Highbury Financial (HBRF) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2007
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____________ to _____________

Commission File Number 000-51682

Highbury Financial Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-3187008
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
999 Eighteenth Street, Ste. 3000 Denver, Colorado	80202
(Address of principal executive offices)	(Zip Code)

(303) 357-4802

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ¨ Accelerated Filer  ¨ Non-Accelerated Filer  x

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

As of October 31, 2007, 9,527,000 shares of common stock, par value $0.0001 per share, were issued and outstanding.

	Page
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements	2
Highbury Financial Inc.	2
Condensed Consolidated Balance Sheets	2
Condensed Consolidated Statements of Operations	3
Condensed Consolidated Statements of Cash Flows	4
Notes to Unaudited Condensed Consolidated Financial Statements	5
U.S. Mutual Fund Business of ABN AMRO Asset Management Holdings, Inc.	18
Combined Statements of Financial Condition	18
Combined Statements of Operations	19
Combined Statements of Changes in Owner’s Equity	20
Combined Statements of Cash Flows	21
Notes to Unaudited Combined Financial Statements	22
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	48
Item 4 - Controls and Procedures	48
PART II. OTHER INFORMATION	49
Item 1 - Legal Proceedings	49
Item 1A - Risk Factors	49
Item 6 - Exhibits	50
Signatures	51

ITEM 1 - FINANCIAL STATEMENTS

Highbury Financial Inc. and Subsidiary

Condensed Consolidated Balance Sheets

	September 30, 2007			December 31, 2006
	(unaudited)
Current assets:
Cash and equivalents	$	8,259,926		$	6,248,705
Short-term investments		3,106,981			-
Marketable securities		196,957			-
Accounts receivable (Note 11)		3,155,459			3,646,422
Deferred acquisition costs		265,616			-
Prepaid expenses		195,780			221,220
Other current assets		-			13,670
Total current assets		15,180,719			10,130,017
Fixed assets		1,210,616			573,534
Accumulated depreciation		(126,568	)		-
Fixed assets, net		1,084,048			573,534
Identifiable intangibles (Note 3)		26,753,000			26,753,000
Goodwill (Note 3)		9,673,412			9,673,412
Deferred income taxes (Notes 3, 9)		-			87,276
Other long term assets		152,123			150,000
Total assets	$	52,843,302		$	47,367,239
Current liabilities:
Accounts payable and accrued expenses (Note 5)	$	4,329,704		$	2,269,470
Income taxes payable (Note 9)		655,792			242,089
Deferred income taxes (Notes 3, 9)		526,698			-
Total current liabilities		5,512,194			2,511,559
Deferred rent (Note 4)		767,354			-
Total liabilities		6,279,548			2,511,559
Commitments and contingencies (Note 7)		-			-
Minority interest (Note 3)		840,000			626,901
Stockholders' equity (Notes 2, 3, 8):
Preferred stock, $0.0001 par value, authorized 1,000,000 shares; none issued		-			-
Common stock, $0.0001 par value, authorized 50,000,000 shares; 9,527,000 shares issued and outstanding as of December 31, 2006 and September 30, 2007		953			953
Additional paid-in capital		55,393,484			56,693,484
Accumulated deficit		(9,670,683	)		(12,465,658	)
Total stockholders' equity		45,723,754			44,228,779
Total liabilities and stockholders' equity	$	52,843,302		$	47,367,239

See Notes to Unaudited Condensed Consolidated Financial Statements

2

Highbury Financial Inc. and Subsidiary

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Revenue (Note 11)	$	10,157,568		$	-		$	31,829,001		$	-
Operating expenses:
Distribution and sub-advisory costs		(4,735,347	)		-			(14,992,086	)		-
Compensation and related expenses		(1,777,417	)		-			(5,091,841	)		-
Other operating expenses		(1,320,117	)		(147,649	)		(3,891,330	)		(408,323	)
Depreciation and other amortization		(46,345	)		-			(126,568	)		-
Amortization of intangible assets		-			-			-			-
Total expenses		(7,879,226	)		(147,649	)		(24,101,825	)		(408,323	)
Operating income / (loss)		2,278,342			(147,649	)		7,727,176			(408,323	)
Non-operating income:
Interest income		135,146			5,812			341,920			9,188
Investment income / (loss)		(473	)		461,190			50,221			1,179,735
Total non-operating income		134,673			467,002			392,141			1,188,923
Income before minority interest		2,413,015			319,353			8,119,317			780,600
Minority interest (Note 3)		(947,709	)		-			(3,535,525	)		-
Income before provision for income taxes		1,465,306			319,353			4,583,792			780,600
Provision for income taxes (Note 9):
Current		(437,901	)		(194,181	)		(1,174,843	)		(492,366	)
Deferred - Intangible-related		(236,772	)		-			(710,315	)		-
Deferred - Other		102,066			75,841			96,341			204,016
Total income taxes		(572,607	)		(118,340	)		(1,788,817	)		(288,350	)
Net income for the period	$	892,699		$	201,013		$	2,794,975		$	492,250
Weighted average shares outstanding, basic		9,527,000			9,635,000			9,527,000			8,859,469
Net income per share, basic	$	0.09		$	0.02		$	0.29		$	0.06
Weighted average shares outstanding, diluted		9,683,634			9,635,000			11,420,944			8,859,469
Net income per share, diluted	$	0.09		$	0.02		$	0.24		$	0.06

See Notes to Unaudited Condensed Consolidated Financial Statements

3

Highbury Financial Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

(unaudited) 

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Cash flows from operating activities:
Net income for the period	$	892,699		$	201,013		$	2,794,975		$	492,250
Adjustments to reconcile net income to net cash used in operating activities:
(Increase) / decrease in deferred taxes		134,706			(75,843	)		613,974			(204,018	)
Depreciation and other amortization		46,345			-			126,568			-
Minority interest		947,709			-			3,535,525			-
Changes in operating assets and liabilities:
(Increase) / decrease in short-term investments		(41,478	)		-			(3,106,981	)		-
(Increase) / decrease in marketable securities		473			-			(50,221	)		-
(Increase) / decrease in accounts receivable		188,163			-			490,963			-
(Increase) / decrease in prepaid expenses		(121,687	)		26,560			25,440			(78,795	)
(Increase) / decrease in other current assets		-			-			13,670			-
(Increase) / decrease in other long term assets		(1,108	)		-			(2,123	)		-
(Increase) / decrease in accounts payable and accrued expenses		(524,334	)		402,421			633,810			139,612
(Increase) / decrease in trust account		-			(533,586	)		-			(1,134,926	)
Increase / (decrease) in deferred investment income		-			72,397			-			185,192
Increase / (decrease) in income taxes payable		265,301			194,181			413,703			262,366
Increase / (decrease) in deferred rent		88,470			-			244,994			-
Increase / (decrease) in minority interest		-			-			213,099			-
Net cash used in operating activities		1,875,259			287,143			5,947,396			(338,319	)
Cash flows from investing activities:
Purchase of investments		-			-			(1,400,010	)		-
Sale of investments		201,332			-			1,253,274			-
Cash held in trust fund		-			-			-			(43,289,567	)
Payment of costs of the acquisition		-			(384,041	)		-			(384,041	)
Capital expenditures		(10,232	)		-			(114,722	)		-
Net cash used in investing activities		191,100			(384,041	)		(261,458	)		(43,673,608	)
Cash flows from financing activities: (Note 2)
Proceeds from sale of shares of common stock		-			-			-			47,460,000
Proceeds from issuance of option		-			-			-			100
Payments of notes payable, stockholders		-			-			-			(70,000	)
Payments of costs of public offering		-			-			-			(2,944,987	)
Distributions paid to minority interest holders		(991,992	)		-			(2,374,717	)		-
Repurchase of underwriters’ purchase option		(1,300,000	)		-			(1,300,000	)		-
Net cash provided by financing activities		(2,291,992	)		-			(3,674,717	)		44,445,113
Net increase / (decrease) in cash		(225,633	)		(96,898	)		2,011,221			433,186
Cash at beginning of period		8,485,559			566,986			6,248,705			36,902
Cash at end of period	$	8,259,926		$	470,088		$	8,259,926		$	470,088
Supplemental schedule of non-cash financing and investing activities:
Accrual of deferred acquisition costs	$	265,616		$	(4,584	)	$	265,616		$	752,381
Accrual of deferred underwriting fees		-			-			-			673,333
Deferred rent and leasehold improvements recorded in connection with construction allowance		-			-			522,360			-
Supplemental disclosure of cash flow information:
Cash paid for taxes	$	172,600		$	-		$	761,139		$	232,146

See Notes to Unaudited Condensed Consolidated Financial Statements

4

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation

The accompanying condensed consolidated financial statements as of September 30, 2007 and for the three and nine months ended September 30, 2007 and September 30, 2006 are unaudited and include the accounts of Highbury Financial Inc. (“Highbury” or the “Company”) and its 65%-owned subsidiary, Aston Asset Management LLC (“Aston”). The Company has selected December 31 as its fiscal year end.

In the opinion of management, all adjustments (consisting of normal accruals) have been made that are necessary to present fairly the consolidated financial position of the Company as of September 30, 2007 and the consolidated results of operations and consolidated cash flows for the three and nine months ended September 30, 2007 and September 30, 2006. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full year. The accompanying December 31, 2006 consolidated balance sheet has been derived from the audited consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006.

The accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations.

Highbury is an investment management holding company providing permanent capital solutions to mid-sized investment management firms. The Company pursues acquisition opportunities and seeks to establish accretive partnerships with high quality investment management firms. Highbury’s strategy is to provide permanent equity capital to fund buyouts from corporate parents, buyouts of founding or departing partners, growth initiatives, or exit strategies for private equity funds. This strategy includes leaving material equity interests with management teams to align the interests of management and Highbury’s shareholders and, in general, does not include integrating future acquisitions, although Highbury may execute add-on acquisitions for its current or future affiliates. The Company seeks to augment and diversify its sources of revenue by management team, asset class, investment style, distribution channel and client type.

2. Initial Public Offering

Highbury was incorporated in Delaware on July 13, 2005 to acquire, or acquire control of, operating businesses in the financial services industry that may provide significant opportunities for growth, with a particular focus on investment management and securities firms (“Business Combination”).

The registration statement for the Company's initial public offering ("Offering") was declared effective January 25, 2006. The Company consummated the Offering, including full exercise of the over-allotment option, on January 31, 2006 and February 3, 2006, respectively. Simultaneously with the Offering, all of the Company's stockholders prior to the Offering (the “Initial Stockholders”), including all of the officers and directors of the Company, purchased an aggregate of 166,667 units from the Company in a private placement (the “Private Placement”). The units sold in the Private Placement were identical to the units sold in the Offering, but the purchasers in the Private Placement waived their rights to conversion and to receipt of distribution on liquidation in the event the Company did not complete a Business Combination.

The Company sold 7,910,000 units ("Units") in the Private Placement and the Offering, which included the 1,010,000 Units subject to the underwriters’ over-allotment option. Each Unit consists of one share of the Company's common stock, $0.0001 par value (“Common Stock”), and two redeemable common stock purchase warrants ("Warrants"). Each Warrant entitles the holder to purchase from the Company one share of Common Stock at an exercise price of $5.00 commencing January 25, 2007 and expiring four years from the effective date of the Offering (January 25, 2010). The Warrants will be redeemable, at the Company's option, at a price of $0.01 per Warrant upon 30 days' notice after the Warrants become exercisable, only in the event that the last sale price of the Common Stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given. Separate trading of the Common Stock and Warrants underlying the Company’s Units was permitted on February 21, 2006 and commenced on March 1, 2006.

5

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

Under the terms of the Warrants, the Company is required to use its best efforts to maintain the effectiveness of the registration statement covering the shares of Common Stock underlying the Warrants. However, the Company is not obligated to deliver securities, and there are no contractual penalties for failure to deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration statement is not effective at the time of exercise, the holder of such Warrant shall not be entitled to exercise such Warrant. The Company entered into an Amended and Restated Clarification Agreement on December 15, 2006, which clarifies that in no event (whether in the case of a registration statement not being effective or otherwise) is the Company required to net cash settle the Warrants. Consequently, the Warrants will expire unexercised and unredeemed if there is no effective registration statement covering the shares of Common Stock issuable upon exercise of the Warrants.

In connection with the Offering, the Company issued an option, for $100, to the underwriters to purchase 336,667 Units at an exercise price of $7.50 per Unit. In July 2007, the Company entered into Unit Purchase Option Repurchase Agreements with the underwriters of the Offering pursuant to which the Company repurchased the option from the underwriters for aggregate cash payments of $1,300,000. The unit purchase option was cancelled upon its repurchase.

The Company received proceeds from the Private Placement and the Offering, net of the underwriters’ discount and commissions and offering expenses, of $43,783,582. An amount of $42,616,234 of the net proceeds of the Offering and the Private Placement and $673,333 of compensation for the underwriters of the Offering, which was deferred until the consummation of a Business Combination (net of approximately $0.11 for each share of common stock converted in connection with the Business Combination as described below) but which would be forfeited if a Business Combination was not consummated, was placed in an interest-bearing trust account ("Trust Account") until the earlier of (i) the consummation of a Business Combination or (ii) liquidation of the Company. Under the agreement governing the Trust Account, funds were only invested in United States "government securities" within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 with a maturity of 180 days or less. The remaining net proceeds (not held in the Trust Account) have been used to pay for business, legal and accounting due diligence on prospective acquisitions and general and administrative expenses of the Company.

On April 20, 2006, the Company and Aston (together with Highbury, the “Highbury Entities”), entered into an Asset Purchase Agreement (“Asset Purchase Agreement”) with AAAMHI, ABN AMRO Investment Fund Services, Inc. (“AAIFS”), ABN AMRO Asset Management, Inc., (“AAAMI”), Montag & Caldwell, Inc., (“Montag”), Tamro Capital Partners LLC, (“TAMRO”), Veredus Asset Management LLC, (“Veredus”), and River Road Asset Management, LLC, (“River Road” and together with AAAMHI, AAIFS, AAAMI, Montag, TAMRO and Veredus individually referred to as a “Seller” and collectively as “Sellers”) to acquire substantially all of the Sellers’ business of providing investment advisory, administration, distribution and related services to the U.S. mutual funds (the “Target Funds”) specified in the Asset Purchase Agreement (collectively, the “Business”). After entering into the Asset Purchase Agreement, Highbury submitted the transaction for stockholder approval.

The Initial Stockholders agreed to vote their 1,725,000 founding shares of common stock (Note 8), as well as the 166,667 shares of common stock included in the units they purchased in the Private Placement, in accordance with the vote of the majority in interest of all other stockholders of the Company ("Public Stockholders") with respect to any Business Combination. After the consummation of the Business Combination, these voting safeguards are no longer applicable.

6

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

With respect to the Business Combination, any Public Stockholder who voted against the Business Combination had the right to demand that the Company convert his shares. The per share conversion price was equal to the amount in the Trust Account, net of taxes payable, calculated as of two business days prior to the consummation of the Business Combination, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Offering. Such Public Stockholders were entitled to receive their per-share interest, net of taxes payable, in the Trust Account computed excluding the shares held by Initial Stockholders.

The stockholders approved the Business Combination at the Company’s annual meeting of stockholders on November 27, 2006, and the Business Combination was subsequently consummated on November 30, 2006. The Company used $40,459,312 of the proceeds of the Offering and the Private Placement to consummate the Business Combination with the Sellers. In connection with the consummation of the Business Combination, the Company converted 108,000 shares to cash for one Public Stockholder at a cost of $618,972, or approximately $5.73 per share. These shares were subsequently retired by the Company. On November 30, 2006, the Company paid the underwriters $678,606, inclusive of the deferred interest, net of taxes payable, and less approximately $11,670 for the shares of common stock which were converted. The Company recorded the deferred underwriting fees payable to the underwriters as an expense of the public offering resulting in a charge directly to stockholders' equity.

3. Significant Accounting Policies

Use of Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make assumptions and estimates that affect the amounts reported in the financial statements and accompanying notes, including intangible assets and goodwill, liabilities for losses and contingencies and income taxes. Management believes that the estimates used are reasonable, although actual amounts could differ from the estimates and the differences could have a material impact on the consolidated financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid investments, including money market mutual funds, with original maturities of three months or less to be cash equivalents. Certain cash accounts are maintained at large financial institutions and, at times, may exceed federally insured limits.

