SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

For the transition period from to

PZENA INVESTMENT MANAGEMENT, INC.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements provide our current expectations, or forecasts, of future events. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in Item 1A, “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended December 31, ~~2010.~~2011. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly revise any forward-looking statements to reflect circumstances or events after the date of this Quarterly Report, or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission, or SEC, after the date of this Quarterly Report on Form 10-Q.

Forward-looking statements include, but are not limited to, statements about:

· our anticipated future results of operations and operating cash flows;

· our business strategies and investment policies;

· our financing plans and the availability of short- or long-term borrowing, or equity financing;

· our competitive position and the effects of competition on our business;

· potential growth opportunities available to us;

· the recruitment and retention of our employees;

· our expected levels of compensation for our employees;

· our potential operating performance, achievements, efficiency, and cost reduction efforts;

· our expected tax rate;

· changes in interest rates;

our expectation with respect to the economy, capital markets, the market for asset management services, and other industry trends; and

· ~~the impact of future legislation and regulation, and changes in existing legislation and regulation, on our business.~~

the impact of future legislation and regulation, and changes in existing legislation and regulation, on our business.

The reports that we file with the SEC, accessible on the SEC’s website at www.sec.gov, identify additional factors that can affect forward-looking statements.

PART I. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share and per-share amounts)

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2011 2010 2011 2010

REVENUE $ 19,950 $ 18,482 $ 64,109 $ 57,020

EXPENSES
Compensation and Benefits Expense 7,727 7,375 24,375 22,026
General and Administrative Expense 1,969 1,837 5,972 5,927
TOTAL OPERATING EXPENSES 9,696 9,212 30,347 27,953
Operating Income 10,254 9,270 33,762 29,067

OTHER INCOME/(EXPENSE)
Interest Income 72 60 144 145
Dividend Income 29 25 100 125
Interest Expense — — — (232 )
Net Realized and Unrealized Gain/(Loss) from Investments (1,150 ) 544 (709 ) 137
Change in Liability to Selling and Converting Shareholders (50 ) (1,725 ) (2,307 ) (1,633 )
Other Income/(Expense) (61 ) 3 (232 ) 72
Total Other Expense (1,160 ) (1,093 ) (3,004 ) (1,386 )
Income Before Income Taxes 9,094 8,177 30,758 27,681
Income Tax Expense/(Benefit) 1,500 (1,075 ) 1,567 1,373
Net Income 7,594 9,252 29,191 26,308
Less: Net Income Attributable to Non-Controlling Interests 7,097 8,033 26,178 23,632
Net Income Attributable to Pzena Investment Management, Inc. $ 497 $ 1,219 $ 3,013 $ 2,676

Net Income for Basic Earnings per Share $ 497 $ 1,219 $ 3,013 $ 2,676
Basic Earnings per Share $ 0.05 $ 0.13 $ 0.31 $ 0.29
Basic Weighted Average Shares Outstanding 10,013,573 9,367,659 9,770,068 9,125,477

Net Income for Diluted Earnings per Share $ 497 $ 5,632 $ 18,350 $ 16,096
Diluted Earnings per Share $ 0.05 $ 0.09 $ 0.28 $ 0.25
Diluted Weighted Average Shares Outstanding 10,013,573 64,993,746 65,011,182 65,006,198

Cash Dividends per Share of Class A Common Stock $ 0.03 $ 0.03 $ 0.09 $ 0.06


	For the Three Months
	Ended March 31,
	2012			2011

REVENUE	$	19,768		$	21,788

EXPENSES
Compensation and Benefits Expense		8,173			8,388
General and Administrative Expense		1,703			1,947
TOTAL OPERATING EXPENSES		9,876			10,335
Operating Income		9,892			11,453

OTHER INCOME/(EXPENSE)
Interest Income		54			28
Interest Expense		(26	)		-
Dividend Income		24			11
Net Realized and Unrealized Gain/(Loss) from Investments		855			255
Change in Liability to Selling and Converting Shareholders		(973	)		(117	)
Other Income/(Expense)		105			(50	)
Total Other Income		39			127
Income Before Income Taxes		9,931			11,580
Income Tax Expense		246			583
Net Income		9,685			10,997
Less: Net Income Attributable to Non-Controlling Interests		8,678			9,340
Net Income Attributable to Pzena Investment Management, Inc.	$	1,007		$	1,657

Net Income for Basic Earnings per Share	$	1,007		$	1,657
Basic Earnings per Share	$	0.10		$	0.18
Basic Weighted Average Shares Outstanding		10,575,089			9,385,543

Net Income for Diluted Earnings per Share	$	5,698		$	6,968
Diluted Earnings per Share	$	0.09		$	0.11
Diluted Weighted Average Shares Outstanding		65,326,809			65,199,988

Cash Dividends per Share of Class A Common Stock	$	0.19		$	0.03

See accompanying notes to consolidated financial statements.

(in thousands, except share and per-share amounts)

	Shares of		Shares of										Non-
	Class A		Class B		Class A		Additional			Retained			Controlling
	Common Stock		Common Stock		Common Stock		Paid-In Capital			Earnings			Interests			Total

Balance at December 31, 2011		10,575,089		53,967,555	$	105	$	12,000		$	1,832		$	32,287		$	46,224
Amortization of Non-Cash Compensation		-		9,500		-		60			-			305			365
Directors' Shares		-		-		-		13			-			57			70
Net Income		-		-		-		-			1,007			8,678			9,685
Retirement of Class B Units		-		-		-		(7	)		-			7			-
Class A Cash Dividends Declared and Paid ($0.19 per share)		-		-		-		-			(2,009	)		-			(2,009	)
Distributions to Non-Controlling Interests		-		-		-		-			-			(13,708	)		(13,708	)
Balance at March 31, 2012		10,575,089		53,977,055	$	105	$	12,066		$	830		$	27,626		$	40,627

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands, except share amounts)

Shares of Shares of Retained
Class A Class B Class A Additional Earnings/ Non-
Common Common Common Paid-In (Accumulated Controlling
Stock Stock Stock Capital Deficit) Interests Total

Balance at December 31, 2010 9,367,659 55,012,324 $ 93 $ 10,836 $ (357 ) $ 23,224 $ 33,796
Unit Conversion 1,207,430 (1,207,430 ) 12 727 — (662 ) 77
Retirement of Class B Units — (1,095 ) — (1 ) — (3 ) (4 )
Directors' Shares — — — 32 — 178 210
Amortization of Non-Cash Compensation — 9,000 — 383 — 2,141 2,524
Net Income — — — — 3,013 26,178 29,191
Contributions from Non-Controlling Interests — — — — — 450 450
Distributions to Non-Controlling Interests — — — (111 ) — (22,750 ) (22,861 )
Effect of Consolidation of Affiliates — — — — — 2,418 2,418
Class A Cash Dividends Declared and Paid
($0.09 per share) — — — — (876 ) — (876 )
Balance at September 30, 2011 10,575,089 53,812,799 $ 105 $ 11,866 $ 1,780 $ 31,174 $ 44,925

See accompanying notes to consolidated financial statements.

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2011 2010 2011 2010

OPERATING ACTIVITIES
Net Income $ 7,594 $ 9,252 $ 29,191 $ 26,308
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Depreciation 104 108 311 322
Non-Cash Compensation 1,039 901 3,402 2,565
Director Share Grant 70 14 210 41
Net Realized and Unrealized Loss/(Gain) from Investments 1,150 (544 ) 709 (137 )
Change in Liability to Selling and Converting Shareholders 50 1,725 2,307 1,633
Deferred Income Taxes 905 (1,677 ) (534 ) (579 )

Changes in Operating Assets and Liabilities:
Advisory Fees Receivable 2,027 (928 ) (27 ) (870 )
Due from Broker 2,064 58 401 103
Restricted Cash (1 ) (4 ) (3 ) (13 )
Prepaid Expenses and Other Assets 112 16 428 (120 )
Due to Broker 23 (79 ) 26 (715 )
Accounts Payable, Accrued Expenses, and Other Liabilities 3,519 3,110 8,301 7,473
Tax Receivable Agreement Payments — — (84 ) —
Purchases of Investments (6,513 ) (294 ) (26,928 ) (3,805 )
Proceeds from Sale of Investments 6,361 304 26,754 7,279
Net Cash Provided by Operating Activities 18,504 11,962 44,464 39,485

INVESTING ACTIVITIES
Purchases of Deferred Compensation — (2,042 ) (1,433 ) (2,042 )
Proceeds from Deferred Compensation — — 847 —
Receivable from Related Parties (22 ) (13 ) — 27
Purchase of Property and Equipment (4 ) (3 ) (155 ) (13 )
Net Cash Used In Investing Activities (26 ) (2,058 ) (741 ) (2,028 )

FINANCING ACTIVITIES
Distributions to Non-Controlling Interests (6,710 ) (6,322 ) (22,860 ) (20,225 )
Contributions from Non-Controlling Interests 200 — 450 4,321
Retirement of Class B Units (4 ) — (4 ) (2 )
Term Loan and Senior Subordinated Notes Repayment — — — (10,000 )
Dividends (298 ) (281 ) (876 ) (562 )
Net Cash Used in Financing Activities (6,812 ) (6,603 ) (23,290 ) (26,468 )
NET CHANGE IN CASH $ 11,666 $ 3,301 $ 20,433 $ 10,989

CASH AND CASH EQUIVALENTS - Beginning of Period $ 25,196 $ 23,596 $ 16,381 $ 15,908
Effect of Consolidation/(Deconsolidation) of Affiliates — (96 ) 48 (96 )
Net Change in Cash 11,666 3,301 20,433 10,989
CASH AND CASH EQUIVALENTS - End of Period $ 36,862 $ 26,801 $ 36,862 $ 26,801

Supplementary Cash Flow Information:
Interest Paid $ — $ — $ — $ 232
Income Taxes Paid $ 757 $ 643 $ 2,877 $ 2,597

See accompanying notes to consolidated financial statements.
PZENA INVESTMENT MANAGEMENT, INC.

	For the Three Months
	Ended March 31,
	2012			2011
OPERATING ACTIVITIES
Net Income	$	9,685		$	10,997
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Depreciation		58			103
Disposal of Fixed Assets		(93	)		-
Non-Cash Compensation		686			1,183
Director Share Grant		70			70
Net Realized and Unrealized Gain from Investments		(855	)		(255	)
Change in Liability to Selling and Converting Shareholders		973			117
Deferred Income Taxes		(345	)		(185	)
Changes in Operating Assets and Liabilities:
Advisory Fees Receivable		(1,447	)		(867	)
Due from Broker		(2,528	)		(548	)
Restricted Cash		-			(1	)
Prepaid Expenses and Other Assets		69			312
Due to Broker		2,947			1,768
Accounts Payable, Accrued Expenses, and Other Liabilities		641			1,038
Tax Receivable Agreement Payments		(2,093	)		(84	)
Change in Lease Liability		(154	)		-
Purchases of Investments		(20,835	)		(11,400	)
Proceeds from Sale of Investments		21,213			10,638
Net Cash Provided by Operating Activities		7,992			12,886

INVESTING ACTIVITIES
Purchases of Investments in Deferred Compensation Plan		(452	)		(1,433	)
Proceeds from Investments in Deferred Compensation Plan		544			847
Payments to/(from) Related Parties		(20	)		19
Purchase of Property and Equipment		-			(117	)
Net Cash Provided by/(Used in) Investing Activities		72			(684	)

FINANCING ACTIVITIES
Distributions to Non-Controlling Interests		(13,337	)		(6,296	)
Dividends		(2,009	)		(281	)
Net Cash Used in Financing Activities		(15,346	)		(6,577	)

NET CHANGE IN CASH	$	(7,282	)	$	5,625

CASH AND CASH EQUIVALENTS - Beginning of Period	$	35,083		$	16,381
Effect of Consolidation of Affiliates		-			48
Net Change in Cash		(7,282	)		5,625
CASH AND CASH EQUIVALENTS - End of Period	$	27,801		$	22,054

Supplementary Cash Flow Information:
In-Kind Distribution to Non-Controlling Interests of
Equity Securities, at Fair Value	$	371		$	-
Interest Paid	$	26		$	-
Income Taxes Paid	$	740		$	881

See accompanying notes to consolidated financial statements.

Pzena Investment Management, Inc.

Unaudited Notes to ~~the~~ Consolidated Financial Statements

Pzena Investment Management, Inc. (the “Company”) functions as the ~~holding company through which the business~~sole managing member of its operating company, Pzena Investment Management, LLC (the “operating company”), is conducted. Concurrently with the consummation of the Company’s initial public offering on October 30, 2007, the operating agreement of the operating company was amended and restated such that, among other things, the Company became the sole managing member of the operating company.. As a result, ~~of these transactions:~~the Company: (i) ~~the Company has consolidated~~consolidates the financial results of the operating company ~~with its own,~~ and ~~reflected~~reflects the membership interest in it that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) ~~the Company~~ recognizes income generated from its economic interest in the operating company’s net income.

Pzena Investment Management, LLC is an investment adviser which is registered under the Investment Advisers Act of 1940 and is headquartered in New York, New York. As of ~~September 30, 2011,~~March 31, 2012, the operating company managed assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and non-U.S. capital markets.

The Company, through its investment in its operating company, has consolidated the results of operations and financial condition of the following entities as of ~~September 30, 2011:~~March 31, 2012:

		Operating Company's
		Ownership at
Legal Entity	Type of Entity (Date of Formation)	~~September 30, 2011~~March 31, 2012
Pzena Investment Management, ~~PTY~~Pty	Australian Proprietary Limited Company (12/16/2009)		100.0%
Pzena Investment Management Special Situations, LLC	Delaware Limited Liability Company (12/01/2010)		99.9%
Pzena Large Cap Value Fund	Massachusetts Trust (11/01/2002)		0.0%
Pzena International Value Service	Delaware Limited Liability Company (12/22/2003)		0.0%

Note 2—Significant Accounting Policies

Basis of Presentation:

The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and related Securities and Exchange Commission (“SEC”) rules and regulations. The Company’s policy is to consolidate all majority-owned subsidiaries in which it has a controlling financial interest, which includes the Pzena Investment Management Special Situations, LLC, and the Pzena Investment Management, ~~PTY, as well as~~Pty. The Company also consolidates variable-interest entities (“VIEs”) where the Company is deemed to be the primary beneficiary, which includes the Pzena Large Cap Value Fund and the Pzena International Value Service. These majority-owned subsidiaries in which the Company has a controlling financial interest and the VIEs where the Company is deemed to be the primary beneficiary are collectively referred to as “consolidated subsidiaries.” As required by the Consolidation Topic of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), the Company also consolidates or consolidated non-variable-interest entities in which it acts or acted as the general partner or managing member. All of these entities represent or represented private investment partnerships over which the Company exercises or exercised control. Non-controlling interests recorded on the consolidated financial statements of the Company include the non-controlling interests of the outside investors in each of these entities, as well as those of the operating company. All significant inter-company transactions and balances have been eliminated.

The operating company is the managing member of the Europe, Australasia, and Far East (“EAFE”) Value Service (legally known as Pzena International Value Service), a limited liability company. ~~Neither the Company, nor the operating company, holds an equity ownership percentage in this entity at September 30,~~Prior to 2011, ~~or held an equity ownership percentage during the periods presented. Since~~ the holders of the equity ~~investment~~investments in this ~~partnership lack~~entity lacked a controlling financial ~~interest,~~interest. Correspondingly, it was considered a VIE. The Company was not the primary beneficiary of this ~~entity is deemed a VIE.~~entity.

As of February 1, 2011, as a result of a shift in the equity ownership of the entity on that date, the operating company was considered the primary beneficiary of this entity. ~~Correspondingly,~~As a result, the entity was consolidated as of February 1, 2011. At ~~September 30, 2011,~~March 31, 2012, EAFE Value Service’s ~~$1.9~~$1.2 million in net assets were included in the Company’s consolidated statements of financial condition.

The Pzena Large Cap Value Fund is a Massachusetts Trust in which a majority of the trustees are members of the executive committee of the operating company. A majority of the trustees ~~are~~do not hold equity investments in this trust. Since the holders of the equity ~~investment in this Trust. Since the holders of the equity investment~~investments in this partnership lack a controlling financial interest in it, this entity is deemed to be a VIE. The Company is considered the primary beneficiary of this VIE. At ~~September 30, 2011,~~March 31, 2012, the Pzena Large Cap Value Fund’s ~~$0.7~~$0.9 million ofin net assets were included in the Company’s consolidated statements of financial condition.

All of the consolidated investment partnerships are ~~or were,~~ investment companies under the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies. The Company has retained the specialized accounting for these partnerships pursuant to the Consolidation of Partnerships and Similar Entities Subtopic of the FASB ASC. Thus, the Company reports these investment partnerships’ investments in equity securities at fair value, with net realized and unrealized gains and losses reported in earnings in the consolidated statements of operations.

VIEs that are not consolidated continue to receive investment management services from the Company, and are vehicles through which the Company offers its Global Value and/or EAFE Value strategies. The total net assets of these VIEs was approximately ~~$206.0~~$211.8 million and ~~$515.6~~$219.2 million at ~~September 30, 2011~~March 31, 2012 and December 31, ~~2010,~~2011, respectively. Neither the Company nor the operating company were exposed to losses as a result of its involvement with these entities because they had no direct investment in them.

The Company records in its own equity its pro-rata share of transactions that impact the operating company’s net equity, including ~~equity~~unit and option issuances and any potential adjustments to accumulated other comprehensive income. The operating company’s pro-rata share of such transactions are recorded as adjustments to additional paid-in capital or non-controlling interests, as applicable, on the consolidated statements of financial position.

Management’s Use of Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates.

Fair Values of Financial Instruments:

The carrying amounts of all financial instruments in the consolidated statements of financial condition are presented at their fair value.

