News Column

FORTRESS INVESTMENT GROUP LLC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 27, 2014

(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 Annual Report on Form 10-K. 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 I, Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K.



Overview

Our Business

Fortress is a leading, highly diversified global investment management firm with approximately $61.8 billion in AUM as of December 31, 2013. Fortress applies its deep experience and specialized expertise across a range of investment strategies - private equity, credit, liquid markets and traditional fixed income - on behalf of our over 1,500 institutional clients and private investors worldwide. We earn management fees based on the amount of capital we manage, incentive income based on the performance of our alternative investment funds, and investment income (loss) from our principal investments. We invest capital in each of our alternative investment businesses. The performance of our funds was solid in 2013, with strong performances in most funds and an overall improvement in our operating results in comparison with 2012. In addition, we have continued significant capital raising within our funds and we have continued to improve our financial position. For more information about these topics, please refer to "- Performance of our Funds," "- Assets Under Management," and "- Liquidity and Capital Resources" below.



As of December 31, 2013, we managed the following businesses:

Private Equity - a business that manages approximately $15.6 billion of AUM comprised of two business segments: (i) general buyout and sector-specific funds focused on control-oriented investments in cash flow generating assets and asset-based businesses in North America and Western Europe; and (ii) publicly traded permanent capital vehicles that invest in a wide variety of real estate related assets including securities, loans, real estate properties and mortgage servicing related assets. Liquid Hedge Funds - a business that manages approximately $7.4 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. In addition, this segment includes an endowment style fund, which invests in Fortress Funds, funds managed by external managers, and direct investments; and a fund that seeks to generate returns by executing a positively convex investment strategy. Credit Funds - a business that manages approximately $13.4 billion of AUM comprised of two business segments: (i) credit hedge funds which make highly diversified investments in direct lending, corporate debt and securities, portfolios and orphaned assets, real estate and structured finance on a global basis and throughout the capital structure, with a value orientation, as well as non-Fortress originated funds for which Fortress has been retained as manager as part of an advisory business; and (ii) credit private equity ("PE") funds which are comprised of a family of "credit opportunities" funds focused on investing in distressed and undervalued assets, a family of ''long dated value'' funds focused on investing in undervalued assets with limited current cash flows and long investment horizons, a family of "real assets" funds focused on investing in tangible and intangible assets in four principal categories (real estate, capital assets, natural resources and intellectual property), a family of Asia funds, including Japan real estate funds and an Asian investor based global opportunities fund, and a family of real estate opportunities funds, as well as certain sector-specific funds with narrower investment mandates tailored for the applicable sector. Logan Circle - our traditional asset management business, which has approximately $25.4 billion of AUM, provides institutional clients actively managed investment solutions across a broad spectrum of fixed income and growth equity strategies. Logan Circle's core fixed income products cover the breadth of the maturity and risk spectrums, including short, intermediate and long duration, core/core plus, investment grade credit, high yield and emerging market debt. In April 2013, Logan Circle launched a growth equities investment business focused on investing and managing concentrated portfolios of publicly traded U.S. equities.



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

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Understanding the Asset Management Business

As an asset manager we perform a service - we use our investment expertise to make investments on behalf of other parties (our "fund investors"). An "alternative" asset manager is simply an asset manager that focuses on certain investment methodologies, typically hedge funds and private equity style funds as described below. Private equity style funds are typically "closed-end" funds, which means they work as follows. We solicit fund investors to make capital commitments to a fund. Fund investors commit a certain amount of capital when the fund is formed. We may "draw" or "call" this capital from the fund investors as the fund makes investments. Capital is returned to fund investors as investments are realized. The fund has a set termination date and we must use an investment strategy that permits the fund to realize all of the investments it makes in the fund within that period. Fund investors may not withdraw or redeem capital, barring certain extraordinary circumstances, and additional fund investors are not permitted to join the fund once it is fully formed. Typically, private equity style funds make longer-term, less liquid (i.e. less readily convertible to cash) investments. Hedge funds are typically "open-end" funds, which means they work as follows. We solicit fund investors to invest capital at the fund formation and invest this capital as it is received. Additional fund investors are permitted to join the fund on a periodic basis. Fund investors are generally permitted to redeem their capital on a periodic basis. The fund has an indefinite life, meaning that it continues for an indeterminate period as long as it retains fund investors. Typically, hedge funds make short-term, liquid investments. Our credit hedge funds share certain characteristics of both private equity and hedge funds, and generally make investments that are relatively illiquid in nature.



In addition, Fortress has a traditional asset management business. The traditional asset management business works similarly to the hedge fund business, except that generally there is no provision for incentive income and management fee rates are lower.

In exchange for our services, we receive remuneration in the form of management fees and incentive income. Management fees are typically based on a fixed annual percentage of the capital we manage for each fund investor, and are intended to compensate us for the time and effort we expend in researching, making, managing and realizing investments. Incentive income is typically based on achieving specified performance criteria, and it is intended to align our interests with those of the fund investors and to incentivize us to earn attractive returns.



We also invest our own capital alongside the fund investors in order to further align our interests and to earn a return on the investments.

In order to be successful, we must do a variety of things including, but not limited to, the following:

• Increase the amount of capital we manage for fund investors, also known as

our "assets under management" or "AUM"

• Earn attractive returns on the investments we make.

• Effectively manage our liquidity, including our debt, if any, and expenses.

Each of these objectives is discussed below.

Assets Under Management

Management fee paying assets under management, or AUM, fluctuate based on four primary factors:

• Capital raising: AUM increases when we receive more capital from our fund

investors to manage on their behalf. Typically, fund investors make this decision based on: (a) the amount of capital they wish, or are able, to invest in the types of investments a certain manager or fund makes, and



(b) the reputation and track record of the manager and its key investment

employees. • Realization of private equity investments and return of capital



distributions: In "closed-end" funds, AUM decreases when we return capital

to fund investors as investments are realized. Investments are realized

when they are sold or otherwise converted to cash by the manager. Similarly, AUM decreases in publicly traded investment vehicles when return of capital distributions are made to investors.



• Redemptions: In "open-end" funds, AUM decreases after fund investors ask

for their capital to be returned, or "redeemed," at periodic intervals.

Typically, fund investors make this decision based on the same factors

they used in making the original investment, which may have changed over time or based on circumstances, as well as on their liquidity needs. • Fund performance: AUM increases or decreases in accordance with the performance of fund investments. 45



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It is critical for us to continue to raise capital from fund investors. Without new capital, AUM declines over time as private equity investments are realized and hedge fund investors redeem capital based on their individual needs. Therefore, we strive to maintain a good reputation and a track record of strong performance. We strive to also form and market funds in accordance with investor demand.



We disclose the changes in our assets under management below, under "- Assets Under Management"

Performance



Performance can be evaluated in a number of ways, including the measures outlined below:

• Fund returns: Fund returns express the rate of return a fund earns on

its investments in the aggregate. They can be compared to the returns

of other managers, to returns offered by other investments or to

broader indices. They can also be compared to the performance hurdles

necessary to generate incentive income. We disclose our fund returns

below, under "- Performance of Our Funds."

• Proximity to incentive income threshold: This is a measure of a fund's

performance relative to the performance criteria it needs to achieve in

order for us to earn incentive income.

Incentive income is calculated differently for the hedge funds and private equity funds, as described below.

• We generally earn incentive income from hedge funds based on a straight

percentage of the returns of each fund investor, since fund investors

may enter the fund at different times. Incentive payments are made

periodically, typically annually for the Fortress hedge funds. Once an

incentive payment is made, it is not refundable. However, if a

particular fund investor suffers a loss on its investment, either from

the date of the Fund's inception or since the last incentive payment to

the manager, this establishes a "high water mark" for that investor,

meaning a threshold that has to be exceeded in order for us to begin earning incentive income again from that fund investor. Investors in the same fund could have different high water marks, in terms of both percentage return and dollar amount. • Since it is impractical to disclose this information on a fund



investor-by-investor basis, it may be disclosed based on the following

metrics: the percentage of fund investors who have a high water mark, and the aggregate dollar difference between the value of those fund investors' investments and their applicable aggregate high water mark. The investments held by fund investors who do not have a high water mark are eligible to generate incentive income for us on their next dollar earned. • We generally earn incentive income from private equity style funds based on a percentage of the returns of the fund, subject to the achievement of a minimum return (the "preferred" return) to fund investors. Incentive income is generally paid as each investment in a fund is realized, subject to a "clawback." At the termination of a



fund, a computation is done to determine how much incentive income we

should have earned based on the fund's overall performance, and any incentive income payments received by us in excess of the amount we should have earned must be returned by us (or "clawed back") to the



fund for distribution to fund investors. Certain of our private equity

style funds pay incentive income only after all of the fund's invested

capital has been returned. 46



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Depending on where they are in their life cycle and how they have performed, private equity funds will fall into one of several categories as shown below: PE Style Fund Status Key Disclosures In a liquidation of the fund's assets at their estimated fair value as of the reporting date: Would we owe a clawback of Has the fund made Would the fund incentive (Refer to Note 3 to our incentive income owe us incentive income to the consolidated financial payments to us? income? fund? statements) Yes Yes No - The amount of previously distributed incentive income. - The amount of "undistributed incentive income," which is the amount of incentive income that would be due to us upon a liquidation of the fund's remaining assets at their current estimated fair value. Yes No Yes - The amount of previously distributed incentive income. - The "intrinsic clawback," which is the amount of incentive income that we would have to return to the fund upon a liquidation of its remaining assets at their current estimated fair value. - The amount by which the total current fund value would have to increase as of the reporting date in order to reduce the intrinsic clawback to zero such that we would be in a position to earn additional incentive income from the fund in the future. No Yes N/A - The amount of "undistributed incentive income," which is the amount of incentive income that would be due to us upon a liquidation of the fund's remaining assets at their current estimated fair value. No No N/A - The amount by which the total current fund value would have to increase as of the reporting date such that we would be in a position to earn incentive income from the fund in the future.



We disclose each of these performance measures, as applicable, for all of our funds in Note 3 to our consolidated financial statements contained herein.

Liquidity, Debt and Expense Management

We may choose to use leverage, or debt, to manage our liquidity or enhance our returns. We strive to achieve a level of debt that is sufficient to cover working capital and investment needs, but not in an amount or manner which causes undue stress on performance, either through required payments or restrictions placed on Fortress.

Our liquidity, and our ability to repay our debt, as well as the amount by which our metrics exceed those required under our financial covenants are discussed below, under "- Liquidity and Capital Resources", "- Debt Obligations", and "- Covenants". We must structure our expenses, primarily compensation expense which is our most significant expense, so that key employees are fairly compensated and can be retained, while ensuring that expenses are not fixed in such a way as to endanger our ability to operate in times of lower performance or reduced liquidity. To this end, we generally utilize discretionary bonuses, profit sharing and equity-based compensation as significant components of our compensation plan.



• Profit sharing means that when profits increase, either of Fortress as

a whole or of a specified component (such as a particular fund) of Fortress, employees receive increased compensation. In this way, employees' interests are aligned 47



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with Fortress's, employees can receive significant compensation when performance is good, and we are able to reduce expenses when necessary.

• Equity-based compensation means that employees are paid in equity of

Fortress rather than in cash. This form of compensation has the advantage of not requiring a cash expenditure, while aligning employees' interests with those of Fortress. Our liquidity is discussed below, under "- Liquidity and Capital Resources". Our compensation expenses, including profit sharing and equity-based compensation, are discussed in Note 8 to our consolidated financial statements contained herein. Our segment operating margin, which we define as the ratio of our fund management distributable earnings to our segment revenues, and which is a measure of our profitability, is discussed in Note 11 to our consolidated financial statements contained herein.



Understanding our Financial Statements

Balance Sheet

Our assets consist primarily of the following: 1) Investments in our funds, recorded generally based on our share of the

funds' underlying net asset value, which in turn is based on the estimated

fair value of the funds' investments.

2) Cash.

3) Amounts due from our funds for fees and expense reimbursements.

4) Deferred tax assets, which relate to potential future tax benefits. This asset is not tangible - it was not paid for and does not represent a receivable or other claim on assets.



Our liabilities consist primarily of the following: 1) Debt owed under our credit facility or other debt obligations (if any).

2) Accrued compensation, generally payable to employees shortly after year-end.

3) Amounts due to our Principals under the tax receivable agreement. These

amounts partially offset the deferred tax assets and do not become payable

to the Principals until the related future tax benefits are realized.

4) Deferred incentive income, which is incentive income that we have already

received in cash but is subject to contingencies and may have to be

returned ("clawed back") to the respective funds if certain performance

hurdles are not met.



Management, in considering the liquidity and health of the company, mainly focuses on the following aspects of the balance sheet: 1) Expected cash flows from funds, including the potential for incentive income.

2) Cash on hand.



3) Collectibility of receivables.

4) Current amounts due under our credit facility or other debt obligations

(if any).

5) Other current liabilities, primarily accrued compensation.

6) Financial covenants under our debt obligations.

7) Likelihood of clawback of incentive income.

Income Statement

Our revenues and other income consist primarily of the following: 1) Fees and expense reimbursements from our funds, including management fees,

which are based on the size of the funds, and incentive income, which is

based on the funds' performance.

2) Returns on our investments in the funds.

Our expenses consist primarily of the following: 1) Employee compensation paid in cash, including profit sharing compensation.

2) Equity-based compensation, which is not paid in cash but has a dilutive

effect when it vests because it results in additional shares being issued.

(This amount is broken out from total compensation in the compensation

footnote in our consolidated financial statements.)

3) Principals agreement compensation (prior to December 31, 2011), which had

no economic effect on us and was not considered by management in assessing

our performance.

4) Other general and administrative expenses and interest expenses.

5) Taxes 48



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The primary measure of operating performance used by management is "Distributable Earnings," which is further discussed in the "- Results of Operations - Segment Analysis" section herein.

Essentially, the key components of our income are the fees we are earning from our funds in comparison to the compensation and other corporate expenses we are paying in cash, and the resulting operating margin. Other significant components include (i) the unrealized changes in value of our funds, reported as unrealized gains (losses) and earnings (losses) from equity method investees, as this is indicative of changes in potential future cash flows, (ii) taxes, and (iii) equity-based compensation, because it will eventually have a dilutive effect when the related shares are issued. In addition, in February 2014, Newcastle distributed all of the common shares of New Media to its shareholders. Fortress entered into a management agreement with New Media in which it receives an annual management fee of 1.5% of the company's equity (as defined in the agreement) and incentive compensation (as defined in the agreement). Fortress determined that New Media qualifies as a variable interest entity and, upon the completion of Newcastle's distribution of New Media's common shares, Fortress determined that it was the primary beneficiary. As a result, Fortress consolidated New Media beginning in February 2014. The consolidation of New Media will not have a material impact on net income attributable to Class A shareholders and total Fortress shareholders' equity as substantially all of the operating results of New Media will be attributable to non-controlling interests. For additional information please see Part II, Item 8 " Financial Statements and Supplementary Data - Note 12 - Subsequent Events."



Managing Business Performance

We conduct our management and investment business through the following primary segments: (i) private equity funds, (ii) permanent capital vehicles, (iii) liquid hedge funds, (iv) credit hedge funds, (v) credit PE funds, (vi) Logan Circle, and (vii) principal investments in those funds, as well as cash that is available to be invested. These segments are differentiated based on their varying strategies and, secondarily, on fund investor terms.



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 one senior employee) and income tax expense.

Management assesses the performance of each segment based on its ''distributable earnings.'' Distributable earnings is not a measure of cash generated by operations that 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 retain existing investors, attract new capital and investors, secure investment opportunities, obtain financing for transactions, consummate investments and deliver attractive risk-adjusted returns.



Our ability to execute our business strategy depends upon a number of market conditions, including:

The strength and liquidity of the U.S. and global equity and debt markets and related financial and economic conditions.