Short-Term Investments

Short-term investments include (i) a zero coupon U.S. Treasury Bill with a maturity of October 11, 2007 carried on the Company’s financial statements at $1,550,608 as of September 30, 2007 and (ii) a zero coupon U.S. Treasury Bill with a maturity of January 10, 2008 carried on the Company’s financial statements at $1,556,373 as of September 30, 2007.

Marketable Securities

In March 2007, Highbury invested $1,000,010 of initial seed capital in the Aston/River Road Small-Mid Cap Fund, a new mutual fund started by Aston. During the second quarter, Highbury liquidated this investment as new assets flowed into the fund generating total proceeds to Highbury of $1,051,942. The change in the value of this investment is included in investment income on the statements of operations for the nine months ended September 30, 2007.

In June 2007, Highbury invested $200,000 in the Aston/River Road Small-Mid Cap Fund Class I and $200,000 in the Aston/River Road Dynamic Equity Fund Class I. Each of these investments provided the initial seed capital for a new mutual fund share class within the two existing funds. In July, 2007 Highbury liquidated its investment in the Aston/River Road Small-Mid Cap Fund Class I as new assets flowed into the fund generating total proceeds to Highbury of $201,332. Highbury continues to hold its investment in the Aston/River Road Dynamic Equity Fund Class I. As of September 30, 2007, this investment was valued at $196,957. This balance is reflected on the balance sheet as of September 30, 2007 in the line item investments, and the change in the value of these investments is included in investment income on the statement of operations for the three and nine months ended September 30, 2007. Securities underlying the amounts reflected on the balance sheet include investments in common stock of corporations and cash.

7

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

Fixed Assets

Fixed assets are recorded at cost and depreciated using the straight-line method over their estimated useful lives. The estimated useful lives of office equipment and furniture and fixtures generally range from three to eleven years. Computer software developed or obtained for internal use is amortized using the straight-line method over the estimated useful life of the software, generally three years or less. The costs of improvements that extend the life of a fixed asset are capitalized, while the cost of repairs and maintenance are expensed as incurred. Leasehold improvements are amortized over the shorter of their expected useful lives or the remaining term of the lease for which they are incurred. Under the terms of Highbury’s credit facility (Note 6), these fixed assets are collateral for borrowings under the credit facility.

Goodwill and Intangible Assets

The purchase price and the capitalized transaction costs incurred in connection with the acquisition of the Business are allocated based on the fair value of the assets acquired, which is primarily the acquired mutual fund advisory contract. In determining the allocation of the purchase price to the acquired mutual fund advisory contract, Highbury analyzed the present value of the acquired business’ mutual fund advisory contract based on a number of factors including: the acquired business’ historical and potential future operating performance; the historical and potential future rates of new business from new and existing clients and attrition among existing clients; the stability and longevity of existing advisory and sub-advisory relationships; the acquired business’ recent, as well as long-term, investment performance; the characteristics of the acquired business’ products and investment styles; the stability and depth of the management team; and the acquired business’ history and perceived franchise or brand value.

The Company has determined that the acquired mutual fund advisory contract meets the indefinite life criteria outlined in FAS No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"), because the Company expects both the contract and the cash flows generated by the contract to continue indefinitely due to the likelihood of continued renewal at little or no cost. Accordingly, the Company does not amortize this intangible asset, but instead assesses, each reporting period, whether events or circumstances have occurred which indicate that the indefinite life criteria are no longer met. If the Company determines the indefinite life criteria are no longer met, the Company will amortize the asset over its remaining useful life. The Company reviews this asset for impairment at least annually, or more frequently whenever events or circumstances occur indicating that the recorded intangible asset may be impaired. If Highbury concludes that the carrying value of the asset exceeds its fair value, an impairment loss will be recorded in an amount equal to any such excess.

The excess of purchase price for the acquisition of the Business over the fair value of net assets acquired, including the acquired mutual fund advisory contract, is reported as goodwill. Goodwill is not amortized, but is instead reviewed for impairment. The Company assesses goodwill for impairment at least annually, or more frequently whenever events or circumstances occur indicating that the recorded goodwill may be impaired. If the carrying amount of goodwill exceeds the fair value, an impairment loss would be recorded in an amount equal to that excess.

8

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

Restricted Cash

Under the terms of the letter of credit provided to the lessor in connection with Aston’s lease agreement, the Company is required to maintain $150,000 on deposit with the bank. This balance is included in other long-term assets on the balance sheet.

Deferred Income Taxes

Deferred income taxes reflect the expected future tax consequences of temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes. During the Company’s development stage, which ended on November 30, 2006, many of its expenses were not currently deductible for income tax purposes. Since the Company is no longer in the development stage, most of its expenses are currently deductible for income tax purposes. The Company will amortize the capitalized expenses it incurred during its development stage for income tax purposes over the next 15 years. A valuation allowance may be established when necessary to reduce deferred tax assets to the amount expected to be realized. Highbury’s deferred income taxes principally relate to the amortization of intangible assets and development stage expenses.

Minority Interest

Highbury owns 65% of Aston and is its manager member. Highbury has a contractual arrangement with Aston whereby a percentage of revenue is allocable to fund Aston’s operating expenses, including compensation (the Operating Allocation), while the remaining portion of revenue (the Owners' Allocation) is allocable to the Company and the other members, with a priority to Highbury. The portion of the income or loss of Aston allocated to owners other than Highbury is included in minority interest in the Consolidated Statements of Income. Minority interest on the Consolidated Balance Sheets includes capital and undistributed income owned by the Management Members. Additionally as of September 30, 2007, approximately $947,709 of undistributed Owners’ Allocation owed to the Management Members is included as a distribution payable within accounts payable and accrued expenses on the Consolidated Balance Sheets. This amount was subsequently paid to the Management Members in October 2007.

Revenue Recognition

Highbury derives its operating revenues from Aston, its majority-owned subsidiary. Highbury also earns interest income on its cash balances and investment income on its investments in the Aston Funds.

Aston earns investment advisory and administrative fees for services provided to the Aston Funds, six money market funds advised by AAAMHI and a limited number of separately managed accounts. These fees are primarily based on predetermined percentages of the market value of the assets under management and are billed in arrears of the period in which they are earned. These fees are recognized over the period in which services are performed unless facts and circumstances would indicate that collectibility of the fees is not reasonably assured. Expense reimbursements to certain of the Aston Funds in accordance with agreements are reported as an offset to investment advisory fees.

Substantially all of Aston’s revenues are derived from the Aston Funds for which Aston is the investment advisor. Management has determined that no allowance for doubtful accounts is necessary due to all fees being collected within one month from the date of invoice.

Distribution and Advisory Costs

Included in distribution and advisory costs in the accompanying financial statements are fees paid to nine institutional investment management firms pursuant to contracts related to the management and distribution of the Aston Funds and managed account assets. Such costs are recorded in the period incurred. Aston pays investment sub-advisory fees pursuant to management contracts with these entities under which these firms provide investment sub-advisory services to certain Aston Funds. Aston has also entered into nearly 400 selling/service agreements through which independent third parties sell the Aston Funds and/or provide other services to their clients in exchange for certain payments. Unless paid pursuant to the Aston Funds’ Rule 12b-1 Plan, these payments, as well as certain sales and marketing costs, are included within distribution and sub-advisory costs.

9

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

Leases

Aston currently leases office space for its primary office in Chicago and for two satellite offices in New Jersey and California under various leasing arrangements. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. All leases and subleases are accounted for under Statement of Financial Accounting Standard ("FAS") No. 13, "Accounting for Leases." These leases are classified as operating leases. Most lease agreements classified as operating leases contain renewal options, rent escalation clauses or other inducements provided by the landlord. Rent expense is accrued to recognize lease escalation provisions and inducements provided by the landlord, if any, on a straight-line basis over the lease term.

Loss Contingencies

Highbury accrues estimates for loss contingencies related to legal actions, investigations and proceedings when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Currently, the Company is unaware of any legal actions, investigations or proceedings which could result in a loss to Highbury. As such, the Company has not accrued for any such contingencies.

Income Per Common Share

Income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. The dilutive effect of the Company’s 15,820,000 outstanding Warrants has been included in diluted income per share calculations for the three and nine months ended September 30, 2007. The dilutive effect of the Warrants is calculated using the treasury stock method and the weighted average stock price for the period. The Warrants have not been considered for the three and nine months ended September 30, 2006 because the Warrants were not exercisable until the later of the completion of the Business Combination and January 25, 2007.

Fair Value

Financial Accounting Standard No. 107 ("FAS 107"), "Disclosures about Fair Value of Financial Instruments," requires Highbury to disclose the estimated fair values for certain of its financial instruments.

Financial instruments include items such as accounts receivable, accounts payable, loans, interest rate contracts, notes payable and other items as defined in FAS 107.

Fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices are used when available; otherwise, management estimates fair value based on prices of financial instruments with similar characteristics or by using valuation techniques such as discounted cash flow models. Valuation techniques involve uncertainties and require assumptions and judgments regarding prepayments, credit risk and discount rates. Changes in these assumptions will result in different valuation estimates. The fair value presented would not necessarily be realized in an immediate sale nor are there typically plans to settle liabilities prior to contractual maturity. Additionally, FAS 107 allows companies to use a wide range of valuation techniques; therefore, it may be difficult to compare the Company's fair value information to other companies' fair value information.

The carrying amounts of cash and equivalents, accounts receivable and accounts payable approximates fair value because of the short-term nature of these instruments.

10

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

Segment Information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes disclosure requirements relating to operating segments in annual and interim financial statements. Management has determined that the Company operates in one business segment, namely as an investment adviser managing mutual funds and separate accounts.

Share-Based Compensation

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share-Based Payment”, (“SFAS No. 123R” or the “Statement”). This Statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and its related implementation guidance. On January 1, 2006, the Company adopted the provisions of SFAS No. 123R using the modified prospective method. The Statement requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as financing cash flows.

Recent Accounting Pronouncements

Fair Value Option for Financial Assets and Financial Liabilities:

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. Management is currently evaluating this standard and its impact, if any, on the Company’s consolidated financial statements.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

4. Lease Commitments

Aston currently leases office space for its primary office in Chicago and for two satellite offices in New Jersey and California under various leasing arrangements. The lease for the office in New Jersey expires in May 2008. The lease for the office in California is on a month-to-month basis. At September 30, 2007, the Company's aggregate future minimum payments for the Chicago lease, which carries an eleven year term, are payable as follows:

Year ending December 31,	Required Minimum Payments		Annual Lease Expense
2007	$	17,412	$	206,564
2008		215,474		219,174
2009		222,003		219,174
2010		228,533		219,174
2011		235,062		219,174
Thereafter		1,279,257		1,114,481
Total	$	2,197,741	$	2,197,741

11

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

In addition to the base rent, Aston is required to pay its pro rata share of the real estate taxes and operating expenses of its building. The figures in the table above reflect the base annual rent payments and the base annual rent expense on a straight line basis in accordance with SFAS 13. During the three and nine months ended September 30, 2007, Aston recognized $54,793 and $151,770, respectively, of rent expense in connection with this lease. Under the terms of Aston’s lease, Aston is entitled to an abatement of the base rent and real estate taxes and operating expenses for a period of 11 months at the beginning of the lease term. This abatement period will end in December 2007. Management has estimated that the abatement relating to rent expense is approximately $189,000 and that the abatement related to real estate taxes and operating expenses is approximately $190,000. In addition, the lessor contributed $522,360 to the construction costs in connection with the build-out of the office space. This construction allowance, certain leasehold improvements incurred by Aston in connection with the build-out of the office space and the aforementioned abatement of the real estate taxes and operating expenses have been recorded as deferred rent and are being amortized as a reduction to rent expense over the term of the lease in accordance with SFAS 13. The amortization of these deferred rent amounts are not included in the annual rent expense schedule above. Also, Aston has an option to extend the lease under the same terms and conditions for a single additional five-year period.

5. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

	At September 30,		At December 31,
	2007		2006
Payable to sub-advisors	$	1,059,033	$	1,556,961
Payable to brokers		489,388		239,949
Payable to Management Members		947,709		-
Other payables		1,833,574		472,560
	$	4,329,704	$	2,269,470

6. Credit Facility

Highbury entered into a credit agreement with City National Bank on August 21, 2006, which provides for a revolving line of credit of up to $12.0 million. On November 9, 2006, the Company entered into a new credit agreement with City National Bank which amended and restated the initial credit agreement to amend the definitions of debt and net worth to exclude the effects of accounting for the Company’s outstanding common stock warrants and the underwriters’ unit purchase option as liabilities. Highbury subsequently determined that it should account for these securities as equity. The credit facility will be used for working capital, general corporate purposes and repurchases of the Company’s outstanding securities, if appropriate.

The Company’s borrowing under the credit facility bears interest, at Highbury’s option, at either the fluctuating prime rate minus 0.50% or LIBOR plus 1.50%. In addition, Highbury will pay annually a fee of 0.25% on the average daily balance of the unused portion of the credit facility. The Company will have to make interest payments monthly for any prime rate borrowings. For any LIBOR borrowings, interest payments will be made at the end of any LIBOR contract or quarterly, whichever is sooner. Any outstanding principal is due at maturity on October 31, 2007.

12

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

The credit facility is secured by all of our assets and contains customary and appropriate affirmative and negative covenants for financings of its type (subject to customary exceptions). The financial covenants include a maximum total leverage ratio of 2.0x Adjusted EBITDA and a minimum net worth of $20 million. Other covenants will, among other things, limit our ability to incur liens or other encumbrances, make certain investments, dispose of assets, enter into mergers or acquisitions and incur indebtedness.

There were no borrowings outstanding under this facility at any point in 2006 or in the first nine months of 2007, including at September 30, 2007. Highbury has maintained compliance with the applicable covenants of this facility in 2006 and in the first nine months of 2007.

On October 31, 2007, Highbury and City National Bank executed an amendment to the credit agreement which provides for an extension of the agreement through October 31, 2008 and modifies certain provisions of the agreement. The amendment increases the maximum total leverage ratio (including debt from all sources) to 5.0x Adjusted EBITDA, although borrowings under the credit agreement continue to be limited to 2.0x Adjusted EBITDA, and incorporates a minimum fixed charge coverage ratio of 1.25x.

7. Commitments and Contingencies

The Asset Purchase Agreement provides for a contingent adjustment payment payable in cash shortly after the second anniversary of the closing of the Business Combination. In the event the annualized investment advisory fee revenue generated under investment advisory contracts between Aston and the Target Funds or any other funds advised by Aston and sub-advised by the Sellers for the six months prior to the second anniversary of the date of the closing of the acquisition, or the Target Revenue:

· exceeds $41.8 million, Aston and Highbury will collectively pay to AAAMHI the difference between the Target Revenue and $41.8 million, up to a total aggregate payment of $3.8 million; or

· is less than $34.2 million, AAAMHI will pay to Aston and Highbury the difference between the $34.2 million and the Target Revenue, up to a total aggregate payment of $3.8 million.

The future annualized revenue will be determined based on the definition of “Approved Target Funds” which includes the existing funds and new funds or classes of funds which are advised by Aston and sub-advised by the Sellers. As a result, in the event that Highbury were to acquire other mutual fund investment managers and the trustees of those mutual funds were to retain sub-advisers affiliated with the Sellers, such revenues would be counted for purposes of calculation of the future annualized revenue. For the six month period ended September 30, 2007, the annualized investment advisory fee revenue generated under investment advisory contracts between Aston and the Target Funds was approximately $35.5 million. As such, Highbury has not accrued any liability for this contingency.

The Company presently occupies office space provided by an affiliate of several of our Initial Stockholders. Such affiliate has agreed that it will make such office space, as well as certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company agreed to pay such affiliate $7,500 per month for such services commencing on January 26, 2006. In October 2007 as a result of additional financial reporting services being provided by such affiliate, the Company agreed to increase the monthly payment to $10,000 beginning in November 2007. The statements of operations for the three month periods ended September 30, 2007 and September 30, 2006 each include $22,500 related to this agreement. For the nine month periods ended September 30, 2007 and September 30, 2006, the statements of operations include $67,500 and $61,452, respectively, related to this agreement. The agreement is terminable by either party upon six months’ prior notice.