Revenue Recognition:

Revenue, comprised of advisory fee income, is recognized over the period in which advisory services are provided. Advisory fee income includes management fees that are calculated based on percentages of assets under management (“AUM”), generally billed quarterly, either in arrears or advance, depending on their contractual terms. Advisory fee income also includes performance fees that may be earned by the Company depending on the investment return of the assets under management. Performance fee arrangements generally entitle the Company to participate, on a fixed-percentage basis, in any returns generated in excess of an agreed-upon benchmark. The Company’s participation percentage in such return differentials is then multiplied by AUM to determine the performance fees earned. In general, returns are calculated on an annualized basis over the contract’s measurement period, which usually extends to three years. Performance fees are generally payable annually. Following the preferred method identified in the Revenue Recognition Topic of the FASB ASC, such performance fee income is recorded at the conclusion of the contractual performance period, when all contingencies are resolved. For each of the three months ended ~~September 30,~~March 31, 2012 and 2011, the Company recognized approximately ~~$1.1~~$0.3 million in performance fee income. No such income was recognized for the three months ended September 30, 2010. For the nine months ended September 30, 2011 and 2010, the Company recognized approximately $2.5 million and $0.3 million, respectively, in performance fee income.

Basic earnings per share is computed by dividing the Company’s net income ~~or loss~~ attributable to its common stockholders by the weighted average number of shares outstanding during the reporting period. For the three months ended March 31, 2012 and 2011, the Company’s basic earnings per share was determined as follows:

	For the Three Months
	Ended March 31,
	2012		2011
	(in thousands, except share and
	per share amounsts)

Net Income for Basic Earnings per Share	$	1,007	$	1,657
Basic Weighted-Average Shares Outstanding		10,575,089		9,385,543
Basic Earnings per Share	$	0.10	$	0.18

Diluted earnings per share adjusts this calculation to reflect the impact of all outstanding operating company membership units, ~~as well as~~ operating company phantom units, ~~and~~ outstanding operating company unit options and options to purchase Class A ~~Common Stock,~~common stock, to the extent they would have a dilutive effect on net income per share for the reporting period. The calculation of diluted earnings per share is also adjusted to reflect the impact of the operating company’s unvested restricted Class B units, which have nonforfeitable rights to dividends and are considered participating securities. Net income ~~or loss~~ for diluted earnings per share generally assumes all outstanding operating company membership units are converted into Company stock at the beginning of the reporting period and the resulting change to Company net income associated with its increased interest in the operating company is taxed at the Company’s effective tax rate, exclusive of one-time charges and adjustments associated with both the valuation allowance and the liability to selling and converting shareholders. When this conversion results in an increase in earnings per share or a decrease in loss per share, diluted net income and diluted earnings per share are assumed to be equal to basic net income and basic earnings per share for the reporting period.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ the Company’s diluted net income was determined as follows:

	For the Three
	Months Ended March 31,
	2012		2011
	(in thousands)

Net Income Attributable to Non-Controlling Interests of
Pzena Investment Management, LLC	$	8,209	$	9,290
Less: Assumed Corporate Income Taxes		3,518		3,979
Assumed After-Tax Income of Pzena Investment Management, LLC	$	4,691	$	5,311

Assumed After-Tax Income of Pzena Investment Management, LLC	$	4,691	$	5,311
Net Income of Pzena Investment Management, Inc		1,007		1,657
Diluted Net Income	$	5,698	$	6,968

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2011 2010 2011 2010
(in thousands)

Non-Controlling Interests of Pzena Investment Management, LLC $ 7,811 $ 7,722 $ 26,841 $ 23,483
Less: Assumed Corporate Income Taxes 3,348 3,309 11,504 10,063
Assumed After-Tax Income of Pzena Investment Management, LLC $ 4,463 $ 4,413 $ 15,337 $ 13,420

Assumed After-Tax Income of Pzena Investment Management, LLC $ 4,463 $ 4,413 $ 15,337 $ 13,420
Net Income of Pzena Investment Management, Inc. 497 1,219 3,013 2,676
Diluted Net Income(1)
$ 4,960 $ 5,632 $ 18,350 $ 16,096

Under the two-class method, earnings per share is calculated by dividing net income for diluted earnings per share by the weighted-average number of common shares outstanding during the period, plus the dilutive effect of any potential common shares outstanding during the period using the more dilutive of the treasury method or two-class method. The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period. The Company’s net income for diluted earnings per share is reduced by the amount allocated to participating restricted Class B units for purposes of calculating earnings per share. Dividends paid per share on the operating company’s unvested restricted Class B units are equal to the dividends paid per Company Class A common stock.

~~(1)~~ ~~Since the assumed incremental income results in an increase in per share income for~~For the three months ended ~~September 30,~~March 31, 2012 and 2011, ~~diluted net income~~

~~and~~the Company’s diluted earnings per share ~~are assumed to be equal to basic net income and basic earnings per share for the reporting period.~~

were determined as follows:

	For the Three
	Months Ended March 31,
	2012		2011
	(In thousands, except share and
	per share amounts)

Diluted Net Income Allocated to:
Class A Common Stock	$	5,676	$	6,968
Participating Class B Restricted Units		22		-
Total Diluted Net Income Attributable to Shareholders	$	5,698	$	6,968

Basic Weighted-Average Shares Outstanding		10,575,089		9,385,543
Dilutive Effect of Operating Company B Units		53,977,055		55,003,690
Dilutive Effect of Options		519,448		714,861
Dilutive Effect of Phantom Units		9,730		95,894
Dilutive Weighted-Average Shares Outstanding		65,081,322		65,199,988
Add: Participating Class B Restricted Units		245,487		-
Total Dilutive Weighted-Average Shares Outstanding		65,326,809		65,199,988

Diluted Earnings per Share	$	0.09	$	0.11

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ the following ~~operating company units,~~ options to purchase operating company membership units, ~~and~~options to purchase shares of Class A common stock and ~~phantom~~ operating company phantom units were excluded from the calculation of diluted net income per share, as their inclusion would have had an antidilutive effect for the respective periods:

~~For the three and nine months ended September 30, 2011 and 2010, the Company’s basic and diluted earnings per share were determined as follows:~~

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2011 2010 2011 2010

(in thousands, except share and per-share amounts)

Net Income for Basic Earnings per Share $ 497 $ 1,219 $ 3,013 $ 2,676
Basic Weighted Average Shares Outstanding 10,013,573 9,367,659 9,770,068 9,125,477
Basic Earnings per Share $ 0.05 $ 0.13 $ 0.31 $ 0.29

Net Income for Diluted Earnings per Share $ 497 $ 5,632 $ 18,350 $ 16,096
Dilutive Effect of Operating Company B Units(1)
— 54,960,418 54,618,934 55,202,995
Dilutive Effect of Options(1)
— 638,779 603,567 656,538
Dilutive Effect of Phantom Units(1)
— 26,890 18,613 21,188
Diluted Weighted Average Shares Outstanding 10,013,573 64,993,746 65,011,182 65,006,198
Diluted Earnings per Share $ 0.05 $ 0.09 $ 0.28 $ 0.25

~~(1) Since the assumed incremental income results in an increase in per share income for the three months ended September 30, 2011, the~~

~~assumed effects of the conversion of operating~~ ~~company Class~~ ~~B units, options to purchase operating company units, options to purchase Class~~

~~A common stock, and phantom operating company units are excluded from the calculation of diluted income per share.~~

Cash and Cash Equivalents:

At ~~September 30,~~March 31, 2012 and December 31, 2011, cash and cash equivalents was ~~$36.9 million.~~$27.8 million and $35.1 million, respectively. The Company considers all money market funds and highly-liquid debt instruments with an original maturity of three months or less at the time of purchase to be cash equivalents. The Company maintains its cash in bank deposit and other accounts whose balances, at times, exceed federally insured limits.

Interest on cash and cash equivalents is recorded as interest income on an accrual basis in the consolidated statements of operations. Dividends associated with the investments of the Company’s consolidated subsidiaries are recorded as dividend income on an ex-dividend basis in the consolidated statement of operations.

The Company ~~maintains~~maintained a compensating balance of ~~$1.4~~$1.0 million at ~~September 30,~~March 31, 2012 and December 31, 2011 as collateral for a letter of credit issued by a third party in lieu of a cash security deposit, as required by the Company’s lease for its New York office space. Such ~~amount is~~amounts are recorded in ~~restricted cash~~Restricted Cash in the consolidated statements of financial condition.

Due to/from ~~broker~~Broker consists primarily of ~~cash balances and~~ amounts ~~receivable/payable~~payable/receivable for unsettled securities transactions held/initiated at the clearing brokers of the Company’s consolidated ~~investment partnerships.~~subsidiaries.

Investments, at Fair Value:

Investments, at Fair Value represents the securities held by the Company and its consolidated ~~investment partnerships,~~subsidiaries, as well as investments in mutual funds. The Company’s investments in third-party mutual funds are held to satisfy the Company’s obligations under its deferred compensation program.

All such investments are recorded at fair value, with net realized and unrealized gains and losses reported in earnings in the consolidated statements of operations.

The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The Fair Value Measurements and Disclosures Topic of the FASB ASC also establishes a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy contains three levels: (i) valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets (Level 1); (ii) valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets, and other observable inputs directly or indirectly related to the asset or liability being measured (Level 2); and (iii) valuation inputs are unobservable and significant to the fair value measurement (Level 3). Additionally, entities are required to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value and define assets and liabilities measured at fair value by major class.

The Company’s fair value measurements relate to its consolidated investments in equity securities, which are ~~primarily~~ exchange-traded securities with quoted prices in active markets, and its investments in mutual funds. The fair value measurements of the equity securities and mutual funds have been classified as Level 1.

The following table presents these instruments’ fair value at ~~September 30, 2011:~~March 31, 2012:

The following table presents these instruments’ fair value at December 31, ~~2010:~~2011:

Level 1 Level 2 Level 3
(in thousands)

Assets:
Equity Securities $ 842 $ — $ —
Investments in Mutual Funds 2,481 — —
Total Fair Value $ 3,323 $ — $ —

~~Securities Valuation:~~

	Leve1 1		Level 2		Level 3
	(in thousands)
Assets:
Equity Securities	$	2,285	$	-	$	-
Investments in Mutual Funds		2,634		-		-
Total Fair Value	$	4,919	$	-	$	-

Securities Valuation:

Investments in equity securities for which market quotations are available are valued at the last reported price or closing price on the primary market or exchange on which they trade. If no reported equity sales occurred on the valuation date, equity investments are valued at the bid price. Investments in mutual funds are valued at the closing net asset value per share of the fund on the day of valuation. Transactions are recorded on ~~the~~a trade ~~date.~~date basis.

The net realized gain or loss on sales of securities and mutual funds is determined on a specific identification basis and is included in net realized and unrealized gain/(loss) from investments in the consolidated statements of operations.

Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, amounts due from brokers, and advisory fees receivable. The Company maintains its cash and ~~temporary~~ cash ~~investments~~equivalents in bank deposits and other accounts whose balances, at times, exceed federally insured limits.

The concentration of credit risk with respect to advisory fees receivable is generally limited due to the short payment terms extended to clients by the Company. On a periodic basis, the Company evaluates its advisory fees receivable and establishes an allowance for doubtful accounts, if necessary, based on a history of past write-offs and collections and current credit conditions. For the three months ended September 30, 2011 and 2010, approximately 7.1% and 10.4%, respectively, of the Company’s advisory fees were generated from an advisory agreement with one client. For the nine months ended September 30, 2011 and 2010, approximately 7.9% and 10.1%, respectively, of the Company’s advisory fees were generated from an advisory agreement with one client. At ~~September 30, 2011~~March 31, 2012 and December 31, ~~2010,~~2011, no allowance for doubtful accounts has been deemed necessary.

Property and Equipment:

Property and equipment is carried at cost, less accumulated depreciation and amortization. Depreciation is provided on a straight-line basis over the estimated useful lives of the respective assets, which range from three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvements or the remaining lease term.

Business Segments:

The Company views its operations as comprising one operating segment.

Income Taxes:

The Company is a “C” corporation under the Internal Revenue Code, and thus liable for federal, state, and local taxes on the income derived from its economic interest in its operating company. The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes. It has not made a provision for federal or state income taxes because it is the individual responsibility of each of the operating company’s members (including the Company) to separately report their proportionate share of the operating company’s taxable income or loss. Similarly, the income of the Company’s consolidated ~~investment partnerships~~subsidiaries is not subject to income taxes, since it is allocated to each partnership’s individual partners. The operating company has made a provision for New York City Unincorporated Business Tax (“UBT”).

The Company and its consolidated subsidiaries account for all federal, state, and local taxation pursuant to the asset and liability method, which requires deferred income tax assets and liabilities to be recorded for temporary differences between the ~~financial statement~~carrying amount and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more likely than not to be realized. At ~~September 30, 2011,~~March 31, 2012, the Company had a ~~$60.3~~$60.0 million valuation allowance against deferred tax assets recorded as part of the Company’s initial public offering and the subsequent exchanges of Class B units for shares of its Class A common stock. At December 31, ~~2010,~~2011, the Company had a ~~$59.4~~$61.1 million valuation allowance against these deferred tax assets. The income tax expense, or benefit, is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities. The Company records its deferred tax liabilities as a component of other liabilities in the consolidated statements of financial condition.

Foreign Currency:

Investment securities and other assets and liabilities denominated in foreign currencies are remeasured into U.S. dollar amounts at the date of valuation. Purchases and sales of investment securities, and income and expense items denominated in foreign currencies, are remeasured into U.S. dollar amounts on the respective dates of such transactions.

The Company does not isolate the portion of the results of its operations resulting from the impact of changes in foreign exchange rates on its investments, from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included in net realized and unrealized gain/(loss) on investments in the consolidated statements of operations.

Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Company’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net realized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities resulting from changes in exchange rates.

The functional currency of the Company is the United States Dollar. The functional currency of the Company’s representative office in Australia is the Australian Dollar. Assets and liabilities of this office are translated at the spot rate in effect at the applicable reporting date, and the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. Any resulting unrealized cumulative translation adjustment is recorded net of taxes as a component of accumulated other comprehensive income in equity. As of ~~September 30, 2011,~~March 31, 2012, the Company did not record any accumulated other comprehensive income.

Note 3—Property and Equipment

Property and equipment, net, is comprised of the following:

	As of
	March 31,			December 31,
	2012			2011
	(in thousands)

Leasehold Improvements	$	1,162		$	1,100
Computer Hardware		965			972
Furniture and Fixtures		788			788
Office Equipment		271			271
Computer Software		214			214
Total		3,400			3,345
Less: Accumulated Depreciation and Amortization		(2,536	)		(2,516	)
Total	$	864		$	829

As of
September 30, December 31,
2011 2010
(in thousands)

Leasehold Improvements $ 2,145 $ 2,145
Furniture and Fixtures 1,164 1,164
Computer Hardware 1,026 887
Office Equipment 271 271
Computer Software 214 212
Total 4,820 4,679
Less: Accumulated Depreciation and Amortization (3,024 ) (2,727 )
Total $ 1,796 $ 1,952

Depreciation is included in general and administrative expense and totaled $0.1 million for each of the three months ended ~~September 30, 2011~~March 31, 2012 and ~~2010. Such expenses totaled $0.3 million for each of the nine months ended September 30, 2011 and 2010.~~2011.

Note 4—Related Party Transactions

For the three months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ the Company earned $0.5 million and ~~$1.1~~$1.0 million, respectively, in investment advisory fees from unconsolidated VIEs which receive investment management services from the Company. ~~For the nine months ended September 30, 2011 and 2010, the Company earned $2.1 million and $3.2 million, respectively, in such fees.~~ The Company is not the primary beneficiary of these VIEs.

At both ~~September 30, 2011~~March 31, 2012 and December 31, ~~2010,~~2011, the Company had less than $0.1 million remaining of advances to an international investment company for organization and start-up costs, which are included in ~~receivable~~Receivable from ~~related parties~~Related Parties on the consolidated statements of financial condition. The Company is the sponsor and investment manager of this entity. ~~This entity is included in the previously mentioned unconsolidated VIEs, of which the Company is not considered the primary beneficiary.~~

At ~~September 30, 2011~~March 31, 2012 and December 31, ~~2010,~~2011, receivables from related parties included less than $0.1 million of loans to employees.

The ~~Company has, in~~operating company manages the ~~past, issued loans that were in~~personal funds of certain of the ~~form of forgivable promissory notes, which were amortized through compensation expense~~Company’s employees, including the CEO, its two Presidents, and its two Executive Vice Presidents, pursuant to ~~their terms. For~~investment management agreements in which it has waived its regular advisory fees. The operating company also manages an account beneficially owned by a private fund in which certain of the ~~nine months ended September 30, 2010, less than~~Company’s executive officers invest. Investments by employees in individual accounts are permitted only at the discretion of the executive committee of the Company, but are generally not subject to the same minimum investment levels that are required of outside investors. In addition, the operating company manages the personal funds of some of its employees’ family members at reduced advisory fee rates. The aggregate value of the fees that the Company waived related to the Company’s executive officers and other employees was approximately $0.1 million for the each of ~~such amortization was recognized through compensation and benefits expense. No such amortization was recognized for~~ the three months ended ~~September 30, 2010. The Company did not have any forgivable promissory notes at September 30, 2011 or December~~March 31, ~~2010.~~2012 and 2011.

On October 28, 2008, the operating company issued an aggregate of $16.0 million principal amount of senior subordinated notes to entities established by Richard S. Pzena, the Company’s Chief Executive Officer, for the benefit of certain of his family members, an entity controlled by a Company Director, and a former employee. The Notes were repaid in full during the year ended December 31, 2010.

Note 5—Commitments and Contingencies

In the normal course of business, the Company enters into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants. In certain cases, the Company may have recourse against third parties with respect to these indemnities. The Company maintains insurance policies that may provide coverage against certain claims under these indemnities. ~~The~~ ~~Guarantees Topic~~ ~~of the FASB ASC provides accounting and disclosure requirements for certain guarantees.~~ The Company has had no claims or payments pursuant to these agreements, and it believes the likelihood of a claim being made is remote. Utilizing the methodology in the Guarantees Topic of the FASB ASC, the Company’s estimate of the value of such guarantees is de minimis, and, therefore, no accrual has been made in the consolidated financial statements.