U.S. and global financial and economic conditions have a substantial impact on the success of our business strategy, including our ability to effect realizations and make new investments. In addition, equity market conditions impact the ability of our private equity-style funds to increase the value, and effect realizations, of their portfolio company investments and the ability of our funds to generate positive investment returns. The condition of the debt markets also has a meaningful impact on our business. Several 49



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of our funds are directly and indirectly exposed to the debt markets: we invest in debt instruments, our funds borrow money to make investments and our funds utilize leverage in order to increase investment returns, which ultimately drive the performance of our funds. Our portfolio companies also require access to financing for their operations and refinancing of their debt. Furthermore, from time to time, we utilize debt to finance our investments in our funds and for working capital purposes. In general, strong financial and economic conditions including equity and debt markets enable us to execute our business strategy and generate attractive returns while dampening distressed investment strategies, and periods of weakening economies and markets and increased volatility can also present opportunities to invest at reduced valuations and in distressed asset classes, while negatively impacting fees and realizations. For example, a significant decline in the value of our funds' investments would require that our funds satisfy minimum return or "high water mark" requirements before generating incentive income and could subject us to "clawback" payments relating to incentive income previously collected. For hedge funds and certain other funds, opportunities to generate returns depend on their investment strategies, which may benefit from market declines or volatility. Global markets continue to focus on the path of U.S. monetary policy as an indicator of the likely direction of global interest rates. Concerns over potential Federal Reserve tapering of its monetary stimulus caused significant market corrections starting in late spring and lasting well into the summer. After the Federal Reserve announced its intention to continue its bond purchasing program, U.S. equity markets improved significantly. In December, the Federal Reserve announced that it would begin tapering in 2014 but not necessarily tightening monetary policy, which contributed to market improvements, particularly as better than expected growth and employment data was also reported. Various factors could affect the pace of tapering, which began in January 2014, including weaker growth and inflation. Although the U.S. economy appears to be recovering, the recovery has been subject to intermittent disruptions, such as the U.S. government shutdown in the fall of 2013. These disruptions, in addition to inconsistent economic data points, have made the recovery's progress more difficult to assess. However, the Federal Reserve's announcement contributed to record-high levels in U.S. equity markets and, together with the strengthening of the U.S. dollar, we believe these are trends that may continue as markets adjust to more robust U.S. growth and less quantitative support from the Federal Reserve, though market volatility is also expected. The Eurozone has slowly started to recover from its recession, though growth and economic recovery remains uneven across regions and, in general, behind that of the U.S. Although we believe sovereign risk has reduced in the Eurozone, slow growth together with a weak labor market and lower levels of inflation continue to hinder gradual recovery in Europe. The European Central Bank may retain its explicit easing bias and forward guidance language in the near term in order to support overall recovery. Prospects for a more politically-stable Eurozone are moving in a positive direction, with the potential for political crisis largely on the regional level. The broader Eurozone, however, will likely face difficult discussions around support packages and restructuring of financial institutions. Our hedge funds hold actively-traded long and short positions, with frequently changing levels of exposure, in the debt of several European sovereignties. Based on the positions held by our funds as of December 31, 2013, there was not a material risk to the performance of the company under typical market stress scenarios. However, the investments held by certain of our funds could be material to the individual performance of such funds and, therefore, our reputation. In Japan, the "Abenomics" plan to reflate the economy, which included substantial quantitative and qualitative easing alongside initial fiscal stimulus, yielded results in 2013, boosting growth and business confidence levels, as well as improving equity valuations and inflation conditions. We believe the current government will continue to implement this loose monetary policy and stimulus strategy as well as further easing measures. Economic improvement and wage inflation could decrease the government's dependence on a weaker Japanese Yen. However, the success of structural reforms aimed at improving growth through private investment remains uncertain and markets are likely to fluctuate based on whether such reforms are implemented, as well as whether Japan reaches and is able to sustain its inflation target.



Market conditions over the last several years have impacted our business in several ways:

• Volatility in the markets since the financial crisis in 2008 increased

the importance of maintaining sufficient liquidity without relying upon

additional infusions of capital from the equity and debt 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. The maintenance of sufficient liquidity

may limit our ability to make investments, distributions, or engage in

other strategic transactions.



• Improved economic conditions over the last several years, including

relatively low interest rates, have benefitted our business in a number

of ways, including, but not limited to, a strong financing environment

that has enabled our private equity funds and their portfolio companies

to secure long-term financing, refinance debt at attractive levels, raise public and private equity capital and improve portfolio company



profitability. Improving economic conditions and higher valuations in

private equity funds have also contributed to their ability to launch new investment vehicles and raise capital for them. While improved



conditions have created a more challenging environment for identifying

new investments, we continue to deploy meaningful amounts of new capital. 50



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• Following a period of deleveraging, where a general reduction in the value of assets, and capital availability led to refinancing at a



significantly lower level of leverage, that resulted in significant

opportunities for investors with sufficient capital to acquire assets at reduced prices, near-term investment opportunities have become more sporadic in nature given pricing and market dynamics. However,



potential opportunities exist, particularly where access to capital is

restricted and in Europe where economies may continue to decline. • Despite the uncertain economic recovery, our funds continue to make investments on an opportunistic basis, and we continue to raise new funds as discussed above and 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. 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 returns available from traditional investment products, and to a lesser extent on interest rates 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. This is 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 of investment products offered by alternative asset managers. Solving for funding gaps and historically low interest rates have caused pension plans and other institutional investors to look to alternative investments in order to increase the yield on their investments. As a result, the amount of capital being invested into the alternative investment sector appears to have increased significantly in 2013. However, certain investors appear to have become increasingly focused on the liquidity and redemption terms of alternative investment funds and have expressed a desire to have the ability to redeem or otherwise liquidate their investments in a more rapid timeframe than what is permitted under the terms of many existing funds. Investors in long-term, locked-up (i.e., "private equity style") funds have engaged in longer, more intensive and detailed due diligence procedures prior to making commitments to invest in such funds, which has led to the general perception across the alternative asset management industry that capital raising for long-term capital will require longer time periods, a greater commitment of capital raising resources and will generally be more difficult overall than it was previously. Moreover, some investors are increasingly shifting to managed accounts with fee structures that are less favorable to us. The factor which most directly impacts our results is our investment performance relative to our competitors, including products offered by other alternative asset managers. As illustrated in "- Performance of Our Funds" below, we have generated solid returns across most of our funds, and the performance of our more recent vintage private equity funds has rebounded significantly since 2008, with significant increases in value recorded in 2013. As a result, as illustrated in "- Assets Under Management" below, we have been able to raise meaningful additional capital in various funds, including newly formed funds and permanent capital vehicles. However, our ongoing ability to raise capital for new and existing funds will be a function of investors' assessment of our investment performance relative to that of our competition in the current market environment, as well as other factors.



The strength of the industries or sectors in which our funds have concentrated investments.

Our private equity funds, as well as certain of our managed accounts, currently have significant investments in companies whose assets are concentrated in the following industries and sectors: financial services (particularly loan servicing and consumer finance), transportation and infrastructure, gaming, real estate (including Florida commercial real estate and German residential real estate), and senior living. The overall performance of our funds may be affected by market conditions and trends related to these industries and sector-specific trends. Within the financial services industry, regulatory pressures on the banks combined with a gradually improving economy resulted in a positive market for non-regulated financial institutions domestically. Worldwide growth in trade and transportation continued to expand in 2013 albeit at a more measured pace than in the prior year. Industry dynamics in the senior living sector were also positive, benefiting from a recovery in housing prices, demand outpacing inventory growth and significant growth in the senior population. Challenging European markets have resulted in opportunities for distressed investments in country specific markets such as Italy. 51



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We believe that unfolding developments in the U.S. residential housing market are generating significant investment opportunities. The residential mortgage industry is undergoing major structural changes that are transforming the way mortgages are originated, owned and serviced. In particular, we believe that excess mortgage servicing rights (MSRs) present an opportunity due to a supply-demand imbalance and significant barriers to entry. New Residential and the MSR Opportunities Funds have recently made significant investments in excess MSRs. Our macro liquid hedge funds actively trade in global markets. Performance in 2013 has been favorable, led by positions that profited from weakening of the Japanese Yen, strengthening in global equity markets and rising U.S. interest rates. During the period from the end of May through August, losses were sustained in global foreign exchange and emerging market fixed income positions as the U.S. Dollar weakened and emerging markets interest rates rose. Towards the end of the third quarter and in the fourth quarter, our funds posted gains primarily driven by equity positions, which profited from the new highs reached this year. Global market conditions and trends formed around them are always subject to change, however, as are the positions held by our liquid hedge funds. 52



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Table of Contents Assets Under Management We measure AUM by reference to the fee paying assets we manage. Our AUM has changed as a result of the factors set forth in the table below (in millions): Private Equity Credit (I) Permanent Capital Liquid Hedge Funds (I) Vehicles Funds Hedge Funds PE Funds Logan Circle Total 2011 AUM January 1, 2011 $ 11,923$ 3,037$ 6,355$ 6,773$ 4,817$ 11,708$ 44,613 Capital raised (A) - 220 1,318 309 190 - 2,037 Increase in invested capital 237 - 25 107 3,123 - 3,492 Redemptions (B) - - (1,708 ) (145 ) - - (1,853 ) RCA distributions (C) - - - (1,222 ) - - (1,222 ) Return of capital distributions (D) (317 ) (19 ) - (140 ) (1,854 ) - (2,330 ) Adjustment for capital reset (E) (J) (1,997 ) - - - - (1,997 ) Crystallized incentive income (F) - - (69 ) (91 ) - - (160 ) Net client flows (traditional) - - - - - 841 841 Income (loss) and foreign exchange (G) (561 ) (57 ) (406 ) 385 (44 ) 975 292 AUM December 31, 2011 $ 9,285$ 3,181$ 5,515$ 5,976$ 6,232$ 13,524$ 43,713 2012 Capital raised (A) - 450 993 247 1,058 - 2,748 Increase in invested capital 163 - 7 21 2,817 - 3,008 Redemptions (B) - - (2,045 ) (37 ) - - (2,082 ) RCA distributions (C) - - - (1,100 ) - - (1,100 ) Return of capital distributions (D) (1,036 ) - (93 ) (233 ) (1,964 ) - (3,326 ) Adjustment for capital reset (E) (J) - - - - (331 ) - (331 ) Crystallized incentive income (F) - - (3 ) (76 ) - - (79 ) Net client flows (traditional) - - - - - 5,710 5,710 Income (loss) and foreign exchange (G) 2,199 29 686 867 (63 ) 1,451 5,169 AUM December 31, 2012 $ 10,611$ 3,660$ 5,060$ 5,665$ 7,749$ 20,685$ 53,430 2013 Capital raised (A) - 1,398 2,546 505 - - 4,449 Increase in invested capital 541 - 3 - 2,236 - 2,780 Redemptions (B) - - (850 ) (83 ) - - (933 ) RCA distributions (C) - - - (1,020 ) - - (1,020 ) Return of capital distributions (D) (1,008 ) - (122 ) (20 ) (2,150 ) - (3,300 ) Adjustment for capital reset (E) (J) - (1,492 ) - - (6 ) - (1,498 ) Crystallized incentive income (F) - - (87 ) (168 ) - - (255 ) Net client flows (traditional) - - - - - 4,753 4,753 Income (loss) and foreign exchange (G) 1,892 (19 ) 848 977 (302 ) (52 ) 3,344 AUM December 31, 2013 (H) $ 12,036$ 3,547$ 7,398$ 5,856$ 7,527$ 25,386$ 61,750



(A) Includes offerings of shares by our permanent capital vehicles, if any.

(B) Excludes redemptions which reduced AUM subsequent to December 31, as of each

respective year end. Redemptions are further detailed below.

(C) Represents distributions from (i) assets held within redeeming capital

accounts ("RCA") in our Drawbridge Special Opportunities Funds, which

represent accounts where investors have provided withdrawal notices and are

subject to payout as underlying fund investments are realized, and (ii) the

Value Recovery Funds.

(D) For private equity and credit PE funds, return of capital distributions are

based on realization events. Such distributions include, in the case of

private equity and credit PE funds that are in their capital commitment

periods, recallable capital distributions. 53



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(E) The reset date of certain private equity or credit PE funds is an event

determined by the earliest occurrence of (i) the first day following the

expiration of the capital commitment period of a fund, (ii) a successor fund

or entity draws capital contributions or charges management fees (not

applicable to credit PE funds) or (iii) the date on which all unpaid capital

obligations have been canceled. For the period commencing with the initial

closing of or contribution to the fund and ending on the last day of the

semi-annual or quarterly period ending on or after the reset date, certain

funds generate management fees as a percentage of the fund's capital

commitments and certain funds generate management fees as a percentage of

the fund's aggregate capital contributions. Thereafter, such funds generally

generate management fees as a percentage of the aggregate capital

contributed adjusted for the fair value of each investment that is below the

associated investment's contributed capital.

(F) Represents the transfer of value from investors (fee paying) to Fortress

(non-fee paying) related to realized hedge fund incentive income.

(G) Represents the change in AUM resulting from realized and unrealized changes

in the reported value of the funds. For certain private equity funds, also

includes the impact of a change in AUM basis from invested capital to fair

value for certain portfolio companies which became publicly traded.

(H) AUM is presented mainly in reference to Fortress's ability to generate

management fees. Note 3 to our consolidated financial statements, contained

herein, provides further information regarding incentive income, and Note 4

provides further information regarding Fortress's investments in the funds,

including gains and losses thereon. The percentage of capital invested by Fortress across different funds varies. (I) As of December 31, 2013, the private equity and credit funds had approximately $2.2 billion and $4.9 billion of uncalled and recallable capital, respectively, that will become assets under management if



deployed/called, of which an aggregate of $2.2 billion is only available for

follow-on investments, management fees and other fund expenses. (J) In April 2013, Eurocastle Investment Limited ("Eurocastle") completed a



restructuring process that resulted in the conversion of its outstanding

convertible debt. As part of that restructuring, Fortress entered into an amended management agreement with Eurocastle that reduced the AUM used to



compute Eurocastle's management fees from €1.5 billion to €0.3 billion as of

April 1, 2013, and in doing so also reduced the earnings threshold required

for Fortress to earn incentive income from Eurocastle. Following the conversion of its outstanding convertible debt, Eurocastle effected a one for two hundred reverse split of its common stock.



Redemptions

Fortress's liquid hedge funds, other than the Fortress Partners Funds, are subject to varying redemption terms based on investor classes, but generally offer monthly or quarterly redemption terms. Redemption notices generally must be received in the period prior to payment. Certain of Fortress's liquid managed accounts provide for management fees based on a leverage factor (which cannot go below 1.0) that is applied to net asset value, meaning that increasing or decreasing the leverage factor impacts management fees. Investors in these accounts may redeem their capital on a periodic basis similarly to the liquid hedge fund investors, and may also elect on a monthly basis to increase or decrease the leverage factor in their accounts. An election to decrease the leverage factor is treated similarly to a redemption request in the tables set forth below due to its impact on AUM. The Fortress Partners Funds provide for annual redemption terms. Redemption notices must be received at least 180 days prior to a calendar year end, and related payments are made subsequent to year end. For instance, the 2013 redemption notice date was July 5, 2013 for redemptions to be paid in the first quarter of 2014. The credit hedge funds generally provide for annual return of capital terms. Return of capital requests must be received at least 90 days prior to a calendar year end, and related payments are made subsequent to year end. For instance, the 2013 return of capital request notice date was October 3, 2013 for capital to be returned after December 31, 2013. Such returns of capital may be paid over time as the underlying fund investments are realized, in accordance with the governing terms of the applicable funds. During the period prior to the return of capital for which a return request has been submitted, such amounts continue to be subject to management fees and, as applicable, incentive income. In particular, return of capital requests within the flagship credit hedge fund (onshore only) in 2009, 2010, 2011, 2012 and 2013 are being paid over time as the underlying fund investments are realized. In such a case, pending payment, this capital is referred to as a redeeming capital account or "RCA."



In certain cases, redemption notices may be subject to cancellation after receipt and prior to payment.

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Redemption notices and return of capital requests received from fee-paying investors, and related payments which are made in periods after notices are received, have been as follows:

Redemption Notices / Return of Capital Requests Received and Outstanding through December 31, 2013 (in thousands):

Payments Made Payments Made with Respect with Respect Liquid Hedge to Liquid Hedge Credit Hedge to Credit Hedge Fund those Notices Fund Fund Return of those Requests Fund Notice Redemption - Remaining Capital - Remaining Receipt Notices Inception to Outstanding Requests Inception to Outstanding Period Received Date Notices Received Date (C) Notices 2013 $ 957,414$ 466,056$ 510,051$ 157,251$ 36,250$ 121,001 2012 1,482,907 1,483,319 - 248,402 170,923 108,690 2011 2,382,209 2,291,242 - 785,831 616,092 312,444 Prior - (A) 254,900 (A) $ 510,051 (B) $ 797,035 (B) (A) Includes all prior periods with notices / requests that are still outstanding as of period end.



(B) For liquid hedge funds, reflects $510.1 million to be paid primarily in the

first quarter of 2014. For credit hedge funds, reflects $767.9 million in

RCAs to be paid as the underlying investments are realized and $29.1 million

to be paid primarily in the first quarter of 2014. Excludes any notices

received from investors whose status has changed from fee-paying to non-fee-paying subsequent to notice receipt.



(C) RCA payments are reflected in the AUM rollforward table as RCA distributions

rather than as redemptions.