13

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

The Initial Stockholders are entitled to registration rights with respect to the shares of common stock and warrants of the Company owned by them. The holders of the majority of the founding shares are entitled to make up to two demands that the Company register these shares and any other warrants or shares of the Company owned by them (excluding the shares purchased in the Private Placement) at any time commencing on the date the founding shares are released from escrow. In addition, the Initial Stockholders have certain "piggy-back" registration rights with respect to such securities on registration statements filed subsequent to the date the founding shares are released from escrow. The holders of a majority of the units purchased in the Private Placement are entitled to make up to two demands that the Company register the shares, warrants and shares underlying the warrants comprising such units at any time commencing on the date the Company consummates a Business Combination. In addition, the Initial Stockholders have certain "piggy-back" registration rights with respect to such securities on registration statements filed subsequent to the date the Company consummates a Business Combination. The Company will bear the expenses incurred in connection with the filing of any of the foregoing registration statements.

The founding shares have been placed in escrow until the earliest of: (1) January 25, 2009; (2) the Company's liquidation; and (3) the consummation of a liquidation, merger or stock exchange, stock purchase or other similar transaction which results in all of the Company's stockholders having the right to exchange their shares of common stock for cash, securities or other property. During the escrow period, the Initial Stockholders may not sell or transfer their founding shares except among the Initial Stockholders, to their spouses and children or trusts established for their benefit, by virtue of the laws of decent and distribution upon the death of any Initial Stockholder or pursuant to a qualified domestic relations order, but the Initial Stockholders retain all other rights as stockholders, including, without limitation, the right to vote their shares and receive cash dividends, if declared.  

The Company paid fees and issued securities to the underwriters in the Offering as described above in Note 2.

Highbury and Aston are subject to claims, legal proceedings and other contingencies in the ordinary course of their business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved in a manner unfavorable to the Company or Aston. Highbury and Aston establish accruals for matters for which the outcome is probable and can be reasonably estimated. Management is not aware of any claims, legal proceedings and other contingencies that could result in a loss to Highbury or Aston. As such, no contingencies have been accrued.

8. Stockholders’ Equity

Preferred Stock

The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.0001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. As of September 30, 2007, no shares of preferred stock have been issued.

Common Stock

The Company’s initial stockholders purchased 1,500,000 common shares for $25,000 on August 1, 2005. On January 13, 2006, the Board of Directors authorized a stock dividend of 0.15 shares of common stock for each share of common stock outstanding, bringing the initial outstanding shares to 1,725,000. All references in the accompanying financial statements to the number of shares of stock outstanding have been retroactively restated to reflect the stock dividend. The Company sold 7,910,000 Units in the Private Placement and the Offering, which included all of the 1,010,000 Units subject to the underwriters’ over-allotment option. Included in these Units were one share of common stock and two warrants to purchase shares of common stock. In connection with the consummation of the Business Combination, the Company repurchased 108,000 shares from one Public Stockholder. As of September 30, 2007, 9,527,000 shares of common stock, par value $0.0001 per share, were issued and outstanding.

14

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

Common Stock Commitments

At September 30, 2007, 15,820,000 shares of common stock were reserved for issuance upon exercise of redeemable Warrants.

9. Income Taxes

We adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes ("FIN 48") an interpretation of FASB Statement No. 109 ("SFAS 109") on January 1, 2007. As a result of the implementation of FIN 48, we recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, we had no unrecognized tax benefits, and at September 30, 2007, we continue to have no unrecognized tax benefits. We will recognize interest and penalties related to uncertain tax positions in income tax expense, if any. As of September 30, 2007, we do not have any accrued interest related to uncertain tax positions. The tax years 2005 and 2006 remain open to examination by the major taxing jurisdictions to which we are subject.

The provisions for income taxes for the three and nine months ended September 30, 2007 and September 30, 2006 consist of the following: 

		Three Months Ended September 30,					Nine Months Ended September 30
		2007		2006			2007		2006
Current
Federal	$	370,185	$	169,919		$	963,976	$	430,847
State		67,716		24,262			210,867		61,519
Deferred
Federal		108,540		(66,365	)		494,710		(177,730	)
State		26,166		(9,476	)		119,264		(25,377	)
Reversal of Valuation Allowance		-		-			-		(909	)
	$	572,607	$	118,340		$	1,788,817	$	288,350

The sources of the net deferred tax liability are as follows:

		September 30,
		2007
Amortization of goodwill and intangibles for income tax purposes	$	785,304
Amortization of deferred expenses		9,494
Deferred rent		(95,548	)
Depreciation methods used for income tax purposes		(8,193	)
Unrecognized investment loss for income tax purposes		(1,187	)
Expenses deferred for income tax purposes		(163,172	)
Net deferred income taxes	$	526,698

15

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

During 2006, the Company began to generate taxable income and therefore is no longer recording a valuation allowance against its deferred tax assets. Deferred tax liabilities are primarily the result of tax deductions for the Company's intangible assets. The Company amortizes its acquired intangible assets over a 15-year period for tax purposes only, reducing its tax basis below its carrying value for financial statement purposes and generating deferred taxes each reporting period. Highbury amortized $607,107 and $1,821,321 related to the goodwill and intangible assets in the three and nine months ended September 30, 2007, respectively. Additionally, at November 30, 2006, when Highbury ceased to be a corporation in the development stage, the Company had total deferred expenses of $440,342 that are being amortized for tax purposes over a 15-year period. These expenses were currently deductible for financial statement purposes during Highbury’s development stage but were not deductible for tax purposes. Highbury amortized $7,339 and $22,017 of this deferred expense in the three and nine months ended September 30, 2007, respectively. The primary source of the timing difference is Aston’s lease which requires no cash payments during the first 11 months of the lease although rent expense is recorded for financial reporting purposes. This lease arrangement is further discussed in Note 4.

10. Earnings Per Share

The calculation of basic earnings per share is based on the weighted average number of shares of the Company's common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share, but adjusts for the effect of the potential issuance of incremental shares of the Company's common stock. The following is a reconciliation of the numerator and denominator used in the calculation of earnings per share available to common stockholders.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Numerator:
Net income	$	892,699	$	201,013	$	2,794,975	$	492,250
Denominator:
Average shares outstanding - basic		9,527,000		9,635,000		9,527,000		8,859,469
Dilutive effect of Warrants		156,634		—		1,893,944		—
Average shares outstanding - diluted		9,683,634		9,635,000		11,420,944		8,859,469

As of September 30, 2007, the Company’s dilutive instruments outstanding include 15,820,000 Warrants which became eligible to be exercised on January 25, 2007. There are no effects of dilutive instruments included in the calculation for the three and nine months ended September 30, 2006 because the Warrants were not exercisable until the later of the completion of the Business Combination and January 25, 2007. The dilutive effect of the Warrants is calculated using the treasury stock method and the average share price during the period. The Warrants are described in more detail in Note 2.

11. Related Party Transactions

Highbury’s Board of Directors has adopted certain policies and procedures for the review, approval and ratification of related party transactions, which the Company refers to as the Related Person Policy. Among other things, the Related Party Policy provides that any transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which Highbury (including any of its subsidiaries) was, is or will be a participant and the amount involved exceeds $120,000, and in which any related person had, has or will have a direct or indirect material interest, must be reported to the Company’s board of directors prior to the consummation or amendment of the transaction. A related person, as defined in the Related Party Policy, means any person who is, or at any time since the beginning of the Company’s last fiscal year was, a director or executive officer of the Company or a nominee to become a director of the Company; any person who is known to be the beneficial owner of more than 5% of any class of Highbury’s voting securities; any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the director, executive officer, nominee or more than 5% beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee or more than 5% beneficial owner; and any firm, corporation or other entity in which any of the foregoing persons is employed or is a general partner or principal or in a similar position or in which such person has a 5% or greater beneficial ownership interest. The Company’s Board of Directors reviews these related party transactions and considers all of the relevant facts and circumstances available to the board, including (if applicable) but not limited to: the benefits to Highbury; the availability of other sources of comparable products or services; the terms of the transaction; and the terms available to unrelated third parties or to employees generally. The Board of Directors may approve only those related party transactions that are in, or are not inconsistent with, the best interests of the Company and its stockholders, as the board determines in good faith. At the beginning of each fiscal year, the board will review any previously approved or ratified related party transactions that remain ongoing and have a remaining term of more than six months. The Board will consider all of the relevant facts and circumstances and will determine if it is in the best interests of Highbury and its stockholders to continue, modify or terminate these related party transactions.

16

Highbury Financial Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

Aston is the investment advisor to the Aston Funds, a Delaware business trust. Aston’s Chief Executive Officer, is the Chairman of the Board of Trustees of the Aston Funds. Aston’s President, is the President and Chief Executive Officer of the Aston Funds. Aston’s Chief Financial Officer and Chief Compliance Officer, is the Senior Vice President, Secretary, Treasurer, Chief Financial Officer, Chief Operating Officer and Chief Compliance Officer of the Aston Funds. As a result of these relationships, the Aston Funds may be considered related parties as such are defined in Financial Accounting Standard No. 57 (“FAS 57”), “Related Party Disclosures.” In the three and nine months ended September 30, 2007, Aston earned advisory fees of $8,660,761 and $27,217,354, respectively, and administrative fees of $1,077,026 and $3,306,678, respectively, from the Aston Funds. These fees, in total, accounted for approximately 95% and 96% of Aston’s total revenue for each of the three and nine months ended September 30, 2007, respectively. As of September 30, 2007, the Company’s balance sheet includes accounts receivable of $2,931,604 associated with these fees, as Aston is generally paid in the first week of the month following the month in which fees were earned. There were no comparable fees or receivables recorded in the three and nine months ended September 30, 2006.

In the first quarter of 2007, Highbury engaged Berkshire Capital Securities LLC (“Berkshire Capital”) to act as a non-exclusive financial advisor in connection with possible future acquisitions. In such capacity, Berkshire Capital will assist the Company in structuring, negotiating and completing acquisitions of targets identified by Highbury and acknowledged by both Highbury and Berkshire Capital as being subject to Berkshire Capital’s engagement. If the Company enters into an agreement to acquire such a target company during the term of Berkshire Capital’s engagement or within two years thereafter, and such acquisition is completed, then the Company will pay Berkshire Capital a success fee at closing equal to the greater of (a) the sum of 3.0% of the first $15 million of the aggregate consideration in such transaction and 1.0% of the aggregate consideration in such transaction in excess of $15 million, and (b) $600,000. Upon the execution of a definitive agreement with respect to an acquisition, Highbury will pay Berkshire Capital $200,000 which will be credited against the success fee. Highbury will also reimburse Berkshire Capital for its reasonable expenses in performing its services under the engagement letter and will indemnify Berkshire Capital for liabilities it incurs in performing such services, unless such liabilities are attributable to Berkshire Capital’s gross negligence or willful misconduct.

The Company presently occupies office space provided by Berkshire Capital. Berkshire Capital has agreed that it will make such office space, as well as certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company agreed to pay Berkshire Capital $7,500 per month for such services commencing on January 26, 2006. In October 2007 as a result of additional financial reporting services being provided by Berkshire Capital, the Company agreed to increase the monthly payment to $10,000 beginning in November 2007. The statements of operations for the three month periods ended September 30, 2007 and September 30, 2006 each include $22,500 related to this agreement. For the nine month periods ended September 30, 2007 and September 30, 2006, the statements of operations include $67,500 and $61,452, respectively, related to this agreement. The agreement is terminable by either party upon six months’ prior notice.

17

U.S. Mutual Fund Business of

ABN AMRO Asset Management Holdings, Inc.

Combined Statements of Financial Condition

	September 30,		December 31,
	2006		2005
	(Unaudited)
Assets
Cash and cash equivalents	$	7,218,817	$	5,239,747
Advisory and administrative fees receivable		3,284,200		4,074,486
Goodwill		10,518,750		10,518,750
Other intangible assets		22,045,000		22,045,000
Other assets		1,635		1,635
Total assets	$	43,068,402	$	41,879,618
Liabilities and owner’s equity
Accounts payable—affiliates	$	1,459,012	$	2,266,559
Accrued compensation and benefits		288,511		648,625
Other accrued liabilities		875,143		954,318
Total liabilities		2,622,666		3,869,502
Owner’s equity		40,445,736		38,010,116
Total liabilities and owner’s equity	$	43,068,402	$	41,879,618

See accompanying notes.

18

U.S. Mutual Fund Business of

ABN AMRO Asset Management Holdings, Inc.

Combined Statements of Operations

(Unaudited) 

	Nine Months Ended September 30,					Three Months Ended September 30,
	2006		2005			2006		2005
Revenues
Advisory fees, net	$	30,594,808	$	35,753,511		$	9,547,025	$	10,753,861
Administration fees		1,035,174		1,143,016			342,627		210,230
Total revenues		31,629,982		36,896,527			9,889,652		10,964,091
Operating expenses
Distribution and advisory costs:
Affiliates		17,508,916		22,315,324			5,263,632		6,618,465
Other		5,599,279		8,598,644			1,857,843		2,619,157
Total distribution and advisory costs		23,108,195		30,913,968			7,121,475		9,237,622
Compensation and related expenses		3,248,940		3,830,626			1,028,777		1,218,046
Related party expense allocations		1,910,933		1,870,326			637,428		630,173
Other operating expenses		851,427		549,768			273,076		258,517
Total operating expenses		29,119,495		37,164,688			9,060,756		11,344,358
Operating income (loss)	$	2,510,487	$	(268,161	)	$	828,896	$	(380,267	)
Interest income		242,878		83,893			92,599		34,980
Net income (loss) before taxes	$	2,753,365	$	(184,268	)	$	921,495	$	(345,287	)
Income tax provision		—		—			—		—
Net income (loss)	$	2,753,365	$	(184,268	)	$	921,495	$	(345,287	)

See accompanying notes.

19

U.S. Mutual Fund Business of

ABN AMRO Asset Management Holdings, Inc.

Combined Statements of Changes in Owner’s Equity

(Unaudited)

Nine Months Ended September 30, 2006 and 2005

Owner’s equity at January 1, 2005	$	59,421,138
Net loss		(184,268	)
Net transfers from AAAMHI		678,715
Owner’s equity at September 30, 2005	$	59,915,585
Owner’s equity at January 1, 2006	$	38,010,116
Net income		2,753,365
Net transfers to AAAMHI		(317,745	)
Owner’s equity at September 30, 2006	$	40,445,736

Three Months Ended September 30, 2006 and 2005

Owner’s equity at July 1, 2005	$	59,463,057
Net loss		(345,287	)
Net transfers to AAAMHI		797,815
Owner’s equity at September 30, 2005	$	59,915,585
Owner’s equity at July 1, 2006	$	39,390,071
Net income		921,495
Net transfers to AAAMHI		134,170
Owner’s equity at September 30, 2006	$	40,445,736

See accompanying notes.

20

U.S. Mutual Fund Business of

ABN AMRO Asset Management Holdings, Inc.

Combined Statements of Cash Flows

(Unaudited) 

	Nine Months Ended September 30,						Three Months Ended September 30,
	2006			2005			2006			2005
Operating activities
Net income	$	2,753,365		$	(184,268	)	$	921,495		$	(345,287	)
Adjustments to reconcile net income (loss) to net cash flow provided by operating activities:
Changes in assets and liabilities:
(Increase) decrease in advisory and administrative fees receivable		790,286			90,768			366,718			11,468
(Increase) decrease in other assets		—			1,524			—			—
Increase (decrease) in accounts payable—affiliates		(807,547	)		(779,311	)		50,324			(279,417	)
Increase (decrease) in accrued compensations and benefits		(360,114	)		389,417			(189,036	)		271,604
Increase (decrease) in other accrued liabilities		79,175			552,328			109,531			129,302
Net cash flow provided by (used in) operating activities		2,296,815			70,458			1,259,032			(212,330	)
Financing activities
Transfers (to) from AAAMHI, net		(317,745	)		678,715			134,170			797,815
Net cash provided by (used in) financing activities		(317,745	)		678,715			134,170			797,815
Net increase in cash and cash equivalents		1,979,070			749,173			1,393,202			585,485
Cash and cash equivalents at beginning of period		5,239,747			3,158,266			5,825,615			3,321,954
Cash and cash equivalents at end of period	$	7,218,817		$	3,907,439		$	7,218,817		$	3,907,439

See accompanying notes.

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U.S. Mutual Fund Business of

ABN AMRO Asset Management Holdings, Inc.