The Company leases office space under a non-cancelable operating lease agreement which expires on October 31, 2015. The Company reflects minimum lease expense for its headquarters on a straight-line basis over the lease term. During the year ended December 31, 2011, the Company entered into a noncancelable sublease agreement for certain excess office space associated with its operating lease agreement. The noncancelable sublease agreement also expires on October 31, 2015.

Lease expenses ~~totaled $0.5 million and $0.4 million~~ for the three months ended ~~September 30,~~March 31, 2012 and 2011 were $0.3 million and ~~2010,~~$0.5 million, respectively, and are included in general and administrative expense. ~~Such expenses totaled $1.5 million for each of the nine months ended September 30, 2011 and 2010, respectively. Lease expenses are presented net of sublease income.~~

Note 6—Compensation and Benefits

Compensation and benefits expense to employees and members is comprised of the following:

	For the Three Months				For the Nine Months				For the Three
	Ended September 30,				Ended September 30,				Months Ended March 31,
	2011		2010		2011		2010		2012		2011
	(in thousands)								(in thousands)

Cash Compensation and Other Benefits	$	6,688	$	6,474	$	20,973	$	19,461	$	7,487	$	7,205
Non-Cash Compensation		1,039		901		3,402		2,565		686		1,183
Total Compensation and Benefits Expense	$	7,727	$	7,375	$	24,375	$	22,026	$	8,173	$	8,388

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ the ~~Company awarded~~operating company granted no options to ~~acquire Class B~~purchase units ~~under~~in the operating company pursuant to the Pzena Investment Management, LLC 2006 Equity Incentive Plan (the “2006 Equity Incentive Plan”) and no options to ~~acquire~~purchase shares of Class A common stock ~~under~~pursuant to the Pzena Investment Management, Inc. 2007 Equity Incentive Plan (the “2007 Equity Incentive Plan”).

For the three months ended ~~September 30,~~March 31, 2012 and 2011, and 2010, the Company recognized approximately $0.7 million and $0.5 million, respectively, in compensation and benefits expense associated with the amortization of all operating company Class B units and options to acquire operating company Class B units under the 2006 Equity Incentive Plan, and options to acquire Class A common stock issued under the 2007 Equity Incentive Plan. For the nine months ended September 30, 2011 and 2010, the Company recognized approximately $2.0 million and $1.6 million in such compensation and benefits expense.

~~For the nine months ended September 30, 2011 and 2010,~~ the operating company granted ~~6,000~~53,116 and ~~7,000,~~6,000, respectively, restricted operating company Class B units, and the related shares of Class B common stock, ~~to certain members~~ pursuant to the 2006 Equity Incentive Plan. ~~No such units were granted for the three months ended September 30, 2011 and 2010.~~ These unit grants each vest ratably over a four-year period commencing January 1, 2012 and 2011, ~~and 2010,~~ respectively. ~~The amortization of these unit-based awards was less than $0.1 million for each of~~

For the three months ended ~~September 30,~~March 31, 2012 and 2011, the Company recognized approximately $0.3 million and ~~2010,~~$0.7 million, respectively, in compensation and ~~$0.1 million for each~~benefits expense associated with the amortization of all unvested operating company Class B unit and option grants issued under the ~~nine months ended September 30, 2011~~2006 Equity Incentive Plan, and ~~2010.~~unvested Class A common stock option grants issued under the 2007 Equity Incentive Plan.

Pursuant to the Pzena Investment Management, LLC Amended and Restated Bonus Plan (the “Bonus Plan”), ~~which became effective January 1, 2007, was amended and restated as of October 30, 2007, and was further amended as of October 31, 2008,~~ eligible employees whose cash compensation is in excess of certain thresholds have a portion of that excess mandatorily deferred. Amounts deferred may be credited to an investment account, take the form of phantom Class B units, or be invested in money market funds at the employee’s discretion, and vest ratably over four years. ~~At both September 30, 2011~~As of March 31, 2012 and December 31, ~~2010,~~2011, the liability associated with deferred compensation investment accounts was approximately ~~$0.9~~$0.3 million and $1.2 million, respectively, which is recorded in the deferred compensation liability on the consolidated ~~statement~~statements of financial condition. For the three months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ the Company recognized approximately ~~$0.3~~$0.4 million, and ~~$0.4~~$0.5 million, respectively, in compensation and benefits expense associated with the amortization of all unvested deferred compensation awards associated with the Bonus Plan. ~~For the nine months ended September 30, 2011 and 2010, the Company recognized approximately $1.3 million and $0.9 million in such expense.~~

As of ~~September 30, 2011~~March 31, 2012 and December 31, ~~2010,~~2011, the Company had approximately ~~$2.1~~$2.4 million and ~~$4.5~~$2.1 million, respectively, in unrecorded compensation expense related to unvested operating company phantom Class B units issued pursuant to ~~our~~its deferred compensation plan, operating company Class B unit and option grants issued under the 2006 Equity Incentive Plan, and Class A common stock option grants issued under the 2007 Equity Incentive Plan.

The Company issues to certain of its employees delayed-vesting cash awards. For the three months ended March 31, 2012 and 2011, no such awards were granted. Delayed-vesting cash awards have varying vesting schedules, with $0.8 million to be paid at the end of 2012, and the remaining $0.4 million to be paid at the end of 2013.

Note 7—Income Taxes

The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes. Neither it nor the Company’s other consolidated subsidiaries ~~has~~have made a provision for federal or state income taxes because it is the individual responsibility of each of these entities’ members (including the Company) to separately report their proportionate share of the respective entity’s taxable income or loss. The operating company has made a provision for New York City UBT. The Company, as a “C” corporation under the Internal Revenue Code, is liable for federal, state and local taxes on the income derived from its economic interest in its operating company, which is net of UBT. Correspondingly, in its consolidated financial statements, the Company reports both the operating company’s provision for UBT, as well as its provision for federal, state and local corporate taxes.

The components of the income tax ~~expense/(benefit)~~expense are as follows:

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2011 2010 2011 2010
(in thousands)
Current Provision:
Unincorporated Business Taxes $ 595 $ 602 $ 2,100 $ 1,951
Local Corporate Tax — — — —
State Corporate Tax — — — —
Federal Corporate Tax — — — —
Total Current Provision $ 595 $ 602 $ 2,100 $ 1,951

Deferred Provision:
Unincorporated Business Taxes $ 1 $ (56 ) $ (38 ) $ (168 )
Local Corporate Tax 71 60 235 176
State Corporate Tax 124 114 413 335
Federal Corporate Tax 427 391 1,420 1,152
Total Deferred Provision $ 623 $ 509 $ 2,030 $ 1,495

Change in Valuation Allowance $ 282 (2,186 ) (2,563 ) (2,073 )

Total Income Tax Expense/(Benefit) $ 1,500 $ (1,075 ) $ 1,567 $ 1,373

~~For the three and nine months ended September 30, 2011 and 2010, the Company’s pre-tax income was determined as follows:~~

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2011 2010 2011 2010
(in thousands)

Income Before Income Taxes $ 9,094 $ 8,177 $ 30,758 $ 27,681
Unincorporated Business Taxes (596 ) (546 ) (2,062 ) (1,783 )
Non-Controlling Interests (7,097 ) (8,033 ) (26,178 ) (23,632 )
Income Before Corporate Taxes $ 1,401 $ (402 ) $ 2,518 $ 2,266

	For the Three
	Months Ended March 31,
	2012			2011
	(in thousands)

Current Provision:
Unincorporated Business Taxes	$	591		$	768
Local Corporate Tax		-			-
State Corporate Tax		-			-
Federal Corporate Tax		-			-
Total Current Provision	$	591		$	768

Deferred Provision:
Unincorporated Business Taxes	$	42		$	(1	)
Local Corporate Tax		77			77
State Corporate Tax		136			136
Federal Corporate Tax		469			468
Total Deferred Provision	$	724		$	680

Change in Valuation Allowance		(1,069	)		(865	)

Total Income Tax Expense	$	246		$	583

The Income Taxes Topic of the FASB ASC establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax return positions in financial statements. It is the Company’s policy to recognize accrued interest, and penalties associated with uncertain tax positions in ~~total income tax expense/(benefit)~~Income Tax Expense/(Benefit) on the consolidated statement of operations. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ no such expenses were recognized. As of ~~September 30, 2011~~March 31, 2012 and December 31, ~~2010,~~2011, no such accruals were recorded.

The Company and the operating company are generally no longer subject to U.S. Federal or state and local income tax examinations by tax authorities for any year prior to ~~2007.~~2008. All tax years subsequent to, and including, ~~2007~~2008 are considered open and subject to examination by tax authorities.

The acquisition of the operating company Class B units, noted below, has allowed the Company to make an election under Section 754 of the Internal Revenue Code (“Section 754”) to step up its tax basis in the net assets acquired. This step up is deductible for tax purposes over a 15-year period. Based on the net proceeds of the initial public offering and tax basis of the operating company, this election ~~has given~~gave rise to aan initial deferred tax asset of approximately $68.7 million.

Pursuant to a tax receivable agreement signed between the members of the operating company and the Company, 85% of the cash savings generated by this election will be distributed to the selling and converting shareholders upon the realization of this benefit.

If the Company exercises its right to terminate the tax receivable agreement early, the Company will be obligated to make an early termination payment to the selling and converting shareholders, based upon the net present value (based upon certain assumptions and deemed events set forth in the tax receivable agreement) of all payments that would be required to be paid by the Company under the tax receivable agreement. If certain change of control events were to occur, the Company would be obligated to make an early termination payment.

As discussed further in Note 11, Shareholders’ Equity, below, on ~~September 15, 2011,~~ March 28, 2011, ~~and March 31, 2010,~~ certain of the operating company’s members exchanged an aggregate of ~~670,902,~~ 536,528 ~~and 734,618, respectively,~~ of their Class B units for an equivalent number of shares of Company Class A common stock. The Company elected to step up its tax basis in the incremental assets acquired in accordance with Section 754. Based on the exchange-date fair values of the Company’s common stock and the tax basis of the operating company, this election gave rise to a ~~$1.5 million deferred tax asset and a corresponding $1.3 million liability to converting shareholders on September 15, 2011, a~~ $2.4 million deferred tax asset and a corresponding $2.0 million liability to converting shareholders on March 28, ~~2011, and a $3.6 million deferred tax asset and a corresponding $3.0 million liability to converting shareholders on March 31, 2010.~~2011. The Company assessed the realizability of the deferred tax asset associated with ~~each of these exchanges~~this exchange and determined that a portion of ~~each of their~~its benefits would go unutilized. Consequently, the Company established a ~~$1.3 million, a~~ $2.1 million ~~and a $3.2~~ valuation allowance on ~~September 15, 2011,~~ March 28, 2011 ~~and March 31, 2010, respectively,~~ to reduce the deferred tax asset to an amount more likely than not to be realized. ~~These~~This deferred tax ~~assets remain~~asset remains available to the Company and can be used to reduce taxable income in future years. The Company similarly reduced the associated liability to selling and converting shareholders by ~~$1.1 million,~~ $1.8 million ~~and $2.7 million~~ at ~~September 15, 2011,~~ March 28, 2011, ~~and March 31, 2010, respectively,~~ to reflect this change in the estimated realization of these assets. As required by the Income Taxes Topic of the FASB ASC, the Company recorded the effects of these transactions in equity.

During the three months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ after giving effect to the exchange discussed earlier, the Company’s valuation allowance was ~~increased by approximately $0.3 million and~~ reduced by approximately ~~$2.2~~$1.1 million and $0.9 million, respectively, due to revised estimates of future taxable income. To reflect this change in the estimated realization of the asset and its liability for future payments, the Company increased its liability to selling and converting shareholders by $1.0 million and $0.1 million, ~~and $1.7 million~~respectively, for the three months ended ~~September 30, 2011~~March 31, 2012 and 2010, respectively. During the nine months ended September 30, 2011 and 2010, after giving effect to the exchanges discussed earlier, the Company’s valuation allowance was decreased by approximately $2.6 million and $2.1 million, respectively, due to revised estimates of future taxable income. To reflect this change in the estimated realization of the asset, the Company correspondingly increased its liability to selling and converting shareholders by $2.3 million and $1.6 million, for the nine months ended September 30, 2011 and 2010, respectively.2011. The effects of these changes to the deferred tax asset and liability to selling and converting shareholders were recorded as a component of the income tax ~~expense/(benefit)~~expense and ~~change in liability to selling and converting shareholders,~~other expense, respectively, on the consolidated statements of operations. As of ~~September 30, 2011~~March 31, 2012 and December 31, ~~2010,~~2011, the net values of all deferred tax assets were approximately ~~$9.9~~$9.2 million and $8.8 million, respectively.

~~As of September 30, 2011 and December 31, 2010, the net values of the liability to selling and converting shareholders were approximately $11.9 million and $9.3 million, respectively.~~

The change in the Company’s deferred tax assets, net of valuation allowance, for the three ~~and nine~~ months ended ~~September 30, 2011~~March 31, 2012 is summarized as follows:

Valuation
Section 754 Other Allowance Total
(in thousands)

Balance at December 31, 2010 $ 65,468 $ 2,797 $ (59,431 ) $ 8,834
Deferred Tax Expense (777 ) 96 — (681 )
Unit Exchange 2,381 — (2,075 ) 306
Change in Valuation Allowance — — 865 865
Balance at March 31, 2011 $ 67,072 $ 2,893 $ (60,641 ) $ 9,324
Deferred Tax Expense (816 ) 71 — (745 )
Change in Valuation Allowance — — 1,980 1,980
Balance at June 30, 2011 $ 66,256 $ 2,964 $ (58,661 ) $ 10,559
Deferred Tax Expense (789 ) 166 — (623 )
Unit Exchange 1,544 — (1,339 ) 205
Change in Valuation Allowance — — (282 ) (282 )
Balance at September 30, 2011 $ 67,011 $ 3,130 $ (60,282 ) $ 9,859

						Valuation
	Section 754			Other		Allowance			Total
	(in thousands)

Balance at December 31, 2011	$	66,224		$	3,661	$	(61,050	)	$	8,835
Deferred Tax Expense		(823	)		158		-			(665	)
Change in Valuation Allowance		-			-		1,069			1,069
Balance at March 31, 2012	$	65,401		$	3,819	$	(59,981	)	$	9,239

1314

The change in the Company’s deferred tax liabilities, which is included in other liabilities on the Company’s consolidated statements of financial condition, for the three ~~and nine~~ months ended ~~September 30, 2011~~March 31, 2012, is summarized as follows:

Total
(in thousands)

Balance at December 31, 2010 $ (51 )
Deferred Tax Expense 1
Balance at March 31, 2011 $ (50 )
Deferred Tax Expense 19
Balance at June 30, 2011 $ (31 )
Deferred Tax Expense —
Balance at September 30, 2011 $ (31 )

	Total
	(in thousands)

Balance at December 31, 2011	$	(13	)
Deferred Tax Expense		(59	)
Balance at March 31, 2012	$	(72	)

The change in the Company’s deferred tax assets, net of valuation allowance, for the three ~~and nine~~ months ended ~~September 30, 2010~~March 31, 2011 is summarized as follows:

						Valuation											Valuation
	Section 754			Other		Allowance			Total			Section 754			Other		Allowance			Total
	(in thousands)											(in thousands)

Balance at December 31, 2009	$	65,006		$	2,001	$	(60,253	)	$	6,754
Balance at December 31, 2010												$	65,468		$	2,797	$	(59,431	)	$	8,834
Deferred Tax Expense		(726	)		173		—			(553	)		(777	)		96		-			(681	)
Unit Exchange		3,577			—		(3,186	)		391			2,381			-		(2,075	)		306
Change in Valuation Allowance		—			—		1,266			1,266			-			-		865			865
Balance at March 31, 2010	$	67,587		$	2,174	$	(62,173	)	$	7,858
Deferred Tax Expense		(849	)		303		—			(546	)
Change in Valuation Allowance		—			—		(1,379	)		(1,379	)
Balance at June 30, 2010	$	67,008		$	2,477	$	(63,552	)	$	5,933
Deferred Tax Expense		(801	)		236		—			(565	)
Change in Valuation Allowance		—			—		2,186			2,186
Balance at September 30, 2010	$	66,207		$	2,713	$	(61,366	)	$	7,554
Balance at March 31, 2011												$	67,072		$	2,893	$	(60,641	)	$	9,324

The change in the Company’s deferred tax liabilities ~~which is included in other liabilities on the Company’s consolidated statements of financial condition,~~ for the three ~~and nine~~ months ended ~~September 30, 2010~~March 31, 2011 is summarized as follows:

Total
(in thousands)

Balance at December 31, 2009 $ (275 )
Deferred Tax Expense 56
Balance at March 31, 2010 $ (219 )
Deferred Tax Expense 56
Balance at June 30, 2010 $ (163 )
Deferred Tax Expense 56
Balance at September 30, 2010 $ (107 )

	Total
	(in thousands)

Balance at December 31, 2010	$	(51	)
Deferred Tax Expense		1
Balance at March 31, 2011	$	(50	)

As of March 31, 2012 and December 31, 2011, the net values of the liability to selling and converting shareholders were approximately $10.1 million and $11.2 million, respectively.