We note that performance between the notice / request date and the payment date may result in differences between the amount of redemption notices / return of capital requests received and the ultimate payments. The table above reflects the actual notices / requests received, the actual payments made, and the actual remaining NAV of related investors. Therefore, the aggregate notices / requests received will not equal the total payments made plus the remaining outstanding notices / requests, due primarily to post-notice performance and redemption cancellations. Performance of Our Funds



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

AUM Returns (B) Inception December 31, Inception to December 31, Name of Fund Date Maturity Date (A) 2013 2012 2011 2013 2012 2011 Private Equity Private Equity Funds that Report IRR's Fund I Nov-99 Closed May-13 $ - $ - $ - 25.7 % 25.7 % 25.7 % Fund II Jul-02 (A) - - - 35.5 % 35.6 % 35.4 % Fund III Sep-04 Jan-15 1,099 1,288 1,286 6.9 % 5.8 % 0.8 % Fund III Coinvestment Nov-04 Jan-15 90 118 85 1.8 % 1.1 % (0.7 )% Fund IV Mar-06 Jan-17 2,859 2,790 2,437 3.1 % 2.4 % (3.0 )% Fund IV Coinvestment Apr-06 Jan-17 460 485 567 (0.7 )% (0.8 )% (4.7 )% Fund V (E) May-07 Feb-18 4,069 2,891 2,441 4.1 % (1.0 )% (5.1)% Fund V Coinvestment (E) Jul-07 Feb-18 515 603 541 (7.2 )% (9.6 )% (15.6%) GAGACQ Coinvestment Sep-04 Permanent Fund (GAGFAH) - - - 19.4 % 19.2 % 14.4 % FRID (GAGFAH) Mar-05 Apr-15 652 606 304 (0.9 )% (3.2 )% (14.1 )% FRIC (Brookdale) Mar-06 May-16 164 153 105 (3.7 )% (5.1 )% (11.9 )% FICO (Intrawest) Aug-06 Jan-17 - - - (100.0 )% (100.0 )% (100.0 )% FHIF (Holiday) Dec-06 Jan-17 1,083 1,083 1,067 6.8 % 7.6 % 7.1 % FECI (Florida East Jun-07 Feb-18 Coast/Flagler) 436 443 443 (0.3 )% (1.6 )% (4.0 )% WWTAI Jul-11 Jan-25 175 101 9 (C) (C) (C) MSR Opportunities Fund Aug-12 Aug-22 I A 255 - - (C) N/A N/A MSR Opportunities Fund Aug-12 Aug-22 I B 64 - - (C) N/A N/A MSR Opportunities Fund Jul-13 Jul-23 II A 36 - - (C) N/A N/A MSR Opportunities Fund Jul-13 Jul-23 II B - - - (C) N/A N/A MSR Opportunities MA I Jul-13 Jul-23 8 - - (C) N/A N/A Continued on next page. 55



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Table of Contents AUM Returns (B) Inception December 31, Inception to Date Name of Fund Date Maturity Date (A) 2013 2012 2011 (D) 2013 2012 2011 Private Equity - Permanent Capital Vehicles Newcastle Investment Jun-98 Permanent Corp. 1,795 1,729 1,294 N/A 7.0 % 10.1 % 12.9 % New Residential May-13 Permanent Investment Corp. 1,196 - - N/A 10.5 % N/A N/A Eurocastle Investment Oct-03 Permanent Limited 556



1,931 1,887 N/A 6.7 % N/A N/A

Liquid Hedge Funds Drawbridge Global Macro Jun-02 Redeemable Funds (A) 284 357 392 9.0 % 13.7 % 16.9 % (10.5 )% Fortress Macro Funds May-09 Redeemable 1,546



1,566 1,962 8.8 % 14.1 % 17.8 % (9.3 )% Fortress Macro MA1

Nov-11 Redeemable 359



177 50 15.0 % 14.7 % 17.9% (C) Fortress Commodities

Jan-08 Closed May-12 Funds -



- 724 (1.4 )% N/A (12.5 )% (8.0 )% Fortress Commodities Fund Nov-09 Closed Apr-12 MA1 Ltd

-



- 95 (4.7 )% N/A (6.6 )% (7.8 )% Fortress Partners Fund LP Jul-06 Redeemable (A)

566



691 780 2.7 % 4.8 % 8.0 % 0.5 % Fortress Partners

Nov-06 Redeemable Offshore Fund LP (A) 669



706 676 3.1 % 6.7 % 7.7 % (2.1 )% Fortress Asia Macro Funds Mar-11 Redeemable 1,697 433 208 14.5 % 17.1 % 21.2% (C) Fortress Convex Asia

May-12 Redeemable Funds 96



50 - (5.0 )% (3.3 )% (C) N/A Fortress Redwood Fund LTD Aug-13 Redeemable 613 N/A N/A (C) (C) N/A N/A

Credit Hedge Funds Drawbridge Special Opp's Aug-02 PE style redemption Fund LP (F)

3,898 3,793 4,040 11.7 % 18.4 % 17.9 % 10.9 % Drawbridge Special Opp's Aug-02 PE style redemption Fund LTD (F) 1,317 1,117 877 11.6 % 15.6 % 16.6 % 11.5 % Worden Fund Jan-10 PE style redemption 201 209 191 12.8 % 13.7 % 17.6 % 5.8% Worden Fund II Aug-10 PE style redemption 31 40 21 11.2 % 12.4 % 13.2 % 7.3% Value Recovery Funds and (G) Non-redeemable related assets 402 496 811 (G) (G) (G) (G)



Continued on next page.

56



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Table of Contents AUM Returns (B) Inception December 31, Inception to December 31, Name of Fund Date Maturity Date (A) 2013 2012 2011 2013 2012 2011 Credit PE Funds Credit Opportunities Jan-08 Oct-20 Fund 692



997 1,307 25.8 % 26.9 % 27.7 % Credit Opportunities Jul-09 Jul-22 Fund II

745



1,014 1,148 18.3 % 18.5 % 15.7% Credit Opportunities Sep-11 Mar-24 Fund III

1,400



795 322 (C) (C) (C) FCO Managed Accounts Sep-08 to Oct-21 to Jun-24

Oct-10 1,172



1,027 950 20.0 % 23.1%(H) 24.9%(H) FCO Managed Accounts Apr-12 to Jul-24 - Mar-27 (C)

Jun-12 457



514 258 (C) (C) (C) Long Dated Value Fund I Apr-05 Apr-30

185



186 193 5.0 % 4.3 % 4.0 % Long Dated Value Fund Nov-05 Nov-30 II

142 153 157 3.7 % 2.6 % 3.8 % Long Dated Value Fund Feb-07 Feb-32 III 87 128 197 8.6 % 8.0 % 6.2 % LDVF Patent Fund Nov-07 Nov-27 3 16 16 12.7 % 9.7 % 14.7 % Real Assets Fund Jun-07 Jun-17 77



88 112 8.5 % 9.3 % 8.7 % Japan Opportunity Fund Jun-09 Jun-19

364



587 958 22.2 % 20.5 % 17.4% Japan Opportunity Fund Dec-11 Dec-21 II (Dollar)

713 713 - (C) (C) N/A



Japan Opportunity Fund Dec-11 Dec-21 II (Yen)

696 845 - (C) (C) N/A Net Lease Fund I Jan-10 Feb-20 33 80 62 22.8 % (C) (C)



Global Opportunities Sep-10 Sep-20 Fund

255



310 350 (C) (C) (C) Life Settlements Fund Dec-10 Dec-22

261 210 172 (C) (C) (C) Life Settlements Fund Dec-10 Dec-22 MA 23 19 15 (C) (C) (C) Real Estate May-11 Sep-24 Opportunities Fund 187 47 - (C) (C) N/A Real Estate Oct-11 Oct-23

Opportunities REOC Fund 29 13 8 (C) (C) N/A Subtotal - all funds 34,712 31,598 29,518 Managed accounts 1,652 1,147 671 Total - Alternative Investments 36,364 32,745 30,189 Logan Circle 25,386 20,685 13,524 Total (I) $ 61,750$ 53,430$ 43,713 (A) For funds with a contractual maturity date, maturity date represents the



final contractual maturity date including the assumed exercise of extension

options, which in some cases require the approval of the applicable fund

advisory board. Fund II has passed its contractual maturity date and is in

the process of an orderly wind down. Our permanent capital vehicles have

permanent equity as they have an indefinite life and no redemption terms.

Investor capital in the liquid hedge funds and the Fortress Partners Funds

is generally redeemable at the option of the fund investors; however, a

substantial portion of the Drawbridge Global Macro Funds' and Fortress

Partner Funds' investor capital is not redeemable by its investors and such

capital will only be distributed as underlying assets are realized, in

accordance with their governing documents. The Drawbridge Special

Opportunities Funds and Worden Funds may pay redemptions over time, as the

underlying investments are realized, in accordance with their governing

documents ("PE style redemption"). The Value Recovery Funds generally do not

allow for redemptions, but are in the process of realizing their remaining

investments in an orderly liquidation. Management notes that funds which had

a term of three years or longer at inception, funds which have permanent

equity, funds which have a PE style redemption and funds which do not allow

for redemptions aggregated approximately 79% of our alternative investment

AUM as of December 31, 2013.

(B) Represents the following:

For private equity funds and credit PE funds, returns represent net annualized 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 the 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 permanent capital vehicles, returns represent the current dividend yield which is calculated by annualizing the most recently declared base dividend and dividing the result by the closing stock price for the period. Excludes the impact of special dividends declared in connection with REIT compliance, which may increase returns. For liquid and credit hedge 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. (C) These funds had no successor fund formed and either (a) were in their



investment periods and had capital, other than recallable capital, remaining

to invest, or (b) had less than one year elapsed from their inception, through the end of these periods. (D) For liquid hedge funds and credit hedge funds, reflects a composite of monthly returns presented on an annualized net return basis.



(E) Fund V includes Fund V (GLPI Sisterco) and Fund V Coinvestment includes Fund

V Coinvestment (GLPI Sisterco). 57



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(F) The returns for the Drawbridge Special Opportunities Funds reflect the

performance of each fund excluding the performance of the redeeming capital

accounts (i.e. investors who requested redemptions in prior periods and who

are being paid out as investments are realized).

(G) 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.

(H) Accounts which fall within the description of Note (C) above for certain of

the periods presented are excluded from the computations of returns for those periods.



(I) In addition to the funds listed, Fortress manages NIH, FPRF and Mortgage

Opportunities Funds I and II. Such funds are excluded from the table because

they did not include any fee paying assets under management at the end of

the periods presented. Fund I, Fund II, GAGACQ Coinvestment Fund and FICO

(Intrawest), had zero AUM as of December 31, 2013, 2012 and 2011, but for

purposes of continuity of presentation, the returns of these funds have been

left in the table. Results of Operations The following is a discussion of our results of operations as reported under GAAP. For a detailed discussion of distributable earnings, revenues and expenses from each of our segments, see "- Segment Analysis" below. Year Ended December 31, Variance 2013 2012 2011 2013/2012 2012/2011 Revenues Management fees: affiliates $ 520,283$ 456,090$ 464,305$ 64,193$ (8,215 ) Management fees: non-affiliates 62,795 45,617 58,096 17,178 (12,479 ) Incentive income: affiliates 419,828 246,438 155,303 173,390 91,135 Incentive income: non-affiliates 44,383 26,162 1,917 18,221 24,245 Expense reimbursements: affiliates 206,452 186,592 169,282 19,860 17,310 Expense reimbursements: non-affiliates 7,209 4,580 4,057 2,629 523 Other revenues 4,033 4,390 5,668 (357 ) (1,278 ) 1,264,983 969,869 858,628 295,114 111,241 Expenses Interest expense 5,382 15,781 18,526 (10,399 ) (2,745 ) Compensation and benefits 741,761 750,359 706,060 (8,598 ) 44,299 Principals agreement compensation (expired in 2011) - - 1,051,197 - (1,051,197 ) General, administrative and other expense (including depreciation, amortization and impairment) 150,460 142,080 179,125



8,380 (37,045 )

897,603 908,220 1,954,908



(10,617 ) (1,046,688 )

Other Income (Loss) Gains (losses) 53,933 48,921 (30,054 ) 5,012 78,975 Tax receivable agreement liability adjustment (8,787 ) (8,870 ) 3,098 83 (11,968 ) Earnings (losses) from equity method investees 136,866 156,530 41,935 (19,664 ) 114,595 182,012 196,581 14,979 (14,569 ) 181,602 Income (Loss) Before Income Taxes 549,392 258,230 (1,081,301 ) 291,162 1,339,531 Income tax benefit (expense) (65,801 ) (39,408 ) (36,035 ) (26,393 ) (3,373 ) Net Income (Loss) $ 483,591$ 218,822$ (1,117,336 )$ 264,769$ 1,336,158 Principals' and Others' Interests in Income (Loss) of Consolidated Subsidiaries $ 283,144$ 140,538$ (685,821 )$ 142,606$ 826,359 Net Income (Loss) Attributable to Class A Shareholders $ 200,447$ 78,284$ (431,515 )$ 122,163$ 509,799 58



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Factors Affecting Our Business

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

•changes in our AUM; •level of performance of our funds; and •changes in the size of our fund management and investment platform and our related compensation structure.



Each of these factors is described below.

Average Management Fee Paying AUM

Average management 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 credit PE funds, which in connection with private equity funds raised after March 2006 includes the mark-to-market value on public securities held within the fund, (ii) contributed capital for our permanent capital vehicles, or (iii) the NAV for hedge funds and the NAV or fair value for managed accounts (including Logan Circle). Average fee paying AUM, based on a simple quarterly average, was as follows (in millions): Private Equity Credit Permanent Liquid Hedge Hedge Year Ended Funds Capital Vehicles Funds Funds PE Funds Logan Circle Total December 31, 2013 $ 11,295$ 3,308$ 6,266$ 5,714$ 7,191$ 22,597$ 56,371 December 31, 2012 10,295 3,409 4,838 5,831 6,388 17,806 48,567 December 31, 2011 10,135 3,192 6,132 6,376 5,228 12,712 43,775 We note that, in certain cases, there are timing differences between an event's impact on average AUM and its impact on management fees earned. For instance, AUM is adjusted upon the occurrence of a private equity fund's reset date, but management fees are not impacted until the next contractual management fee calculation date (generally semi-annual).



Management Fees

Changes in 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 an increase in AUM may not be recognized until the following period.

In July 2012, Fortress formed a consolidated senior living property management subsidiary and has agreements to manage certain senior living properties, most of which are owned by Newcastle. For these services, Fortress receives management fees based on a percentage of revenues from the properties.



Incentive Income

Incentive income is calculated as a percentage of returns (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 continues 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. In determining our segment measure of operations, distributable earnings, we generally recognize private equity style incentive income when gains are realized and hedge fund incentive income based on current returns, and we recognize our employees' share of this income as compensation expense at the same time. In contrast, GAAP requires that we likewise recognize the compensation when incurred, but we must defer the recognition of the revenue until all contingencies, primarily minimum returns over the lives of the private equity style funds and annual performance requirements of the hedge funds, are resolved - regardless of the probability of such returns being met. As a result, when we have significant private equity style realizations or positive returns in interim periods in our hedge funds, which we regard as positive events, the related incentive income impact improves our segment distributable earnings while reducing our GAAP results for the same period. 59



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Fund Management and Investment Platform

In order to accommodate the demands of our funds' 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 increasing number of employees, and related augmentation of systems and infrastructure. Our headcount changed from 979 asset management employees as of December 31, 2011, to 975 asset management employees as of December 31, 2012, and then changed to 1,074 asset management employees as of December 31, 2013. Additionally, we had 1,250 employees as of December 31, 2013 at the senior living properties that we manage (whose compensation expense is reimbursed to us by the owners of the facilities) compared to 1,021 such employees as of December 31, 2012.



Revenues

Year Ended December 31, 2013 compared to the Year Ended December 31, 2012

Total revenues were $1,265.0 million for the year ended December 31, 2013, a net increase of $295.1 million, compared to $969.9 million for the year ended December 31, 2012. The increase in revenues was attributable to (i) increases of $64.2 million and $17.2 million in management fees from affiliates and non-affiliates, respectively, (ii) increases of $173.4 million and $18.2 million in incentive income from affiliates and non-affiliates, respectively, and (iii) increases of $19.9 million and $2.6 million in expense reimbursements from affiliates and non-affiliates, respectively. The increase in management fees from affiliates of $64.2 million was primarily due to increases in average management fee paying AUM, based on a simple quarterly average, in our private equity funds and liquid hedge funds, of $1.0 billion and $0.8 billion, respectively, and an increase of $21.0 million in management fees resulting from Newcastle and Eurocastle options granted to Fortress during the year ended December 31, 2013 as compared to the prior period. The increase in management fees from non-affiliates of $17.2 million was primarily related to an increase in average management fee paying AUM, based on a simple quarterly average, of $0.6 billion and $3.8 billion in our liquid hedge fund managed accounts and Logan Circle, respectively. The increase in incentive income from affiliates of $173.4 million was primarily attributable to (i) an increase of $62.1 million in incentive income primarily earned from the Drawbridge Special Opportunities Funds as a result of an increase in incentive earned on RCA distributions, which represent accounts where investors have provided withdrawal notices and receive payout as underlying fund investments are realized and due to an increase in the average capital eligible for incentive income primarily attributable to higher returns during the year ended December 31, 2013 in the non-RCA accounts, which crystallizes annually, (ii) an increase of $22.9 million of incentive income recognized from Fund II primarily as a result of a realization event and the fund reaching its maturity date during the year ended December 31, 2013, which resulted in the recognition of income as certain contingencies for repayment were resolved, (iii) an increase of $15.7 million in crystallized incentive income recognized from our permanent capital vehicles, (iv) a net increase of $64.4 million in incentive income recognized from our liquid hedge funds primarily as a result of a transfer of interest between two of our funds during August 2013, redemptions and an increase in the average capital eligible for incentive income primarily attributable to higher returns during the year ended December 31, 2013, (v) an increase of $2.2 million of incentive income recognized primarily from the liquidation of Fund I in May 2013, (vi) an increase of $1.7 million of incentive income recognized from the Worden Funds and (viii) a net increase of $4.4 million in incentive income from our credit PE funds primarily due to an increase in deemed tax distributions, which are no longer subject to clawback, for the year ended December 31, 2013, as compared to the prior period. The $18.2 million increase in incentive income from non-affiliates was primarily related to an increase of $18.7 million in crystallized incentive income from our liquid hedge funds managed accounts, slightly offset by a decrease of $0.3 million in incentive income from our credit PE managed accounts. The increase in expense reimbursements from affiliates of $19.9 million was primarily related to an increase in operating expenses eligible for reimbursement from our funds, the most significant of which related to the full year effect of the formation of the senior living property management business in July 2012, for the year ended December 31, 2013, as compared to the prior period.



