise impose additional taxes, Class A shareholders would be negatively impacted because we would incur a material increase in our tax liability as a public company from the date any such changes became applicable to us, which could result in a reduction in the value of our Class A Shares.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

On June 18, 2009, the Company held its Annual Meeting of Shareholders at which the shareholders voted upon (i) the election of Robert I. Kauffman, Michael E. Novogratz and Takumi Shibata to the Board of Directors as Class II directors for three-year terms and (ii) the ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the 2009 fiscal year.

The shareholders elected each of the directors and approved the ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the 2009 fiscal year. The number of votes cast for or against and the number of abstentions with respect to each matter voted upon, as applicable, is set forth below (broker non-votes do not apply to these proposals):


Proposal	For	Against	Abstain
Election of Directors
Robert I. Kauffman	396,805,623		2,992,383
Michael E. Novogratz	396,572,277		3,225,729
Takumi Shibata	393,021,059		6,776,852
Ratification of the Appointment of Independent Registered Public Accounting Firm	398,697,992	732,954	367,060

Item 5.

Other Information

On August 4, 2009, George W. Wellde, Jr. was appointed to the Company’s Board of Directors as well as the Audit Committee and Nominating, Corporate Governance and Conflicts Committee of the Board of Directors. The Company will provide the same compensation to Mr. Wellde for his services on the Board and Audit Committee as the Company provides to other non-employee Board and Audit Committee members, which includes the following:

(1)

a grant of a number of restricted Class A shares equal in value to $300,000, based upon the average closing price of our Class A shares over the thirty trading-day period prior to the commencement of Mr. Wellde’s service on the Board, which will become vested in three equal portions on the day immediately preceding our annual shareholders meeting in each of 2010, 2011 and 2012 (provided that Mr. Wellde is still serving as of the applicable vesting date). Mr. Wellde will be entitled to all dividends that become payable on such shares during the restricted period;

(2)

a $30,000 payment for service on the Board, which is payable semi-annually; and

(3)

a $10,000 payment for service on the Audit Committee.

Mr. Wellde may elect to receive the payments for Board and Audit Committee service in cash or Class A shares.

Also, effective August 11, 2009, in connection with Mr. Mudd’s appointment as Chief Executive Officer, the Company is eliminating the position of Chief Operating Officer. As a result, Randal Nardone will no longer hold the title of Chief Operating Officer but will continue to perform the same services for Fortress as he has performed prior to this date. Mr. Nardone will continue to serve as a principal of the Company and a member of Fortress’s board of directors.

Item 6.

Exhibits

(a)

and (c) Financial statements and schedules:

See Part I, Item 1, “Financial Statements”

(b)

Exhibits filed with this Quarterly Report on Form 10-Q:


3.1		Certificate of Formation of the Registrant (incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-138514), Exhibit 3.1).

3.2		Certificate of Amendment to Certificate of Formation of the Registrant (incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-138514), Exhibit 3.2).

3.3		Fourth Amended and Restated Limited Liability Company Agreement of the Registrant.

10.1		Second Amendment to the Third Amended and Restated Credit Agreement, dated March 12, 2009, among FIG LLC, as Borrower, certain subsidiaries and affiliates of the Borrower, as Guarantors, the Lenders party thereto and L/C Issuer (incorporated by reference to the Registrant’s Annual Report on Form 10-K filed with the SEC on March 16, 2009 (File No. 001-33294), Exhibit 10.31).

10.2		Third Amendment to the Third Amended and Restated Credit Agreement, dated March 13, 2009, among FIG LLC, as Borrower, certain subsidiaries and affiliates of the Borrower, as Guarantors, the Lenders party thereto and L/C Issuer (incorporated by reference to the Registrant’s Annual Report on Form 10-K filed with the SEC on March 16, 2009 (File No. 001-33294), Exhibit 10.32).

10.3		Fourth Amendment to the Third Amended and Restated Credit Agreement, dated June 11, 2009, among FIG LLC, a Delaware limited liability company, certain subsidiaries and affiliates of the borrower, as guarantors, Bank of America, N.A., individually and as administrative agent and letter of credit issuer, Citibank, N.A., individually and as syndication agent, and the following commercial lending institutions: Deutsche Bank AG, New York Branch, Goldman Sachs Credit Partners, L.P., Lehman Commercial Paper Inc., Wells Fargo Bank, N.A., ING Capital LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on June 17, 2009).

10.4		Amended and Restated Fortress Investment Group LLC 2007 Omnibus Equity Incentive Plan.

10.5		Employment, Non-Competition and Non-Solicitation Agreement, dated July 19, 2009, by and between Daniel H. Mudd and the Registrant (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on July 20, 2009).

10.6		Form of Indemnification Agreement, by and between Fortress Investment Group LLC and the executive officers and directors of the Registrant.

31.1		Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


FORTRESS INVESTMENT GROUP LLC

August 10, 2009

By:		/s/ Wesley R. Edens
		Wesley R. Edens
		Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



By:		/s/ Wesley R. Edens
		Wesley R. Edens
		Chief Executive Officer

August 10, 2009



By:		/s/ Daniel N. Bass
		Daniel N. Bass
		Chief Financial Officer

August 10, 2009



By:		/s/ Jonathan R. Brown
		Jonathan R. Brown
		Chief Accounting Officer

August 10, 2009