Notes to Combined Financial Statements

(Unaudited)

1. Basis of Presentation

The accompanying combined financial statements include the U.S. Mutual Fund Business of ABN AMRO Asset Management Holdings, Inc. (AAAMHI) (the Business). The principal operations of the Business relate to investment advisory, administrative and distribution services provided to certain registered investment companies comprising ABN AMRO Funds (the Funds) and a small number of managed accounts of AAAMHI. The Business is included in the consolidated financial statements of AAAMHI, a wholly owned subsidiary of ABN AMRO Asset Management Holding N.V. (AAAMHNV), which is a wholly owned subsidiary of ABN AMRO Bank N.V. (ABN AMRO). Pursuant to an Asset Purchase Agreement (the Agreement), dated as of April 20, 2006, AAAMHI and its wholly-owned subsidiaries and certain other affiliated entities (ABN AMRO Investment Fund Services, Inc., ABN AMRO Asset Management, Inc. (AAAM), Montag & Caldwell, Inc. (Montag), TAMRO Capital Partners LLC (TAMRO), Veredus Asset Management LLC (Veredus) and River Road Asset Management, LLC (River Road)) agreed to sell the Business to Highbury Financial Inc. (Highbury) for an aggregate cash purchase price of $38.6 million. Upon completion of the sale transaction, certain members of the Business’ management and staff will join Highbury. Additionally, a newly formed subsidiary of Highbury, Aston Asset Management LLC, will become adviser to the Funds, which will be re-named the Aston Funds. AAAMHI and certain affiliates who are currently the advisers to the Funds will continue to provide advisory services to the Funds after completion of the sale but in a sub-advisory capacity. A senior officer of AAAMHI and three other individuals not involved in the Business have also agreed to join Highbury in connection with the Acquisition of the Business.

The combined financial statements have been prepared from AAAMHI’s historical accounting records on a carve-out basis to include the historical financial position, results of operations, and cash flows applicable to the Business. The combined financial statements exclude all continuing operations of AAAMHI and its affiliated entities listed in the preceding paragraph that will be retained by the sellers. The combined financial statements have been prepared as if the Business had been a stand-alone operation, though they are not necessarily representative of results had the Business operated as a stand-alone operation, and it is not practicable to estimate what those expenses would have been on a stand-alone basis. Revenues, expenses, assets, and liabilities were derived from amounts associated with the Business in the AAAMHI financial records. The financial results include allocations based on methodologies that management believes are reasonable of corporate expenses from AAAMHI and allocations of other corporate expenses from AAAMHI’s parent company that may be different from comparable expenses that would have been incurred if the Business operated as a stand-alone business. Specifically, ABN AMRO Services Company, Inc., a wholly-owned subsidiary of AANAHC (see Note 7), provides the Business with certain IT, infrastructure and e-mail services. LaSalle Bank Corporation, also a wholly-owned subsidiary of AANAHC, provides the Business with payroll, benefits, general ledger maintenance, internal audit and accounts payable services. These services are charged based upon utilized quantities (typically number of employees, number of transactions processed, hours worked). AAAMHI provides the Business with executive management, finance, human resources and personal trade compliance services. These services are charged based upon employee count or management time incurred. AAAMHI’s parent and its parent companies provide other executive management, technology, sales support, finance, compliance and human resources support services. These services are charged out on a formula basis that considers Assets Under Management, number of employees and non-interest expense. The cost of these services is included under the caption “Related-party expense allocations” in the accompanying combined statements of operations. Certain cash receipts and cash payments related to the Business were handled through AAAMHI and affiliate cash accounts, which are not included in the carve-out financial statements. These amounts have been accounted for as net capital contributions or distributions to or from the Business and are reflected as “Net transfers (to) from AAAMHI” in the combined statements of changes in owner’s equity and the combined statements of cash flows reflects these cash transactions.

Preparation of the combined financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported financial statement amounts and accompanying notes. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from those estimates.

22

U.S. Mutual Fund Business of

ABN AMRO Asset Management Holdings, Inc.

Notes to Combined Financial Statements

(Unaudited)

2. Summary of Significant Accounting Policies

Principles of Combination

The accompanying combined statements of financial condition, operations, cash flows and owner's equity of the Business for the three and nine months ended September 30, 2006 and 2005 have been prepared on a carve-out basis (see Note 1).

Cash and Cash Equivalents

Cash and cash equivalents represent cash in banks and investments in money market mutual funds.

Goodwill and Intangible Assets

The Business has adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (FAS 142). Intangible assets, comprising the estimated value of investment management contracts, and goodwill, included in the combined financial statements of the Business relate to the acquisition of certain AAAMHI affiliates including the Business. These amounts reflect management’s best estimate of a reasonable allocation to the Business of such amounts included in the financial records of AAAMHI. The provisions of SFAS No. 142 require that goodwill and other intangible assets with indefinite lives no longer be amortized, but instead be tested at least annually for impairment and require reporting units to be identified for the purpose of assessing potential future impairments of goodwill. The Business’ acquired intangible management contract asset relate to the provision of investment advisory services to the Funds in exchange for fees that are based on a percentage of the average daily net assets of the funds. These management contracts were acquired in 2001 as part of the acquisition of certain AAAMHI affiliates. The management contracts are subject to annual renewal by the Funds’ board of trustees which is expected to continue indefinitely since this has been the experience for the Funds as well as for the mutual fund industry as a whole. Accordingly, the Business’ acquired intangible assets related to the Funds are considered to be of an indefinite life as there is no foreseeable limit on the contract period. The Business conducts its annual testing of goodwill and intangible assets for impairment annually in the fourth quarter, unless events warrant more frequent testing.

Revenue Recognition

The Business derives its revenues from investment advisory and administrative services provided to the Funds and a limited number of managed accounts of AAAMHI. Based on the terms of the advisory and administrative agreements in place that set out fees to be earned as a stated percentage of assets under management, advisory and administrative fees are recognized in revenue in the period such services are performed unless facts and circumstances would indicate that collectibility of the fees are not reasonably assured. Expense reimbursements to certain of the Funds in accordance with agreements are reported as an offset to investment advisory fees. Such reimbursements totaled $1,733,234 and $1,558,315 for the nine months ended September 30, 2006 and September 30, 2005, respectively, and totaled $586,248 and $533,332 for the three months ended September 30, 2006 and September 30, 2005, respectively.

Distribution and Advisory Costs

Included in distribution and advisory costs in the accompanying financial statements are fees paid to AAAMHI and its affiliates and other non-affiliated entities pursuant to contracts related to the management and distribution of the Funds and managed account assets. Such costs are recorded in the period incurred.

The Funds pay five affiliates of AAAMHI (Montag, AAAM, TAMRO, Veredus and River Road) investment advisory fees pursuant to management contracts with these entities under which the affiliates provide investment advisory services to the Funds. AAAM also pays two third-party investment management firms, MFS Institutional Advisors, Inc. and Optimum Investment Advisors, LLC, investment sub-advisory fees pursuant to management contracts with these entities under which these independent firms provide investment sub-advisory services to two of the Funds. The Business, generally through ABN AMRO Distribution Services (USA) Inc. (the Distributor), has entered into nearly 400 selling/service agreements through which independent third parties sell the Business’ Funds and/or provide other services to their clients in exchange for certain payments. Unless paid by the Distributor pursuant to the Funds’ Rule 12b-1 Plan, these payments, as well as certain sales and marketing costs, are included within distribution and advisory costs.

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U.S. Mutual Fund Business of

ABN AMRO Asset Management Holdings, Inc.

Notes to Combined Financial Statements

(Unaudited)

Income Taxes

The Business is a component of AAAMHI, and as such was a component of the consolidated income tax return of AAAMHI, or an affiliate of AAAMHI, for the periods presented in these financial statements. However, for the purpose of the preparation of these financial statements, the Business is considered a stand-alone entity and any required provision for federal and state income taxes has been determined accordingly. The provision for federal and state income taxes is comprised of two components, current and deferred income taxes. Deferred tax assets and liabilities are determined based on temporary differences between the financial and tax reporting bases of assets and liabilities and are measured using currently enacted rates and laws. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not.

Fair Value of Financial Instruments

The carrying value of financial assets and liabilities included in the accompanying combined statements of financial condition approximate fair values due to their short-term nature.

3. Goodwill and Intangible Assets

Goodwill and intangible assets at September 30, 2006 and December 31, 2005 included in the accompanying combined statements of financial condition are shown net of accumulated amortization of $1,553,200 and $2,113,467 recorded prior to 2002 and the adoption of FAS 142. Impairment charges of approximately $10.4 million of intangible assets and $13.3 million of goodwill were recorded by the Business in 2005 in accordance with FAS 142.

The facts and circumstances leading to the impairment charges to goodwill and intangible assets relate to management’s assessment of declines in net assets in the Funds resulting from net share redemptions and unfavorable investment performance trends. The fair value of the Business used to determine the impairment of goodwill was determined with reference to the expected proceeds to be received upon the sale of the Business. The fair value of the intangible asset related to the investment management contracts used to determine the amount of impairment of the intangible asset, was determined based on a discounted cash flow analysis of the acquired contracts. No impairment of goodwill or intangibles was determined to be required for periods prior to 2005.

4. Distribution and Advisory Costs

Distribution and advisory costs in the accompanying combined statement of operations consist of the following: 

	Nine Months Ended  September 30,				Three Months Ended  September 30,
	2006		2005		2006		2005
Advisory costs:
AAAMHI affiliates		16,993,344		21,829,187		5,093,799		7,254,565
Third party sub-advisers		2,115,662		1,865,924		703,324		672,714
Total advisory costs		19,109,006		23,695,111		5,797,123		7,927,279
Distribution costs:
AAAMHI affiliates		515,572		486,137		169,833		(636,100	)
Non-affiliates		3,483,617		6,732,720		1,154,519		1,946,443
Total distribution costs		3,999,190		7,218,857		1,324,353		1,310,343
Total distribution and advisory costs		23,108,195		30,913,968		7,121,475		9,237,622

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U.S. Mutual Fund Business of

ABN AMRO Asset Management Holdings, Inc.

Notes to Combined Financial Statements

(Unaudited)

5. Income Taxes

A reconciliation of the differences between the total income tax provision (benefit) and the amounts computed at the statutory federal tax rate of 35% for the three and nine month periods ended September 30, 2006 and 2005, is as follows:

		Nine Months Ended September 30,						Three Months Ended September 30,
		2006			2005			2006			2005
Income tax provision (benefit) at statutory federal income tax rate	$	963,678		$	(64,494	)	$	322,523		$	(120,850	)
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit		137,668			(9,213	)		46,075			(17,264	)
Valuation allowance adjustment		(1,101,346	)		73,707			(368,598	)		138,114
Provision for income taxes	$	—		$	—		$	—		$	—

The current and deferred portion of the total provision for income taxes was $0 for each of the respective periods.

The components of the net deferred tax balances as of September 30, 2006 and December 31, 2005, are as follows:

	September 30, 2006			December 31, 2005
Deferred tax assets:
Net operating loss carryforwards	$	6,696,036		$	6,560,728
Goodwill and intangibles		1,907,833			3,107,833
Other		—			36,654
Less valuation allowance		(8,603,869	)		(9,705,215	)
Net deferred taxes	$	—		$	—

The need for a valuation allowance to reduce federal and state deferred tax assets and net operating losses has been determined as if the Business was a stand-alone entity. As such, management believes it is more likely than not that these items will not be realized.

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U.S. Mutual Fund Business of

ABN AMRO Asset Management Holdings, Inc.

Notes to Combined Financial Statements

(Unaudited)

6. Benefit Plans

Pension Plans

ABN AMRO Bank sponsors a non-contributory defined benefit pension plan covering substantially all U.S. salaried employees. Assets held by the plan consist primarily of shares of registered investment companies and pooled trust funds. The allocated expense of the Business totaled $61,365 and $158,227 for the nine months ended September 30, 2006 and 2005, respectively, and totaled $16,521 and $22,836 for the three months ended September 30, 2006 and 2005, respectively.

Profit Sharing and Savings Plan

ABN AMRO Bank sponsors a profit sharing and savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all U.S. salaried employees. Under the plan, employee contributions are partially matched by the respective ABN AMRO Bank subsidiary. In addition, the respective ABN AMRO Bank subsidiary may allocate a portion of its net profits to employees’ accounts in the plan. The allocated expense of the Business totaled $97,035 and $106,962 for the nine months ended September 30, 2006 and 2005, respectively, and totaled $22,125 and $26,669 for the three months ended September 30, 2006 and 2005, respectively.

Group Welfare Plan

ABN AMRO Bank provides welfare and life insurance benefits to substantially all U.S. salaried employees and their dependents. The amount charged to expense includes welfare benefits paid to participants, net of participant contributions, and administrative costs. Life insurance premiums paid to insurance companies are recognized as an expense when paid. The allocated expense of the Business totaled $142,358 and $183,093 for the nine months ended September 30, 2006 and 2005, respectively, and totaled $80,361 and $59,367 for the three months ended September 30, 2006 and 2005, respectively.

7. Related Party Transactions

ABN AMRO is a Dutch bank with operations around the world. With respect to its asset management business in the United States, ABN AMRO has two primary wholly-owned subsidiaries, ABN AMRO North America Holding Company (AANAHC) and AAAMHNV. AAAMHNV owns 100% of AAAMHI, and the assets of the Business are owned in their entirety by AAAMHI.

In the ordinary course of business, the Business utilizes investment advisory services provided by several affiliated entities. Five subsidiaries of AAAMHI, including Montag (100% owned), AAAM (100% owned), TAMRO (100% owned), Veredus (50% owned) and River Road (45% owned), currently serve as investment advisors to the Funds. The Funds pay the investment advisors an advisory fee, net of any fee waivers and expense reimbursements, and the advisors pay the Business a fixed percentage of the net advisory fees for administrative and distribution services. The payments made to affiliated entities, which provide advisory and distribution services to certain mutual funds and separate account assets of AAAMHI are included under the caption “Distribution and advisory costs” in the accompanying combined statements of operations (See Note 4).

The Business also utilizes operational and support services provided by several affiliated entities. ABN AMRO Services Company, Inc., a wholly-owned subsidiary of AANAHC, provides the Business with certain IT, infrastructure and e-mail services. LaSalle Bank Corporation, also a wholly-owned subsidiary of AANAHC, provides the Business with payroll, benefits, general ledger maintenance, internal audit and accounts payable services. AAAMHI provides the Business with executive management, finance, human resources and personal trade compliance services. The cost of these services is included under the caption “Related-party expense allocations” in the accompanying combined statements of operations. Payables to affiliates related to distribution, advisory or other services provided to the Business are included in “Accounts payable - affiliates” in the accompanying combined statements of financial condition.

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission on March 23, 2007.

Unless otherwise provided in this Quarterly Report, references to the “Company,” the “Registrant,” the “Issuer,” “we,” “us,” and “our” refer to Highbury Financial Inc. and its subsidiary. References to Highbury refer solely to Highbury Financial Inc. and references to Aston refer solely to Aston Asset Management LLC, a subsidiary of Highbury.

Forward Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results to be materially different from historical results and results expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, the following:

· our performance is directly affected by changing conditions in global financial markets generally and in theequity markets particularly, and a decline or a lack of sustained growth in these markets may result in decreased advisory fees and administrative fees and a corresponding decline (or lack of growth) in our operating results and in the cash flow distributable to us from our existing or future affiliates;

· we cannot be certain that we will be successful in finding or investing in additional investment management firms on favorable terms, or that existing and future affiliates will have favorable operating results;

· we may need to raise capital by making long-term or short-term borrowings or by selling shares of our common stock or other securities in order to finance investments in additionalinvestment management firms or additional investments in our existing affiliate, and we cannot be sure that such capital will be available to us on acceptable terms, if at all; and

· those certain other factors discussed under the caption “Risk Factors” in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on March 23, 2007, and in any other filings we make with the Securities and Exchange Commission from time to time.

We will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of events, whether or not anticipated. In that respect, we wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

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Overview

Highbury is an investment management holding company providing permanent capital solutions to mid-sized investment management firms. We pursue acquisition opportunities and seek to establish accretive partnerships with high quality investment management firms. Highbury’s strategy is to provide permanent equity capital to fund buyouts from corporate parents, buyouts of founding or departing partners, growth initiatives, or exit strategies for private equity funds. This strategy includes leaving material equity interests with management teams to align the interests of management and Highbury’s shareholders and, in general, does not include integrating our acquisitions, although Highbury may execute add-on acquisitions for its current or future affiliates. We seek to augment and diversify our sources of revenue by management team, asset class, investment style, distribution channel and client type. We intend to fund future acquisitions with retained net income or the issuance of debt or equity.