Year Ended December 31, 2012 compared to the Year Ended December 31, 2011

Total revenues were $969.9 million for the year ended December 31, 2012, a net increase of $111.2 million, compared to $858.6 million for the year ended December 31, 2011. The increase in revenues was attributable to increases of $91.1 million and $24.2 60



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million in incentive income from affiliates and non-affiliates, respectively, and an increase of $17.3 million in expense reimbursements from affiliates. These increases were partially offset by decreases of $8.2 million and $12.5 million in management fees from affiliates and non-affiliates, respectively, and a decrease of $1.3 million in other revenues. The decrease in management fees from affiliates of $8.2 million was primarily due to (i) a decrease in management fees from our private equity funds as a result of a decrease in AUM of approximately $2.0 billion related to the expiration of the capital commitment periods of Fund V, Fund V Coinvestment and FECI in 2011, and (ii) decreases of $1.3 billion and $0.5 billion in average fee paying AUM, based on a simple quarterly average, in our liquid and credit hedge funds, respectively. These decreases were offset by an increase of $8.9 million in management fees due to Newcastle options granted to Fortress during the year ended December 31, 2012 as compared to the prior comparative period and an increase of $1.2 billion in average fee paying AUM in our credit PE funds. The decrease in management fees from non-affiliates of $12.5 million was primarily related to a decrease of $14.7 million due to an advisory agreement that concluded in the third quarter of 2011 and a decrease of $4.6 million primarily due to the termination of a managed account in the fourth quarter of 2011. These decreases were partially offset by an increase of $6.7 million in management fees from non-affiliates from Logan Circle as a result of an increase of $5.1 billion in average fee paying AUM. The increase in incentive income from affiliates of $91.1 million was primarily attributable to (i) a net increase of $40.3 million in crystallized incentive income recognized from certain of our liquid hedge funds, primarily due to higher returns, (ii) a $53.5 million increase in incentive income earned from our credit hedge funds primarily due to higher returns from non-redeeming capital accounts (or "non-RCA"), which represents accounts where investors have not provided withdrawal notices, and crystallized incentive income from our Worden Funds, and (iii) an increase of $2.6 million of incentive income from our credit PE funds, which was realized as a result of deemed tax distributions and the dissolution of a fund and, therefore, is no longer subject to clawback. These increases were partially offset by $5.1 million in incentive income recognized from Fund II during the year ended December 31, 2011 which was related to distributions of capital to investors. These distributions resulted in the recognition of income as certain contingencies for repayment were resolved.



The $24.2 million increase in incentive income from non-affiliates was primarily related to crystallized incentive income from our liquid managed accounts.

The increase in expense reimbursements from affiliates of $17.3 million is primarily related to an increase in operating expenses eligible for reimbursement from our funds, including expenses related to our senior living property manager, for the year ended December 31, 2012 as compared to the prior comparative period. Expenses



Year Ended December 31, 2013 compared to the Year Ended December 31, 2012

Expenses were $897.6 million for the year ended December 31, 2013, a net decrease of $10.6 million, compared to $908.2 million for the year ended December 31, 2012. The decrease was attributable to a decrease of $8.6 million in compensation and benefits, and a decrease of $10.4 million in interest expense. These decreases were partially offset by a net increase of $8.4 million in general, administrative and other expenses. Total compensation and benefits decreased due to a $174.0 million decrease in equity-based compensation primarily due to the final vesting of RSUs issued in connection with our IPO and RPUs in January 2013. This decrease was substantially offset by (i) a $108.8 million increase in profit-sharing expenses primarily related to our liquid hedge funds, credit PE funds, credit hedge funds, and Principal Performance Payments, (ii) a $34.2 million increase in other payroll, taxes, and benefits (including wages), and (iii) a $22.4 million increase in discretionary bonuses. Changes in profit sharing expense are a result of changes in the performance of relevant funds and the amount of profit sharing interests held by employees in the respective periods. The $34.2 million increase in other payroll, taxes and benefits was the result of an increase in headcount and the full year effect of the formation of the senior living property management business in July 2012. The increase of $22.4 million in discretionary bonuses is primarily related to increased headcount and improved performance of the Company.



The decrease in interest expense of $10.4 million primarily relates to a decrease in the average outstanding debt balance and average interest rate for the year ended December 31, 2013, as compared to the prior period.

The increase in general, administrative and other expenses was primarily due to (i) an increase of $3.4 million in professional fees (ii) an increase of $3.2 million in other general and other expenses and (iii) an increase of $1.8 million in recruitment fees. 61



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Year Ended December 31, 2012 compared to the Year Ended December 31, 2011

Expenses were $908.2 million for the year ended December 31, 2012, a net decrease of $1,046.7 million, compared to $1,954.9 million for the year ended December 31, 2011. The decrease was attributable to decreases of (i) $2.7 million in interest expense, (ii) $1,051.2 million in principals agreement compensation, and (iii) $37.0 million in general, administrative and other expenses. These decreases were partially offset by a net increase of $44.3 million in compensation and benefits.

Principals agreement compensation decreased as a result of the expiration of the agreement in December 2011.

The decrease in general, administrative and other expenses was primarily due to (i) the impairment of goodwill and other intangible assets related to Logan Circle ($20.1 million) during the year ended December 31, 2011, (ii) a decrease in allowances for potentially uncollectible expense reimbursements in connection with a certain fund experiencing liquidity shortfalls ($4.5 million), (iii) a decrease in operating expenses related to an advisory agreement that concluded in the third quarter of 2011 ($7.6 million), and (iv) a decrease in professional fees ($6.0 million). Total compensation and benefits increased primarily due to a $12.7 million increase in other payroll, taxes and benefits, a $13.0 million increase in discretionary bonuses, and a $57.8 million increase in profit-sharing expenses related to our credit hedge funds, liquid hedge funds, Principal Performance Payments, and permanent capital vehicles, partially offset by a $19.6 million decrease in profit-sharing expenses related to our credit PE funds and private equity funds, and a $19.6 million decrease in equity-based compensation. The increases in other payroll, taxes and benefits were primarily due to an increase in wages, severance and related taxes for the year ended December 31, 2012 as compared to the prior comparative period as a result of increased headcount and the formation of a senior living property management subsidiary. The $19.6 million decrease in equity-based compensation was primarily due to (i) a $15.9 million decrease due to the STIP agreement entered into by one of the Principals with a senior employee which impacted 2011 but not 2012, (ii) a $6.2 million decrease related to the net impact of changes in actual forfeiture activity and changes in the forfeiture assumptions associated with the RSUs, and (iii) a $5.3 million decrease related to lower grant date valuations of RSUs granted during 2012 in comparison to RSUs granted during the comparable period in 2011. These decreases were partially offset by a $2.4 million increase related to the departure of our former CEO during the year ended December 31, 2012 and a $5.4 million increase in expense associated with the Principal Performance Payments. Changes in profit sharing expense are a result of changes in the performance of relevant funds and the amount of profit sharing interests held by employees in the respective periods.



Current and Future Compensation Expense

We seek to compensate our employees in a manner that aligns their compensation with the creation of long-term value for our shareholders. We aim to reward sustained financial and operational performance for all of our businesses and to motivate key employees to remain with us for long and productive careers. We must achieve our goals of alignment, motivation, and retention within the confines of current performance and liquidity. Aside from base salary, there are three significant components in our compensation structure. Discretionary bonuses are awarded annually based on performance and on our estimation of market compensation. We note that while the payment of discretionary bonuses is optional, it is important for us to maintain a certain level of discretionary bonuses, based on the level of market compensation, even in periods of weaker performance, in order to retain and motivate employees. Equity-based compensation awards, primarily RSUs, which are typically subject to service-based vesting conditions, are a key component of this compensation as they achieve all three goals. We set the level of our equity-based compensation each year based on performance (firm and individual) and our liquidity, as well as the number of shares available under our equity incentive plan and the dilutive impact they would have upon vesting. In future periods, we will further recognize non-cash compensation expense on our non-vested equity-based awards outstanding as of December 31, 2013 of $44.0 million with a weighted average recognition period of 2.1 years. Profit-sharing compensation is awarded, generally upon fund formation and, in certain cases, subject to vesting, based on certain employees' roles within the fund businesses, and serves to motivate these employees and align their interests with both our and our funds' investors. Private equity and credit PE profit-sharing expense is generally based on a percentage of realized fund incentive income. Liquid and credit hedge fund profit sharing expense may be based on a percentage of fund incentive income, a percentage of fund "net management fees" (management fees less related expenses), or a percentage of the incentive income generated by an individual trader (regardless of overall fund performance). The actual expense is based on actual performance 62



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within the funds and is detailed by segment in Note 8 to our consolidated financial statements contained herein. We note the following with respect to profit-sharing expense:

• Within our hedge funds, profit-sharing expenses can vary greatly by fund,

depending on the compensation packages negotiated with key traders and

investment officers within these funds. Therefore, the overall profit-sharing

percentage of a given hedge fund segment will vary from year to year

depending on which funds and which employees generate the most profits within

the segment. From time to time, senior management engages a compensation consultant to provide management with surveys to help us understand how the compensation we offer to our employees compares to the compensation our peers offer to their employees.



Principals Agreement Compensation

As a result of the Principals Agreement, which expired in December 2011, $4,763.0 million was charged to compensation expense on a straight-line basis over the approximately five-year vesting period. Fortress was not a party to this agreement. It was an agreement between our principals to further incentivize them to remain with Fortress. This GAAP expense had no economic effect on Fortress or its shareholders. As a result, management did not include this expense in any of its analyses of performance. When Fortress recorded this non-cash expense, it recorded a corresponding increase in capital. In August 2011, our principals agreed to extend their employment for a new five-year term effective January 1, 2012, on substantially similar terms and conditions as their prior employment agreements. In order to align the termination of the Principals Agreement with the effective date of their new employment agreements, our principals agreed to amend the expiration date of the Principals Agreement to December 31, 2011; as a result, all of the remaining expense related to this agreement, including $99.1 million that would otherwise have been recognized in 2012, has been recorded as principals agreement compensation during the year ended December 31, 2011. Other Income (Loss)



Year Ended December 31, 2013 compared to the Year Ended December 31, 2012

Other Income (Loss) was $182.0 million for the year ended December 31, 2013, a net decrease of $14.6 million, compared to $196.6 million for the year ended December 31, 2012. This decrease was primarily attributable to (i) a net decrease of $19.7 million in earnings from equity method investees primarily related to the performance of our private equity funds and liquid hedge funds, slightly offset by an increase in performance of our credit PE funds for the twelve months ended December 31, 2013 relative to the prior period, (ii) unrealized losses of $3.7 million associated with the fair value of our holdings of digital currency and (iii) a decrease of $1.1 million in the fair value on affiliate investments and options. This decrease was partially offset by an increase of $8.1 million in the fair value of the derivatives held, primarily Japanese Yen foreign exchange contracts, and a $3.0 million increase in the fair value of equity securities, for the year ended December 31, 2013 as compared to the prior period.



Year Ended December 31, 2012 compared to the Year Ended December 31, 2011

Other Income (Loss) was $196.6 million for the year ended December 31, 2012, a net increase of $181.6 million, compared to $15.0 million for the year ended December 31, 2011. This increase was primarily attributable to (i) significant increases in net unrealized gains primarily related to our direct investments in GAGFAH and Newcastle and (ii) better performance resulting in an increase in earnings from equity method investees with respect to our investments in our private equity funds, credit PE funds, liquid hedge funds and credit hedge funds for the year ended December 31, 2012 relative to the prior comparative period. These increases were partially offset by an increase in the expense associated with the tax receivable agreement liability.



Income Tax Benefit (Expense)

Fortress has recorded a significant deferred tax asset. 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 and the tax receivable agreement is discussed in our consolidated financial statements included herein. For the years ended December 31, 2013, 2012 and 2011 Fortress recognized income tax expense (benefit) of $65.8 million, $39.4 million and $36.0 million respectively. The primary reasons for changes in income tax expense (benefit) are (i) changes in annual taxable income and related foreign and state income taxes (and forecasts thereof which are used to calculate the tax provision during interim periods), (ii) changes in the mix of businesses producing income, which may be subject to tax at different rates, and related changes in our structure, and (iii) the tax impact of RSUs and RPUs that vested and were delivered at a value substantially less than their original value. 63



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Factors that impacted the period-over-period change in income tax expense (benefit) are detailed as follows:

Comparative Years

2013 vs. 2012 2012 vs. 2011 Change in pre-tax income applicable to Class A Shareholders (A) $ 52,021$ 40,642 Change in foreign and state income taxes 3,247 (6,900 ) Change in mix of business (B) (5,240 ) (17,151 ) Change in deferred tax asset-impact of equity compensation vesting (C) (3,659 )



2,410

Change in deferred tax asset valuation allowance and related adjustments

(21,186 ) (4,052 ) Write off of deferred tax asset related to options in affiliates (D) - (11,464 ) Other 1,210 (112 ) Total change $ 26,393$ 3,373



(A) Changes in pre-tax income applicable to Class A shareholders are caused by

changes in the pre-tax income of Fortress Operating Group and by changes in

the Class A shareholders' ownership interest in Fortress Operating Group.

(B) From 2011 to 2012, a lesser proportion of our total income was subject to

corporate tax. In 2012, we generated more unrealized gains and certain other

income, which income is passed directly to shareholders, increasing the

proportion of our total income which was not subject to corporate tax and

thereby reducing the proportion which was subject to corporate income tax.

There was a similar change from 2012 to 2013.

(C) This factor changes based on the amount of equity-based compensation

delivered in a given year.

(D) This portion of the deferred tax asset was fully reserved in the valuation

allowance during 2011.



Principals' and Others' Interests in Income (Loss) of Consolidated Subsidiaries

Year Ended December 31, 2013 compared to the Year Ended December 31, 2012

Principals' and Others' Interests in Income (Loss) of Consolidated Subsidiaries increased from $140.5 million to $283.1 million, an increase of $142.6 million, primarily attributable to (i) an increase of $155.9 million resulting from a $291.0 million increase in Fortress Operating Group consolidated net income during the year ended December 31, 2013 as compared to the year ended December 31, 2012, (ii) a decrease of $1.1 million resulting from Others' interests in the net income of consolidated subsidiaries of Fortress Operating Group offset by (iii) a decrease of $12.2 million resulting from the dilution of noncontrolling interests in Fortress Operating Group caused by the delivery of restricted stock and restricted partnership awards.



Year Ended December 31, 2012 compared to the Year Ended December 31, 2011

Principals' and Others' Interests in Income (Loss) of Consolidated Subsidiaries increased from ($685.8) million to $140.5 million, an increase of $826.3 million, primarily attributable to (i) an increase of $842.5 million resulting from a $1.4 billion increase in Fortress Operating Group consolidated net income during the year ended December 31, 2012 as compared to the year ended December 31, 2011, (ii) a decrease of $18.6 million resulting from the dilution of noncontrolling interests in Fortress Operating Group caused by the delivery of restricted stock and restricted partnership awards, and (iii) an increase of $2.4 million resulting from Others' interests in the net income of consolidated subsidiaries of Fortress Operating Group.



Segment Analysis

Fortress conducts its management and investment business through the following primary segments: (i) private equity funds, (ii) permanent capital vehicles, (iii) liquid hedge funds, (iv) credit hedge funds, (v) credit PE funds, (vi) Logan Circle and (vii) principal investments in these funds as well as cash that is available to be invested. These segments are differentiated based on their varying strategies and, secondarily, on fund investor terms. 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 one senior employee) and income tax expense. 64



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Distributable earnings is described in Note 11 to Part II, Item 8, "Financial Statements and Supplementary Data - Segment Reporting," which includes 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.