Note 8—Investments, at Fair Value

Investments in equity securities consisted of the following at ~~September 30, 2011:~~March 31, 2012:

Cost Unrealized Loss Fair Value
(in thousands)

Equity Securities $ 3,007 $ (419 ) $ 2,588
Mutual Funds 2,852 (99 ) 2,753
Total $ 5,859 $ (518 ) $ 5,341

			Unrealized
	Cost		Gain/(loss)		Fair Value
	(in thousands)

Equity Securities	$	1,891	$	222	$	2,113
Investments in Mutual Funds		2,491		329		2,820
Total	$	4,382	$	551	$	4,933

1415

Investments in equity securities consisted of the following at December 31, ~~2010:~~2011:

									Unrealized
	Cost		Unrealized Gain		Fair Value		Cost		Gain/(loss)			Fair Value
	(in thousands)						(in thousands)

Equity Securities	$	736	$	106	$	842	$	2,382	$	(97	)	$	2,285
Mutual Funds		2,043		438		2,481
Investments in Mutual Funds								2,542		92			2,634
Total	$	2,779	$	544	$	3,323	$	4,924	$	(5	)	$	4,919

Note 9—Non-Controlling Interests

Non-controlling interests in the operations of the Company’s operating company and consolidated subsidiaries are comprised of the following:

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2011 2010 2011 2010
(in thousands)

Non-Controlling Interest of Pzena Investment Management, LLC $ 7,811 $ 7,722 $ 26,841 $ 23,483
Non-Controlling Interest of Consolidated Investment Partnerships (714 ) 311 (663 ) 149
Non-Controlling Interests $ 7,097 $ 8,033 $ 26,178 $ 23,632

	For the Three
	Months Ended March 31,
	2012		2011
	(in thousands)

Non-Controlling Interests of Pzena Investment Management, LLC	$	8,209	$	9,290
Non-Controlling Interests of Consolidated Subsidiaries		469		50
Non-Controlling Interests	$	8,678	$	9,340

Distributions to non-controlling interests represent tax allocations and dividend equivalents paid to the members of the operating company, as well as withdrawals made by the Company’s consolidated ~~investment partnerships.~~subsidiaries.

Note 10—Members’ Equity Interests of Operating Company

Except as otherwise provided by law, the liability of a member of the operating company is limited to the amount of its capital account. A member may transfer or assign all, or any part of, its membership interest ~~with~~to any other party (a “Transferee”). A Transferee of such membership interest shall not become a member unless its membership in the ~~prior written consent of Pzena Investment Management, Inc., which may be withheld at its sole discretion.~~operating company is unanimously approved by the then existing member(s) in writing. Any ~~transferee~~Transferee admitted as a member shall succeed to the capital account, or portion thereof, transferred or assigned, as if no such transfer or assignment had occurred.

Note 11—Shareholders’ Equity

The Company functions as the holding company through which the business of its operating company is conducted. Concurrently with the consummation of the Company’s initial public offering on October 30, 2007, the operating agreement of the operating company was amended and restated such that, among other things, the Company became the sole managing member of the operating company. As a result, ~~of these transactions:~~the Company: (i) ~~the Company has consolidated~~consolidates the financial results of the operating company ~~with its own~~ and ~~reflected~~reflects the membership interest in it that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) ~~the Company~~ recognizes income generated from its economic interest in the operating company’s net income. ~~Additionally, the Class B units of the operating company that the Company acquired were reclassified as Class A units of the operating company.~~ Class A and Class B units of the operating company have the same economic rights per unit. As of ~~September 30,~~March 31, 2012 and December 31, 2011, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately ~~16.4%~~16.3% and 83.6%, respectively, of the economic interests in the operations of the business. As of December 31, 2010, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately 14.5% and 85.5%83.7%, respectively, of the economic interests in the operations of the business.

Each Class B unit of the operating company has a corresponding share of the Company’s Class B common stock, par value $0.000001 per ~~share, that was issued in exchange for payment of this par value.~~share. Each share of the Company’s Class B common stock entitles its holder to five votes, until the first time that the number of shares of Class B common stock outstanding constitutes less than 20% of the number of all shares of the Company’s common stock outstanding. From this time and thereafter, each share of the Company’s Class B common stock entitles its holder to one vote. When a Class B unit is exchanged for a share of the Company’s Class A common stock or forfeited, a corresponding share of the Company’s Class B common stock will automatically be redeemed and cancelled. Conversely, to the extent that the Company causes the operating company to issue additional Class B units to employees pursuant to its equity incentive plan, these additional holders of Class B units would be entitled to receive a corresponding number of shares of the Company’s Class B common stock (including if the Class B units awarded are subject to vesting).

All holders of the Company’s Class B common stock have entered into a stockholders’ agreement, pursuant to which they agreed to vote all shares of Class B common stock then held by them, and acquired in the future, together on all matters submitted to a vote of the common stockholders.

The outstanding shares of the Company’s Class A common stock represent 100% of the rights of the holders of all classes of the Company’s capital stock to receive distributions, except that holders of Class B common stock will have the right to receive the class’s par value upon the Company’s liquidation, dissolution or winding up.

Pursuant to the operating agreement of the operating company, each vested Class B unit is exchangeable for a share of the Company’s Class A common stock, subject to certain exchange timing and volume limitations.

On ~~September 15, 2011,~~ March 28, 2011 and ~~March 31, 2010,~~September 15, 2011, certain of the operating company’s members exchanged an aggregate of ~~670,902,~~ 536,528 and ~~734,618,~~670,902, respectively, of their Class B units for an equivalent number of shares of Company Class A common stock. These acquisitions of additional operating company membership interests were treated as reorganizations of entities under common control as required by the Business Combinations Topic of the FASB ASC. There were no such exchanges for the three months ended March 31, 2012.

~~The incremental assets and liabilities assumed in the exchanges were recorded on September 15, 2011, March 28, 2011 and March 31, 2010 as follows:~~

September 15, March 28, March 31,
2011 2011 2010
(in thousands)

Pzena Investment Management, LLC Members' Capital $ 9,274 $ 7,425 $ 10,140
Pzena Investment Management, LLC Accumulated Deficit (8,870 ) (7,167 ) (9,824 )
Realizable Deferred Tax Asset 205 306 391
Net Tax Receivable Liability to Converting Unitholders (174 ) (260 ) (332 )
Total $ 435 $ 304 $ 375

Common Stock, at Par $ 7 $ 5 $ 7
Additional Paid-in Capital 428 299 368
Total $ 435 $ 304 $ 375

Note 12—Subsequent Events

The Company evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.

1617

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

Overview

We are a public-equity investment management firm that utilizes a classic value investment approach across all of our investment strategies. We currently manage assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and non-U.S. capital markets. At ~~September 30, 2011,~~March 31, 2012, our assets under management, or AUM, was ~~$12.2~~$14.7 billion. We manage separate accounts on behalf of institutions and high net worth individuals, and act as sub-investment adviser for a variety of SEC-registered mutual funds and offshore funds.

We function as the ~~holding company through which the business~~sole managing member of our operating company, Pzena Investment Management, LLC (the “operating company”), is conducted. Concurrently with the consummation of our initial public offering and reorganization on October 30, 2007, we became the sole managing member of the operating company. As such, we now control its business and affairs and, therefore, consolidate its financial results with ours. In light of our employees’ and other investors’ collective membership interest in our operating company, we reflect their ownership as a non-controlling interest in our consolidated financial statements.. As a result, ~~we have consolidated~~we: (i) consolidate the financial results of ~~the~~our operating company with our own, and ~~reflected~~reflect the membership interest in it that we do not own as a non-controlling interest in our consolidated financial ~~statements~~statements; and we(ii) recognize income generated from our economic interest in ~~the~~our operating company’s net income. As of ~~September 30, 2011,~~March 31, 2012, the holders of Class A common stock (through the Company) and the holders of Class B units of our operating company held approximately ~~16.4%~~16.3% and ~~83.6%~~83.7%, respectively, of the economic interests in the operations of our business.

Non-GAAP Net Income

Our results for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012, and 2011 ~~and 2010 included~~include the recurring adjustments related to ~~our~~the Company’s tax receivable agreement and the associated liability to its selling and converting shareholders. We believe that these accounting adjustments add a measure of non-operational complexity which partially obscures the underlying performance of ~~the~~our business. In evaluating ~~the~~our financial condition and results of operations, we also review certain non-GAAP measures of earnings, which exclude these items. Excluding these adjustments, non-GAAP diluted net income and non-GAAP diluted net income per share were ~~$5.3~~$5.6 million and ~~$0.08,~~$0.09, respectively, for the three months ended ~~September 30, 2011,~~March 31, 2012, and ~~$5.2~~$6.2 million and ~~$0.08,~~$0.10, respectively, for the three months ended September 30, 2010. Excluding the same adjustments, non-GAAP diluted net income and non-GAAP diluted net income per share were $18.1 million and $0.28, respectively, for the nine months ended September 30, 2011, and $15.7 million and $0.24, respectively, for the nine months ended September 30, 2010.March 31, 2011. GAAP and non-GAAP net income for diluted earnings per share generally ~~assume~~assumes all operating company membership units are converted into Company stock at the beginning of the reporting period, and the resulting change to our net income associated with our increased interest in the operating company is taxed at our effective tax rate, exclusive of these adjustments. When this conversion results in an increase in earnings per share or a decrease in loss per share, diluted net income and diluted earnings per share are assumed to be equal to basic net income and basic earnings per share for the ~~reporting period. The Company’s effective tax rate, exclusive of~~ adjustments related to our tax receivable agreement and the associated liability to selling and converting ~~shareholders,~~shareholders. Our effective tax rate, exclusive of these adjustments, was ~~42.9%~~42.8% for each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 42.7% for each of the three and nine months ended September 30, 2010,~~ as noted in the section ~~“Operating Results—Income~~“Income Tax ~~Expense/(Benefit),”~~Expense” below.

We use these non-GAAP measures to assess the strength of the underlying operations of the business. We believe that these adjustments, and the non-GAAP measures derived from them, provide information to better analyze our operations between periods, and over time. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP.

1718

A reconciliation of the non-GAAP measures to the most comparable GAAP measures is included below:

												For the Three
	For the Three Months					For the Nine Months						Months Ended March 31,
	Ended September 30,					Ended September 30,						2012			2011
	2011		2010			2011			2010			(In thousands, except share and
	(in thousands, except share and per-share amounts)											per share amounts)

GAAP Net Income	$	497	$	1,219		$	3,013		$	2,676		$	1,007		$	1,657
Net Effect of Tax Receivable Agreement		332		(461	)		(256	)		(440	)		(96	)		(748	)
Non-GAAP Net Income	$	829	$	758		$	2,757		$	2,236		$	911		$	909

GAAP Non-Controlling Interest of Pzena Investment Management, LLC	$	7,811	$	7,722		$	26,841		$	23,483
GAAP Income Attributable to Non-Controlling Interest
of Pzena Investment Management, LLC												$	8,209		$	9,290
Less: Assumed Corporate Income Taxes		3,348		3,309			11,504			10,063			3,518			3,979
Assumed After-Tax Income of Pzena Investment Management, LLC	$	4,463	$	4,413		$	15,337		$	13,420		$	4,691		$	5,311
Non-GAAP Net Income of Pzena Investment Management, Inc.		829		758			2,757			2,236			911			909
Non-GAAP Diluted Net Income	$	5,292	$	5,171		$	18,094		$	15,656		$	5,602		$	6,220

Non-GAAP Diluted Earnings Per Share Attributable to
Pzena Investment Management, Inc. Common Stockholders:
Non-GAAP Net Income for Diluted Earnings per Share	$	5,292	$	5,171		$	18,094		$	15,656		$	5,602		$	6,220
Non-GAAP Diluted Earnings per Share	$	0.08	$	0.08		$	0.28		$	0.24
Non-GAAP Diluted Weighted Average Shares Outstanding		64,910,014		64,993,746			65,011,182			65,006,198
Non-GAAP Diluted Earnings Per Share												$	0.09		$	0.10
Non-GAAP Diluted Weighted-Average Shares Outstanding													65,326,809			65,199,988

Revenue

We generate revenue primarily from management fees and performance fees, which we collectively refer to as our advisory fees, by managing assets on behalf of institutional accounts and for retail clients, which are generally open-end mutual funds catering primarily to retail investors. Our advisory fee income is recognized over the period in which investment management services are provided. Following the preferred method identified in the Revenue Recognition Topic of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), income from performance fees is recorded at the conclusion of the contractual performance period, when all contingencies are resolved.

Our advisory fees are primarily driven by the level of our AUM. Our AUM increases or decreases with the net inflows or outflows of funds into our various investment strategies and with the investment performance thereof. In order to increase our AUM and expand our business, we must develop and market investment strategies that suit the investment needs of our target clients, and provide attractive returns over the long term. The value and composition of our AUM, and our ability to continue to attract clients, will depend on a variety of factors including, among other things:

our ability to educate our target clients about our classic value investment strategies and provide them with exceptional client service;

the relative investment performance of our investment strategies, as compared to competing products and market indices;

competitive conditions in the investment management and broader financial services sectors;

general economic conditions;

investor sentiment and confidence; and

our decision to close strategies when we deem it to be in the best interests of our clients.

For our institutional accounts, we are paid fees according to a schedule, which varies by investment strategy. The substantial majority of these accounts pay us management fees pursuant to a schedule in which the rate we earn on the AUM declines as the amount of AUM increases.

Pursuant to our sub-investment advisory agreements with our retail clients, we are generally paid a management fee according to a schedule in which the rate we earn on the AUM declines as the amount of AUM increases. Certain of these funds pay us fixed-rate management fees. Due to the substantially larger account size of certain of these accounts, the average advisory fees we earn on them, as a percentage of AUM, are lower than the advisory fees we earn on our institutional accounts.

Certain of our clients pay us fees according to the performance of their accounts relative to certain agreed-upon benchmarks, which results in a ~~slightly~~ lower base fee, but allows us to earn higher fees if the relevant investment strategy outperforms the agreed-upon benchmark.

The majority of advisory fees we earn on institutional accounts is based on the value of our AUM at a specific date on a quarterly basis, either in arrears or advance. Advisory fees on certain of our institutional accounts, and with respect to ~~most~~all of our retail accounts, are calculated based on the average of the monthly or daily market value. Advisory fees are also generally adjusted for any cash flows into or out of a portfolio, where the cash flow represents greater than 10% of the value of the portfolio. While a specific group of accounts may use the same fee rate, the method used to calculate the fee according to the fee rate schedule may differ as described above.

Our advisory fees may fluctuate based on a number of factors, including the following:

changes in AUM due to appreciation or depreciation of our investment portfolios, and the levels of the contribution and withdrawal of assets by new and existing clients;

distribution of AUM among our investment strategies, which have differing fee schedules;

distribution of AUM between institutional accounts and retail accounts, for which we generally earn lower overall advisory fees; and

the level of our performance with respect to accounts on which we are paid performance fees.

Expenses

Our expenses consist primarily of compensation and benefits ~~expenses,~~expense, as well as general and administrative ~~expenses.~~expense. These expenses may fluctuate due to a number of factors, including the following:

variations in the level of total compensation expense due to, among other things, bonuses, awards of equity to our employees and members of our operating company, changes in our employee count and mix, and competitive factors; and

expenses, such as rent, professional service fees and data-related costs, incurred, as necessary, to run our business.

Compensation and Benefits Expense

Our largest expense is compensation and benefits, which includes the salaries, bonuses, equity-based compensation, and related benefits and payroll costs attributable to our members and employees. Compensation and benefits packages are benchmarked against relevant industry and geographic peer groups in order to attract and retain qualified personnel.

Pursuant to the Pzena Investment Management, LLC Amended and Restated 2006 Equity Incentive Plan (the “2006 Equity Incentive Plan”), we have issued restricted units and options to purchase units in ~~the~~our operating company. Under the Pzena Investment Management, Inc. 2007 Equity Incentive Plan (“the 2007 Equity Incentive Plan”), we have issued options to acquire shares of our Class A common stock.

We use a fair-value method in recording the compensation expense associated with the granting of ~~these~~ restricted units, and options to purchase units and common stock, to new and existing members of our operating company under the 2006 and 2007 Equity Incentive ~~Plan.~~Plans. Under this method, compensation expense is measured at the ~~grant date~~grant-date based on the estimated fair value of the award and is recognized over the award’s vesting period.

The fair value of ~~the~~awarded units is determined by reference to the market price of our Class A common stock on the date of grant, since these units are exchangeable for shares of our Class A common stock on a one-for-one basis. We determined that the total grant-date fair value of the units granted in the three months ended March 31, 2012 was $0.2 million. The fair value of the units granted in the three months ended March 31, 2011 was not material. For the three months ended March 31, 2012 and 2011, we recognized approximately $0.2 million and less than $0.1 million, respectively, in compensation and benefits expense associated with the amortization of all restricted operating company Class B units.

The fair value of the options to purchase Class B units and Class A common stock is determined by using an appropriate option pricing model on the ~~grant date.~~grant-date. For the three months ended March 31, 2012 and 2011, we recognized approximately $0.1 million and $0.5 million, respectively, in compensation and benefits expense associated with the amortization of all unvested options to acquire operating company Class B units and unvested options to acquire Class A common stock issued under the 2006 and 2007 Equity Incentive Plans.

Pursuant to the Pzena Investment Management, LLC Amended and Restated Bonus Plan (the “Bonus Plan”), eligible employees whose cash compensation is in excess of certain thresholds have a portion of that excess mandatorily deferred. These deferred amounts may be invested, at the employee’s discretion, in certain third-party mutual funds, restricted phantom units of our operating company, or money market funds. Amounts deferred in any calendar year reduce that year’s cash compensation expense and ~~vest~~are amortized ratably over a four-year period ~~beginning on January 1~~st ofcommencing the ~~next~~following year. At ~~both September 30, 2011~~March 31, 2012 and December 31, ~~2010,~~2011, the liability associated with deferred compensation investment accounts was approximately ~~$0.9~~$0.3 million ~~which~~and $1.2 million, respectively, and is recorded ~~in the~~as deferred compensation liability on the consolidated ~~statement~~statements of financial condition. For the three months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010, the Company~~we recognized approximately ~~$0.7~~$0.4 million and ~~$0.5~~$0.6 million, respectively, in compensation and benefits expense associated with the amortization of all operating company Class B units and options to acquire Class B units issued under the 2006 Equity Incentive Plan, and options to acquire Class A common stock issued under our Pzena Investment Management, Inc. 2007 Equity Incentive Plan (the “2007 Equity Incentive Plan”). For the nine months ended September 30, 2011 and 2010, the Company recognized approximately $2.0 million and $1.6 million in suchdeferred compensation ~~and benefits expense.~~awards. Should additional amounts be deferred in future years, we would expect the non-cash portion of our compensation expense to increase as the previously and subsequently deferred amounts are amortized through the statement of operations.