Highbury was formed on July 13, 2005, for the purpose of acquiring or acquiring control of, through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination, one or more financial services businesses. Highbury closed its initial public offering on January 31, 2006. After deducting the underwriting discounts and commissions and the offering expenses, the total net proceeds to Highbury from the offering and the private placement that Highbury closed contemporaneously with its initial public offering, were approximately $43,783,582. Highbury deposited $42,616,234 of the net proceeds and the non-accountable expense allowance of $673,333, which the underwriters agreed to defer until consummation of our initial business combination, into a trust account at Lehman Brothers, Inc., or the trust account, maintained by Continental Stock Transfer & Trust Company acting as trustee, for an initial total of $43,289,567 in the trust account. On November 30, 2006, upon consummation of the acquisition, the trust account was liquidated.

Business Combination. On April 20, 2006, Highbury and Aston entered into an asset purchase agreement, dated as of April 20, 2006, referred to in this Quarterly Report on Form 10-Q as the asset purchase agreement, among Highbury, Aston and ABN AMRO Asset Management Holdings, Inc., or AAAMHI, ABN AMRO Investment Fund Services, Inc., ABN AMRO Asset Management, Inc., Montag & Caldwell, Inc., Tamro Capital Partners LLC, Veredus Asset Management LLC, and River Road Asset Management, LLC, collectively referred to herein as the sellers. Pursuant to the asset purchase agreement, on November 30, 2006, we acquired substantially all of the sellers’ business of providing investment advisory, administration, distribution and related services to the target funds specified in the asset purchase agreement. In connection with the consummation of this transaction, referred to in this Quarterly Report as the acquisition, Aston entered into agreements with each of the sellers that managed the target funds prior to the acquisition, pursuant to which each such seller now acts as a sub-adviser to the applicable target fund, each of which is now rebranded an Aston Fund. Pursuant to the asset purchase agreement, the sellers have agreed not to terminate these agreements for a period of five years following the consummation of the acquisition.

Pursuant to the asset purchase agreement, Highbury and Aston paid $38.6 million in cash to AAAMHI. The asset purchase agreement provides for a contingent adjustment payment in cash on the second anniversary of the date of the closing of the acquisition, as follows: in the event the annualized investment advisory fee revenue generated under investment advisory contracts between Aston and the sellers applicable to the target funds for the six months prior to the second anniversary of the date of the closing of the acquisition, or the target revenue, (x) exceeds $41.8 million, we will pay to AAAMHI the difference between the target revenue and $41.8 million, up to a total aggregate payment of $3.8 million, or (y) is less than $34.2 million, AAAMHI will pay to us the difference between the $34.2 million and the target revenue, up to a total aggregate payment of $3.8 million.

The acquired business was founded in 1993 within Alleghany Asset Management, Inc. by employees of Aston to manage open-end investment funds for retail and institutional clients in the United States. Originally, the acquired business employed investment advisers affiliated with its parent to manage the assets of the funds, while it centralized the distribution, marketing, reporting and other operations of the fund family. As the business developed, the acquired business created new mutual funds managed by experienced independent investment advisers. As of September 30, 2007, Aston managed 22 no-load mutual funds, comprised of 18 equity funds and four fixed income funds, with approximately $5.0 billion of mutual fund assets under management. Aston also managed approximately $137 million of separate account portfolios. Historically, the acquired business utilized seven different entities to manage the equity funds, of which five were affiliates of the sellers and two were independent. Upon consummation of the acquisition, Aston entered into long-term contracts with each of these entities pursuant to which they continue to sub-advise the funds. The contracts with the sellers’ affiliates will not be terminable by the sub-advisers for five years. One existing fixed income manager and two new managers have been retained to manage three fixed income funds. Aston’s relationship with the sub-advisers is supported by limited non-compete provisions and certain capacity guarantees in certain products to benefit Aston. This arrangement is intended to ensure that the investment philosophies and processes guiding the mutual funds in the future are consistent with their historical investment philosophies and processes.

28

Aston intends to expand its assets under management with a combination of internal growth, new product development and accretive acquisitions. The Company believes the development of new products will provide growth in the future.

New products may include:

· additional open-end mutual funds with current or new sub-advisers;

· funds of funds;

· closed-end funds;

· wrap accounts; or

· an expanded separate account management program.

A fund of funds is a fund that invests in other commingled investment funds. Closed-end funds are funds that do not offer daily liquidity for investor purchases and sales at net asset value, but rather are typically listed on an exchange and traded in the secondary market. Wrap accounts are accounts offered by retail distribution firms that provide access to institutional investment management services without the use of a registered investment company. A separate account is an account managed for a single investor not commingled with the assets of other investors.

Since the consummation of the acquisition, Aston has opened five new equity mutual funds. The Aston/Optimum Large Cap Opportunity Fund opened in December 2006, and the Aston/River Road Small-Mid Cap Fund opened in March 2007. In August 2007, the Aston/Neptune International Fund, the Aston/Resolution Global Equity Fund and the Aston/ABN AMRO Global Real Estate Fund commenced operations. During the balance of 2007, Aston expects to open five additional mutual funds, including:

A mid-cap growth fund subadvised by Montag & Caldwell Investment Counsel;

A mid-cap growth fund subadvised by ClariVest Asset Management;

A mid-cap value fund subadvised by Cardinal Capital;

An international small-cap fund subadvised by Strategic Global Advisors; and

An international large-cap fund subadvised by Baring Asset Management.

In addition, Aston will continue discussions with existing sub-advisers and additional investment management firms to create a variety of new mutual funds.

In addition, Aston may be able to develop new distribution channels including:

29

· arrangements with banks and insurance companies which, like ABN AMRO, elect to divest their mutual fund operations but enter into agreements with Aston to service their customers; and

· wholesalers focused on the traditional retail broker channel.

Revenue Sharing Arrangement with Aston. Highbury formed Aston on April 19, 2006 and became the sole member of Aston. In connection with Highbury and Aston entering into the asset purchase agreement, the limited liability company agreement of Aston was amended and eight individuals, who were previously employed by ABN AMRO and the acquired business, were admitted as members of Aston (collectively referred to in this Quarterly Report as the Aston management members). Highbury owns 65% of the membership interests of Aston, and the Aston management members own 35% of the membership interests of Aston.

Pursuant to the limited liability company agreement, 72% of the revenues, or the Operating Allocation, of Aston is used to pay operating expenses of Aston, including salaries and bonuses of all employees of Aston (including the Aston management members). The remaining 28% of the revenues, or Owners’ Allocation, of Aston is allocated to the owners of Aston. The Owners’ Allocation is allocated among the members of Aston according to their relative ownership interests.Currently, 18.2% of total revenue is allocated to Highbury and 9.8% of total revenue is allocated to the Aston management members.

Highbury’s contractual share of revenues has priority over the distributions to the Aston management members in the event Aston’s actual operating expenses exceed the Operating Allocation. As a result, excess expenses first reduce the portion of the Owners’ Allocation allocated to the Aston management members until the Aston management members’ allocation is eliminated before Highbury’s allocation is reduced. Any reduction in the distribution of revenues to be paid to Highbury is required to be paid to Highbury out of any future excess Operating Allocation and the portion of future Owners’ Allocation allocated to the Aston management members, with interest.

Business Overview. Commencing with the acquisition on November 30, 2006 of the acquired business, we derive most of our revenue from the provision of investment management and related services. Aston generates revenue by charging mutual funds an advisory fee and an administrative fee based on a percentage of invested assets. A portion of the fees are paid to the sub-advisers, to a third-party sub-administrator and to third-party distribution partners. Each fund typically bears all expenses associated with its operation and the issuance and redemption of its securities. In particular, each fund pays investment advisory fees (to Aston), shareholder servicing fees and expenses, fund accounting fees and expenses, transfer agent fees, custodian fees and expenses, legal and auditing fees, expenses of preparing, printing and mailing prospectuses and shareholder reports, registration fees and expenses, proxy and annual meeting expenses and independent trustee fees and expenses. Aston has guaranteed many of the funds that their expenses will not exceed a specified percentage of their net assets. Aston absorbs all advisory fees and other mutual fund expenses in excess of these self-imposed limits in the form of expense reimbursements or fee waivers and collects as revenue the advisory fee less reimbursements and waivers. As of September 30, 2007, Aston was reimbursing 17 mutual funds whose expenses exceed the applicable expense cap.

Relationships with a limited number of clients account for a significant majority of our revenue. We expect that Aston’s relationships with these clients will continue to account for a substantial portion of our total revenue in future periods. Aston’s client, the Aston Funds, a Delaware business trust, which accounts for approximately 97% of our assets under management, is comprised of 22 mutual funds that are currently managed by Aston. Because all these funds have the same trustees, it is possible that the contracts with them could be terminated simultaneously. Of these 22 funds, Aston/Montag & Caldwell Growth and Aston/Optimum Mid Cap each accounted for more than 10% of the revenues of Aston in the most recent fiscal quarter. Additionally, the assets under management that Aston sources through independent financial advisers using Schwab and Fidelity, as custodians, each generate more than 10% of revenues received by Aston. These various client concentrations leave us vulnerable to any adverse change in the financial condition of any of our major clients. The loss of any of these relationships may have a material adverse impact on our revenues.

30

Our level of profitability will depend on a variety of factors, including:

· those affecting the global financial markets generally and the equity markets particularly, which could potentially result in considerable increases or decreases in our assets under management;

· the level of revenue, which is dependent on our ability to maintain or increase assets under management by maintaining existing investment advisory relationships and fee structures, marketing our services successfully to new clients and obtaining favorable investment results;

· our ability to maintain certain levels of operating profit margins;

· the availability and cost of the capital with which we finance our existing and new acquisitions;

· our success in making new acquisitions and the terms upon which such transactions are completed;

· the level of intangible assets and the associated amortization expense resulting from our acquisitions;

· the level of expenses incurred for holding company operations; and

· the level of taxation to which we are subject.

Key Operating Measures

We use the following key measures to evaluate and assess our business:

· Assets Under Management. Aston is the investment manager for 22 open-end mutual funds, comprised of 18 equity and four fixed income funds. Aston generates revenues by charging each fund investment advisory and administrative fees (collected in monthly installments), each of which are equal to a percentage of the daily weighted average assets under management of the fund. Assets under management change on a daily basis as a result of client investments and withdrawals and changes in the market value of securities held in the mutual funds. We carefully review net asset flows into the mutual funds, trends in the equity markets and the investment performance of the mutual funds, both absolutely and relative to their peers, to monitor their effects on the overall level of assets under management.

· Total Revenue. Total revenue for Aston is equal to the sum of the advisory fees and the administrative fees and money market service fees earned by the business in a given period. We operate Aston under a revenue sharing structure through which Highbury receives a fixed percentage (18.2%) of the total revenue earned by Aston. In addition, Highbury earns interest income on its cash balances which we recognize as non-operating income on the financial statements.

· Weighted Average Fee Basis. The weighted average fee basis is equal to the total revenue, net of Aston sub-administration fees, earned in a specific period divided by the weighted average assets under management for that period. Because each fund has a different fee schedule, the weighted average fee basis provides us with a single indicator of the business’ ability to generate fees on its total assets under management across all products. In the third quarter of 2007, we modified our calculation of this key operating measure to more accurately reflect the formula used to calculate Aston’s Owners’ Allocation.

· Total Operating Expenses. The total operating expenses include the operating expenses of Aston as well as Highbury. At the Aston level, we monitor total operating expenses relative to Aston’s total revenue to ensure there is sufficient operating margin to cover expenses. We expect total operating expenses (including distribution and sub-advisory costs) to equal approximately 72% of the total revenue of Aston, as provided in Aston’s limited liability company agreement. At the Highbury level, we incur operating expenses in connection with our pursuit of accretive acquisitions, including expenses for travel, entertainment and due diligence. We also incur legal and accounting expenses in connection with our SEC filing requirements and expenses of directors’ and officers’ insurance.

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Description of Certain Line Items

Following is a description of the components of certain line items from our consolidated financial statements:

· Operating Revenue. Aston generates advisory fees based on a fixed percentage of the daily weighted average assets under management for each fund and receives these fees on a monthly basis. For many funds, Aston provides an expense cap which guarantees to investors that the total expenses of a fund will not exceed a fixed percentage of the total assets under management. For small funds, the fixed expenses for fund accounting, client reporting, printing and other expenses, when combined with the investment advisory fees and administrative fees, cause a fund’s total expenses to exceed the expense cap. In such cases, Aston reimburses the funds for the excess fixed expenses or waives a portion of the investment advisory fee, so as to keep the total expenses of the fund at or below the expense cap. Aston’s advisory fees include investment advisory fees from all of the funds, net of all fee waivers and expense reimbursements. Additionally, Aston generates administration fees for providing administration services. Such services include marketing and customer relations, bookkeeping and internal accounting functions, and legal, regulatory and board of trustees support. Finally, Aston earns monthly fees from AAAMHI in return for providing administration services to six money market funds which continue to be advised by AAAMHI.

· Distribution and Sub-advisory Costs. Aston has contracted on a non-exclusive basis with nearly 400 different institutions to sell its mutual funds, in exchange for a distribution fee, to retail and institutional investors. These distribution fees are generally equal to a fixed percentage of the assets invested by the retail or institutional investor. In addition, Aston employs third-party investment managers to perform the security research and investment selection processes for each of its mutual funds. Under this arrangement, Aston pays the third-party investment manager a sub-advisory fee, generally equal to 50% of the advisory fees for the mutual fund, net of fee waivers, expense reimbursements, and applicable distribution fees paid under the distribution agreements discussed above. Total distribution and sub-advisory fees represent the largest component of expenses for Aston. Since these fees are generally based on total assets under management, they increase or decrease proportionately with total assets under management.

· Compensation and Related Expenses. As of September 30, 2007, Aston employed 36 full-time employees. The compensation and related expenses of Aston include the base salaries, incentive compensation, health insurance, retirement benefits and other costs related to the employees. These expenses increase and decrease with the addition or termination of employees. Highbury currently has no employees and provides no compensation to its officers or directors.

· Other Operating Expenses. The most significant components of other operating expenses include professional fees, insurance, occupancy, marketing and advertising, voice and data communication and travel and entertainment expenses.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations for the purposes of this document are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Actual results could differ from those estimates.

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The Company’s significant accounting policies are presented in Note 3 to its condensed consolidated financial statements included elsewhere herein, and the following summaries should be read in conjunction with the financial statements and the related notes. While all accounting policies affect the financial statements, certain policies may be viewed as critical. Critical accounting policies are those that are both most important to the portrayal of the financial statements and results of operations and that require management’s most subjective or complex judgments and estimates. We believe the policies that fall within this category are the policies related to principles of combination, goodwill and intangible assets, valuation and income taxes.

Principles of Consolidation. The consolidated financial statements include the accounts of Highbury and Aston, in which Highbury has a controlling financial interest. Generally, an entity is considered to have a controlling financial interest when it owns a majority of the voting interest in an entity. Highbury is the manager member of Aston and owns 65% of Aston. Highbury has a contractual arrangement with Aston whereby a percentage of revenue is allocable to fund Aston’s operating expenses (referred to as the Operating Allocation), while the remaining portion of revenue (referred to as the Owners' Allocation) is allocable to Highbury and the other members, with a priority to Highbury. The portion of the income of Aston allocated to owners other than Highbury is included in minority interest in the Consolidated Statements of Income. Minority interest on the Consolidated Balance Sheets includes capital and undistributed income owned by the management members of Aston. All material intercompany balances and transactions have been eliminated.

Goodwill and Intangible Assets. The purchase price and the capitalized transaction costs incurred in connection with the acquisition of the acquired business are allocated based on the fair value of the assets acquired, which is primarily the acquired mutual fund advisory contract. In determining the allocation of the purchase price to the acquired mutual fund advisory contract, we have analyzed the present value of the acquired business’ existing mutual fund advisory contracts based on a number of factors including: the acquired business’ historical and potential future operating performance; the historical and potential future rates of new business from new and existing clients and attrition among existing clients; the stability and longevity of existing advisory and sub-advisory relationships; the acquired business’ recent, as well as long-term, investment performance; the characteristics of the acquired business’ products and investment styles; the stability and depth of the management team; and the acquired business’ history and perceived franchise or brand value.