"Distributable earnings" for the existing Fortress businesses 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 credit 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, b. for other Fortress Funds, at interim periods, adding (a) incentive



income on an accrual basis as if the incentive income from these funds

were payable on a quarterly basis, minus (b) incentive income recorded

in accordance with GAAP,

Other Income (ii) with respect to income from certain principal investments and certain

other interests that cannot be readily transferred or redeemed:

a. for equity method investments in the private equity funds and credit 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, b. subtracting gains (or adding losses) on stock options held in our permanent capital vehicles, c. subtracting unrealized gains (or adding unrealized losses) on



derivatives, direct investments in publicly traded portfolio companies

and in our permanent capital vehicles, (iii) adding (a) proceeds from the sale of shares received pursuant to the



exercise of stock options in certain of our permanent capital vehicles, 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 permanent capital

vehicle options assigned to employees, RSUs and RPUs (including the portion of related dividend and distribution equivalents recorded as compensation expense), and restricted shares),



(vi) adding or subtracting, as necessary, any changes in the fair value of

contingent consideration payable with respect to the acquisition of a

business, to the extent management intends to pay it in equity and it is

recorded on the statement of operations under GAAP,

(vii) adding back the amortization of intangible assets and any impairment of

goodwill or intangible assets recorded under GAAP,

(viii) adding back compensation expense recorded in connection with the

forfeiture arrangements entered into among the principals, which expired

in December 2011 (Note 8),

(ix) adding the income (or subtracting the loss) allocable to the interests in

consolidated subsidiaries attributable to Fortress Operating Group units,

and (x) adding back income tax benefit or expense and any income or expense recorded in connection with the tax receivable agreement (Note 6). 65



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Table of Contents Private Equity Funds The following table presents our results of operations for our private equity funds segment: Year Ended December 31, Variance 2013 2012 2011 2013/2012 2012/2011 Segment revenues Management Fees $ 136,406$ 119,492$ 131,898$ 16,914$ (12,406 ) Incentive Income 13,738 10,993 (1,748 ) 2,745 12,741 Segment revenues - total $ 150,144$ 130,485$ 130,150$ 19,659$ 335 Pre-tax distributable earnings $ 94,461$ 85,389$ 92,813 $



9,072 $ (7,424 )

Year Ended December 31, 2013 compared to Year Ended December 31, 2012

Pre-tax distributable earnings increased by $9.1 million primarily due to: Revenues

Management fees were $136.4 million for the year ended December 31, 2013, a net increase of $16.9 million, compared to $119.5 million for the year ended December 31, 2012. Management fees increased by $16.9 million due to (i) a net increase of $9.8 million in management fees primarily from Fund IV, Fund V, and FRID primarily as a result of an increase in the market values of certain portfolio companies, some of which were below their invested capital in prior periods, which impacted the computation of fees for the year ended December 31, 2013, (ii) an increase of $3.5 million in management fees from the MSR Opportunities Funds which called initial capital in January 2013 (MSR Opportunities Fund I) and September 2013 (MSR Opportunities Fund II), (iii) an increase of $1.7 million in management fees from WWTAI due to an increase in investor commitments and net capital inflows, and (iv) an increase of $1.9 million in management fees from other funds. Incentive income was $13.7 million for the year ended December 31, 2013, a net increase of $2.7 million, compared to $11.0 million of incentive income recognized for the year ended December 31, 2012. Incentive income increased by $2.7 million due to (i) a $2.2 million increase in the amount of incentive income earned from realization events that occurred in Fund I for the year ended December 31, 2013 as compared to the prior period, and (ii) a $0.5 million increase in the amount of incentive income earned from realization events that occurred in WWTAI for the year ended December 31, 2013 as compared to the prior period. Expenses Expenses were $55.7 million for the year ended December 31, 2013, a net increase of $10.6 million, compared to $45.1 million for the year ended December 31, 2012. The net increase of $10.6 million in expenses was primarily attributable to a net increase of $9.7 million in compensation and benefits expense due to increased headcount, as well as a net increase of $0.8 million in profit sharing compensation expense (primarily related to the Fund I realization events mentioned above). Year Ended December 31, 2012 compared to Year Ended December 31, 2011



Pre-tax distributable earnings decreased by $7.4 million primarily due to:

Revenues

Management fees were $119.5 million for the year ended December 31, 2012, a net decrease of $12.4 million, compared to $131.9 million for the year ended December 31, 2011. Management fees decreased $12.4 million primarily as a result of (i) a decrease of $11.3 million due to the reset of Fund V, Fund V Coinvestment and FECI upon expiration of their respective capital commitment periods in 2011, (ii) a decrease of $1.2 million in management fees in Fund II and Mortgage Opportunities Fund III, which were no longer subject to management fees effective in the third quarter of 2011, and (iii) a decrease of $1.8 million in management fees primarily as a result of a net decrease in market values of certain portfolio companies below their invested capital in prior periods. These decreases were partially offset by an increase of $1.9 million in management fees in Fund IV, FHIF, WWTAI and managed accounts due to net capital inflows and a net increase in market values of certain portfolio companies which were below their invested capital in prior periods, which impacted the computation of management fees for the year ended December 31, 2012. Incentive income was $11.0 million for the year ended December 31, 2012, a net increase of $12.7 million, compared to ($1.7) million recognized for the year ended December 31, 2011. Incentive income increased $12.7 million primarily as a result of the reversal of $8.4 million of previously recognized reserves for the potential clawback of incentive income from Fund II during the 66



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year ended December 31, 2012, as compared to the recognition of a $4.5 million incremental reserve for the potential clawback of incentive income from Fund II during the year ended December 31, 2011.



Expenses

Expenses were $45.1 million for the year ended December 31, 2012, a net increase of $7.8 million, compared to $37.3 million for the year ended December 31, 2011. The net increase of $7.8 million in expenses was primarily attributable to a net increase of $10.7 million in compensation and benefits, which includes an increase of $4.6 million in profit sharing compensation expense (primarily related to the clawback reserve reversal mentioned above). This increase in compensation expenses was partially offset by a net decrease of $2.9 million in general and administrative and allocable expenses primarily related to an allowance for uncollectible amounts due from one of our private equity funds recognized in 2011. Publicly Traded Permanent Capital Vehicles The following table presents our results of operations for our permanent capital vehicles segment: Year Ended December 31, Variance 2013 2012 2011 2013/2012 2012/2011 Segment revenues Management Fees $ 58,970$ 56,255$ 53,357$ 2,715$ 2,898 Incentive Income 17,574 242 - 17,332 242



Segment revenues - total $ 76,544$ 56,497$ 53,357$ 20,047$ 3,140 Pre-tax distributable earnings $ 30,920$ 28,809$ 24,798$ 2,111$ 4,011

Year Ended December 31, 2013 compared to Year Ended December 31, 2012

Pre-tax distributable earnings increased by $2.1 million primarily due to: Revenues

Management fees were $59.0 million for the year ended December 31, 2013, a net increase of $2.7 million, compared to $56.3 million for the year ended December 31, 2012. Management fees increased by $2.7 million primarily as a result of (i) a $15.6 million increase in management fees primarily due to an increase in Newcastle AUM resulting from their equity raises in the second and third quarters of 2012 and the first quarter of 2013, prior to the distribution of New Residential common shares, and the second and fourth quarters of 2013, and (ii) a $2.7 million increase due to fees generated by our senior living property management business which launched in July 2012. These increases were partially offset by a $15.6 million decrease in Eurocastle management fees due to a decrease in AUM as a result of their restructuring process and amended management agreement in April 2013. Incentive income was $17.6 million for the year ended December 31, 2013, a net increase of $17.3 million, compared to $0.2 million of incentive income recognized for the year ended December 31, 2012. Incentive income increased by $17.3 million primarily as a result of (i) the recognition of incentive income of $15.7 million for the year ended December 31, 2013, and (ii) an increase of $1.7 million in the exercise of our permanent capital vehicle options allocated to employees which resulted in an increase in incentive income for the year ended December 31, 2013 as compared to the prior period. Expenses Expenses were $45.6 million for the year ended December 31, 2013, a net increase of $17.9 million, compared to $27.7 million for the year ended December 31, 2012. The increase of $17.9 million in expenses was primarily attributable to (i) a $10.0 million increase in net compensation and benefits expense primarily due to higher headcount in Newcastle, New Residential and the senior living property management business, partially offset by decreased headcount in Eurocastle, (ii) an increase of $4.2 million in profit sharing compensation expense related to the exercise of certain permanent capital vehicle options allocated to employees and the recognition of incentive income mentioned above, (iii) a net increase of $2.5 million in general and administrative and allocable expenses, and (iv) an increase of $1.2 million in accruals for Principal Performance Payments as compared to the prior period. 67



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Year Ended December 31, 2012 compared to Year Ended December 31, 2011

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

Revenues

Management fees were $56.3 million for the year ended December 31, 2012, an increase of $2.9 million, compared to $53.4 million for the year ended December 31, 2011. Management fees increased $2.9 million primarily as a result of (i) a $5.3 million increase due to an increase in Newcastle AUM resulting from their equity raises in 2011 and 2012, and (ii) $1.4 million of property management fees for the year ended December 31, 2012. These increases were partially offset by a $3.8 million decrease in management fees from certain investments within our permanent capital vehicles, which were concluded in the first quarter of 2012, as well as changes in foreign currency exchange rates.



Incentive income of $0.2 million for the year ended December 31, 2012 resulted from the exercise of Newcastle options.

Expenses

Expenses were $27.7 million for the year ended December 31, 2012, a net decrease of $0.9 million, compared to $28.6 million for the year ended December 31, 2011. The net decrease of $0.9 million in expense was primarily attributable to a $1.9 million net decrease in general and administrative expenses and allocable expenses primarily as a result of a decrease in overall corporate expenses and a decrease in average headcount within our permanent capital vehicles. This decrease was partially offset by a $1.1 million increase in accruals for Principals Performance Payments.



Liquid Hedge Funds

The following table presents our results of operations for our liquid hedge funds segment: Year Ended December 31, Variance 2013 2012 2011 2013/2012 2012/2011 Segment revenues Management Fees $ 110,622$ 77,531$ 108,873$ 33,091$ (31,342 ) Incentive Income 150,700 67,645 3,787 83,055 63,858 Segment revenues - total $ 261,322$ 145,176$ 112,660$ 116,146$ 32,516 Pre-tax distributable earnings $ 112,934$ 45,284$ 13,750$ 67,650$ 31,534



Year Ended December 31, 2013 compared to Year Ended December 31, 2012

Pre-tax distributable earnings increased by $67.7 million primarily due to:

Revenues

Management fees were $110.6 million for the year ended December 31, 2013, a net increase of $33.1 million, compared to $77.5 million for the year ended December 31, 2012. Management fees increased by $33.1 million primarily due to $21.3 million, $13.0 million, $4.0 million and $0.9 million net increases in management fees earned from the Fortress Asia Macro Funds (including related managed accounts), Fortress Macro Funds (including related managed accounts and Fortress Redwood Fund which launched in August 2013), Fortress Macro MA I Fund and Fortress Convex Asia Funds, respectively, primarily as a result of an increase in net capital inflows. These increases were partially offset by a $3.1 million decrease in management fees due to the closing of the Fortress Commodities Funds (including related managed accounts) in the second quarter of 2012, and $1.6 million and $1.4 million in net decreases in management fees from the Fortress Partners Funds and Drawbridge Global Macro Funds, respectively, primarily as a result of net capital outflows. Incentive income, which is determined on a fund-by-fund basis, was $150.7 million for the year ended December 31, 2013, a net increase of $83.1 million, compared to $67.6 million for the year ended December 31, 2012. Incentive income increased by $83.1 million primarily due to increases of $44.8 million, $30.7 million, $4.6 million, and $3.0 million in the incentive income generated by the Fortress Macro Funds (including related managed accounts and Fortress Redwood Fund), Fortress Asia Macro Funds (including related managed accounts), Fortress MA I Fund and Drawbridge Global Macro Funds, respectively, as a result of a higher proportion of capital being eligible for incentive income as substantially all capital met or exceeded its high water mark in 2013 and generated subsequent positive performance for the year ended December 31, 2013 as compared to the prior period. 68



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Table of Contents Expenses Expenses were $148.4 million for the year ended December 31, 2013, a net increase of $48.5 million, compared to $99.9 million for the year ended December 31, 2012. The increase of $48.5 million in expenses was primarily attributable to (i) an increase of $30.6 million in profit sharing compensation expense, (ii) an increase of $10.3 million in net compensation and benefits expense, and (iii) an increase of $7.5 million in accruals for Principal Performance Payments. Year Ended December 31, 2012 compared to Year Ended December 31, 2011



Pre-tax distributable earnings increased by $31.5 million primarily due to:

Revenues

Management fees were $77.5 million for the year ended December 31, 2012, a net decrease of $31.3 million, compared to $108.9 million for the year ended December 31, 2011. Management fees decreased $31.3 million primarily due to net decreases of $18.4 million, $13.9 million and $1.8 million in management fees from the Fortress Commodities Funds (including related managed accounts), Fortress Macro Funds (including related managed accounts), and Fortress Partners Funds, respectively, primarily as a result of net capital outflows and the closing of the Fortress Commodities Funds in May 2012. These decreases were partially offset by (i) a $2.8 million increase in management fees from the Fortress Asia Macro Funds (including related managed accounts), which launched in March 2011, and (ii) a $0.3 million increase in management fees from the Convex Asia Funds, which launched in May 2012. Incentive income, which is determined on a fund-by-fund basis, was $67.6 million for the year ended December 31, 2012, a net increase of $63.9 million, compared to $3.8 million for the year ended December 31, 2011. Incentive income increased $63.9 million primarily due to (i) a net increase of $52.0 million in the incentive income generated by the Fortress Macro Funds (including related managed accounts) as a result of a higher proportion of capital being eligible for incentive income as certain capital met or exceeded its high water mark in 2012 and generated subsequent positive performance, and (ii) an increase of $14.4 million in the incentive income generated by the Fortress Asia Macro Funds (including related managed accounts) as a result of higher returns and capital as compared to the prior comparative period. These increases in incentive income were partially offset by decreases of $2.2 million and $0.3 million in the incentive income generated by the Fortress Commodities Funds (including related managed accounts), and Fortress Partners Funds, respectively. These decreases were primarily a result of all capital eligible for incentive income remaining below its respective high water mark and the closing of the Fortress Commodities Funds. Expenses Expenses were $99.9 million for the year ended December 31, 2012, a net increase of $1.0 million, compared to $98.9 million for the year ended December 31, 2011. The increase of $1.0 million in expenses was primarily attributable to an increase of $5.0 million in accruals for Principal Performance Payments. This increase was partially offset by (i) a decrease of $3.9 million in net general and administrative and allocable expenses, and (ii) a decrease of $0.1 million in net compensation and benefits expense.



Credit Hedge Funds

The following table presents our results of operations for our credit hedge funds segment: Year Ended December 31, Variance 2013 2012 2011 2013/2012 2012/2011 Segment revenues Management Fees $ 101,890$ 101,194$ 121,835$ 696$ (20,641 ) Incentive Income 190,846 130,305 78,460 60,541 51,845 Segment revenues - total $ 292,736$ 231,499$ 200,295$ 61,237$ 31,204 Pre-tax distributable earnings $ 120,863$ 92,523$ 37,217$ 28,340$ 55,306 69



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Year Ended December 31, 2013 compared to Year Ended December 31, 2012

Pre-tax distributable earnings increased by $28.3 million primarily due to: Revenues

Management fees were $101.9 million for the year ended December 31, 2013, a net increase of $0.7 million, compared to $101.2 million for the year ended December 31, 2012. Management fees increased by$0.7 million primarily due to (i) a $1.2 million increase in management fees from the Drawbridge Special Opportunities Funds as a result of an increase in average fee paying capital and (ii) a $0.2 million increase in management fees from the Worden Funds as a result of an increase in average fee paying capital. These increases were partially offset by (i) a decrease of $0.5 million in management fees from the Value Recovery Funds and related assets primarily as a result of certain asset structures within the Value Recovery Funds terminating in the third quarter of 2012 and (ii) a decrease of $0.2 million in management fees from the Drawbridge Special Opportunities Managed Accounts. Incentive income, which is determined on a fund-by-fund basis, was $190.8 million for the year ended December 31, 2013, a net increase of $60.5 million, compared to $130.3 million for the year ended December 31, 2012. Incentive income increased by $60.5 million primarily due to an increase of $62.1 million in incentive income generated by the Drawbridge Special Opportunities Funds, due to higher returns in the onshore fund and increased crystallization due to RCA distributions in 2013, and an increase of $1.7 million in incentive income generated by the Worden Funds. These increases were partially offset by a $3.3 million decrease in incentive income from other investments. Expenses Expenses were $171.9 million for the year ended December 31, 2013, a net increase of $32.9 million, compared to $139.0 million for the year ended December 31, 2012. The increase of $32.9 million in expenses was primarily attributable to (i) an increase of $27.8 million in profit sharing compensation expense, (ii) an increase of $5.0 million in accruals for Principal Performance Payments, and (iii) an increase of $0.4 million in compensation and benefits expense. These increases in expenses were partially offset by a $0.3 million decrease in general and administrative expenses and allocable expenses. Year Ended December 31, 2012 compared to Year Ended December 31, 2011



Pre-tax distributable earnings increased by $55.3 million primarily due to:

Revenues

Management fees were $101.2 million for the year ended December 31, 2012, a net decrease of $20.6 million, compared to $121.8 million for the year ended December 31, 2011. Management fees decreased $20.6 million primarily due to (i) a $14.7 million decrease in management fees from an advisory agreement that concluded in the third quarter of 2011, (ii) a $3.1 million decrease in management fees from the Value Recovery Funds and related assets due to a decrease in investment distributions, and (iii) a $2.6 million net decrease in management fees primarily from the Drawbridge Special Opportunities Funds as a result of net investor distributions. Incentive income, which is determined on a fund-by-fund basis, was $130.3 million for the year ended December 31, 2012, a net increase of $51.8 million, compared to $78.5 million for the year ended December 31, 2011. Incentive income increased $51.8 million primarily due to net increases of $44.1 million and $7.6 million in incentive income generated by the Drawbridge Special Opportunities Funds and Worden Funds, respectively, primarily due to higher returns in 2012.



Expenses

Expenses were $139.0 million for the year ended December 31, 2012, a net decrease of $24.1 million, compared to $163.1 million for the year ended December 31, 2011. The decrease of $24.1 million in expenses was primarily attributable to (i) a net decrease of $65.1 million in allocable expenses primarily as a result of a change in expense allocation methodology, and (ii) a net decrease of $6.5 million in general and administrative expenses primarily related to the advisory agreement which concluded in the third quarter of 2011. These decreases in expenses were partially offset by (i) a net increase of $33.9 million in compensation and benefits, which includes a net increase of $27.8 million in profit sharing compensation expense, and (ii) $13.5 million of accruals for Principal Performance Payments. 70



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Table of Contents Credit PE Funds The following table presents our results of operations for our credit PE segment: Year Ended December 31, Variance 2013 2012 2011 2013/2012 2012/2011 Segment revenues Management Fees $ 95,925$ 98,393$ 73,273$ (2,468 )$ 25,120 Incentive Income 120,137 68,568 117,598 51,569 (49,030 ) Segment revenues - total $ 216,062$ 166,961$ 190,871$ 49,101$ (23,910 ) Pre-tax distributable earnings $ 56,112$ 34,015$ 101,169$ 22,097$ (67,154 )



Year Ended December 31, 2013 compared to Year Ended December 31, 2012

Pre-tax distributable earnings increased by $22.1 million primarily due to: Revenues

Management fees were $95.9 million for the year ended December 31, 2013, a net decrease of $2.5 million, compared to $98.4 million for the year ended December 31, 2012. Management fees decreased by $2.5 million primarily due to (i) a $8.2 million decrease in management fees in Fortress Credit Opportunities Fund I and Fortress Credit Opportunities Fund II primarily attributable to net capital distributions, (ii) a $4.6 million decrease in management fees in Japan Opportunity Fund due to the expiration of its capital commitment period in June 2012, and (iii) a $1.2 million decrease in management fees in the Long Dated Value Funds and Real Assets Funds, for the year ended December 31, 2013, as compared to the prior period. These decreases in management fees were partially offset by an $11.5 million increase in management fees primarily due to net capital calls or additional commitments made after the first quarter of 2012, most notably in Japan Opportunity Fund II, Credit Opportunities Fund III and FCO Managed Accounts. Incentive income was $120.1 million for the year ended December 31, 2013, a net increase of $51.5 million, compared to $68.6 million for the year ended December 31, 2012. Incentive income increased by $51.5 million primarily due to (i) a net increase of $48.7 million in incentive income generated primarily by the Credit Opportunities Funds and FCO Managed Accounts, (ii) a net increase of $5.8 million in incentive income generated by Japan Opportunities Fund II, (iii) a net increase of $3.3 million in incentive income generated by the Net Lease Fund, and (iv) a net increase of $3.5 million in incentive income generated from other funds, primarily by the Global Opportunities Fund and the Long Dated Value Funds. All of the increases noted were a result of an increase in distributions generated by realization events. These increases in incentive income were partially offset by a decrease of $9.8 million in incentive income earned from other funds, primarily Japan Opportunity Fund I due to a decrease in distributions as compared to the prior period.