As of ~~September 30, 2011,~~March 31, 2012, we had approximately ~~$2.1~~$2.4 million in total unrecorded compensation expense related to unvested operating company phantom units issued pursuant to our Bonus Plan, operating company unit and option grants issued under the 2006 Equity Incentive Plan, and ~~stock and~~ option grants issued under our 2007 Equity Incentive Plan. We expect that the amortization of these amounts will be approximately $1.5 million in 2012, $0.8 million in ~~the remainder of 2011, $0.9~~2013, $0.3 million in ~~2012, $0.2~~2014 and $0.1 million in ~~2013, and $0.2 million in 2014.~~2015.

We have historically granted delayed-vesting cash awards to certain of our members. These delayed-vesting cash awards have varying vesting schedules, with $0.8 million to be paid in 2012 and the remaining $0.4 million to be paid in 2013.

General and Administrative Expense

General and administrative expense includes office rent and other expenses, professional and outside services fees, depreciation, and the costs associated with operating and maintaining our research, trading, and portfolio accounting systems. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the overall size and scale of our business operations.

We incur additional expenses associated with being a public company for, among other things, director and officer insurance, director fees, SEC reporting and compliance (including Sarbanes-Oxley and Dodd-Frank compliance), professional fees, transfer agent fees, and other similar expenses. These additional expenses have and will continue to reduce our net income.

Other Income/(Expense)

Other income/(expense) is derived primarily from investment income or loss arising from our consolidated ~~investment partnerships,~~subsidiaries, our investments in various private investment vehicles that we employ to incubate new strategies, income or loss generated by our investments in third-party mutual funds, ~~interest expense on our outstanding debt prior to its repayment in 2010,~~ and interest income generated on our cash balances. Other income/(expense) is also affected by changes in our estimates of the liability due to our selling and converting shareholders associated with payments owed to them under the tax receivable agreement which was executed in connection with our reorganization and offering on October 30, 2007. As discussed further below under “Tax Receivable Agreement,” this liability represents 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax that we realize as a result of the amortization of the increases in tax basis generated from our acquisitions of our operating company’s units from our selling and converting shareholders. Amounts waived by our selling and converting shareholders, if any, reduce this liability. We expect the interest and investment components of other income/(expense), in the aggregate, to fluctuate based on market conditions and the performance of our consolidated investment partnerships and other investments.

Non-Controlling Interests

Our operating company has historically consolidated the results of operations of the private investment partnerships over which we exercise a controlling influence. ~~After our reorganization, we became~~We are the sole managing member of our operating company and ~~now~~ control its business and affairs and, therefore, consolidate its financial results with ours. In light of our employees’ and outside investors’ interest in our operating company, we have reflected their membership interests as a non-controlling interest in our consolidated financial statements. As a result, ~~subsequent to October 30, 2007,~~ our income is generated by our economic interest in our operating company’s net income. As of ~~September 30, 2011,~~March 31, 2012, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately ~~16.4%~~16.3% and ~~83.6%~~83.7%, respectively, of the economic interests in the operations of the business.

Income Tax Expense/(Benefit)

~~While~~As a “C” corporation under the Internal Revenue Code, we are liable for federal, state and local taxes on the income derived from our economic interest in the operating company, ~~has historically not been subject to U.S. federal and certain state income taxes, it has been subject to~~which is net of its provision for New York City Unincorporated Business ~~Tax. As a result of~~Taxes, or UBT. Correspondingly, in our ~~reorganization,~~consolidated financial statements, we ~~are now subject to taxes applicable to C-corporations.~~report both the operating company’s provision for UBT, as well as our provision for federal, state and local corporate taxes.

Valuation allowances are established, when necessary, to reduce deferred tax assets to anthe amount more likely than not to be realized. As of ~~September 30, 2011~~March 31, 2012 and December 31, ~~2010,~~2011, our valuation allowance against the deferred tax asset associated with our acquisition of operating company units in conjunction with the offering and subsequent exchanges was ~~$60.3~~$60.0 million and ~~$59.4~~$61.1 million, respectively.

Assets Under Management and Flows

As of ~~September 30, 2011,~~March 31, 2012, our approximately ~~$12.2~~$14.7 billion of AUM was invested in a variety of value-oriented investment strategies, representing distinct capitalization segments of U.S. and non-U.S. equity markets. The performance ~~and AUM~~ of our five largest investment strategies as of ~~September 30, 2011 are~~March 31, 2012 is further described below. We follow the same investment process for each of these strategies. Our investment strategies are distinguished by the market capitalization ranges from which we select securities for their portfolios, which we refer to as each strategy’s investment universe, as well as the regions in which we invest. While our investment process includes ongoing review of companies in the investment universes described below, our actual investments may include companies outside of the relevant market capitalization range at the time of our investment. In addition, the number of holdings typically found in the portfolios of each of our investment strategies may vary, as described below.

The following table indicates the annualized returns, gross and net (which represents annualized returns prior to, and after, payment of advisory fees, respectively), of our five largest investment strategies from their inception to March 31, 2012, and in the five-year, three-year, and one-year periods ended March 31, 2012, relative to the performance of: (i) the market index which is most commonly used by our clients to compare the performance of the relevant investment strategy, and (ii) the S&P 500® Index, which is provided for the limited purpose of providing a comparison to the broader equity market.

	Period Ended March 31, 2012(1)
Investment Strategy (Inception Date)	Since Inception	5 Years	3 Years	1 Year
Large Cap Value (October 2000)
Annualized Gross Returns	4.9%	(3.0)%	26.7%	2.6%
Annualized Net Returns	4.4%	(3.5)%	26.1%	2.1%
Russell 1000® Value Index	4.1%	(0.8)%	22.8%	4.8%
S&P 500® Index	1.7%	2.0%	23.4%	8.5%
Global Value (January 2004)
Annualized Gross Returns	2.7%	(6.0)%	24.1%	(4.8)%
Annualized Net Returns	1.9%	(6.6)%	23.2%	(5.4)%
MSCI World(SM) Index—Net/U.S.$(2)	5.0%	(0.7)%	20.2%	0.6%
S&P 500® Index	5.0%	2.0%	23.4%	8.5%
EAFE Diversified Value (November 2008)
Annualized Gross Returns	15.3%	—	23.2%	(6.2)%
Annualized Net Returns	15.0%	—	22.9%	(6.4)%
MSCI EAFE® Index—Net/U.S.$(2)	10.0%	—	17.1%	(5.8)%
S&P 500® Index	14.1%	—	23.4%	8.5%
Value Service (January 1996)
Annualized Gross Returns	10.1%	(2.5)%	27.8%	4.7%
Annualized Net Returns	9.3%	(3.2)%	27.0%	4.0%
Russell 1000® Value Index	7.7%	(0.8)%	22.8%	4.8%
S&P 500® Index	7.1%	2.0%	23.4%	8.5%
Small Cap Value (January 1996)
Annualized Gross Returns	13.6%	3.4%	37.4%	0.3%
Annualized Net Returns	12.4%	2.4%	36.1%	(0.7)%
Russell 2000® Value Index	9.4%	0.0%	25.4%	(1.1)%
S&P 500® Index	7.1%	2.0%	23.4%	8.5%

(1)	The historical returns of these investment strategies are not necessarily indicative of their future performance, or the future performance of any of our other current or future investment strategies.

(2)	Net of applicable withholding taxes.

Large Cap Value. We screen a universe of the 500 largest U.S.-listed companies, based on market capitalization, to build a portfolio generally consisting of 30 to 40 stocks. We launched this strategy in October 2000. At March 31, 2012, the Large Cap Value strategy generated a one-year annualized gross return of 2.6%, underperforming both its benchmark and the broader equity market in general. This underperformance relative to the benchmark was due primarily to our investments in the technology and financial sectors and our underweight investment exposure to the consumer staples sector, partially offset by our stock selection within the energy sector and materials sectors.

Global Value. We screen a universe of the 1,500 largest non U.S.-listed companies, based on market capitalization, and the 500 largest U.S.-listed companies, based on market capitalization, to build a portfolio generally consisting of 40 to 60 stocks. We launched this strategy in January 2004. At March 31, 2012, the Global Value strategy generated a one-year annualized gross return of -4.8%, underperforming both its benchmark and the broader equity market in general. This underperformance relative to the benchmark was due primarily to our overweight investment exposure to the financial services and technology sectors, and our stock selection in the consumer staples sector.

EAFE Diversified Value. We screen a universe of the 1,500 largest non-U.S.-listed companies, based on market capitalization, to build a portfolio generally consisting of 60 to 100 stocks. We launched this strategy in November 2008. At March 31, 2012, the EAFE Diversified Value strategy generated a one-year annualized gross return of -6.2%, underperforming both its benchmark and the broader equity market in general. This underperformance relative to the benchmark was due primarily to our overweight investment exposure to the financial services sector, partially offset by an underweight exposure to the basic materials and our stock selection in the consumer staples sectors.

Value Service. We screen a universe of the 1,000 largest U.S.-listed companies, based on market capitalization, to build a portfolio generally consisting of 30 to 40 stocks. We launched this strategy in January 1996. At March 31, 2012, the Value strategy generated a one-year annualized gross return of 4.7%, relatively even with its benchmark but underperforming the broader equity market in general.

Small Cap Value. We screen a universe of U.S.-listed companies ranked from the 1,001st to 3,000th largest, based on market capitalization, to build a portfolio generally consisting of 40 to 50 stocks. We launched this strategy in January 1996. At March 31, 2012, the Small Cap Value strategy generated a one-year annualized gross return of 0.3%, outperforming its benchmark but underperforming the broader equity market in general. This outperformance relative to the benchmark was due primarily to our stock selection in the health care sector, partially offset by our overweight investment exposure to the consumer discretionary sector.

Our earnings and cash flows are heavily dependent upon prevailing financial market conditions. Significant increases or decreases in the various securities markets, particularly the equities markets, can have a material impact on our results of operations, financial condition, and cash flows.

The change in AUM in our institutional accounts and our retail accounts for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011, and ~~2010, and for~~the twelve months ended ~~September 30, 2011,~~March 31, 2012, is described below. Inflows are composed solely of the investment of new or additional assets by new or existing clients. Outflows consist solely of redemptions of assets by existing clients.

The following table describes the allocation of our AUM among our investment strategies, as of ~~September 30, 2011~~March 31, 2012 and ~~2010:~~2011:

~~During the third quarter of 2011, the~~The performance of our investment strategies ~~was negatively~~has been impacted by ~~significant downward movement~~the volatility in the equity markets. ~~Several major concerns continued~~In 2011, our investment strategies generally underperformed relative to weigh on investor confidence in the third quarter of 2011, including the sluggish economic recoveries in many developed countries, the European debt crisis, a divided U.S. Congress struggling to reach an agreement on deficit reduction and raising the statutory federal debt ceiling, and inflation in emerging markets. This, coupled with $0.9 billion in net outflows, resulted in ourtheir respective benchmarks. Our AUM ~~decreasing by $2.1~~declined $1.6 billion, or ~~14.7%~~9.8%, from ~~$14.3~~$16.3 billion at ~~September 30, 2010,~~March 31, 2011, to ~~$12.2~~$14.7 billion at ~~September 30, 2011.~~March 31, 2012.

~~As of September 30, 2011,~~At March 31, 2012, we managed ~~$10.0~~$12.2 billion in institutional accounts and ~~$2.2~~$2.5 billion in retail accounts, for a total of ~~$12.2~~$14.7 billion in ~~assets under management.~~assets. For the three months ended ~~September 30, 2011,~~March 31, 2012, we experienced ~~market depreciation of $3.4 billion and~~ total gross outflows of ~~$0.8~~$1.0 billion, which were partially offset by total gross inflows of ~~$0.5~~$0.2 billion. For the three months ended ~~September 30, 2011,~~March 31, 2012, assets in institutional accounts ~~decreased~~increased by ~~$2.9~~$0.9 billion, or ~~22.5%~~8.0%, due to ~~$2.8~~$1.6 billion in market ~~depreciation~~appreciation and ~~$0.4~~$0.1 billion in gross ~~outflows,~~inflows, partially offset by $0.8 billion in gross outflows. Assets in retail accounts increased by $0.3 billion, ~~in gross inflows. For the three months ended September 30, 2011, assets in retail accounts decreased by $0.8 billion,~~ or ~~26.7%~~13.6%, as a result of ~~$0.6~~$0.4 billion in market ~~depreciation~~appreciation and ~~$0.4~~$0.1 billion in gross ~~outflows,~~inflows, partially offset by $0.2 billion in gross ~~inflows.~~outflows.

For the nine months ended September 30, 2011, we experienced total gross outflows of $2.9 billion and market deprecation of $2.6 billion, offset by total gross inflows of $2.1 billion. For the nine months ended September 30, 2011, assets in institutional accounts decreased by $2.5 billion, or 20.0%, due to market depreciation of $2.2 billion and $1.6 billion in gross outflows, offset by $1.3 billion in gross inflows. For the nine months ended September 30, 2011, assets in retail accounts decreased by $0.9 billion, or 29.0%, as a result of $1.3 billion in gross outflows and $0.4 billion in market depreciation, offset by $0.8 billion in gross inflows.

For the nine months ended September 30, 2010, we experienced total gross inflows of $2.3 billion and market appreciation of $0.7 billion, which were offset by total gross outflows of $3.0 billion. For the nine months ended September 30, 2010, assets in institutional accounts increased by $0.6 billion, or 5.6% , due to $1.3 billion in gross inflows and $0.6 billion in market appreciation, offset by $1.3 billion in gross outflows. For the nine months ended September 30, 2010, assets in retail accounts decreased by $0.6 billion, or 16.7%, as a result of $1.7 billion in gross outflows, offset by $1.0 billion in gross inflows and $0.1 billion in market appreciation.

~~As of September 30, 2011, institutional accounts represented 82.0% of~~At March 31, 2012, our ~~total AUM, compared to 79.0% at September 30, 2010. As of September 30, 2011, our Global~~non-U.S. Value and ~~non-U.S.~~Global Value investment strategies accounted for ~~39.3%~~43.5% of our AUM, compared to ~~35.7%~~35.0% at ~~September 30, 2010.~~March 31, 2011.

Our revenues are correlated with the levels of our weighted average AUM. Our weighted average AUM fluctuates based on changes in the market value of accounts advised and managed by us, and on our fund flows. Since we are long-term fundamental investors, we believe that our investment strategies yield the most benefits, and are best evaluated, over a long-term timeframe. We believe that our investment strategies are generally evaluated by our clients and our potential future clients based on their relative performance since inception, and the previous one-year, three-year, and five-year periods. There has typically been a correlation between our strategies’ investment performance and the size and direction of asset flows over the long term. To the extent that our returns for these periods outperform client benchmarks, we would generally anticipate increased asset flows over the long term. Correspondingly, negative returns relative to client benchmarks could cause existing clients to reduce their exposure to our products, and hinder new client acquisition.

~~The following table indicates~~Given the ~~annualized returns, gross~~lower weighted average AUM in 2012 compared to 2011, our revenues for the three months ended March 31, 2012 decreased from our revenues for the three months ended March 31, 2011. An increase in weighted average AUM and in revenues typically results in higher operating income and net ~~(which represents annualized returns prior to and after payment of advisory fees, respectively), of our five largest investment strategies from their inception to September 30, 2011,~~income. On the contrary, a decrease in weighted average AUM and in ~~the five-year, three-year,~~revenues typically results in lower operating income, net income, and ~~one-year periods ended September 30, 2011, relative to the performance of: (i) the market index which is most commonly used by~~operating margins. We would expect pressure on our ~~clients to compare the performance of the relevant investment strategy, and (ii) the S&P 500~~® ~~Index, which is provided for the limited purpose of providing a comparison to the broader equity market.~~

Period Ended September 30, 2011(1)
Investment Strategy (Inception Date)
Since Inception

5 Years

3 Years

1 Year
Large Cap Value (October 2000)
Annualized Gross Returns 2.7 % (6.8)% 0.6 % (7.5)%
Annualized Net Returns 2.2 % (7.3)% 0.1 % (8.0)%
Russell 1000® Value Index
2.2 % (3.5)% (1.5)% (1.9)%
S&P 500® Index
(0.3)% (1.2)% 1.2 % 1.1 %
Global Value (January 2004)
Annualized Gross Returns (0.1)% (9.3)% (2.5)% (13.9)%
Annualized Net Returns (0.8)% (10.0)% (3.2)% (14.5)%
MSCI World(SM) Index—Net/U.S.$(2)
2.9 % (2.2)% (0.1)% (4.3)%
S&P 500® Index
2.3 % (1.2)% 1.2 % 1.1 %
EAFE Diversified Value (November 2008)
Annualized Gross Returns 11.2 % — — (11.4)%
Annualized Net Returns 11.0 % — — (11.6)%
MSCI EAFE® Index—Net/U.S.$(2)
6.8 % — — (9.3)%
S&P 500® Index
7.8 % — — 1.1 %
Value Service (January 1996)
Annualized Gross Returns 8.6 % (6.4)% 0.7 % (6.5)%
Annualized Net Returns 7.8 % (7.0)% 0.0 % (7.2)%
Russell 1000® Value Index
6.4 % (3.5)% (1.5)% (1.9)%
S&P 500® Index
5.8 % (1.2)% 1.2 % 1.1 %
Small Cap Value (January 1996)
Annualized Gross Returns 12.0 % 0.4 % 4.7 % (7.5)%
Annualized Net Returns 10.7 % (0.6)% 3.7 % (8.4)%
Russell 2000® Value Index
7.9 % (3.1)% (2.8)% (6.0)%
S&P 500® Index
5.8 % (1.2)% 1.2 % 1.1 %

~~(1) The historical returns of these investment strategies are not necessarily indicative of their future performance, or~~operating margins in the future ~~performance of any of~~if average AUM and revenues were to decline. For the three months ended March 31, 2012, our ~~other~~

~~current or future investment strategies.~~

~~(2) Net of applicable withholding taxes.~~

~~Large Cap Value.~~ We screen a universe of the 500 largest U.S.-listed companies, based on market capitalization, to build a portfolio generally consisting of 30 to 40 stocks. We launched this strategy in October 2000. At September 30,operating expense decreased from its comparable 2011 ~~the Large Cap Value strategy achieved a one-year annualized gross return of -7.5%, underperforming both its benchmark and the broader domestic equity market in general. This performance was~~period, due primarily to ~~our overweight investment exposure to~~reductions in real estate expenses associated with the ~~financial services~~sublease of excess office space and ~~technology sectors, partially offset by an underweight exposure to health care.~~

~~Global Value.~~ We screen a universe of the 1,500 largest non U.S.-listed companies, based on market capitalization, and the 500 largest U.S.-listed companies, based on market capitalization, to build a portfolio generally consisting of 40 to 60 stocks. We launched this strategy in January 2004. At September 30, 2011, the Global Value strategy achieved a one-year annualized gross return of -13.9%, underperforming the benchmark most commonly used by our clients. This performance was due to our overweight investment exposure to the financials and information technology sectors.