We have determined that the acquired mutual fund advisory contract meets the indefinite life criteria outlined in Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), because we expect both the contract and the cash flows generated by the contract to continue indefinitely due to the likelihood of continued renewal at little or no cost. Accordingly, we do not amortize this intangible asset, but instead review this asset at least annually for impairment. If the carrying amount of this intangible asset exceeds the fair value, an impairment loss would be recorded in an amount equal to that excess. Additionally, each reporting period, we assess whether events or circumstances have occurred which indicate that the indefinite life criteria are no longer met. If the indefinite life criteria are no longer met, we will amortize the intangible asset over its remaining useful life.

The excess of purchase price for the acquisition of the acquired business over the fair value of net assets acquired, including the acquired mutual fund advisory contract, is reported as goodwill. Goodwill is not amortized, but is instead reviewed for impairment. Highbury assesses goodwill for impairment at least annually, or more frequently whenever events or circumstances occur indicating that the recorded goodwill may be impaired. If the carrying amount of goodwill exceeds the fair value, an impairment loss would be recorded in an amount equal to that excess.

Valuation. In allocating the purchase price of the acquisition and testing our assets for impairment, we make estimates and assumptions to determine the value of our acquired client relationships. In these valuations, we make assumptions of the growth rates and useful lives of existing and prospective client accounts. Additionally, we make assumptions of, among other factors, projected future earnings and cash flow, valuation multiples, tax benefits and discount rates. The impacts of many of these assumptions are material to our financial condition and operating performance and, at times, are subjective. If we used different assumptions, the carrying value of our intangible assets and the related amortization could be stated differently and our impairment conclusions could be modified.

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Income Taxes. Deferred tax assets and liabilities are primarily the result of timing differences between the carrying value of assets and liabilities and the deductibility of operating expenses for financial reporting and income tax purposes. Deferred tax liabilities are primarily the result of tax deductions for the Company's intangible assets. We amortize acquired intangible assets over a 15-year period for tax purposes only, reducing their tax basis below their carrying value for financial statement purposes and generating deferred taxes each reporting period. We amortized $607,107 and $1,821,321 related to goodwill and intangible assets in the three and nine months ended September 30, 2007, respectively. Additionally, at November 30, 2006, when Highbury ceased to be a corporation in the development stage, we had total deferred expenses of $440,342 that are being amortized for tax purposes over a 15-year period. These expenses were currently deductible for financial statement purposes during Highbury’s development stage but were not deductible for tax purposes. Highbury amortized $7,339 and $22,017 of this deferred expense in the three and nine months ended September 30, 2007. During the three and nine months ended September 30, 2007, we incurred $101,529 and $281,222, respectively, of rent, taxes and operating expenses in connection with Aston’s lease for financial reporting purposes. Under the terms of the lease, Aston made no cash payments during either period, resulting in a deferred tax asset.

We adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes ("FIN 48") an interpretation of FASB Statement No. 109 ("SFAS 109") on January 1, 2007. As a result of the implementation of FIN 48, we recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, we had no unrecognized tax benefits, and at September 30, 2007, we continue to have no unrecognized tax benefits. We will recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2007, we do not have any accrued interest related to uncertain tax positions. The tax years 2005 and 2006 remain open to examination by the major taxing jurisdictions to which we are subject.

Principles of Combination. The accompanying combined statements of operations, cash flows and owner’s equity for the acquired business for the three and nine months ended September 30, 2006 have been prepared on a carve-out basis. The combined financial statements have been prepared from AAAMHI’s historical accounting records on a carve-out basis to include the historical financial position, results of operations and cash flows applicable to the acquired business. The combined financial statements have been prepared as if the business had been a stand-alone operation, though they are not necessarily representative of results had the acquired business operated as a stand-alone operation. Revenues, expenses, assets and liabilities were derived from amounts associated with the acquired business in the AAAMHI financial records. The financial results include allocations based on methodologies that management believes are reasonable of corporate expenses from AAAMHI and allocations of other corporate expenses from AAAMHI’s parent company that may be different from comparable expenses that would have been incurred if the acquired business operated as a stand-alone business. Specifically, ABN AMRO Services Company, Inc., a wholly-owned subsidiary of ABN AMRO North America Holding Company, or AANAHC, provided the acquired business with certain IT, infrastructure and e-mail services. LaSalle Bank Corporation, also a wholly-owned subsidiary of AANAHC, provided the acquired business with payroll, benefits, general ledger maintenance, internal audit and accounts payable services. These services were charged based upon utilized quantities (typically number of employees, number of transactions processed, or hours worked). AAAMHI provided the acquired business with executive management, finance, human resources and personal trade compliance services. These services were charged based upon employee count or management time incurred. AAAMHI’s parent and its parent companies provided other executive management, technology, sales support, finance, compliance and human resources support services. These services were charged out on a formula basis that considers assets under management, number of employees and non-interest expense. The cost of these services is included under the caption “Related-party expense allocations” in the accompanying combined statements of operations of the acquired business.

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Certain cash receipts and cash payments related to the acquired business were handled through AAAMHI and affiliate cash accounts which are not included in the carve-out financial statements. “Net transfers from AAAMHI” in the combined statements of changes in owner’s equity reflects these cash transactions.

The discussion and analysis of the acquired business’ financial condition and results of operations for the purposes of this document are based upon its consolidated financial statements, which have been prepared in accordance with GAAP. The acquired business’ significant accounting policies are presented in Note 2 to its combined financial statements included elsewhere herein, and the following summaries should be read in conjunction with the financial statements and the related notes included in this prospectus. The acquired business’ management believes the policies that fall within this category are the policies related to principles of combination and goodwill and intangible assets.

Recently Issued Accounting Pronouncements

In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. We are currently evaluating this standard and its impact, if any, on our consolidated financial statements.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

Summary Financials

Highbury was formed July 13, 2005 to acquire or acquire control of one or more businesses in the financial services industry. On November 30, 2006, the Company completed its acquisition of the U.S. mutual fund business of ABN AMRO, or the acquired business. Selected financial information is presented below for the acquired business and for the Company for the three and nine months ended September 30, 2006. The Company’s consolidated financial results for the three and nine months ended September 30, 2007 include the operations of the acquired business. 

	Three Months Ended September 30, 2006									Three Months Ended September 30, 2007
	Acquired Business			The Company			Combined(1)			The Company
Statement of Income Data
Operating revenue	$	9,889,652		$	—		$	9,889,652		$	10,157,568
Distribution and advisory costs		(7,121,475	)		—			(7,121,475	)		(4,735,347	)
Compensation and related expenses		(1,028,777	)		—			(1,028,777	)		(1,777,417	)
Amortization of intangible assets		—			—			—			—
Depreciation and other amortization		—			—			—			(46,345	)
Other expenses		(910,504	)		(147,649	)		(1,058,153	)		(1,320,117	)
Operating income (loss)	$	828,896		$	(147,649	)	$	681,247		$	2,278,342
Interest and investment income		92,599			467,002			559,601			134,673
Minority interest		—			—			—			(947,709	)
Income taxes		—			(118,340	)		(118,340	)		(572,607	)
Net income (loss)	$	921,495		$	201,013		$	1,122,508		$	892,699
Earnings per share - basic		n/a		$	0.02					$	0.09
Average shares outstanding - basic		n/a			9,635,000						9,527,000
Earnings per share - diluted		n/a		$	0.02					$	0.09
Average shares outstanding - diluted		n/a			9,635,000						9,683,634

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	Nine Months Ended September 30, 2006									Nine Months Ended September 30, 2007
	Acquired Business			The Company			Combined(1)			The Company
Statement of Income Data
Operating revenue	$	31,629,982		$	—		$	31,629,982		$	31,829,001
Distribution and advisory costs		(23,108,195	)		—			(23,108,195	)		(14,992,086	)
Compensation and related expenses		(3,248,940	)		—			(3,248,940	)		(5,091,841	)
Amortization of intangible assets		—			—			—			—
Depreciation and other amortization		—			—			—			(126,568	)
Other expenses		(2,762,360	)		(408,323	)		(3,170,683	)		(3,891,330	)
Operating income (loss)	$	2,510,487		$	(408,323	)	$	2,102,164		$	7,727,176
Interest and investment income		242,878			1,188,923			1,431,801			392,141
Minority interest		—			—			—			(3,535,525	)
Income taxes		—			(288,350	)		(288,350	)		(1,788,817	)
Net income (loss)	$	2,753,365		$	492,250		$	3,245,615		$	2,794,975
Earnings per share - basic		n/a		$	0.06					$	0.29
Average shares outstanding - basic		n/a			8,859,469						9,527,000
Earnings per share - diluted		n/a		$	0.06					$	0.24
Average shares outstanding - diluted		n/a			8,859,469						11,420,944

(1)     The information presented in the “Combined” columns for the three and nine months ended September 30, 2006 is the arithmetic sum of the operating results of the Company and the acquired business for period, which is prior to the date of the acquisition. No pro forma or other adjustments have been made in the presentation of the “Combined” financial results.

Basis of Presentation

In the “Results of Operations” section to follow, we discuss the actual consolidated financial results for the Company for the three and nine months ended September 30, 2007 and September 30, 2006. In addition, we compare the combined results, as defined above in the Summary Financials, for the three and nine months ended September 30, 2006 with the Company’s actual results for the three and nine months ended September 30, 2007. The financial statements for the acquired business for the three and nine months ended September 30, 2006 are presented on a carve-out basis.

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We do not believe that the financial statements for the acquired business are comparable to the financial statements for the Company for periods following the business combination. Prior to the completion of the business combination, the acquired business was a division of AAAMHI and was not a separate legal entity. Historically, the acquired business utilized two sub-advisers and five advisers affiliated with AAAMHI. Because the Aston Funds were introduced over a period of 13 years and were managed by five different affiliates of AAAMHI, the historical fee sharing agreements between the acquired business and each investment adviser with respect to each Aston Fund varied among the funds and over time. In addition, since the acquired business and the investment advisers were part of a commonly controlled corporate entity, the historical fee sharing arrangements were not reflective of market terms but rather internal allocations that also varied.

Subsequent to the completion of the business combination, the investment adviser affiliates of AAAMHI continue to perform the same investment management services for the Aston Funds as they had previously provided. However, as a result of the new sub-advisory agreements, they receive a smaller share of the net advisory fees after payments of third-party distribution fees than they received historically. These new sub-advisory agreements were determined based on arm’s length negotiation between the sub-advisers affiliated with AAAMHI and us and reflect market terms.

In addition, certain amounts included in the acquired business’ financial statements were allocated from AAAMHI or other related entities. We believe that these allocations are reasonable, but not necessarily indicative of costs that would have been incurred by the acquired business had it operated as a stand alone business for the same periods. For these reasons, the revenue and expenses of the acquired business as it operates within the Company are not consistent with the revenue and expenses of the acquired business on a historical basis. As such, it may be difficult to draw conclusions from a comparison of operating results from before and after the acquisition.

Results of Operations

Three months ended September 30, 2007 compared to three months ended September 30, 2006 for the Company

For the three months ended September 30, 2007, the Company earned net income of $892,699 on total operating revenue of $10,157,568. The following table summarizes the components of revenue, weighted average assets under management and the weighted average fee basis for the period.

		For the three months ended September 30, 2007
		Fees		Weighted Average Assets Under Management ($M)			Weighted Average Fee Basis (Annualized)
Net advisory fees	$	8,935,607	$	5,094	(1	)	0.70	%
Administrative fees, net(2)		546,645		8,099	(3	)	0.03	%
Money market service fees		144,936		3,137			0.02	%	(4	)
Total	$	9,627,188		5,094	(5	)	0.76	%	(5	)

(1)	Includes long-term mutual fund and separate account assets under management.
(2)	Excludes $530,380 paid as sub-administrative fees.
(3)	Aston provides administrative services to the Aston Funds, as well as six money market mutual funds managed by affiliates of AAAMHI.
(4)	Aston receives a money market service fee from AAAMHI equal to $550,000 per annum plus 0.0001% of the weighted average assets under management in the six money market mutual funds in excess of $3 billion. The fee is accrued and paid monthly.
(5)	For an estimate of the overall weighted average fee basis, we use the total fees from all sources and the weighted average assets under management for which we provide investment advisory services (Note 1 above).

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As of September 30, 2007, the Company had approximately $5.1 billion of total assets under management, compared to approximately $5.2 billion as of June 30, 2007. As of September 30, 2007, mutual fund assets under management were approximately $5.0 billion, compared to approximately $5.1 billion as of June 30, 2007, a decline of approximately 2%. This decline resulted from net client cash outflows, which represent aggregate contributions from new and existing clients less withdrawals, of $246 million, offset by positive market appreciation of $137 million. The net outflows during the quarter primarily resulted from redemptions in the Aston/ABN AMRO Growth Fund and the Aston/Montag & Caldwell Growth Fund. The Company believes these outflows are the result of investors’ concerns about the relative investment performance of these funds as compared to other similar funds. The Company believes that an improvement in the relative investment performance could stem these outflows. Additionally, Aston is actively developing new products to attract new assets. Since the consummation of the acquisition, Aston has created five new equity mutual funds. The Aston/Optimum Large Cap Opportunity Fund opened in December 2006, and the Aston/River Road Small-Mid Cap Fund opened in March 2007. In August 2007, the Aston/Neptune International Fund, the Aston/Resolution Global Equity Fund and the Aston/ABN AMRO Global Real Estate Fund commenced operations. During the balance of 2007, Aston expects to open five additional mutual funds, including a mid-cap growth fund subadvised by Montag & Caldwell Investment Counsel; a mid-cap growth fund subadvised by ClariVest Asset Management; a mid-cap value fund subadvised by Cardinal Capital; an international small-cap fund subadvised by Strategic Global Advisors; and an international large-cap fund subadvised by Baring Asset Management. During the three months ended September 30, 2007, separate account assets under management increased from $136 million to $137 million.

The Company incurred $7,879,226 of total operating costs for the three months ended September 30, 2007. During the period, Aston incurred total distribution and sub-advisory expenses of $4,735,347, including $3,851,255 payable to the sub-advisers (approximately 43% of the net advisory fees for the period) and $884,092 payable pursuant to third-party distribution agreements (approximately 10% of the net advisory fees for the period). Aston incurred employee compensation and related expenses of $1,777,417 during the period. Highbury has no employees and did not pay compensation of any kind to its directors or officers during the period. The Company incurred $46,345 of depreciation expense relating to Aston’s fixed assets and $1,320,117 of other operating expenses during the period. These expenses include the operating expenses of Aston and Highbury for the period and consist primarily of legal, accounting, insurance, occupancy and administrative fees. Aston’s direct operating expenses for the three months ended September 30, 2007 were $934,033, and Highbury’s direct operating expenses for the three months ended September 30, 2007 were as follows:

Professional fees	$	187,745
Insurance		59,418
Administrative fees		22,500
Travel and entertainment		70,002
Other expenses		46,419
	$	386,084

Non-operating income consists primarily of earnings on cash and cash equivalent balances and short-term investments in U.S. Treasury bills. For the three months ended September 30, 2007, Highbury earned interest income on these balances and investments of $135,146. In June 2007, Highbury invested $200,000 in the Aston/River Road Small-Mid Cap Fund Class I and $200,000 in the Aston/River Road Dynamic Equity Fund Class I. Each of these investments provided the initial seed capital for a new mutual fund share class within the two existing funds. In July, 2007 Highbury liquidated its investment in the Aston/River Road Small-Mid Cap Fund Class I as new assets flowed into the fund generating total proceeds to Highbury of $201,332. As of September 30, 2007, Highbury’s investment in the Aston/River Road Dynamic Equity Fund Class I was valued at $196,957. This balance is reflected on the balance sheet as of September 30, 2007 in the line item investments, and the change in the value of the investment since June 30, 2007 is included in investment income on the statement of operations for the three months ended September 30, 2007.

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The Company recorded income of $2,413,015 before minority interest and provisions for income taxes for the three months ended September 30, 2007. As a result of the Aston management members’ interest in Aston, the Company recorded a minority interest expense of $947,709 for the period.