Expenses

Expenses were $159.9 million for the year ended December 31, 2013, a net increase of $27.0 million, compared to $132.9 million for the year ended December 31, 2012. The increase of $27.0 million in expenses was primarily attributable to (i) an increase of $28.7 million in profit sharing compensation expense, (ii) a net increase of $0.6 million in compensation and benefits expense, and (iii) an increase of $0.6 million in accruals for Principal Performance Payments. These increases in expenses were partially offset by a $2.9 million decrease in general and administrative expenses and allocable expenses. Year Ended December 31, 2012 compared to Year Ended December 31, 2011



Pre-tax distributable earnings decreased by $67.2 million primarily due to:

Revenues

Management fees were $98.4 million for the year ended December 31, 2012, a net increase of $25.1 million, compared to $73.3 million for the year ended December 31, 2011. Management fees increased by $25.1 million primarily due to a $25.9 million net increase in management fees primarily attributable to net capital calls or additional commitments made after 2011, most notably in the Credit Opportunities Funds, FCO Managed Accounts and Japan Opportunity Fund II. These increases in management fees were partially offset by a $0.8 million net decrease in management fees attributable to net capital distributions by the Long Dated Value Funds and Real Assets Funds. 71



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Incentive income was $68.6 million for the year ended December 31, 2012, a net decrease of $49.0 million, compared to $117.6 million for the year ended December 31, 2011. Incentive income decreased $49.0 million primarily due to (i) a decrease of $74.3 million in incentive income generated primarily by Credit Opportunities Fund I and a certain FCO Managed Account, and (ii) a decrease of $1.8 million in incentive income generated by the Long Dated Value Funds and Real Assets Funds for the year ended December 31, 2012 as compared to the prior comparative period. These decreases were partially offset by increases of $12.7 million and $14.4 million in incentive income generated primarily by the Japan Opportunity Funds and Credit Opportunities Fund II, respectively, for the year ended December 31, 2012 as compared to the prior comparative period.



Expenses

Expenses were $132.9 million for the year ended December 31, 2012, a net increase of $43.2 million, compared to $89.7 million for the year ended December 31, 2011. The increase of $43.2 million in expenses was primarily attributable to (i) a net increase of $66.9 million in allocable expenses primarily related to a change in expense allocation methodology, and (ii) a net increase of $0.6 million in accruals for Principal Compensation Payments. These increases were partially offset by (i) a net decrease of $22.2 million in compensation and benefits expense, which includes a net decrease of $19.5 million in profit sharing compensation expense, and (ii) a net decrease of $2.0 million in general and administrative expenses.



Logan Circle

The following table presents our results of operations for our Logan Circle segment: Year Ended December 31, Variance 2013 2012 2011 2013/2012 2012/2011 Segment revenues Management Fees $ 35,833$ 26,796$ 20,050$ 9,037$ 6,746 Incentive Income - - - - - Segment revenues - total $ 35,833$ 26,796$ 20,050$ 9,037$ 6,746 Pre-tax distributable earnings (loss) $ (11,819 )$ (9,793 )$ (17,278 )$ (2,026 )$ 7,485



Year Ended December 31, 2013 compared to Year Ended December 31, 2012

Pre-tax distributable loss increased by $2.0 million primarily due to: Revenues

Management fees were $35.8 million for the year ended December 31, 2013, a net increase of $9.0 million, compared to $26.8 million for the year ended December 31, 2012. Management fees increased $9.0 million due to an increase in average AUM primarily as a result of net client inflows and positive performance. Expenses Expenses were $47.7 million for the year ended December 31, 2013, a net increase of $11.1 million, compared to $36.6 million for the year ended December 31, 2012. The increase of $11.1 million in expenses was primarily attributable to an increase of $6.6 million in net compensation and benefits expense, as well as an increase of $4.5 million in general and administrative expenses and corporate allocable expenses as a result of an increase in average headcount within Logan Circle (including the growth equities business which commenced in April 2013) during the year ended December 31, 2013 as compared to the prior period. Year Ended December 31, 2012 compared to Year Ended December 31, 2011



Pre-tax distributable loss decreased by $7.5 million primarily due to:

Revenues

Management fees were $26.8 million for the year ended December 31, 2012, a net increase of $6.7 million, compared to $20.1 million for the year ended December 31, 2011. Management fees increased by $6.7 million due to an increase in AUM as a result of net client inflows and positive performance. 72



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Table of Contents Expenses Expenses were $36.6 million for the year ended December 31, 2012, a net decrease of $0.7 million, compared to $37.3 million for the year ended December 31, 2011. The decrease of $0.7 million in expenses was primarily attributable to (i) a net decrease of $0.8 million in general and administrative expenses and (ii) a net decrease of $0.8 million in corporate allocable expenses as a result of a decrease in overall corporate expenses and a decrease in average headcount within Logan Circle. These decreases were partially offset by a net increase of $0.9 million in compensation and benefits expense.



Principal Investments

The following table presents our results of operations for our principal investments segment:

Year Ended December 31, Variance 2013 2012 2011 2013/2012 2012/2011 Pre-tax distributable earnings (loss) $ 30,915$ 708$ (10,681 )$ 30,207$ 11,389



Year Ended December 31, 2013 compared to Year Ended December 31, 2012

Pre-tax distributable income increased by $30.2 million primarily due to:

• an $18.9 million increase in net investment income from realizations and the

performance of our investments in our funds. The $18.9 million net increase

in investment income was due to (i) a net increase of $9.3 million in

distributions from realization events in our credit PE funds, private equity

funds, and special investments in our hedge funds, and (ii) a net increase

of $11.3 million in realized gains on investments due to a partial sale of

our GAGFAH stock held. These increases were partially offset by a net

decrease of $1.7 million attributable to our investments in our hedge funds

for the year ended December 31, 2013 as compared to the prior period;



• a $0.2 million increase in net investment income primarily as a result of a

decrease in recorded impairments with respect to our special investments in

our hedge funds and certain illiquid investments for the year ended

December 31, 2013 as compared to the prior period;

• a $10.3 million increase in net investment income due to a decrease in

interest expense primarily as a result of a decrease in the average debt

balance and average interest rate for the year ended December 31, 2013 as

compared to the prior comparable period;

• a $0.6 million increase in net investment income primarily due to the

receipt of dividend income earned from a private investment for the year

ended December 31, 2013 and an increase in dividend income from our direct

investments in Newcastle and New Residential common stock as well as investments held by the new Logan Circle growth equities business for the year ended December 31, 2013, as compared to the prior period; • a $3.2 million increase in net investment income due to net realized and



unrealized gains on our equity securities managed by Logan Circle's growth

equities business; and

• a $1.8 million decrease in net investment income due to our foreign currency

hedges and foreign currency translation adjustments.

Year Ended December 31, 2012 compared to Year Ended December 31, 2011

Pre-tax distributable loss decreased by $11.4 million primarily due to:

• a $0.6 million increase in net investment income from realizations and the

performance of our investments in our funds. The $0.6 million net increase

in investment income was due to a net increase of $5.7 million attributable

to our investments in our hedge funds, offset by a net decrease of $5.1

million from realization events in our credit PE funds, private equity funds, and special investments in our hedge funds for the year ended December 31, 2012 as compared to the prior comparative period.



• a $2.2 million increase in net investment income primarily as a result of a

decrease in recorded impairments with respect to our special investments in

our hedge funds for the year ended December 31, 2012 as compared to the prior comparative period;



• a $2.8 million increase in net investment income due to a net decrease in

interest expense primarily driven by a decrease in average debt balance

during the year ended December 31, 2012 as compared to the prior comparable

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• a $0.4 million decrease in net investment income due to a decrease in

dividend income earned primarily from our direct investment in GAGFAH common

stock, partially offset by an increase in dividend income earned from our direct investment in Newcastle common stock; and



• a $5.7 million increase in net investment income due to our foreign currency

hedges and foreign currency translation adjustments.

The following table reflects all of our investments which are not marked to market through distributable earnings for segment reporting purposes as of December 31, 2013: Fund Fortress Share of NAV (A) Fortress Segment Cost Basis (B) Excess (C) (Deficit) (C) Main Funds Fund II $ 1,215 $ - $ 1,215 N/A Fund III and Fund III Coinvestment 13,298 2,288 11,010 N/A Fund IV and Fund IV Coinvestment 136,481 58,451 78,030 N/A Fund V and Fund V Coinvestment (D) 178,970 52,021 126,949 N/A Long Dated Value Funds 20,527 12,557 7,970 N/A Real Assets Funds 19,305 5,726 13,579 N/A Credit Opportunities Funds 90,601 50,042 40,564 (5 ) Mortgage Opportunities Funds 4,785 - 4,785 N/A Asia Funds (Japan Opportunity Funds, Global Opportunities Fund) 15,755 10,814 4,941 N/A WWTAI 3,801 3,323 478 N/A Real Estate Opportunities Funds 5,227 4,838 389 N/A MSR Opportunities Funds 713 718 7 (12 ) Other Funds (combined) GAGFAH (XETRA: GFJ) 9,430 112 9,318 N/A Brookdale (NYSE: BKD) 35,240 8,136 27,104 N/A Private investment #1 278,704 207,357 71,347 N/A Private investment #2 108,601 44,770 63,831 N/A Permanent capital vehicles Eurocastle (EURONEXT: ECT) 2,506 78 2,428 N/A Newcastle (NYSE: NCT) 5,953 342 5,611 N/A New Residential (NYSE: NRZ) 6,928 413 6,515 N/A Other Hedge fund side pocket investments 98,273 56,050 44,046 (1,823 ) Direct investments - GAGFAH 61,620 20,546 41,074 N/A Direct investments- Other 69,868 25,428 46,474 (2,034 ) Total $ 1,167,801 $ 564,010 $ 607,665$ (3,874 )



(A) Represents the net asset value ("NAV") of Fortress's investment in each

fund. This is generally equal to its GAAP and segment carrying value.

(B) Represents Fortress's cost basis in each investment for segment reporting

purposes, which is net of any prior impairments taken for distributable

earnings.

(C) Represents the difference between NAV and segment cost basis. If negative (a

deficit), this represents potential future impairment. If positive (an

excess), this represents unrealized gains which, if realized, will increase

future distributable earnings.

(D) Includes Fund V (GLPI Sisterco) and Fund V Coinvestment (GLPI Sisterco).

Sensitivity



For an analysis of the sensitivity of segment revenues to changes in the estimated fair value of the Fortress Fund investments, see Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."

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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 (and clawback obligations, if any) 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 use cash to make distributions, particularly the distributions we are required to make to our principals in connection with tax obligations, which can be material. 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. The cash received from these investment returns is limited based on the liquidity terms of the respective funds; for instance, private equity funds generally only distribute cash upon investment realization events. Our primary uses of liquidity include operating expenses (which include compensation, rent and interest, among others), payments under our credit agreement and other debt, capital commitments to our funds and tax and tax-related payments and distributions. 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 or reimbursements, to which we are legally entitled, in order to optimize the operations of the underlying funds. As of December 31, 2013, the aggregate amount of management fees that various of our managed funds owed but had not yet paid was approximately $38.0 million, excluding $12.2 million which has been fully reserved by us, and the ultimate timing of their payment is currently uncertain. In addition, $16.7 million of private equity general and administrative expenses had been advanced on behalf of certain funds, excluding $6.3 million which has been fully reserved by Fortress. Subsequent to December 31, 2013, $6.4 million of past due management fees from one fund were collected. The amount of deferred management fees and reimbursements may increase in the future. Also, while we still believe that we will receive these amounts, if these deferrals continue or increase, 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 credit PE funds, which are subject to restrictions and to management's judgment regarding the optimal timing of the monetization of underlying investments, and to 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 $364.6 million at December 31, 2013, our available draws under our credit facility of $147.3 million as of December 31, 2013, and capital receipts from our balance sheet investments) to meet our operating expenses (including compensation and lease obligations), required debt payments, tax distribution requirements, incentive income clawback obligations (if any), and fund capital commitments, in each case to be funded during the next twelve months (see obligation tables below). From time to time, we evaluate alternative uses for excess cash resources, including debt prepayments, payment of recurring or special dividends, funding investments or share repurchases, which may be subject to approval by our board of directors and will depend on various factors. These uses of cash would not (barring changes in other relevant variables, such as EBITDA and Consolidated EBITDA, as defined in our credit agreement) cause us to violate any of our financial covenants under our credit agreement. 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 make payments required under our credit agreement or for other working capital needs. 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 (and clawback obligations, if any) 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. 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. 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 credit arrangements, industry and market trends and performance, the availability of 75



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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, raising equity capital could be dilutive to our current shareholders and issuing debt obligations could result in significant increases to operating costs. The level of our share price may also limit our ability to use our equity as currency in the potential acquisition of businesses, other companies or assets. 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 December 31, 2013, 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 credit 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. 76



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Our capital commitments to our funds with outstanding commitments as of December 31, 2013 consisted of the following.

Outstanding Commitment Private Equity Funds Fund III Coinvestment $ 2 Fund IV 4,053 Fund IV Coinvestment 3 Fund V (A) 6,143 Fund V Coinvestment (A) 2 FRID (GAGFAH) 812 FHIF (Holiday) 8,089 FECI (Florida East Coast / Flagler) 1,551 WWTAI 4,271 MSR Opportunities Fund I A 20 MSR Opportunities Fund I B 20 MSR Opportunities Fund II A 12,179 MSR Opportunities Fund II B 96 MSR Opportunities MA I 2,918 A&K Global Health 250 Credit PE Funds Credit Opportunities Fund 6,439 Credit Opportunities Fund II 6,357 Credit Opportunities Fund III 11,882 FCO Managed Accounts 43,091 Long Dated Value Fund I 460 Long Dated Value Fund II 1,640 Long Dated Value Fund III 160 LDVF Patent Fund 96 Real Assets Fund 21,088 Japan Opportunity Fund 2,876 Japan Opportunity Fund II 14,119 Net Lease Fund I 486 Global Opportunities Fund 1,843 Life Settlements Fund 65 Life Settlements Fund MA 43 Real Estate Opportunities Fund 1,296 Real Estate Opportunities REOC Fund 116 Karols Development Co 7,745 Other 245 Total $ 160,456



(A) Fund V includes Fund V (GLPI Sisterco) and Fund V Coinvestment includes Fund

V Coinvestment (GLPI Sisterco). 77



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Table of Contents Lease Obligations Minimum future rental payments (excluding expense escalations) under our operating leases are as follows: Year Ending December 31, 2014$ 24,681 2015 21,879 2016 20,349 2017 3,160 2018 791 Thereafter 38 Total $ 70,898 Debt Obligations



As of December 31, 2013, our debt obligations consisted of our credit agreement, as described below.

In February 2013, we entered into a new $150.0 million revolving credit facility (the "Credit Agreement") with a $15.0 million letter of credit subfacility. The Credit Agreement generally bears interest at an annual rate equal to LIBOR plus an applicable rate that fluctuates depending upon our credit rating, and a commitment fee on undrawn amounts that fluctuates depending upon our credit rating, as well as other customary fees. In connection with the closing of the Credit Agreement, approximately $2.4 million of fees and expenses were incurred. In January 2014, in connection with the launch of the affiliated manager platform with the Fortress Asia Macro Funds, we entered into an amendment, consent, and waiver to the Credit Agreement. Pursuant to the amendment, the required lenders under the Credit Agreement consented to the Fortress Asia Macro Funds transaction and conforming amendments, primarily certain definitions relating to the financial covenants in order to account for the portion of the business in which we will retain an economic interest. Increases in the interest rate on our debt obligations under the Credit Agreement, whether through amendments, refinancings, increases in LIBOR, or a downgrade of our credit rating, may result in a direct reduction in our earnings and cash flow from operations and, therefore, impact our liquidity.



The following table presents information regarding our debt obligations:

Contractual Final December 31, 2013 Face Amount and Carrying Value Interest Stated Amount December 31, Available for Debt Obligation December 31, 2013 2012 Rate Maturity Draws Revolving credit agreement (A) (B) $ - $ - LIBOR+2.50% (C) Feb 2016 $ 147,332 Promissory note (D) - 149,453 5.00% Repaid N/A Total $ - $ 149,453



(A) 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, other than fees from Fortress's senior

living property manager.