~~EAFE Diversified Value.~~ We screen a universe of the 1,500 largest non-U.S.-listed companies, based on market capitalization, to build a portfolio generally consisting of 60 to 100 stocks. We launched this strategy in November 2008. At September 30, 2011, the EAFE Diversified Value strategy achieved a one-year annualized gross return of -11.4%, underperforming the benchmark most commonly used by our clients. This performance was due primarily to our overweight investment exposure to the financials sector.

~~Value Service.~~ We screen a universe of the 1,000 largest U.S.-listed companies, based on market capitalization, to build a portfolio generally consisting of 30 to 40 stocks. We launched this strategy in January 1996. At September 30, 2011, the Value strategy achieved a one-year annualized gross return of -6.5%, underperforming both its benchmark and the broader domestic equity market in general. This performance was due primarily to our overweight exposure to the financial services and technology sectors, partially offset by an underweight exposure to health care.

~~Small Cap Value.~~ We screen a universe of U.S.-listed companies ranked from the 1,001 to 3,000 largest, based on market capitalization, to build a portfolio generally consisting of 40 to 50 stocks. We launched this strategy in January 1996. At September 30, 2011, the Small Cap Value strategy achieved a one-year annualized gross return of -7.5%, underperforming both its benchmark and the broader domestic equity market in general. This performance was primarily due to our overweight exposure to the consumer discretionary sector, partially offset by an underweight exposure to health care.lower compensation costs.

Our revenue from advisory fees earned on our institutional accounts and our retail accounts for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ is described below:

~~Three Months Ended September30, 2011 versus September 30, 2010~~

Our total revenue ~~increased $1.5~~decreased $2.0 million, or ~~8.1%~~9.2%, to ~~$20.0~~$19.8 million for the three months ended ~~September 30, 2011,~~March 31, 2012, from ~~$18.5~~$21.8 million for the three months ended ~~September 30, 2010.~~March 31, 2011. This change was driven primarily by increases in performance fees recognized. Such performance fees generated $1.1 million for the three months ended September 30, 2011. No such performance fees were recognized for the three months ended September 30, 2010. As noted above, certain of our clients pay us fees according to the performance of their accounts relative to certain agreed-upon benchmarks, which results in a slightly lower base fee, but allows us to earn higher fees if the relevant investment strategy outperforms the agreed-upon benchmark. The increase was also attributable to increasesdecreases in weighted average AUM, which ~~increased $0.7~~decreased $1.9 billion, or ~~5.1%~~11.7%, to $14.3 billion for the three months ended ~~September 30, 2011,~~March 31, 2012, from ~~$13.6~~$16.2 billion for the three months ended ~~September, 30 2010.~~March 31, 2011. To the extent that we experience reductions in weighted average AUM, either through negative market performance or net client outflows, our revenue will be adversely affected.

Our weighted average fees were ~~0.560%~~0.552% and ~~0.544%~~0.539% for the three months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ respectively. This increase was primarily due to ~~an increase~~a higher mix of assets in ~~performance fees recognized, as discussed above. Institutional accounts comprised 81.8% of weighted average assets for~~ the ~~three months ended September 30, 2011, compared to 77.2% of weighted average assets for the three months ended September 30, 2010.~~

Company’s institutional channel and its retail Emerging Markets strategy, which carry higher fee rates. Weighted average assets in institutional accounts ~~increased $1.2~~decreased $1.0 billion, or ~~11.4%~~7.8%, to ~~$11.7~~$11.9 billion for the three months ended ~~September 30, 2011,~~March 31, 2012, from ~~$10.5~~$12.9 billion for the three months ended ~~September 30, 2010,~~March 31, 2011, and had weighted average fees of ~~0.597%~~0.581% and ~~0.589%~~0.578% for the three months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ respectively. ~~The increase was primarily due to performance fees recognized.~~

Weighted average assets in retail accounts decreased ~~$0.5~~$0.9 billion, or ~~16.1%~~27.3%, to ~~$2.6~~$2.4 billion for the three months ended ~~September 30, 2011,~~March 31, 2012, from ~~$3.1~~$3.3 billion for the three months ended ~~September 30, 2010,~~March 31, 2011, and had weighted average fees of ~~0.395%~~0.406% and ~~0.389%~~0.385% for the three months ended ~~September 30,~~March 31, 2012 and 2011, and 2010, respectively. The increase in weighted average fees in retail accounts was primarily due to the higher mix of assets in the Company’s retail Emerging Markets strategy, which typically carries a higher fee rate, as well as the timing of flows in our retail accounts.

~~Nine Months Ended September 30, 2011 versus September 30, 2010~~

Our total revenue increased $7.1 million, or 12.5%, to $64.1 million for the nine months ended September 30, 2011, from $57.0 million for the nine months ended September 30, 2010. This change was driven primarily by increases in weighted average AUM, which increased $1.3 billion, or 9.2%, to $15.5 billion for the nine months ended September 30, 2011, from $14.2 billion for the nine months ended September 30, 2010. Our increase in revenue was also attributable to an increase in performance fees recognized. Such performance fees generated $2.5 million and $0.3 million in revenue for the nine months ended September 30, 2011 and 2010, respectively. As noted above, to the extent that we experience reductions in weighted average AUM, either through negative market performance or net client outflows, our revenue will be adversely affected.

Our weighted average fees were 0.553% and 0.537% for the nine months ended September 30, 2011 and 2010, respectively. This increase was primarily due to performance fees recognized. Institutional accounts comprised 80.6% of weighted average assets for the nine months ended September 30, 2011, compared to 76.1% of weighted average assets for the nine months ended September 30, 2010.

Weighted average assets in institutional accounts increased $1.7 billion, or 15.7%, to $12.5 billion for the nine months ended September 30, 2011, from $10.8 billion for the nine months ended September 30, 2010, and had weighted average fees of 0.592% and 0.590% for the nine months ended September 30, 2011 and 2010, respectively. The increase in weighted average fees was primarily due to an increase in performance-based fees. These performance-based fees pay incentive fees according to the performance relative to certain agreed-upon benchmarks, which results in a lower base fee, but allows for us to earn higher fees if the relevant investment strategy out-performs the agreed-upon benchmark.

Weighted average assets in retail accounts decreased $0.4 billion, or 11.8%, to $3.0 billion for the nine months ended September 30, 2011, from $3.4 billion for the nine months ended September 30, 2010, and had weighted average fees of 0.388% and 0.367% for the nine months ended September 30, 2011 and 2010, respectively. The increase in weighted average fees in retail accounts was due ~~primarily~~ to ~~the~~a higher mix of assets in ~~the Company’s~~our retail Emerging Markets strategy, which ~~typically carry~~carries a higher fee ~~rate, as well as the~~rate. The timing of asset flows in our other retail ~~accounts.~~accounts also contributed to the change in our retail weighted-average fee rate.

Our operating ~~expenses are~~expense is driven primarily by our compensation costs. The table below describes the components of our compensation expense for the three ~~and nine~~ months ended ~~September 30, 2011~~March 31, 2012 and ~~2010:~~2011:

~~Three Months Ended September 30, 2011 versus September 30, 2010~~

Total operating ~~expenses increased~~expense decreased by ~~$0.5~~$0.4 million, or ~~5.4%~~3.9%, to ~~$9.7~~$9.9 million for the three months ended ~~September 30, 2011,~~March 31, 2012, from ~~$9.2~~$10.3 million for the three months ended ~~September 30, 2010.~~March 31, 2011. This ~~increase~~decrease was primarily attributable to ~~an increase~~reductions in real estate expenses associated with the sublease of excess office space and lower compensation ~~and benefits expenses, as discussed below.~~costs.

Compensation and benefits expense ~~increased~~decreased by ~~$0.3~~$0.2 million, or ~~4.1%~~2.4%, to ~~$7.7~~$8.2 million for the three months ended ~~September 30, 2011,~~March 31, 2012, from ~~$7.4~~$8.4 million for the three months ended ~~September 30, 2010.~~March 31, 2011. This ~~increase~~decrease was primarily attributable to the $0.5 million decrease in other non-cash compensation related to annual equity-based awards to our members, and arose in part as a result of ~~increases~~a shift in ~~discretionary bonus accruals~~compensation mix and the amortization of previously issued awards. We would expect non-cash ~~compensation.~~compensation expense in subsequent years to depend on the size and composition of awards granted under our equity incentive plans.

General and administrative expense ~~increased~~decreased by $0.2 million, or ~~11.1%~~10.5%, to ~~$2.0~~$1.7 million for the three months ended ~~September 30, 2011,~~March 31, 2012, from ~~$1.8~~$1.9 million for the three months ended ~~September 30, 2010.~~March 31, 2011. This ~~increase~~decrease was ~~a result of small fluctuations~~due largely to reductions in ~~various general and administrative~~real estate expense ~~categories.~~associated with the noncancelable sublease agreement we entered into in 2011.

~~Nine Months Ended September 30, 2011 versus September 30, 2010~~

Total operating expenses increased by $2.3 million, or 8.2%, to $30.3 million for the nine months ended September 30, 2011, from $28.0 million for the nine months ended September 30, 2010. This increase was primarily attributable to an increase in compensation and benefits expenses, as discussed below.

Compensation and benefits expense increased by $2.4 million, or 10.9%, to $24.4 million for the nine months ended September 30, 2011, from $22.0 million for the nine months ended September 30, 2010. This increase was primarily a result of increases in discretionary bonus accruals and non-cash compensation.

General and administrative expense increased by $0.1 million, or 1.7%, to $6.0 million for the nine months ended September 30, 2011, from $5.9 million for the nine months ended September 30, 2010. This increase was a result of small fluctuations in various general and administrative expense categories.

Other Income/(Expense)

~~Three Months Ended September 30, 2011 versus September 30, 2010~~

~~Total other income/(expense)~~Other income was ~~an expense of $1.2~~less than $0.1 million for the three months ended ~~September 30, 2011,~~March 31, 2012, and consisted primarily of ~~approximately $1.2~~$0.9 million of net realized and unrealized ~~losses~~gains from investments and $0.2 million in interest, dividend and other income. This was partially offset by $1.0 million in expense related to adjustments to our liability to our selling and converting shareholders. Other income was $0.1 million for the three months ended March 31, 2011, and consisted primarily of $0.3 million of net realized and unrealized gains from investments. This was partially offset by $0.1 million in ~~each of other~~ expense ~~and~~related to adjustments to our liability to our selling and converting shareholders, ~~offset by approximately~~and $0.1 million in ~~interest and dividend income.~~other expense. As discussed further below, ~~under “Tax Receivable Agreement,”~~ the liability to our selling and converting shareholders represents 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we realize as a result of the amortization of the increases in tax basis generated from our purchase of operating company units from our selling shareholders. ~~Amounts waived by our selling shareholders, if any, reduce this liability. Total other income/(expense) was an expense of $1.1~~The $0.6 million for the three months ended September 30, 2010, and consisted primarily of $1.7 million in expenses related to adjustments to our liability to our selling and converting shareholders, offset by $0.5 million of net realized and unrealized gains from investments and $0.1 million in interest and dividend income. The fluctuation in net realized and unrealized gains/(losses) from investments was primarily a result of negative performance in our investment partnerships and mutual funds for the three months ended September 30, 2011, compared to positive performance in our investment partnerships and mutual funds for the three months ended September 30, 2010.

~~Nine Months Ended September 30, 2011 versus September 30, 2010~~

Total other income/(expense) was an expense of $3.0 million for the nine months ended September 30, 2011, and consisted primarily of $2.3 million related to adjustments to our liability to our selling and converting shareholders, $0.7 million of net realized and unrealized losses from investments, and $0.2 million in other expense, offset by approximately $0.2 million in interest and dividend income. Total other income/(expense) was an expense of $1.4 million for the nine months ended September 30, 2010, and consisted primarily of approximately $1.6 million in expenses related to adjustments to our liability to our selling and converting shareholders and $0.2 million in interest expense, offset by approximately $0.3 million in interest and dividend income, $0.1 millionchange in net realized and unrealized gains ~~from investments, and $0.1 million in other income. The fluctuation in net realized and unrealized gains/(losses) from investments~~ was ~~primarily a result of negative performance in our~~due to investment partnerships and mutual funds for the nine months ended September 30, 2011, compared to positive performance in our investment partnerships and mutual funds for the nine months ended September 30, 2010. The decrease in interest expense for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 is a result of the full repayment of the outstanding principal amount of our senior subordinated notes during the nine months ended September 30, 2010.

performance.

Income Tax ~~Expense/(Benefit)~~Expense

Our results for the three months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ included the effects of adjustments related to our tax receivable agreement and the associated liability to selling and converting shareholders. Our effective corporate tax rate, exclusive of these adjustments, ~~related to our tax receivable agreement and the associated liability to selling and converting shareholders,~~ was ~~42.9%~~42.8% for each of the three ~~and nine~~ months ended ~~September 30, 2011~~March 31, 2012 and ~~42.7% for each of the three and nine months ended September 30, 2010.~~2011.

Non-GAAP income before corporate income taxes used to calculate our ~~non-GAAP effective corporate tax rate~~income before income taxes for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ are as follows:

	For the Three Months						For the Nine Months						For the Three
	Ended September 30,						Ended September 30,						Months Ended March 31,
	2011			2010			2011			2010			2012			2011
	(in thousands)												(in thousands)

Income Before Income Taxes	$	9,094		$	8,177		$	30,758		$	27,681		$	9,931		$	11,580
Change in Liability to Selling and Converting Shareholders		50			1,725			2,307			1,633			973			117
Unincorporated Business Taxes		(596	)		(546	)		(2,062	)		(1,783	)		(633	)		(767	)
Net Income Attributable to Non-Controlling Interests		(7,097	)		(8,033	)		(26,178	)		(23,632	)		(8,678	)		(9,340	)
Non-GAAP Income Before Corporate Taxes	$	1,451		$	1,323		$	4,825		$	3,899
Non-GAAP Income Before Income Taxes													$	1,593		$	1,590

Our non-GAAP effective corporate tax rate, which is exclusive of adjustments related to our tax receivable agreement and the associated liability to selling and converting shareholders, was determined as follows:

	For the Three Months Ended March 31,
	2012				2011
			% of Non-				% of Non-
			GAAP Pre-tax				GAAP Pre-tax
	Tax		Income		Tax		Income
	(in thousands)				(in thousands)

Federal Corporate Tax	$	542		34.0%	$	541		34.0%
State and Local Taxes, Net of Federal Benefit		140		8.8%		140		8.8%
Non-GAAP Effective Taxes	$	682		42.8%	$	681		42.8%

Income tax expense decreased $0.4 million, from $0.6 million for the three months ended ~~September 30,~~March 31, 2011, ~~and 2010, was determined as follows:~~

For the Three Months Ended September 30,
2011 2010
% of Non-GAAP % of Non-GAAP
Tax Pre-tax Income Tax Pre-tax Income
(in thousands) (in thousands)

Federal Rate Applied to Non-GAAP Pre-tax Income $ 493 34.0 % $ 450 34.0 %
State and Local Taxes, Net of Federal Benefit 129 8.9 % 115 8.7 %
Non-GAAP Effective Tax Rate $ 622 42.9 % $ 565 42.7 %

~~Our non-GAAP effective corporate tax rate for the nine months ended September 30, 2011 and 2010, was determined as follows:~~

For the Nine Months Ended September 30,
2011 2010
% of Non-GAAP % of Non-GAAP
Tax Pre-tax Income Tax Pre-tax Income
(in thousands) (in thousands)

Federal Rate Applied to Non-GAAP Pre-tax Income $ 1,641 34.0 % $ 1,326 34.0 %
State and Local Taxes, Net of Federal Benefit 427 8.9 % 337 8.7 %
Non-GAAP Effective Tax Rate $ 2,068 42.9 % $ 1,663 42.7 %

~~Three Months Ended September 30, 2011 versus September 30, 2010~~

~~We recognized a $1.5~~to $0.2 million ~~income tax expense~~ for the three months ended ~~September 30,~~March 31, 2012. The 2012 and 2011 ~~and a $1.1 million income tax benefit for the three months ended September 30, 2010. The~~ income tax expense ~~for the three months ended September 30, 2011~~ included ~~$0.3~~$1.1 million ~~in expense~~and $0.9 million, respectively, of benefit associated with adjustments to the valuation allowance recorded against our deferred tax asset related to our ~~initial public offering and subsequent unit exchanges. The income~~ tax ~~benefit for the three months ended September 30, 2010 included $2.2 million of benefit associated with such adjustments.~~receivable agreement. Exclusive of these adjustments, the remaining income tax expense for ~~the~~ three months ended ~~September 30, 2011 was attributable to~~March 31, 2012 consisted of $0.6 million in ~~both~~ operating company unincorporated business taxes and $0.7 million of corporate income taxes. ~~For the three months ended September 30, 2010,~~On a similar basis, the remaining income tax expense ~~was attributable to $0.6~~for the three months ended March 31, 2011 consisted of $0.8 million of operating company unincorporated business taxes and $0.7 million of corporate income ~~taxes and $0.5 million for operating company unincorporated business~~ taxes. The ~~increase~~decrease in these taxes is attributable primarily to ~~an increase~~a decrease in taxable income. ~~As noted above, the non-GAAP effective tax rate increased slightly, to 42.9% for the three months ended September 30, 2011 from 42.7% for the three months ended September 30, 2010.~~ A comparison of the GAAP effective tax ~~rate~~rates for the three months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ is not meaningful due to the valuation allowance adjustments.