Highbury earned net income of $201,013 in the three months ended September 30, 2006. However, since the Company had not completed the acquisition at that time, the Company did not earn any operating revenue during the period. During the period, Highbury’s activities were focused exclusively on identifying targets for an initial business combination. Highbury incurred $147,649 of operating expenses during the period, primarily relating to legal, accounting, insurance and administrative fees and earned interest and investment income of $467,002 on its cash balances held in its trust account and outside of the trust account during the period. Highbury recorded income before provisions for income taxes of $319,353 for the three months ended September 30, 2006.

The following table outlines Highbury’s income tax expenses for the three months ended September 30, 2007 and June 30, 2006.

	Three Months Ended September 30,
	2007			2006
Current	$	437,901		$	194,181
Deferred - intangible related		236,772			-
Deferred - other		(102,066	)		(75,841	)
Total	$	572,607		$	118,340

The sources of the Company’s deferred tax liability are as follows: 

		September 30,
		2007
Amortization of goodwill and intangibles for income tax purposes	$	785,304
Amortization of deferred expenses		9,494
Deferred rent		(95,548	)
Depreciation methods used for income tax purposes		(8,193	)
Unrecognized investment loss for income tax purposes		(1,187	)
Expenses deferred for income tax purposes		(163,172	)
Net deferred income taxes	$	526,698

For further discussion of the Company’s income taxes, please refer to Note 9 of the condensed consolidated financial statements included elsewhere in this document.

The Company had net income of $892,699 for the three months ended September 30, 2007 compared to net income of $201,013 for the three months ended September 30, 2006. Highbury’s basic and diluted earnings per share increased from $0.02 and $0.02, respectively, for the three months ended September 30, 2006 to $0.09 and $0.09, respectively, for the three months ended September 30, 2007.

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Three months ended September 30, 2007 for the Company compared to combined results of the Company and the acquired business in the three months ended September 30, 2006

Combined operating revenue of the Company and the acquired business during the three months ended September 30, 2006 was $9,889,652, as compared to $10,157,568 for the Company during the three months ended September 30, 2007. This increase in revenue was largely attributable to revenues from Aston’s Administrative, Marketing and Compliance Agreement with ABN AMRO, whereby Aston provides certain administrative services to six money market mutual funds managed by ABN AMRO, but was offset by the overall decline in mutual fund assets under management from approximately $5.4 billion as of September 30, 2006 to approximately $5.0 billion as of September 30, 2007. Net advisory fees decreased from $9,547,025 in 2006 to $8,935,607 in 2007, primarily as a result of lower average mutual fund balances. Average mutual fund balances declined as a result of continuing net asset outflows from the Aston Funds, offset in part by positive market appreciation. The administration fees earned by the acquired business increased from $342,627 in 2006 to $1,077,026 in 2007, primarily as a result of the additional services provided to the money market mutual funds and a change in the presentation of the administration fees. The acquired business accrued revenue from administration fees net of certain sub-administration fees paid to a third-party provider. The Company has determined it is appropriate to record the revenues on a gross basis and include the associated sub-administration expenses within other operating costs. The administration fees earned by the Company in the three months ended September 30, 2007, net of all sub-administration fees paid, were $546,645. This represents an increase of $204,018, on a comparable basis, over the fees earned by the acquired business in the prior period. This increase is primarily attributable to the additional administrative services provided to the money market mutual funds. Aston also earned money market service fees from ABN AMRO of $144,936 in the three months ended September 30, 2007 under this agreement. There were no corresponding fees in the three months ended September 30, 2006.

Distribution and advisory costs declined from $7,121,475 for the acquired business in the three months ended September 30, 2006 to $4,735,347 for the Company in the corresponding period in 2007. This decline is partially attributable to the decline in mutual fund assets under management from 2006 to 2007, as these expenses are directly related to the value of assets under management. In addition, the new sub-advisory agreements into which Aston entered at the closing of the acquisition provide for substantially lower payments to the sub-advisers affiliated with AAAMHI than the historical fee-sharing agreements. These new agreements have substantially decreased the sub-advisory costs from pre-acquisition levels.

Combined compensation and related expenses were $1,028,777 for the three months ended September 30, 2006. Compensation and related expenses for the Company were $1,777,417 for the three months ended September 30, 2007. This increase is largely attributable to the increased operating profitability of Aston as a result of the changes in the sub-advisory contracts and other changes to the acquired business since the acquisition. The Aston management team participates directly in this increased profitability through their retention of any excess operating allocation which is paid as compensation. The increase also reflects the addition of three employees at Aston at the time of the acquisition that were not reflected in the compensation expense for the three months ended September 30, 2006.

Combined other operating expenses were $1,058,153 for the three months ended September 30, 2006. During the three months ended September 30, 2007, the Company incurred $1,320,117 of other operating expenses. This increase of $261,964 is largely attributable to the increase in Highbury’s direct operating costs between the periods from $147,649 to $386,084, a difference of $238,435, and supplemented by an increase of approximately $23,529 in Aston’s other operating costs. During the three months ended September 30, 2006, Highbury was in the process of preparing and revising the public disclosure documents for its initial business combination. A majority of the expenses incurred during this period were deferred and capitalized in connection with the other costs of the transaction. During the three months ended September 30, 2007, Highbury incurred $265,616 of costs relating to a potential acquisition during the three months ended September 30, 2007. These costs were not recognized as operating expenses, but are reflected on the balance sheet as of September 30, 2007 as deferred acquisition costs. If the potential acquisition is consummated, these expenses will be capitalized in the costs of the transaction, but will be recognized as expenses if not.

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The Company generated operating income of $2,278,342 during the three months ended September 30, 2007 as compared to combined operating income of $681,247 in the three months ended September 30, 2006 for the Company and the acquired business. While operating revenues were similar between the periods, the increase in operating income is primarily attributable to the Administrative, Marketing and Compliance Agreement with ABN AMRO and to the new sub-advisory contracts signed at the time of the acquisition which reduced Aston’s payments to sub-advisors affiliated with ABN AMRO.

Because of the different capital structures and ownership structures of the acquired business before and after the acquisition, comparisons of the differences in interest income, minority interest and income taxes are not meaningful.

Nine months ended September30, 2007 compared to nine months ended September30, 2006 for the Company

For the nine months ended September 30, 2007, the Company earned net income of $2,794,975 on total operating revenue of $31,829,001. As of September 30, 2007, the Company had approximately $5.1 billion of total assets under management, compared to approximately $5.7 billion as of December 31, 2006. As of September 30, 2007, mutual fund assets under management were approximately $5.0 billion, compared to approximately $5.5 billion as of December 31, 2006, a decline of approximately 9%. This decline resulted from net client cash outflows, which represent aggregate contributions from new and existing clients less withdrawals, of $976 million, offset by positive market appreciation of $503 million. During the first nine months of 2007, separate account assets under management declined from $199 million to $137 million.

The Company incurred $24,101,825 of total operating costs for the nine months ended September 30, 2007. During the period, Aston incurred total distribution and sub-advisory expenses of $14,992,086, including $12,116,888 payable to the sub-advisers (approximately 43% of the net advisory fees for the period) and $2,875,198 payable pursuant to third-party distribution agreements (approximately 10% of the net advisory fees for the period). Aston incurred employee compensation and related expenses of $5,091,841 during the period. Highbury has no employees and did not pay compensation of any kind to its directors or officers during the period. The Company incurred $126,568 of depreciation expense relating to Aston’s fixed assets and $3,891,330 of other operating expenses during the period. These expenses include the operating expenses of Aston and Highbury for the period and consist primarily of legal, accounting, insurance, occupancy and administrative fees. Aston’s direct operating expenses for the nine months ended September 30, 2007 were $2,644,607, and Highbury’s direct operating expenses for the nine months ended September 30, 2007 were as follows:

Professional fees	$	723,038
Insurance		187,239
Administrative fees		67,500
Travel and entertainment		127,631
Other expenses		141,315
	$	1,246,723

Non-operating income consists primarily of earnings on cash and cash equivalent balances and short-term investments in U.S. Treasury bills. For the nine months ended September 30, 2007, Highbury earned interest income on these balances and investments of $341,920. Highbury invested $1,000,010 in the Aston/River Road Small-Mid Cap Fund, a new mutual fund opened by Aston in March 2007. The investment was liquidated prior to September 30, 2007 for a total of $1,051,942. The Company recognized $51,932 of investment income related to this investment in the nine months ended September 30, 2006. In September 2007, Highbury invested $200,000 in the Aston/River Road Small-Mid Cap Fund Class I and $200,000 in the Aston/River Road Dynamic Equity Fund Class I. Each of these investments provided the initial seed capital for a new mutual fund share class within the two existing funds. In July, 2007 Highbury liquidated its investment in the Aston/River Road Small-Mid Cap Fund Class I as new assets flowed into the fund generating total proceeds to Highbury of $201,332. As of September 30, 2007, Highbury’s investment in the Aston/River Road Dynamic Equity Fund Class I was valued at $196,957. This balance is reflected on the balance sheet as of September 30, 2007 in the line item investments, and the change in the value of the investment is included in investment income on the statement of operations for the nine months ended September 30, 2007.

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The Company recorded income of $8,119,317 before minority interest and provisions for income taxes for the nine months ended September 30, 2007. As a result of the Aston management members’ interest in Aston, the Company recorded a minority interest expense of $3,535,525 for the period.

Highbury earned net income of $492,250 in the nine months ended September 30, 2006. However, since the Company had not completed the acquisition at that time, the Company did not earn any operating revenue during the period. During the period, Highbury’s activities were focused exclusively on identifying targets for an initial business combination and negotiating and executing the transaction documents with ABN AMRO. Highbury incurred $408,323 of operating expenses during the period, primarily relating to legal, accounting, insurance and administrative fees and earned interest and investment income of $1,188,923 on its cash balances held in its trust account and outside of the trust account during the period. Highbury recorded income before provisions for income taxes of $780,600 for the nine months ended September 30, 2006.

The following table outlines Highbury’s income tax expenses for the nine months ended September 30, 2007 and September 30, 2006.

	Nine Months Ended September 30,
	2007			2006
Current	$	1,174,843		$	492,366
Deferred - intangible related		710,315			-
Deferred - other		(96,341	)		(204,016	)
Total	$	1,788,817		$	288,350

For further discussion of the Company’s income taxes, please refer to Note 9 of the condensed consolidated financial statements included elsewhere in this document.

The Company had net income of $2,794,795 for the nine months ended September 30, 2007 compared to net income of $492,250 for the nine months ended September 30, 2006. Highbury’s basic and diluted earnings per share increased from $0.06 and $0.06, respectively, for the nine months ended September 30, 2006 to $0.29 and $0.24, respectively, for the nine months ended September 30, 2007.

Nine months ended September 30, 2007 for the Company compared to combined results of the Company and the acquired business in the nine months ended September 30, 2006

Combined operating revenue of the Company and the acquired business during the nine months ended September 30, 2006 was $31,629,982, as compared to $31,829,001 for the Company during the nine months ended September 30, 2007. This increase in revenue was largely attributable to the revenues from Aston’s Administrative, Marketing and Compliance Agreement with ABN AMRO, whereby Aston provides certain administrative services to six money market mutual funds managed by ABN AMRO, but was offset by the overall decline in mutual fund assets under management from approximately $5.4 billion as of September 30, 2006 to approximately $5.0 billion as of September 30, 2007. Net advisory fees decreased from $30,594,808 in 2006 to $28,083,917 in 2007, primarily as a result of lower average mutual fund balances. Average mutual fund balances declined as a result of continuing net asset outflows from the Aston Funds, offset in part by positive market appreciation. As of September 30, 2007, the Company’s total mutual fund assets under management were approximately $5.0 billion, as compared to approximately $5.4 billion as of September 30, 2006 for the acquired business. However, the administration fees earned by the acquired business increased from $1,035,174 in 2006 to $3,306,678 in 2007, primarily as a result of the additional services provided to the money market mutual funds and a change in the presentation of the administration fees. The acquired business accrued revenue from administration fees net of certain sub-administration fees paid to a third-party provider. The Company has determined it is appropriate to record the revenues on a gross basis and include the associated sub-administration expenses within other operating costs. The administration fees earned by the Company in the nine months ended September 30, 2007, net of all sub-administration fees paid, were $1,683,146. This represents an increase of $647,972, on a comparable basis, over the fees earned by the acquired business in the prior period. This increase is primarily attributable to the additional administrative services provided to the money market mutual funds. Aston also earned money market service fees from ABN AMRO of $438,406 in the nine months ended September 30, 2007 under this agreement. There were no corresponding fees in the three months ended September 30, 2006.

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Distribution and advisory costs declined from $23,108,195 for the acquired business in the three months ended September 30, 2006 to $14,992,086 for the Company in the corresponding period in 2007. This decline is partially attributable to the decline in mutual fund assets under management from 2006 to 2007, as these expenses are directly related to the value of assets under management. In addition, the new sub-advisory agreements into which Aston entered at the closing of the acquisition provide for substantially lower payments to the sub-advisers affiliated with AAAMHI than the historical fee-sharing agreements. These new agreements have substantially decreased the sub-advisory costs from pre-acquisition levels.

Combined compensation and related expenses were $3,248,940 for the nine months ended September 30, 2006. Compensation and related expenses for the Company were $5,091,841 for the nine months ended September 30, 2007. This increase is largely attributable to the increased operating profitability of Aston as a result of the changes in the sub-advisory contracts and other changes to the acquired business since the acquisition. The Aston management team participates directly in this increased profitability through their retention of any excess operating allocation which is paid as compensation. The increase also reflects the addition of three employees at Aston at the time of the acquisition that were not reflected in the compensation expense for the first nine months of 2006.

Combined other operating expenses were $3,170,683 for the nine months ended September 30, 2006. During the nine months ended September 30, 2007, the Company incurred $3,891,330 of other operating expenses. This increase of $720,647 is largely attributable to the increase in Highbury’s direct operating costs between the periods from $408,323 to $1,246,723, a difference of $838,400, and offset by a decline of approximately $117,753 in Aston’s other operating costs. During the nine months ended September 30, 2006, Highbury was in the process of identifying targets for the initial business combination, negotiating and executing the acquisition agreements for its initial business combination and preparing and revising the associated public disclosure documents. A majority of the expenses incurred during this period were deferred and capitalized in connection with the other costs of the transaction. During the nine months ended September 30, 2007, Highbury has recognized the majority of its expenses.

The Company generated operating income of $7,727,176 during the nine months ended September 30, 2007 as compared to combined operating income of $2,102,164 in the nine months ended September 30, 2006 for the Company and the acquired business. While operating revenues were similar between the periods, the increase in operating income is primarily attributable to the Administrative, Marketing and Compliance Agreement with ABN AMRO and to the new sub-advisory contracts signed at the time of the acquisition which reduced Aston’s payments to sub-advisors affiliated with ABN AMRO.

Because of the different capital structures and ownership structures of the acquired business before and after the acquisition, comparisons of the differences in interest income, minority interest and income taxes are not meaningful.

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Supplemental Non-GAAP Performance Measure

As supplemental information, we provide a non-GAAP performance measure that we refer to as Cash Net Income. This measure is provided in addition to, but not as a substitute for, GAAP Net Income. Cash Net Income means the sum of (a) net income determined in accordance with GAAP, plus (b) amortization of intangible assets, plus (c) deferred taxes related to intangible assets, plus (d) affiliate depreciation, plus (e) other non-cash expenses. We consider Cash Net Income an important measure of our financial performance, as we believe it represents operating performance before non-cash expenses relating to the acquisition of our interest in our affiliated investment management firm. Cash Net Income is not a measure of financial performance under GAAP and, as calculated by us, may not be consistent with computations of Cash Net Income by other companies. Cash Net Income is used by our management and board of directors as a performance benchmark.