(B) The $150.0 million revolving debt facility includes a $15.0 million letter

of credit subfacility of which $2.7 million was utilized.

(C) Subject to unused commitment fees of 0.4% per annum.

(D) Issued to a former Principal in exchange for his equity interests in

Fortress.

In February 2014, we borrowed $75.0 million from our existing revolving credit facility.

During the year ended December 31, 2013, the average face amount of our outstanding debt was approximately $68.5 million and the highest face amount outstanding at one time during this period was $149.5 million. During this period, we did not incur any new short-term borrowings other than the promissory note described below. On December 21, 2012, one of our Principals retired and we agreed to purchase all of his 2,082,684 Class A shares and his 49,189,480 Fortress Operating Group units at $3.50 per share, or an aggregate of $179.5 million. In connection with this purchase, we paid $30.0 million of cash and issued a $149.5 million promissory note to the former Principal, which bore interest at 5%. In July 2013, Fortress repaid the promissory note in full, plus accrued interest. As such, this note is no longer outstanding. 78



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As a result of our initial public offering and related transactions, secondary public offerings, and other transactions, FIG Asset Co. LLC lent aggregate excess proceeds of approximately $588.1 million to FIG Corp., pursuant to a demand note. As of December 31, 2013, the outstanding balance was approximately $493.2 million, including unpaid interest. This intercompany debt is eliminated in consolidation. Covenants



Fortress Operating Group is required to prepay any amounts outstanding under the Credit Agreement upon the occurrence of certain events.

The events of default under the 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, and change of control. A default under the Credit Agreement would likely have a material, adverse impact on our liquidity. The Credit Agreement contains customary representations and warranties and affirmative and negative covenants that, among other things, restrict the ability of Fortress to create or incur certain liens, incur or guarantee additional indebtedness, merge or consolidate with other companies or transfer all or substantially all of their respective assets, transfer or sell assets, make restricted payments, engage in transactions with affiliates and insiders, and incur restrictions on the payment of dividends or other distributions and certain other contractual restrictions. These covenants are subject to a number of limitations and exceptions set forth in the Credit Agreement. In addition, Fortress Operating Group must not:



• Permit AUM (as defined as Management Fee Earning Assets in the Credit

Agreement) to be less than $25.0 billion as of the end of any calendar

month;

• Permit the Consolidated Leverage Ratio (a measure of Adjusted Net Funded

Indebtedness compared to Consolidated EBITDA, each such term as defined in

the Credit Agreement) to be greater than 2.00 to 1.0 as of the end of any

fiscal quarter for the four quarter period ending on such date; or



• Permit the Consolidated Interest Coverage Ratio (a measure of Consolidated

EBITDA compared to Consolidated Interest Charges, each such term as

defined in the Credit Agreement) to be less than 4.00 to 1.0 as of the end

of any fiscal quarter for the four quarter period ending on such date.



The following table sets forth the financial covenant requirements under the Credit Agreement as of December 31, 2013.

December 31, 2013 (dollars in millions) Requirement Actual Notes AUM, as defined ? $ 25,000$ 44,725 (A) Consolidated Leverage Ratio ? 2.00 - (B)



Consolidated Interest Coverage Ratio ? 4.00 75.71 (B)

(A) Impacted by capital raised in funds, redemptions from funds, and valuations

of fund investments. The AUM presented here is based on the definition of Management Fee Earning Assets contained in the Credit Agreement. (B) The Consolidated Leverage Ratio is equal to Adjusted Net Funded Indebtedness, as defined, divided by the trailing four quarters'



Consolidated EBITDA, as defined. The Consolidated Interest Coverage Ratio is

equal to the quotient of (A) the trailing four quarters' Consolidated

EBITDA, as defined, divided by (B) the trailing four quarters' interest

charges as defined in the Credit Agreement. Adjusted Net Funded Indebtedness

and Consolidated EBITDA are computed as shown below. Consolidated EBITDA, as

defined, is impacted by the same factors as distributable earnings, except

Consolidated EBITDA is not impacted by changes in clawback reserves or gains

and losses, including impairment, on investments. December 31, 2013 (in millions) Outstanding debt $ - Plus: Outstanding letters of credit 2.7 Less: Cash (up to $50 million) (2.7 ) Adjusted Net Funded Indebtedness $ - 79



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Table of Contents Year Ended December 31, 2013 (in millions) Fortress Investment Group LLC net income $



200.4

Depreciation and amortization, interest expense and income taxes

84.9

Extraordinary or non-recurring gains and losses 0.1 Incentive Income Adjustment 21.4 Other Income Adjustment



(234.1 ) Compensation expenses recorded in connection with the assignment of certain

permanent capital vehicle Options and Stock Based Compensation

45.9

Non-controlling interest and tax receivable agreement adjustments at FIG Corp.

285.5

(Income) loss of excluded entities (as defined in the Credit Agreement) 0.8 Consolidated EBITDA $ 404.9 Interest charges $ 5.3



The foregoing summary is not complete and is qualified in its entirety by reference to the Credit Agreement, which is filed as an exhibit hereto.

Dividends / Distributions

2013

On February 26, 2014 Fortress declared a fourth quarter cash dividend of $0.08 per Class A share. This dividend is payable on March 14, 2014 to holders of record of our Class A shares on March 11, 2014. The aggregate amount of this dividend payment is approximately $14.4 million. In connection with this dividend, dividend equivalent payments of approximately $0.9 million will be paid to holders of restricted Class A share units. On October 30, 2013, Fortress declared a third quarter cash dividend of $0.06 per Class A share. The dividend was payable on November 15, 2013 to holders of record of our Class A shares on November 12, 2013. The aggregate amount of this dividend payment was approximately $14.4 million. In connection with this dividend, dividend equivalent payments of approximately $0.4 million were paid to holders of restricted Class A share units. On July 31, 2013, we declared a second quarter cash dividend of $0.06 per Class A share. The dividend was payable on August 16, 2013 to shareholders of record of our Class A shares on August 13, 2013. The aggregate amount of this dividend payment was approximately $14.3 million. In connection with this dividend, dividend equivalent payments of approximately $0.4 million were paid to holders of restricted Class A share units. On May 1, 2013, we declared a first quarter cash dividend of $0.06 per Class A share. The dividend was payable on May 17, 2013 to holders of record of our Class A shares on May 14, 2013. The aggregate amount of this dividend payment was approximately $14.2 million. In connection with this dividend, dividend equivalent payments of approximately $0.3 million were paid to holders of restricted Class A share units.



During the year ended December 31, 2013, Fortress Operating Group declared distributions of $77.9 million to the principals and one senior employee.

2012

On February 26, 2013, we declared a fourth quarter cash dividend of $0.06 per Class A share. The dividend was payable on March 15, 2013 to holders of record of our Class A shares on March 12, 2013. The aggregate amount of this dividend payment was approximately $13.4 million. In connection with this dividend, dividend equivalent payments of approximately $0.5 million were paid to holders of restricted Class A share units. On November 1, 2012, we declared a third quarter cash dividend of $0.05 per Class A share. The dividend was payable on November 19, 2012 to holders of record of our Class A shares on November 14, 2012. The aggregate amount of this dividend payment was approximately $11.0 million. In connection with this dividend, dividend equivalent payments of approximately $0.3 million were paid to holders of restricted Class A share units. 80



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On August 1, 2012, we declared a second quarter cash dividend of $0.05 per Class A share. The dividend was payable on August 20, 2012 to holders of record of our Class A shares on August 15, 2012. The aggregate amount of this dividend payment was approximately $11.0 million. In connection with this dividend, dividend equivalent payments of approximately $0.3 million were paid to holders of restricted Class A share units. On May 2, 2012, we declared a first quarter cash dividend of $0.05 per Class A share. The dividend was payable on May 21, 2012 to holders of record of our Class A shares on May 16, 2012. The aggregate amount of this dividend payment was approximately $10.7 million. In connection with this dividend, dividend equivalent payments of approximately $0.4 million were paid to holders of restricted Class A share units.



During the year ended December 31, 2012, Fortress Operating Group declared distributions of $48.4 million to the principals and one senior employee.

2011

On February 28, 2012, we declared a fourth quarter 2011 cash dividend of $0.05 per Class A share. The dividend was payable on March 15, 2012 to holders of record of our Class A shares on March 12, 2012. The aggregate amount of this dividend payment was $9.6 million. In connection with this dividend, dividend equivalent payments of approximately $0.7 million were paid to holders of restricted Class A share units.



During the year ended December 31, 2011, Fortress Operating Group declared distributions of $48.0 million to the principals and one senior employee in connection with tax obligations.

Cash Flows

Our primary cash flow activities are: (i) generating cash flow from operations, (ii) making investments in Fortress Funds, (iii) meeting financing needs through, and making required payments under, our credit agreement and other debt, and (iv) distributing cash flow to equity holders, as applicable.

As described above in ''- Results of Operations,'' our AUM has changed throughout the periods reflected in our financial statements included in this Annual Report on Form 10-K. This change is a result of the Fortress Funds raising and investing capital, and generating gains from investments, offset by redemptions, capital distributions 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, if such payment would violate the terms of our credit agreement, 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 $432.9 million, $142.0 million and $168.2 million during the years ended December 31, 2013, 2012 and 2011, respectively.



Operating Activities - Comparative - 2013 vs. 2012

Cash received for affiliate and non-affiliate management fees decreased by $14.1 million from $541.3 million in 2012 to $527.2 million in 2013. Management fees are based on average fee paying AUM, which, based on a simple quarterly average, increased within our alternative and traditional investment businesses from 2012 to 2013 (private equity funds increased by $1.0 billion, permanent capital vehicles decreased by $(0.1) billion, liquid hedge funds increased by $1.4 billion, credit hedge funds decreased by $(0.1) billion, credit PE funds increased by $0.8 billion, and Logan Circle increased by $4.8 billion) as a result of capital raising, including new fund formation, and returns, offset by redemptions, capital distributions, and losses. The average management fee rate earned by Logan Circle is significantly lower than that earned by Fortress's alternative asset management businesses. In addition to changes in AUM, management fee receipts were impacted by approximately $38.0 million of management fees that were past due at December 31, 2013, as opposed to $31.5 million at December 31, 2012, as discussed in "- Liquidity and Capital Resources" above. 81



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Incentive income is calculated as a percentage of returns, or profits, earned by the Fortress Funds and non-affiliates or is based on profitable realization events within private equity funds and credit PE funds and based on cash realizations in Value Recovery Funds. A $78.0 million increase in cash incentive income received was mainly due to increased realizations within the credit PE funds in 2013.



Cash received as Distributions of Earnings from Equity Method Investments increased $24.8 million from 2012 as a result of realization events within certain funds.

Cash paid for compensation decreased by $210.4 million from the twelve months ended December 31, 2012 to December 31, 2013. Bonuses and profit sharing payments are generally paid in January or February of the year following the year in which they are earned, so the amounts paid in 2013 and 2012 primarily related to bonuses and profit sharing earned in 2012 and 2011, respectively. However, a portion (approximately $176.2 million) of the bonuses and profit sharing earned in 2012 were also paid in 2012.



Cash paid for interest decreased $10.1 million primarily due to a lower average debt balance of $68.5 million in 2013 compared to $167.8 million in 2012.

The receipt in 2012 of prior period receivables for expense reimbursements resulted in a $65.2 million decrease in 2013 for cash received.

In addition, Fortress made a payment of $21.8 million under the tax receivable agreement during the twelve months ended December 31, 2013, compared to $34.4 million during the twelve months ended December 31, 2012.



Operating Activities - Comparative - 2012 vs. 2011

Cash received for affiliate and non-affiliate management fees increased by $73.8 million from $467.5 million in 2011 to $541.3 million in 2012. The primary driver of the increase was the receipt in 2012 of prior period receivables, mainly resulting from realization events within certain Fortress funds that were previously experiencing liquidity issues. Management fees are based on average fee paying AUM, which, based on a simple quarterly average, increased within our alternative and traditional investment businesses from 2011 to 2012 (private equity funds increased by $0.2 billion, permanent capital vehicles increased by $0.2 billion, liquid hedge funds decreased by $(1.3) billion, credit hedge funds decreased by $(0.5) billion, credit PE funds increased by $1.2 billion, and Logan Circle increased by $5.1 billion) as a result of capital raising, including new fund formation, and returns, offset by redemptions, capital distributions, and losses. The average management fee rate earned by Logan Circle is significantly lower than that earned by Fortress's alternative asset management businesses. In addition to changes in AUM, management fee receipts were impacted by the collection of past due fees and the termination of an advisory agreement. Approximately $31.5 million of management fees were past due at December 31, 2012, as opposed to $95.2 million at December 31, 2011, as discussed in "- Liquidity and Capital Resources" above. In addition, management fees decreased $14.7 million related to an advisory agreement that concluded in 2011.



The receipt in 2012 of prior-period receivables described above also resulted in a $91.0 million increase in cash received for expense reimbursements.

Incentive income is calculated as a percentage of profits earned by the Fortress Funds and non-affiliates or is based on profitable realization events within private equity funds and credit PE funds and based on cash realizations in Value Recovery Funds. A $68.2 million decrease in cash incentive income received was mainly due to reduced realizations within the credit PE funds in 2012.



Cash received as Distributions of Earnings from Equity Method Investments increased $36.1 million from 2011 as a result of realization events within certain funds.

Cash paid for compensation increased by $157.2 million in the year ended December 31, 2012 compared to December 31, 2011. Bonuses and profit sharing payments are generally paid in January or February of the year following the year in which they are earned, so the amounts paid in 2012 and 2011 primarily related to bonuses and profit sharing earned in 2011 and 2010, respectively. However, a portion (approximately $176.2 million) of the bonuses and profit sharing earned in 2012 were also paid in 2012. Cash paid for interest decreased approximately $2.4 million primarily due to a lower average debt balance of $167.8 million in 2012 compared to $273.7 million in 2011. 82



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Table of Contents Investing Activities Our net cash flow provided by (used in) investing activities was $211.7 million, $66.5 million and $80.5 million during the years ended December 31, 2013, 2012 and 2011 respectively. Our investing activities primarily included: (i) contributions to equity method investees of $(37.1) million, $(63.8) million and $(82.6) million during the years ended December 31, 2013, 2012 and 2011 respectively, (ii) distributions of capital from equity method investees of $281.5 million, $140.7 million and $180.9 million during these periods, respectively, (iii) the purchase of $40.0 million of equity securities and digital currency during 2013, (iv) proceeds from the sale of a portion of our GAGFAH direct investment of $18.9 million during 2013 and, (v) purchases of fixed assets, net of proceeds from the disposal of fixed assets, of $(11.5) million, $(10.4) million and $(17.7) million during these periods, respectively.



Financing Activities

Our net cash flow provided by (used in) financing activities was $(384.3) million, $(437.4) million and $(126.2) million during the years ended December 31, 2013, 2012 and 2011, respectively. Our financing activities primarily included (i) distributions made to principals and one senior employee, including those classified within "principals' and others' interests in consolidated subsidiaries," of $(104.7) million, $(45.8) million and $(61.5) million during these periods, respectively, (ii) distributions to employees and others related to their interests in consolidated subsidiaries of $(70.2) million, $(48.8) million and $(62.0) million during these periods, respectively, (iii) contributions from employees and others related to their interests in consolidated subsidiaries of $0.4 million, $0.4 million and $13.5 million during these periods, respectively, (iv) dividend and dividend equivalent payments of $(57.9) million, $(44.2) million and $0.0 million, during these periods, respectively, and (v) our net borrowing and debt repayment, including payments for deferred financing costs. In addition, in 2012, Fortress paid $7.8 million of withholding tax on behalf of employees with respect to the delivery of RSUs, effectively repurchasing Class A shares, and paid $30.0 million to a former Principal in exchange for all of his Class A shares, Class B shares and Fortress Operating Group units.



Critical Accounting Policies

Consolidation

For those entities in which it has a variable interest, Fortress first determines whether the entity is a VIE. This determination is made by considering whether the entity's equity investment at risk is sufficient and whether the entity's at-risk equity holders have the characteristics of a controlling financial interest. A VIE must be consolidated by its primary beneficiary. The primary beneficiary of a VIE is generally defined as the party who, considering the involvement of related parties and de facto agents, has (i) the power to direct the activities of the VIE that most significantly affect its economic performance, and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. This evaluation is updated continuously. For investment companies and similar entities, the primary beneficiary of a VIE is the party who, considering the involvement of related parties and de facto agents, absorbs a majority of the VIE's expected losses or receives a majority of the expected residual returns, as a result of holding a variable interest. This evaluation is also updated continuously. As the general partner or managing member of entities that are limited partnerships or limited liability companies and not VIEs, Fortress is presumed to control the partnership or limited liability company. This presumption is overcome when the unrelated limited partners or members have the substantive ability to liquidate the entity or otherwise remove Fortress as the general partner or managing member without cause based on a simple unaffiliated majority vote, or have other substantive participating rights. 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, based on the assumptions of management, as well as judgments regarding significance and the design of the entities. If, as a result of such analysis, Fortress were required to consolidate a fund, portfolio company, or related entity, it could have a material impact on our gross revenues, expenses, net income, assets, liabilities and total equity. However, we would not expect it to materially impact our net income, or equity, attributable to Class A shareholders. As of December 31, 2013, the investment vehicles in which Fortress held an interest were comprised of 47 VIEs and 126 voting interest entities. For a more detailed discussion about our VIEs and other unconsolidated entities please see Note 4 to Part II, Item 8, "Financial Statements and Supplementary Data - Investments and Fair Value." 83



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Revenue Recognition on Incentive Income

Incentive income is calculated as a percentage of the returns, or profits, earned by the Fortress Funds subject to the achievement of performance criteria. Incentive income from certain of the private equity funds and credit 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. Under this method, we do not recognize incentive income subject to contingent repayment (or clawback) until all of the related contingencies have been resolved. Deferred incentive income related to a particular private equity fund, or credit PE fund, each of which has a limited life, would be recognized upon the termination of a private equity fund, or credit PE fund, or when distributions from a 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. For certain funds, a portion (or all) of any incentive income distribution may be deemed a "tax distribution." Tax distributions are not subject to contingencies. The determination of the amount of a distribution which represents a tax distribution is based on an estimate of both the amount of taxable income generated and the applicable tax rate. Estimates of taxable income are subject to significant judgment.