~~Nine Months Ended September 30, 2011 versus September 30, 2010~~

For the nine months ended September 30, 2011 and 2010, we recognized an income tax expense of $1.6 million and $1.4 million, respectively. The income tax expense for the nine months ended September 30, 2011 and 2010 included benefits associated with adjustments to the valuation allowance recorded against our deferred tax asset related to our initial public offering and subsequent units exchanges of $2.6 million and $2.1 million, respectively. Exclusive of these adjustments, the remaining income tax expense for the nine months ended September 30, 2011 was attributable to $2.1 million in both operating company unincorporated business taxes and corporate income taxes. For the nine months ended September 30, 2010, the remaining income tax expense was attributable to $1.8 million for operating company unincorporated business taxes and $1.7 million of corporate income taxes. The increase in these taxes is attributable primarily to an increase in taxable income. As noted above, the non-GAAP effective tax rate increased slightly, to 42.9% for the nine months ended September 30, 2011 from 42.7% for the nine months ended September 30, 2010. A comparison of the GAAP effective tax rate for the nine months ended September 30, 2011 and 2010 is not meaningful due to the valuation allowance adjustments.

Non-Controlling Interests

~~Three Months Ended September 30, 2011 versus September 30, 2010~~

Net income attributable to non-controlling interests was ~~$7.1 million and $8.0~~$8.7 million for the three months ended ~~September 30, 2011~~March 31, 2012, and ~~2010, respectively. For the three months ended September 30, 2011, non-controlling interests~~ consisted of ~~$7.8~~$8.2 million ofassociated with our employees’ and outside investors’ interest in the income of the operating company, offset by $0.7 million in losses incurred by the outside investors in the Company’s consolidated investment partnerships. For the three months ended September 30, 2010, non-controlling interests consisted of income of $7.7 million of our employees’ and outside investors’approximately 83.7% weighted-average interest in the income of the operating company, and ~~$0.3~~approximately $0.5 million associated with ~~outside investors’~~our consolidated subsidiaries’ interest in the income of our consolidated investment partnerships. The decrease in net income attributable to non-controlling interests is primarily attributable to the negative performance in our consolidated investment partnerships for the three months ended September 30, 2011 compared to positive performance in our consolidated investment partnerships for the three months ended September 30, 2010. This decrease was slightly offset by an increase in our weighted average AUM, which had a corresponding positive impact on operating company revenues and income.

~~Nine Months Ended September 30, 2011 versus September 30, 2010~~

Net income attributable to non-controlling interests was ~~$26.2 million and $23.6~~$9.3 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2011, and ~~2010, respectively. For the nine months ended September 30, 2011, non-controlling interests~~ consisted primarily of ~~$26.8~~$9.3 million ofassociated with our employees’ and outside investors’ approximately 15.0% weighted-average interest in the income of the operating company, offset by $0.7 million in losses incurred by the outside investors in the Company’s consolidated investment partnerships. For the nine months ended September 30, 2010, non-controlling interests consisted of $23.5 million of our employees’ and outside investors’ interest in the income of the operating company, and $0.1 million associated with outside investors’ interest in the income of our consolidated investment partnerships.company. The ~~increase~~change in net income attributable to non-controlling interests reflects primarily the ~~increase~~decrease in our weighted average AUM which had a corresponding ~~positive~~negative impact on operating company revenues and income. This increase was offset by a decrease attributable to negative performance in our consolidated investment partnerships for the nine months ended September 30, 2011 compared to positive performance in our consolidated investment partnerships for the nine months ended September 30, 2010.

2827

Liquidity and Capital Resources

Historically, the working capital needs of our business have primarily been met through the cash generated by our operations. Distributions to members of our operating company ~~and loan amortization payments~~ have been our largest use of cash from financing activities. Investing activities have historically been investments in our own investment strategies, purchases and sales of investments to fund our deferred compensation program, and, to a lesser extent, capital expenditures.

~~As of September 30, 2011,~~At March 31, 2012, our cash and cash equivalents was ~~$36.9~~$27.8 million, inclusive of ~~$2.4~~$2.1 million in cash held by our consolidated ~~investment partnerships.~~subsidiaries. Advisory fees receivable was ~~$15.3~~$16.2 million. We also had approximately $2.8 million in investments set aside to satisfy our obligations under our deferred compensation program.

We expect to fund the liquidity needs of our business in the next twelve months, and over the long-term, primarily through cash generated from operations. As an investment management firm, our business has been materially affected by conditions in the global financial markets and economic conditions throughout the world. Our liquidity is highly dependent on the revenue and income from our operations, which is directly related to our levels of AUM. For the three months ended ~~September 30, 2011,~~March 31, 2012, our weighted average AUM and revenues ~~increased~~decreased by ~~5.1%~~11.7% and ~~8.1%~~9.2%, respectively, compared to our weighted average AUM and revenues for the three months ended September 30, 2010. For the nine months ended September 30, 2011, our weighted average AUM and revenues increased by 9.2% and 12.5%, respectively, compared to our weighted average AUM and revenues for the nine months ended September 30, 2010.March 31, 2011.

In determining the sufficiency of liquidity and capital resources to fund our business, we regularly monitor our liquidity position, including, among other things, cash, working capital, investments, long-term liabilities, lease commitments, debt obligations, and operating company distributions. Compensation is our largest expense. To the extent we deem necessary and appropriate to run our business, recognizing the need to retain our key personnel, we have the ability to change the absolute levels of our compensation packages, as well as change the mix of their cash and non-cash components. Historically, ~~the Company has~~we have not tied ~~its levels~~our level of compensation directly to revenue, as many Wall Street firms do. Correspondingly, there is not a linear relationship between ~~the Company’s~~our compensation and the revenues ~~it generates.~~we generate. This generally has the effect of increasing operating margins in periods of increased revenues, but can reduce operating margins when revenue declines.

We continuously evaluate our staffing requirements and compensation levels with reference to our own liquidity position and external peer benchmarking data. The result of this review directly influences management’s recommendations to our Board of Directors with respect to such staffing and compensation levels.

We anticipate that tax allocations and dividend equivalent payments to the members of our operating company, which consisted of 3132 of our employees, certain unaffiliated persons, ~~and~~ former employees, and us, will continue to be a material financing activity. Cash distributions to operating company members for partnership tax allocations would increase should the taxable income of the operating company increase. Dividend equivalent payments will depend on our dividend policy and the discretion of our Board of Directors, as discussed below.

We currently do not have any ~~long-term debt.~~material need for cash in excess of that derived from our operations. Although we are comfortable with our current capital structure, in the current economic environment, it is uncertain whether additional or alternative sources of debt or equity financing would be available on acceptable terms, if required.

We do not anticipate meaningful outlays for internal investment or capital expenditures over the next twelve months.

We believe that our lack of long-term debt, and ability to vary cash compensation levels, have provided us with an appropriate degree of flexibility in providing for our liquidity needs.

Dividend Policy

We are a holding company and have no material assets other than our ownership of membership interests in our operating company. As a result, we depend upon distributions from our operating company to pay any dividends that our Board of Directors may declare to be paid to our Class A common stockholders. When, and if, our Board of Directors declares any such dividends, we then cause our operating company to make distributions to us in an amount sufficient to cover the dividends declared. Our dividend policy has certain risks and limitations, particularly with respect to liquidity. We may not pay dividends to our Class A common shareholders in amounts that have been paid to them in the past, or at all, if, among other things, we do not have the cash necessary to pay our intended dividends. To the extent we do not have cash on hand sufficient to pay dividends in the future, we may decide not to pay dividends. 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.

On an annual basis, our Board of Directors has targeted a cash dividend payout ratio of approximately 70% to 80% of our non-GAAP net income, subject to growth initiatives and other funding needs. Our ability to pay dividends is subject to the Board of Directors’ discretion and may be limited by our holding company structure and applicable provisions of Delaware law.

Tax Receivable Agreement

Our purchase of membership units of our operating company concurrent with our initial public offering, and the subsequent and future exchanges by holders of Class B units of our operating company for shares of our Class A common stock (pursuant to the exchange rights provided for in the operating company’s operating agreement), has resulted in, and is expected to continue to result in, increases in our share of the tax basis of the tangible and intangible assets of our operating company at the time of our acquisition and these subsequent and future exchanges, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to us. These increases in tax basis and tax depreciation and amortization deductions have reduced, and are expected to continue to reduce, the amount of ~~tax~~cash taxes that we would otherwise be required to pay in the future. We have entered into a tax receivable agreement with the current members of our operating company, the one member of our operating company immediately prior to our initial public offering who sold all of its membership units to us in connection with our initial public offering, and any future holders of Class B units, that requires us to pay them 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize (or are deemed to realize in the case of an early termination payment by us, or a change in control, as described in the tax receivable agreement) as a result of the increases in tax basis described above and certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

Cash Flows

Operating activities provided ~~$18.5~~$8.0 million and ~~$12.0~~$12.9 million in cash flows for the three months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ respectively. The ~~increase~~year-over-year decrease in cash flows from operating activities ~~for the three months ended September 30, 2011 compared to the three months ended September 30, 2010~~ was driven primarily by changes in working capital, in addition to a ~~slight increase in net income, exclusive of the adjustments related to our tax receivable agreement and the associated liability to selling and converting shareholders.~~

Operating activities provided $44.5 million and $39.5 million in cash flows for the nine months ended September 30, 2011 and 2010, respectively. The increase in cash flows from operating activities for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was driven primarily by an increasedecrease in net income, exclusive of the adjustments related to our tax receivable agreement and the associated liability to selling and converting shareholders.

Investing activities consist primarily of capital expenditures, mutual fund contributions to, and redemptions from, our deferred compensation program, and ~~redemptions associated with our deferred compensation program, and activities with~~ related ~~parties. Investing activities used less than $0.1 million and approximately $2.1 million for~~party activity. For the three months ended ~~September 30, 2011 and 2010, respectively. This change was primarily due to $2.1 million in mutual fund contributions to our deferred compensation program during~~March 31, 2012, investing activities generated $0.1 million. For the three months ended ~~September 30, 2010 that was not replicated in the three months ended September 30, 2011. Investing~~March 31, 2011, investing activities used $0.7 ~~million and $2.0 million for the nine months ended September 30, 2011 and 2010, respectively. This change~~million. The increase in cash generated through investing activities was primarily ~~due~~attributable to ~~decreases~~a decrease of $1.0 million in ~~transfers and net contributions to mutual fund~~purchases of investments ~~associated with~~in our deferred compensation ~~program.~~plan and a decrease of $0.1 million in purchases of property and equipment, partially offset by a decrease of $0.3 million in proceeds from investments in our deferred compensation plan.

Financing activities consist primarily of borrowing arrangements and contributions from, and distributions to, non-controlling interests, which represent tax allocations and dividend equivalents paid to the members of the operating company, as well as withdrawals made by ~~the Company’s~~our consolidated investment partnerships. Financing activities used ~~$6.8~~$15.3 million for the three months ended March 31, 2012, and used $6.6 million for the three months ended ~~September 30, 2011 and 2010, respectively.~~March 31, 2011. The $8.7 million increase in cash used in financing activities ~~for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 was~~is primarily due to ~~an increase~~timing of ~~$0.4 million~~dividend and dividend equivalent payments made in ~~distributions to non-controlling interests, offset by an increase~~March of ~~$0.2 million in contributions from non-controlling interests.~~

Financing activities used $23.3 million and $26.5 million for the nine months ended September 30, 2011 and 2010, respectively. The decrease in cash used in financing activities for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was primarily due to the $10.0 million repayment of our senior subordinated notes in 2010 that was not replicated in 2011. This decrease was partially offset a by a $3.8 million decrease in contributions from non-controlling interests, a $2.7 million increase in distributions to non-controlling interests, and an increase in dividends paid of $0.3 million.2012.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2012.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), requires management to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial condition. Management believes that the critical accounting policies discussed below involve additional management judgment due to the sensitivity of the methods and assumptions used.

Consolidation

Our policy is to consolidate all majority-owned subsidiaries in which we have a controlling financial interest and variable-interest entities of which we are deemed to be the primary beneficiary. We also consolidate non-variable-interest entities which we control as the general partner or managing member. We assess our consolidation practices regularly, as circumstances dictate. All significant inter-company transactions and balances have been eliminated.

Investments in private investment partnerships in which we have a minority interest and exercise significant influence are accounted for using the equity method. Such investments, if any, are reflected on the consolidated statements of financial condition as investments in affiliates and are recorded at the amount of capital reported by the respective private investment partnerships. Such capital accounts reflect the contributions paid to, distributions received from, and the equity earnings of, the private investment partnerships. ~~The earnings of these private investment partnerships are included in equity in earnings of affiliates in the consolidated statements of operations.~~

Income Taxes

We are a “C” corporation under the Internal Revenue Code, and thus liable for federal, state and local taxes on the income derived from our economic interest in our operating company. The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes. Our operating company has not made a provision for federal or state income taxes because it is the responsibility of each of the operating company’s members (including us) to separately report their proportionate share of the operating company’s taxable income or loss. Similarly, the income of our consolidated investment partnerships is not subject to income taxes, as such income is allocated to each partnership’s individual partners. The operating company has made a provision for New York City Unincorporated Business Tax (UBT).

We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the ~~financial statement~~ carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryforwards and tax credits. A valuation allowance is maintained for deferred tax assets that we estimate are more likely than not to bego unrealizable based on available evidence at the time the estimate is made. Determining the valuation allowance requires management to make significant judgments and assumptions. In determining the valuation allowance, we use historical and forecasted future operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations. Each quarter, we re-evaluate our estimate related to the valuation allowance, including our assumptions about future taxable income.

We believe that the accounting estimate related to the ~~$60.3~~$60.0 million valuation allowance, recorded against the deferred tax asset associated with our acquisition of operating company membership units, is a critical accounting estimate because the underlying assumptions can change from period to period. For example, tax law changes, or variances in future projected operating performance, could result in a change in the valuation allowance. If we ~~were~~are not able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made.

Management judgment is required in determining our provision for income taxes, evaluating our tax positions and establishing deferred tax assets and liabilities. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to earnings would result.

3130

Item 3. Quantitative and Qualitative Disclosures About Market ~~Risk.~~Risk.

Market Risk

Our exposure to market risk is directly related to our role as investment adviser for the institutional separate accounts we manage and the retail clients for which we act as sub-investment adviser. As noted in Item 1A, “Risk Factors,” of our ~~2010~~ Form 10-K for the year ended December 31, 2011, filed with the SEC on March ~~15, 2011,~~14, 2012, we experienced declines in AUM ~~from~~during the ~~quarter ended September 30, 2007, through the quarter ended March 31, 2009,~~last three quarters of 2011, largely due to the volatility and disruption in the capital and credit markets. ~~We similarly have recently experienced a decline in our AUM from March 31, 2011, when AUM was $16.3 billion, through September 30, 2011, when AUM was $12.2 billion.~~ During this period, we experienced declines in revenue and profitability, and there can be no assurance that there will not be declines in our AUM, revenue and profitability should volatility and disruption in the capital and credit markets occur again in the future. During periods of declining AUM and revenue, such as we experienced from the quarter ended September 30, 2007 through the quarter ended March 31, 2009, and from the quarter ended March 31, 2011 through the quarter ended September 30, 2011, there can be no assurance we will be able to reduce our expenses at a commensurate rate, potentially leading to profitability declines. Additionally, given the nature of our business, there is a minimum expense base necessary to retain our employees and maintain our operations, and it may be difficult to reduce expenses beyond certain levels. An economic downturn, and volatility in the global financial markets, could also significantly affect the estimates, judgments, and assumptions used in the valuation of our financial instruments.

Our revenue for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ was generally derived from advisory fees, which are typically based on the market value of our AUM, which can be affected by adverse changes in interest rates, foreign currency exchange and equity prices. Accordingly, a decline in the prices of securities would cause our revenue and income to decline, due to a decrease in the value of the assets we manage. In addition, such a decline could cause our clients to withdraw their funds in favor of investments offering higher returns or lower risk, which would cause our revenue and income to decline further.

We are also subject to market risk due to a decline in the value of the holdings of our consolidated subsidiaries, which consist primarily of marketable securities and investments in mutual funds. At ~~September 30, 2011,~~March 31, 2012, the fair value of these assets was ~~$5.3 million.~~$2.1 million and $2.8 million, respectively. Assuming a 10% increase or decrease, the fair value would have increased or decreased by ~~$0.5~~$0.2 million and $0.3 million, respectively, at ~~September 30, 2011.~~March 31, 2012.

Interest Rate Risk

Since the Company does not have any debt that bears interest at a variable rate, it does not have any direct exposure to interest rate risk at ~~September 30, 2011.~~March 31, 2012.

Item 4. Controls and ~~Procedures.~~Procedures.

During the course of their review of our consolidated financial statements as of ~~September 30, 2011,~~March 31, 2012, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September 30, 2011,~~March 31, 2012, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have not been any changes in our internal control over financial reporting during the three ~~and nine~~ months ended ~~September 30, 2011~~March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item ~~1. Legal Proceedings.~~

~~In the normal course of business, we may be subject to various legal and administrative proceedings.~~

~~Currently, there are no material legal proceedings pending against us.~~

~~Item 1A. Risk Factors.~~

~~There are no material changes from the risk factors set forth in Part 1, Item 1A of the Company’s 2010 Annual Report on Form 10-K.~~

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

~~None.~~On January 1, 2012, the operating company granted an aggregate of 53,116 Class B units and the related 53,116 shares of Class B common stock to certain employee members.

~~Item 3. Defaults Upon Senior Securities.~~The issuances did not involve any public offering, general advertising or general solicitation. The certificates representing the securities bear a restrictive legend. On the basis of these facts, the securities were issued in a transaction not involving a public offering and were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933 (the “Securities Act”).

~~None.~~

~~Item 4. (Removed and Reserved).~~

~~Item 5. Other Information.~~

~~None.~~

Item 6. ~~Exhibits.~~Exhibits.

Exhibit		Description of Exhibit
10.1 31.1		Amendment, dated as of March 5, 2012, to Amended and Restated Operating Agreement of Pzena Investment Management, LLC, dated as of October 30, 2007, by and among Pzena Investment Management, Inc. as the Managing Member of Pzena Investment Management, LLC and those Class B members whose signatures are affixed thereto (incorporated by reference to Exhibit 10.22 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (SEC File No. 001-33761)). Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15(d)-14(a)
31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15(d)-14(a)
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Materials from the Pzena Investment Management, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Changes in Equity, (iv) Consolidated Statements of Cash Flows, and (vi) related Unaudited Notes to the Consolidated Financial Statements.

3332

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: ~~November 2, 2011~~April 27, 2012

PZENA INVESTMENT MANAGEMENT, INC.


By:	/s/ RICHARD S. PZENA
	Name:	Richard S. Pzena
	Title:	Chief Executive Officer


By:	/s/ GREGORY S. MARTIN
	Name:	Gregory S. Martin
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)

Delaware		20-8999751
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Consolidated Statements of Financial Condition of Pzena Investment Management, Inc. as of ~~September 30, 2011~~March 31, 2012 (unaudited) and December 31, ~~2010~~2011	1
	Consolidated Statements of Operations (unaudited) of Pzena Investment Management, Inc. for the Three Ended March 31, 2012 and ~~Nine Months Ended September 30,~~ 2011 ~~and September 30, 2010~~	2
	Consolidated Statement of Changes in Equity (unaudited) of Pzena Investment Management, Inc. for the ~~Nine~~Three Months Ended ~~September 30, 2011~~March 31, 2012	3
	Consolidated ~~Statement~~Statements of Cash Flows (unaudited) of Pzena Investment Management, Inc. for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2012 and 2011 ~~and September 30, 2010~~	4
	Notes to the Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1718
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3231
Item 4.	Controls and Procedures	3231

	PART II — OTHER INFORMATION
Item 1.	~~Legal Proceedings~~	33
~~Item 1A.~~	~~Risk Factors~~	33
~~Item~~ 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
~~Item 3.~~	~~Defaults Upon Senior Securities~~	33
~~Item 4.~~	~~(Removed and Reserved)~~	33
~~Item 5.~~	~~Other Information~~	3331
Item 6.	Exhibits	3332

SIGNATURES		3433

	For the Three Months				For the Nine Months				For the Three
	Ended September 30,				Ended September 30,				Months Ended March 31,
	2011		2010		2011		2010		2012		2011

Operating Company Units		54,375,231		—		—		—
Options to Purchase Operating Company Units		3,648,117		1,620,060		1,653,060		1,620,060		2,079,646		992,976
Options to Purchase Shares of Class A Common Stock		961,750		961,750		961,750		961,750		961,750		-
Phantom Operating Company Units		152,701		44,916		30,000		44,916		73,572		-
Total		59,137,799		2,626,726		2,644,810		2,626,726		3,114,968		992,976

	As of
	September 30,		December 31,			As of
	2011		2010			March 31,		December 31,
	(unaudited)					2012		2011
						(unaudited)
Assets
ASSETS
Cash and Cash Equivalents	$	36,862	$	16,381		$	27,801	$	35,083
Restricted Cash		1,423		1,420			1,030		1,030
Due from Broker		31		30			2,985		457
Advisory Fees Receivable		15,302		15,275			16,164		14,717
Investments, at Fair Value		5,341		3,323			4,933		4,919
Receivable from Related Parties		63		63			86		66
Other Receivables		194		210			64		54
Prepaid Expenses and Other Assets		509		914			609		688
Deferred Tax Asset, Net of Valuation Allowance of
$60,282 and $59,431, respectively		9,859		8,834
$59,981 and $61,050, respectively							9,239		8,835
Property and Equipment, Net of Accumulated Depreciation
of $3,024 and $2,727, respectively		1,796		1,952
of $2,536 and $2,516, respectively							864		829
TOTAL ASSETS	$	71,380	$	48,402		$	63,775	$	66,678

LIABILITIES AND EQUITY
Liabilities:
Accounts Payable and Accrued Expenses	$	13,114	$	3,879		$	7,899	$	6,062
Due to Broker		32		—			2,947		-
Liability to Selling and Converting Shareholders		11,944		9,287			10,098		11,218
Lease Liability							1,641		1,795
Deferred Compensation Liability		879		875			321		1,173
Other Liabilities		486		565			242		206
TOTAL LIABILITIES		26,455		14,606			23,148		20,454

Equity:
Preferred Stock (Par Value $0.01; 200,000,000 Shares
Authorized; None Outstanding)		—		—			-		-
Class A Common Stock (Par Value $0.01; 750,000,000
Shares Authorized; 10,575,089 and 9,367,659 Shares
Issued and Outstanding in 2011 and 2010, respectively)		105		93
Shares Authorized; 10,575,089 and 10,575,089 Shares
Issued and Outstanding in 2012 and 2011, respectively)							105		105
Class B Common Stock (Par Value $0.000001; 750,000,000
Shares Authorized; 53,812,799 and 55,012,324 Shares
Issued and Outstanding in 2011 and 2010, respectively)		—		—
Shares Authorized; 53,977,055 and 53,967,555 Shares
Issued and Outstanding in 2012 and 2011, respectively)							-		-
Additional Paid-In Capital		11,866		10,836			12,066		12,000
Retained Earnings/(Accumulated Deficit)		1,780		(357	)
Retained Earnings							830		1,832
Total Pzena Investment Mangement, Inc.'s Equity		13,751		10,572			13,001		13,937
Non-Controlling Interests		31,174		23,224			27,626		32,287
TOTAL EQUITY		44,925		33,796			40,627		46,224
TOTAL LIABILITIES AND EQUITY	$	71,380	$	48,402		$	63,775	$	66,678

PZENA INVESTMENT MANAGEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except share amounts)


	Shares of		Shares of								Retained
	Class A		Class B			Class A		Additional			Earnings/			Non-
	Common		Common			Common		Paid-In			(Accumulated			Controlling
	Stock		Stock			Stock		Capital			Deficit)			Interests			Total

Balance at December 31, 2010		9,367,659		55,012,324		$	93	$	10,836		$	(357	)	$	23,224		$	33,796
Unit Conversion		1,207,430		(1,207,430	)		12		727			—			(662	)		77
Retirement of Class B Units		—		(1,095	)		—		(1	)		—			(3	)		(4	)
Directors' Shares		—		—			—		32			—			178			210
Amortization of Non-Cash Compensation		—		9,000			—		383			—			2,141			2,524
Net Income		—		—			—		—			3,013			26,178			29,191
Contributions from Non-Controlling Interests		—		—			—		—			—			450			450
Distributions to Non-Controlling Interests		—		—			—		(111	)		—			(22,750	)		(22,861	)
Effect of Consolidation of Affiliates		—		—			—		—			—			2,418			2,418
Class A Cash Dividends Declared and Paid ($0.09 per share)		—		—			—		—			(876	)		—			(876	)
Balance at September 30, 2011		10,575,089		53,812,799		$	105	$	11,866		$	1,780		$	31,174		$	44,925

PZENA INVESTMENT MANAGEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2011			2010			2011			2010

OPERATING ACTIVITIES
Net Income	$	7,594		$	9,252		$	29,191		$	26,308
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Depreciation		104			108			311			322
Non-Cash Compensation		1,039			901			3,402			2,565
Director Share Grant		70			14			210			41
Net Realized and Unrealized Loss/(Gain) from Investments		1,150			(544	)		709			(137	)
Change in Liability to Selling and Converting Shareholders		50			1,725			2,307			1,633
Deferred Income Taxes		905			(1,677	)		(534	)		(579	)

Changes in Operating Assets and Liabilities:
Advisory Fees Receivable		2,027			(928	)		(27	)		(870	)
Due from Broker		2,064			58			401			103
Restricted Cash		(1	)		(4	)		(3	)		(13	)
Prepaid Expenses and Other Assets		112			16			428			(120	)
Due to Broker		23			(79	)		26			(715	)
Accounts Payable, Accrued Expenses, and Other Liabilities		3,519			3,110			8,301			7,473
Tax Receivable Agreement Payments		—			—			(84	)		—
Purchases of Investments		(6,513	)		(294	)		(26,928	)		(3,805	)
Proceeds from Sale of Investments		6,361			304			26,754			7,279
Net Cash Provided by Operating Activities		18,504			11,962			44,464			39,485

INVESTING ACTIVITIES
Purchases of Deferred Compensation		—			(2,042	)		(1,433	)		(2,042	)
Proceeds from Deferred Compensation		—			—			847			—
Receivable from Related Parties		(22	)		(13	)		—			27
Purchase of Property and Equipment		(4	)		(3	)		(155	)		(13	)
Net Cash Used In Investing Activities		(26	)		(2,058	)		(741	)		(2,028	)

FINANCING ACTIVITIES
Distributions to Non-Controlling Interests		(6,710	)		(6,322	)		(22,860	)		(20,225	)
Contributions from Non-Controlling Interests		200			—			450			4,321
Retirement of Class B Units		(4	)		—			(4	)		(2	)
Term Loan and Senior Subordinated Notes Repayment		—			—			—			(10,000	)
Dividends		(298	)		(281	)		(876	)		(562	)
Net Cash Used in Financing Activities		(6,812	)		(6,603	)		(23,290	)		(26,468	)
NET CHANGE IN CASH	$	11,666		$	3,301		$	20,433		$	10,989

CASH AND CASH EQUIVALENTS - Beginning of Period	$	25,196		$	23,596		$	16,381		$	15,908
Effect of Consolidation/(Deconsolidation) of Affiliates		—			(96	)		48			(96	)
Net Change in Cash		11,666			3,301			20,433			10,989
CASH AND CASH EQUIVALENTS - End of Period	$	36,862		$	26,801		$	36,862		$	26,801

Supplementary Cash Flow Information:
Interest Paid	$	—		$	—		$	—		$	232
Income Taxes Paid	$	757		$	643		$	2,877		$	2,597

See accompanying notes to consolidated financial statements.

	Level 1		Level 2		Level 3
	(in thousands)						Leve1 1		Level 2		Level 3
							(in thousands)
Assets:
Equity Securities	$	2,588	$	—	$	—	$	2,113	$	-	$	-
Investments in Mutual Funds		2,753		—		—		2,820		-		-
Total Fair Value	$	5,341	$	—	$	—	$	4,933	$	-	$	-

	Cost		Unrealized Loss			Fair Value
	(in thousands)

Equity Securities	$	3,007	$	(419	)	$	2,588
Mutual Funds		2,852		(99	)		2,753
Total	$	5,859	$	(518	)	$	5,341

	September 15,			March 28,			March 31,
	2011			2011			2010
	(in thousands)

Pzena Investment Management, LLC Members' Capital	$	9,274		$	7,425		$	10,140
Pzena Investment Management, LLC Accumulated Deficit		(8,870	)		(7,167	)		(9,824	)
Realizable Deferred Tax Asset		205			306			391
Net Tax Receivable Liability to Converting Unitholders		(174	)		(260	)		(332	)
Total	$	435		$	304		$	375

Common Stock, at Par	$	7		$	5		$	7
Additional Paid-in Capital		428			299			368
Total	$	435		$	304		$	375

													For the Twelve									For the Twelve
	For the Three Months						For the Nine Months						Months Ended			For the Three Months						Months Ended
	Ended September 30,						Ended September 30,						September 30,			Ended March 31,						March 31,
Assets Under Management	2011			2010			2011			2010			2011			2012			2011			2012
	(in billions)															(in billions)
Institutional Accounts
Assets
Beginning of Period																$	11.3		$	12.5		$	13.0
Inflows																	0.1			0.4			1.8
Outflows																	(0.8	)		(0.6	)		(2.5	)
Net Flows																	(0.7	)		(0.2	)		(0.7	)
Market Appreciation/(Depreciation)																	1.6			0.7			(0.1	)
End of Period																$	12.2		$	13.0		$	12.2

Retail Accounts
Assets
Beginning of Period Assets	$	12.9		$	10.0		$	12.5		$	10.7		$	11.3		$	2.2		$	3.1		$	3.3
Inflows		0.3			0.6			1.3			1.3			1.9			0.1			0.3			0.8
Outflows		(0.4	)		(0.5	)		(1.6	)		(1.3	)		(2.1	)		(0.2	)		(0.3	)		(1.5	)
Net Flows		(0.1	)		0.1			(0.3	)		0.0			(0.2	)		(0.1	)		-			(0.7	)
Market Appreciation/(Depreciation)		(2.8	)		1.2			(2.2	)		0.6			(1.1	)		0.4			0.2			(0.1	)
End of Period Assets	$	10.0		$	11.3		$	10.0		$	11.3		$	10.0
Retail Accounts
Beginning of Period Assets	$	3.0		$	3.1		$	3.1		$	3.6		$	3.0
End of Period																$	2.5		$	3.3		$	2.5

Total
Assets
Beginning of Period																$	13.5		$	15.6		$	16.3
Inflows		0.2			0.3			0.8			1.0			1.0			0.2			0.7			2.6
Outflows		(0.4	)		(0.7	)		(1.3	)		(1.7	)		(1.7	)		(1.0	)		(0.9	)		(4.0	)
Net Flows		(0.2	)		(0.4	)		(0.5	)		(0.7	)		(0.7	)		(0.8	)		(0.2	)		(1.4	)
Market Appreciation/(Depreciation)		(0.6	)		0.3			(0.4	)		0.1			(0.1	)		2.0			0.9			(0.2	)
End of Period Assets		2.2		$	3.0		$	2.2		$	3.0		$	2.2
Total
Beginning of Period Assets	$	15.9		$	13.1		$	15.6		$	14.3		$	14.3
Inflows		0.5			0.9			2.1			2.3			2.9
Outflows		(0.8	)		(1.2	)		(2.9	)		(3.0	)		(3.8	)
Net Flows		(0.3	)		(0.3	)		(0.8	)		(0.7	)		(0.9	)
Market Appreciation/(Depreciation)		(3.4	)		1.5			(2.6	)		0.7			(1.2	)
End of Period Assets	$	12.2		$	14.3		$	12.2		$	14.3		$	12.2
End of Period																$	14.7		$	16.3		$	14.7

	AUM at September 30,				AUM at March 31,
Investment Strategy	2011		2010		2012		2011
	(in billions)				(in billions)

U.S. Value Strategies	$	7.4	$	9.2	$	8.3	$	10.6
Global Value Strategies		3.0		3.2		4.2		3.6
Non-U.S. Value Strategies		1.8		1.9
Non-U.S. Value Strategeies						2.2		2.1
Total	$	12.2	$	14.3	$	14.7	$	16.3

	Period Ended September 30, 2011(1)
Investment Strategy (Inception Date)	Since Inception	5 Years	3 Years	1 Year
Large Cap Value (October 2000)
Annualized Gross Returns	2.7 %	(6.8)%	0.6 %	(7.5)%
Annualized Net Returns	2.2 %	(7.3)%	0.1 %	(8.0)%
Russell 1000® Value Index	2.2 %	(3.5)%	(1.5)%	(1.9)%
S&P 500® Index	(0.3)%	(1.2)%	1.2 %	1.1 %
Global Value (January 2004)
Annualized Gross Returns	(0.1)%	(9.3)%	(2.5)%	(13.9)%
Annualized Net Returns	(0.8)%	(10.0)%	(3.2)%	(14.5)%
MSCI World(SM) Index—Net/U.S.$(2)	2.9 %	(2.2)%	(0.1)%	(4.3)%
S&P 500® Index	2.3 %	(1.2)%	1.2 %	1.1 %
EAFE Diversified Value (November 2008)
Annualized Gross Returns	11.2 %	—	—	(11.4)%
Annualized Net Returns	11.0 %	—	—	(11.6)%
MSCI EAFE® Index—Net/U.S.$(2)	6.8 %	—	—	(9.3)%
S&P 500® Index	7.8 %	—	—	1.1 %
Value Service (January 1996)
Annualized Gross Returns	8.6 %	(6.4)%	0.7 %	(6.5)%
Annualized Net Returns	7.8 %	(7.0)%	0.0 %	(7.2)%
Russell 1000® Value Index	6.4 %	(3.5)%	(1.5)%	(1.9)%
S&P 500® Index	5.8 %	(1.2)%	1.2 %	1.1 %
Small Cap Value (January 1996)
Annualized Gross Returns	12.0 %	0.4 %	4.7 %	(7.5)%
Annualized Net Returns	10.7 %	(0.6)%	3.7 %	(8.4)%
Russell 2000® Value Index	7.9 %	(3.1)%	(2.8)%	(6.0)%
S&P 500® Index	5.8 %	(1.2)%	1.2 %	1.1 %

	For the Nine Months Ended September 30,
	2011					2010
			% of Non-GAAP					% of Non-GAAP
	Tax		Pre-tax Income			Tax		Pre-tax Income
	(in thousands)					(in thousands)

Federal Rate Applied to Non-GAAP Pre-tax Income	$	1,641		34.0	%	$	1,326		34.0	%
State and Local Taxes, Net of Federal Benefit		427		8.9	%		337		8.7	%
Non-GAAP Effective Tax Rate	$	2,068		42.9	%	$	1,663		42.7	%