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 credit 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. As a result, private equity and credit PE incentive income realization events, which benefit Fortress economically, cause our GAAP earnings to decline in the short term as expense is recognized before the corresponding revenue. 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 3 to Part II, Item 8, "Financial Statements and Supplementary Data - 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 for 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 84



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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. With respect to valuation information provided by independent valuation agents, or pricing services, Fortress performs procedures to verify that such information is reasonable and determined in accordance with GAAP, and that the information is properly classified in the valuation hierarchy. Depending on the circumstances, these procedures generally include the following: (i) using established procedures to assess and approve agents, and their valuation methodologies, prior to their selection, (ii) obtaining a report from an independent auditing firm regarding the reliability of the internal controls of the pricing service providers (formerly known as a "SAS 70 review"), if available, (iii) performing due diligence on the agent's processes and controls, including developing an understanding of the agent's methodologies, (iv) obtaining broker quotations and/or performing an internal valuation in order to gauge the reasonableness of the information provided by the agent, (v) challenging the information provided, as appropriate, and (vi) performing back-testing of valuation information against actual prices received in transactions.



In addition, our investments in our permanent capital vehicles, including options, are held at fair value. The significant assumptions used in valuing the options include volatility, which is subject to significant judgment and estimation. We base this assumption on historical experience, current expectations, the market environment, and other factors.

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: 1. Public market transactions of similar securities 2. Private market transactions of similar or identical securities 3. Analytical methods



Our private equity funds have not to date based a valuation of a private security solely 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 the 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. 85



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Table of Contents Liquid Hedge Funds A substantial portion of the investments in our liquid hedge funds are valued based on quoted market prices. Investments valued based on other observable market parameters in our liquid hedge funds include interest rate swaps and swaptions, equity swaps and foreign exchange swaps which are verified by the independent fund administrator using models with significant observable market parameters. 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.



Investments in other funds are valued primarily based on the net asset values provided by the fund managers of those funds.

Credit Hedge Funds

In our credit hedge funds, investments are valued using quoted market prices, to the extent available. Independent valuation agents are used by our credit 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 a recoverability analysis, which values 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 and/or the discounted cash flow method. 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.



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

Credit PE Funds

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

Traditional Asset Management Business

Investments made within this business are valued in a consistent manner with our funds' policies as described above.

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Changes in the fair value of our funds' investments would impact our results of operations as described in Part II, Item 7A, "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 December 31, 2013. As of December 31, 2013, operations of our traditional asset management business are not material to our operations and are therefore not included in the analysis below.



The categories displayed below correspond directly with the disclosures which are required under fair value accounting guidance.

Liquid Hedge Funds (B) Total Private Fortress Credit Credit Investment Equity Partners Other Funds Hedge PE Company



Basis for Determining Fair Value Funds Funds Long Short Funds Funds Holdings 1. Quoted market prices

10 % 5 % 82 % 87 % 5 % 4 % 11 % 2. Other observable market parameters 30 % 19 % 14 % 13 % 9 % 9 % 19 % 3. Significant unobservable market parameters (A) 60 % 76 % 4 % - % 86 % 87 % 70 % Total 100 % 100 % 100 % 100 % 100 % 100 % 100 %



(A) A substantial portion of our funds' level 3 investment valuations are based

on third party pricing services, broker quotes, or third party fund manager

statements, in addition to internal models. In particular, approximately,

99% and 98% of our credit hedge funds' and credit PE funds', respectively,

level 3 valuations were based on such sources.

(B) The level 3 investments within the "other funds" in the liquid hedge funds

segment are primarily related to the illiquid SPV and sidepocket investments

within the Drawbridge Global Macro Funds.

As of December 31, 2013, $10.0 billion of investments in our private equity funds, $1.1 billion of investments in our liquid hedge funds, $8.2 billion of investments in our credit hedge funds, and $8.1 billion of investments in our credit PE funds are valued with significant unobservable market parameters. A 10% increase or decrease in the value of investments held by the Fortress Funds valued at level 3 would have had the following effects on our results of operations on an unconsolidated basis for the year ended December 31, 2013, consistent with the table above: Private Equity Liquid Hedge Credit



Hedge

Funds Funds Funds Credit PE Funds Management fees, per annum $3.6 million or $1.0 million or $15.2 million or $0.1 million or on a prospective basis ($3.3 million) (A) ($1.0 million) ($15.2 million) ($1.6 million) (A) $0.0 million or $70.5 million or Incentive income N/A (B) ($0.0 million) ($71.4 million) N/A (B)



Earnings from equity $57.0 million or $8.5 million or $3.3 million or $13.0 million or method investees

($57.0 million) ($8.5 million) ($3.3



million) ($13.0 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 credit PE fund management fees would be generally

unchanged as, for investments in non-publicly traded securities, they are

generally 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 credit PE funds is reduced below its

invested capital, there would be a reduction in management fees. As of

December 31, 2013, $3.2 billion of such portfolio companies valued at level

3 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

December 31, 2013 is the current reset date.

(B) Private equity fund and credit 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. 87



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Table of Contents Income Taxes FIG Corp. has recorded a significant deferred tax asset, primarily in connection with our initial public offering and related transactions. 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. However, the projections do contain an estimated marginal growth assumption. 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 federal taxable income for historical periods before deductions relating to the establishment of the deferred tax assets, other than deferred tax assets arising from equity-based compensation, as well as the average of ordinary income 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): 2009 $ 24.8 2010 77.6 2011 53.5 2012 80.9 2013: Estimated 77.7



2014 - 2021: Average Required $ 80.7

Based on the effects of the continuing challenging market conditions, we have made an 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. 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 6 to our financial statements in Part II, Item 8, "Financial Statements and Supplementary Data - Income Taxes and Tax Related Payments." Our effective tax rate for GAAP reporting purposes may be subject to significant variation from period to period. In addition, legislation has been introduced in the United States, which, if enacted in its current or similar form, could cause us to incur a material increase in our tax liability. See Part I, Item 1A, "Risk Factors - Risks Related to Taxation - Several items of tax legislation are currently being considered 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."



Equity-Based Compensation

We currently have several categories of equity-based compensation which are described in Note 8 to Part II, Item 8, "Financial Statements and Supplementary Data - Equity-Based and Other 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 88



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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 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 determination of the grant date;

• 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;

Each of these elements, particularly the forfeiture factor and dividend growth rate 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 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, and (ii) decrease compensation expense related to RSUs with no service conditions since the discount for delayed delivery 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 May 2011, the FASB issued new guidance regarding the measurement and disclosure of fair value, which became effective for Fortress on January 1, 2012. This guidance did not have a material direct impact on Fortress's financial position, results of operations or liquidity.

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



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 II, Item 7A "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.

See Note 10 to Part II, Item 8 "Financial Statements and Supplementary Data" for a discussion of our commitments and contingencies.

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As of December 31, 2013, our material contractual obligations are our lease obligations, our tax receivable agreement obligations, and our capital commitments to our funds as described above. Furthermore, we have potential clawback obligations with respect to our private equity deferred incentive income received to date. Fixed and determinable payments due in connection with these obligations are as follows:

Payments due by period Contractual Obligations Total 2014 2015 and 2016 2017 and 2018 Thereafter Operating lease obligations (1) $ 70,898$ 24,681$ 42,228 $ 3,951 $ 38 Deferred incentive income (2) 83,350 - 83,350 - - Service contracts 41,634 30,180 11,125 267 62 Tax receivable agreement obligations (3) 241,006 26,481 42,991 43,171 128,363 Capital commitments to Fortress Funds (4) 160,456 160,456 - - - Total $ 597,344$ 241,798$ 179,694$ 47,389$ 128,463



(1) Excludes escalation charges which per our lease agreements are not fixed and

determinable payments.

(2) Incentive income received from private equity funds and credit PE funds may

be subject to contingent repayment or clawback upon termination of each

fund, depending on the overall performance of each fund. The amounts

presented herein represent the amount of clawback that would be due based on

a liquidation of the fund at its net recorded asset value as of the reporting date, which we refer to as intrinsic clawback. The period of payment is based on the contractual maturities of the funds including all



available extensions. Based on the accounting method we have adopted, which

requires us to record incentive income revenue only when all related

contingencies are resolved, the amounts accrued as a deferred incentive

income liability on our balance sheet exceed the intrinsic clawback. (3) FIG Corp., a wholly owned subsidiary, entered into a tax receivable agreement with each of the principals that provides for the payment to an exchanging or selling principal of 85% of the amount of cash savings, if



any, in U.S. federal, state, local and foreign income tax that the corporate

taxpayers actually realize (or are deemed to realize in the case of an early

termination payment by the corporate taxpayers or a change of control, as

defined) as a result of an increase in the tax basis of the assets owned by

Fortress Operating Group at the time of an exchange of a Fortress Operating

Group limited partnership unit for one of the Class A shares. Such payments

are expected to occur over approximately ten years.

(4) These obligations represent commitments by us to provide capital funding to

the Fortress Funds. These amounts are due on demand and are therefore

presented in the less than one year category. However, the capital

commitments are expected to be called substantially over the next three

years. In addition, we have entered into five-year employment agreements with our principals which were effective as of January 1, 2012. These agreements do not contain fixed and determinable payments, other than a base salary of $0.2 million per annum per principal, as all payments are performance based. Payments under these agreements may be material. 90



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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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 and investment income (loss). 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. As of December 31, 2013, operations of our traditional asset management business are not material to our operations and are therefore not included in the analysis below.



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 company runs its own investment and risk management process.

• 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 credit hedge funds, credit PE funds and permanent capital vehicles

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 various risk management



techniques 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 and exchange rates as of December 31, 2013 (in thousands): Assets Investments $ 1,253,266



Investments in options $ 104,338

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 generally 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 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 the 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 December 31, 2013, approximately 37% of the management fees earned from our alternative investment businesses (excluding fees based on senior living property revenues) were based on the NAV of the applicable funds.



• For private equity funds and certain credit 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 private equity funds formed after March 2006. For private

equity funds formed after March 2006 that are no longer in the investment

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period, management fees are earned on NAV with respect to 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 permanent capital vehicles, management fees are not calculated based on

NAV but instead a fee is charged based on the funds' contributed capital (or

on revenues, for senior living property management).

• 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, and on the non-investment assets and liabilities of the funds. For the Value Recovery Funds, management fees are based on realizations, which are not dependent on current estimated fair value. Changes in values of investments could also indirectly affect future management fees by, among other things, reducing the funds' access to capital or liquidity and their ability to currently pay management fees.



Fortress Funds' Market Risk Impact on GAAP Incentive Income

Our incentive income is generally based on a percentage of returns, or profits, of the various Fortress Funds subject to the achievement of performance criteria. Our incentive income will be impacted by changes in the values of the funds' investments which, in turn, are 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 the values of its investments, (ii) the period over which the Fortress Funds apply performance criteria (i.e. quarterly, annually 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 significantly 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 credit 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 credit PE funds where incentive income is subject to contingencies at December 31, 2013 would increase or decrease future incentive income by



$195.5 million or $182.1 million, respectively; however, this would have no

effect on our current reported financial condition or results of operations.

• Incentive income from our permanent capital vehicles is generally not impacted by changes in the fair values of their investments, except to the extent they represent impairment, since these changes generally do not



impact the measure of current operating results (i.e. Funds from operations

("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 our permanent capital vehicles'

investments (primarily real estate, loans, securities and other financial

instruments), except for certain items (for example, the unrealized gain or

loss on excess mortgage servicing rights or non-hedge derivatives).

• 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 annual performance criteria. For certain

hedge funds, a 10% decrease in the NAV of the funds on December 31, 2013

would have resulted in a loss to investors for the quarter. In future

periods, this loss could create, or cause a 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. The Value Recovery Funds only

pay incentive income if aggregate realizations exceed an agreed threshold

and, therefore, this potential incentive income is not directly impacted by

changes in fair value.



Fortress Funds' Market Risk Impact on GAAP Investment Income

Our investments in the Fortress Funds, other than our permanent capital vehicles, 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.

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Market Risk - Quantitative Analysis

The following table presents information on the impact to Fortress of a 10% change in the net asset values of the Fortress Funds at December 31, 2013 (in millions). 10% Positive Change GAAP Revenues Segment Revenues (A) Earnings from Management Incentive Equity Method Management Incentive Investment Fees (B) Income Investees (C) Fees (B) Income Income Private Equity (D) Funds $ 6.8 $ N/A (E) $ 78.6 $ 6.8 $ N/A (E) $ N/A Permanent capital vehicles (G) N/A N/A N/A N/A N/A N/A Liquid Hedge Funds 12.3 109.1 (H) 15.5 12.3 109.1 (H) 5.9



Credit

Hedge Funds 10.9 85.6 3.3 10.9 85.6 3.1 PE Funds 0.2 N/A (E) 15.3 0.2 N/A (E) N/A Total $ 30.2$ 194.7 $ 112.7 $ 30.2$ 194.7$ 9.0 10% Negative Change GAAP Revenues Segment Revenues (A) Earnings from Management Incentive Equity Method Management Incentive Investment Fees (B) Income Investees (C) Fees (B) Income Income Private Equity (D) Funds $ (6.5 ) $ N/A (E) $ (78.6 )$ (6.5 ) $ N/A (E) (F) $ N/A (F) Permanent capital vehicles (G) N/A N/A N/A N/A N/A N/A (F) Liquid Hedge Funds (12.3 ) (100.1 ) (H) (15.5 ) (12.3 ) (100.1 ) (H) (5.9 ) Credit Hedge Funds (10.9 ) (86.6 ) (3.3 ) (10.9 ) (86.6 ) (3.1 ) PE Funds (2.0 ) N/A (E) (15.3 ) (2.0 ) N/A (E) (F) N/A (F) Total $ (31.7 )$ (186.7 )$ (112.7 )$ (31.7 )$ (186.7 )$ (9.0 )



(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 credit PE funds, it assumes that the management fees reset as of the

reporting date. Private equity fund and credit 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 credit PE funds is reduced below

its invested capital, there would be a reduction in management fees. As of

the reporting date, $4.7 billion of such private equity fund or credit 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) The changes presented do not include any effect related to our direct



investment in GAGFAH, Penn, or GLPI common stock. A 10% increase (decrease)

in the value of these common shares would affect our unrealized gains and losses by $6.3 million.



(D) The private equity Fortress Funds held concentrated positions in certain

industries as of December 31, 2013, as illustrated in the following table:

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Table of Contents Percentage of Investments Based on Industry Fair Value Transportation and Infrastructure 27 % Financial Services and Assets 33 % Senior Living 22 % Real Estate 10 % Other 8 % 100 %



(E) For GAAP Revenues, private equity fund and credit 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 credit 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) Our investments in our permanent capital vehicles are held at fair value,

based on the market value of the shares we own. Gains (losses) on our shares

in our permanent capital vehicles and options granted to us by our permanent

capital vehicles are affected by movements in the equity price of the

shares. A 10% increase (decrease) in the equity price of the shares would

increase unrealized gains by $28.8 million or decrease unrealized gains by

$26.9 million. Compensation and benefits expense would increase by $3.1

million or decrease by $3.1 million. Furthermore, our permanent capital

vehicles' management fees and incentive income are generally not directly

impacted by changes in the fair value of their investments (unless the

changes are deemed to be impairment, which could impact incentive income).

(H) Incentive income is generally not charged on amounts invested by liquid

hedge funds in funds managed by external managers.

The changes presented in the table above do not include any effect related to our direct investment in accounts managed by our Logan Circle growth equities business. The equity investments in these accounts are owned on Fortress's behalf and are held at fair value. A 10% increase (decrease) in the value of the equity prices of the shares held by those accounts would affect our unrealized gains and losses by $2.3 million.



Interest Rate Risk

Subsequent to the repayment of our term loan in October 2012, we are not materially directly impacted by changes in interest rates.

Exchange Rate Risk

Our investments in Eurocastle, GAGFAH, Global Opportunities Fund, Japan Opportunity Funds and Japanese investments are directly exposed to foreign exchange risk. As of December 31, 2013, we had a $4.8 million investment in Eurocastle and a $60.1 million investment in GAGFAH, including foreign exchange option contracts, which are accounted for at fair value. We also had $13.5 million of investments in Japanese funds and entities. In the event of a 10% change in the applicable foreign exchange rate against the U.S. dollar on December 31, 2013, we estimate the gains and losses for the year ended December 31, 2013 on these investments would have an increase of approximately $2.6 million or a decrease of approximately $5.6 million. Also, the impact of a 10% change in the applicable foreign exchange rate on foreign exchange option contracts used to economically hedge future revenues would cause an increase of approximately $8.4 million or a decrease of approximately $10.2 million in our gains and losses. In addition, we held $32.7 million of foreign-denominated cash as of December 31, 2013. 94



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