Since our acquired assets do not generally depreciate or require replacement by us, and since they generate deferred tax expenses that are unlikely to reverse, we add back these non-cash expenses to Net Income to measure operating performance. We will add back amortization attributable to acquired client relationships because this expense does not correspond to the changes in value of these assets, which do not diminish predictably over time. The portion of deferred taxes generally attributable to intangible assets (including goodwill) that we do not amortize but which generates tax deductions is added back, because these accruals would be used only in the event of a future sale of Aston or an impairment charge, which we consider unlikely. We add back the portion of consolidated depreciation expense incurred by Aston because under Aston’s operating agreement we are not required to replenish these depreciating assets. We also add back expenses that we incur for financial reporting purposes for which there is no corresponding cash expense because such expenses cause our Net Income to be understated relative to our ability to generate cash flow to service debt, if any, finance accretive acquisitions, and repurchase securities, if appropriate.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net Income	$	892,699	$	201,013	$	2,794,975	$	492,250
Intangible-related deferred taxes		236,772		—		710,315		—
Other non-cash expenses		—		—		—		—
Intangible amortization		—		—		—		—
Affiliate depreciation		46,345		—		126,568		—
Cash Net Income	$	1,175,816	$	201,013	$	3,631,858	$	492,250

Liquidity and Capital Resources

Since its inception, Highbury has funded its business activities almost exclusively through cash flows from financing, including the debt and equity provided by the initial shareholders and the funds raised in our initial public offering. Going forward, Highbury expects to fund its business activities with a combination of operating income and the interest income earned on its cash balances and to fund future acquisitions with retained net income or the issuance of debt or equity. As of September 30, 2007, Highbury had no borrowings outstanding. In the future, however, we will closely review our ratio of debt to Adjusted EBITDA (our "leverage ratio") as an important gauge of our ability to service debt, make new investments and access capital. The leverage covenant of our credit facility currently limits our leverage ratio to 2.0x Adjusted EBITDA. We believe this level is prudent for our business, although substantially higher levels of senior and subordinated debt in relation to Adjusted EBITDA may also be prudent to fund future acquisitions. The amendment to our credit agreement dated October 31, 2007 increases the limit on our leverage ratio to 5.0x Adjusted EBITDA. For further information about the amendment to our credit facility, please refer to the section entitled “Credit Facility.”

Historically, the acquired business funded its business activities almost exclusively with operating cash flow. We expect Aston will also fund its business activities almost exclusively with operating cash flow. Highbury may occasionally provide capital to Aston to help finance the development of new products or execute accretive acquisitions. Because Aston, like most investment management businesses, does not require a high level of capital expenditures, such as for purchases of inventory, property, plant or equipment, liquidity is less of a concern than for a company that sells physical assets. Historically, the amount of cash and cash equivalents held on the balance sheet of the acquired business was primarily influenced by the policies of its parent, AAAMHI. Prior to the acquisition, AAAMHI owned 100% of the acquired business and continues to own several other affiliates which also have low capital requirements. As such, cash balances often accumulated in the affiliates until AAAMHI decided to transfer them. These periodic cash transfers cause the value of cash and equivalents held by the business to fluctuate widely and without correlation to the underlying operations of the acquired business.

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As of September 30, 2007, the Company had $8,259,926 of cash and equivalents, $3,106,981 of short-term investments, $196,957 of other investments and $3,155,459 of accounts receivable. The accounts receivable are primarily related to the investment advisory fees, administrative fees and money market service fees earned by Aston in September 2007. Aston receives its revenues generally within the first week of the month following the month in which they are earned. At September 30, 2007, the Company had accounts payable of $4,329,704, primarily attributable to the revenue sharing payments owed to Aston’s distribution partners and the investment sub-advisers. These payments are generally paid shortly after the receipt of the revenue discussed above. In addition, this figure includes $947,709 of distributions payable to the Aston management members which were subsequently paid in October 2007. Because Aston is able to finance its day-to-day operations with operating cash flow, it does not need to retain a significant amount of cash on its balance sheet. Going forward, we expect Aston will distribute all of its excess cash on a quarterly basis to its owners, so we do not expect large cash balances to accrue within Aston. Highbury will retain its cash, and we expect our cash balances will increase over time until the cash is used to fund acquisitions, service debt, if any, or repurchase our securities, if appropriate.

Management believes our existing liquid assets, together with the expected continuing cash flow from operations, our borrowing capacity under the current credit facility and our ability to issue debt or equity securities will be sufficient to meet our present and reasonably foreseeable operating cash needs and future commitments. In particular, we expect to finance future acquisitions through operating cash flows and the issuance of debt or equity securities.

Cash Flow from Operating Activities. Cash flow from operations generally represents net income plus non-cash charges for amortization, deferred taxes and depreciation as well as the changes in our consolidated working capital. For the three months ended September 30, 2007, the Company received $1,875,259 of net cash flow from its operating activities. In addition to net income of $892,699, the Company benefited from $134,706 of deferred taxes related primarily to the amortization of goodwill and intangible assets acquired in the acquisition for income tax purposes. Accounts payable decreased by $524,334 which reduced net cash flow. In the first nine months of 2007, the Company received $5,947,396 of net cash flow from its operating activities. In addition to net income of $2,794,975, the Company benefited from $613,974 of deferred taxes related primarily to the amortization of goodwill and intangible assets acquired in the acquisition for income tax purposes. Accounts receivable decreased by $490,963 which provided additional cash flow. Accounts payable and accrued expenses increased by $633,810, primarily as a result of the accumulation of the quarterly distribution owed to the Aston management members and certain legal and accounting expenses incurred by Highbury in connection with our public reporting requirements. During the period, the Company also purchased $3,106,981 in treasury securities with a current maturity in excess of three months.

Cash Flow from Investing Activities. Changes in net cash flow from investing activities will result primarily from capital expenditures, investments in new affiliates or, from time to time, in new mutual funds created by Aston. In March 2007, Highbury invested $1,000,010 in the Aston/River Road Small-Mid Cap Fund. During the second quarter of 2007, Highbury liquidated this investment as new assets flowed into the fund generating total proceeds to Highbury of $1,051,942. In June 2007, Highbury invested $200,000 in the Aston/River Road Small-Mid Cap Fund Class I and $200,000 in the Aston/River Road Dynamic Equity Fund Class I. Each of these investments provided the initial seed capital for a new mutual fund share class within the two existing funds. In July 2007 Highbury liquidated its investment in the Aston/River Road Small-Mid Cap Fund Class I as new assets flowed into the fund generating total proceeds to Highbury of $201,332. In addition, Aston purchased $10,232 and $114,722 in fixed assets in the three and nine months ended September 30, 2007, respectively.

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Cash Flow from Financing Activities. Changes in net cash flow from financing activities will result primarily from the issuance of equity or debt or the repayment of any obligations which may arise thereunder or the payment of distributions to Aston’s minority interest holders. During the three and nine months ended June 30, 2007, the Company distributed $991,992 and $2,374,717 to the Aston management members. Additionally, in July 2007, Highbury entered into Unit Purchase Option Repurchase Agreements with the underwriters of our initial public offering pursuant to which we repurchased the option from the underwriters for aggregate cash payments of $1,300,000. The unit purchase option was cancelled upon its repurchase. For more information about the unit purchase option, please refer to Note 2 in the accompanying financial statements. Highbury did not have any cash flows related to financing activities in the three months ended September 30, 2006. In the nine months ended September 30, 2006, Highbury received net cash flow of $44,445,113 from financing activities as a result of our initial public offering and private placement in January 2006.

Credit Facility

We entered into a credit agreement with City National Bank on August 21, 2006, which provides for a revolving line of credit of up to $12.0 million. On November 9, 2006, we entered into a new credit agreement with City National Bank which amended and restated our initial credit agreement to amend the definitions of debt and net worth to exclude the effects of accounting for our outstanding common stock warrants and the underwriters’ unit purchase option as liabilities. We subsequently determined that we should account for these securities as equity. The credit facility will be used for working capital, general corporate purposes and repurchases of our outstanding securities, if appropriate.

Borrowings under our credit facility will bear interest, at our option, at either the fluctuating prime rate minus one-half of one percent (0.50%) per year or the LIBOR interest rate plus one and one-half percent (1.50%) per year. In addition, we will be required to pay annually a fee of one quarter of one percent (0.25%) on the average daily balance of the unused portion of the credit facility. We will have to make interest payments monthly for any prime rate borrowings. For any LIBOR borrowings, interest payments will be made at the end of any LIBOR contract or quarterly, whichever is sooner. Any outstanding principal is due at maturity on October 31, 2007. For so long as certain events of default continue, upon notice by City National Bank, the interest rate on any outstanding loans will increase by three percent (3%). As of September 30, 2007, we had no borrowings outstanding.

Our credit facility is secured by all of our assets. Our credit facility contains customary negative covenants which, among other things, limit indebtedness, asset sales, loans, investments, liens, mergers and acquisitions, sale and leaseback transactions and purchases of equity, other than repurchases of our outstanding securities. Our credit facility also contains affirmative covenants as to, among other things, financial statements, taxes, corporate existence and legal compliance. We are also required to maintain a minimum net worth and ratio of debt to Adjusted EBITDA. As of September 30, 2007, we were in compliance with all of the covenant requirements under this credit facility.

On October 31, 2007, Highbury and City National Bank executed an amendment to the credit agreement which provides for an extension of the agreement through October 31, 2008 and modifies certain provisions of the agreement. The amendment increases the maximum total leverage ratio (including debt from all sources) to 5.0x Adjusted EBITDA, although borrowings under the credit agreement continue to be limited to 2.0x Adjusted EBITDA, and incorporates a minimum fixed charge coverage ratio of 1.25x.

Contractual Obligations

There have been no material changes to the Company’s contractual obligations as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on March 23, 2007.

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Supplemental Non-GAAP Liquidity Measure

As supplemental information, we provide information regarding Adjusted EBITDA, a non-GAAP liquidity measure. This measure is provided in addition to, but not as a substitute for, cash flow from operations. Adjusted EBITDA means the sum of (a) net income determined in accordance with GAAP, plus (b) amortization of intangible assets, plus (c) interest expense, plus (d) depreciation, plus (e) other non-cash expenses, plus (f) income tax expense. This definition of Adjusted EBITDA is consistent with the definition of EBITDA used in our credit facility. Adjusted EBITDA, as calculated by us, may not be consistent with computations of Adjusted EBITDA by other companies. As a measure of liquidity, we believe that Adjusted EBITDA is useful as an indicator of our ability to service debt, make new investments and meet working capital requirements. We provide this non-GAAP measure because our management uses this information when analyzing the Company’s financial position.

The following table provides a reconciliation of net income to Adjusted EBITDA:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net Income (GAAP)	$	892,699	$	201,013	$	2,794,975	$	492,250
Income tax expense		572,607		118,340		1,788,817		288,350
Interest expense		—		—		—		—
Intangible amortization		—		—		—		—
Depreciation and other amortization		46,345		—		126,568		—
Other non-cash expenses		—		—		—		—
Adjusted EBITDA	$	1,511,651	$	319,353	$	4,710,360	$	780,600

The following table provides a supplemental reconciliation of cash flow from operations to Adjusted EBITDA:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Cash Flow from Operations	$	1,875,259		$	287,143		$	5,947,396		$	(338,319	)
Interest expense		—			—			—			—
Current income tax provision		437,901			194,181			1,174,843			492,366
Changes in assets and liabilities		(801,509	)		(161,971	)		(2,198,780	)		626,553
Changes in minority interest		—			—			(213,099	)		—
Adjusted EBITDA	$	1,511,651		$	319,353		$	4,710,360		$	780,600

Off-Balance Sheet Arrangements

Warrants issued in conjunction with our initial public offering are equity linked derivatives and accordingly represent off-balance sheet arrangements. The warrants meet the scope exception in paragraph 11(a) of FAS 133 and are accordingly not accounted for as derivatives for purposes of FAS 133, but instead are accounted for as equity. See Note 2 to our financial statements for a discussion of the warrants.

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Agreements with Berkshire Capital

Highbury occupies office space provided by Berkshire Capital Securities LLC, or Berkshire Capital. Messrs. Cameron, Foote and Forth, our executive officers, are affiliated with Berkshire Capital. Berkshire Capital has agreed to make such office space, as well as certain office and secretarial services, available to Highbury, as may be required by Highbury from time to time. Highbury has agreed to pay Berkshire Capital $7,500 per month for such services indefinitely. The agreement is terminable by either party upon six months’ prior notice. The statements of operations for the three months ended September 30, 2007 and September 30, 2006 each include $22,500 related to this agreement. The statements of operations for the nine months ended September 30, 2007 and September 30, 2006 include $67,500 and $61,452, respectively, related to this agreement. In October 2007 as a result of additional financial reporting services being provided by Berkshire Capital, we agreed to increase the monthly payment to $10,000 beginning in November 2007.

We have engaged Berkshire Capital to act as our non-exclusive financial advisor in connection with possible future acquisitions. In such capacity, Berkshire Capital will assist us in structuring, negotiating and completing acquisitions of targets identified by us and acknowledged by both us and Berkshire Capital as being subject to Berkshire Capital’s engagement. If we enter into an agreement to acquire such a target company during the term of Berkshire Capital’s engagement or within two years thereafter, and such acquisition is completed, then we will pay Berkshire Capital a success fee at closing equal to the greater of (a) the sum of 3.0% of the first $15 million of the aggregate consideration in such transaction and 1.0% of the aggregate consideration in such transaction in excess of $15 million, and (b) $600,000. Upon the execution of a definitive agreement with respect to an acquisition, we will pay Berkshire Capital $200,000 which will be credited against the success fee. We will also reimburse Berkshire Capital for its reasonable expenses in performing its services under the engagement letter and will indemnify Berkshire Capital for liabilities it incurs in performing such services, unless such liabilities are attributable to Berkshire Capital’s gross negligence or willful misconduct. The statements of operations for the three and nine months ended September 30, 2007 include only reimbursements of Berkshire Capital for its expenses incurred under this agreement.

Impact of Inflation

Our revenue is directly linked to the total assets under management within the 22 mutual funds and the separate accounts managed by Aston. Our total assets under management increase or decrease on a daily basis as a result of fluctuations in the financial markets and net asset flows from investors. While long-term returns in the financial markets have historically exceeded the rate of inflation, this may not be the case going forward. Our operating expenses are likely to be directly affected by inflation. Furthermore, we earn interest income on our cash balances. While the current interest rates available to us exceed the rate of inflation, this may not be the case going forward. In such cases, the impact of inflation will erode our purchasing power.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no significant changes to our Quantitative and Qualitative Disclosures About Market Risk in the nine months ended September 30, 2007.  Please refer to Item 7A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission on March 23, 2007.

ITEM 4. CONTROLS AND PROCEDURES.

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2007. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.

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During the most recently completed fiscal quarter, there has been no significant change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Neither Highbury nor Aston is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against either of them. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

ITEM 1A. RISK FACTORS

In addition to the other information included in this Quarterly Report on Form 10-Q and the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission on March 23, 2007, you should consider the following risk factors in evaluating our business and future prospects. If any of the risks contained in this Report or our Annual Report occur, our business, financial condition and results of operations may be materially adversely affected. In that event, the trading price of our securities could decline, and our stockholders could lose all or a part of their investment.

If we are unable to maintain a current prospectus relating to the common stock underlying our warrants, our warrants may have little or no value and the market for our warrants may be limited.

No warrants will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us, we have agreed to use our best efforts to maintain a current prospectus relating to the common stock issuable upon exercise of our warrants until the expiration of our warrants. However, we cannot assure you that we will be able to do so. If the prospectus relating to the common stock issuable upon exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, our warrants may not be exercisable before they expire, and we will not net-cash settle the warrants. Thus, our warrants may be deprived of any value. The market for our warrants may be limited, and the warrants may expire worthless and unredeemed. Even if warrant holders are not able to exercise their warrants because there is no current prospectus or the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, we can exercise our redemption rights.

If our stockholders who acquired their shares prior to our initial public offering exercise their registration rights, it may have an adverse effect on the market price of our common stock.

Our stockholders who acquired their shares prior to our initial public offering, or our initial stockholders, are entitled to demand that we register the resale of their 1,725,000 shares of common stock owned prior to our initial public offering. The holders of the majority of these shares may elect to exercise these registration rights at any time after the date on which their shares of common stock are released from escrow, which will be January 31, 2009. In addition, our initial stockholders hold 166,667 shares that they purchased in a private placement contemporaneously with our initial public offering that are now eligible for registration. If all these shares are registered, there will be an additional 166,667 shares of common stock eligible for trading in the public market (and potentially another 333,334 shares of common stock issuable to our initial stockholders upon exercise of warrants). The presence of this additional number of shares of common stock eligible for trading in the public market may have an adverse effect on the market price of our common stock.

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ITEM 6. EXHIBITS

The exhibits are listed on the Exhibit Index and are included elsewhere in this Quarterly Report on Form 10-Q.

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SIGNATURES

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

HIGHBURY FINANCIAL INC.

Dated: November 7, 2007	By: /s/ Richard S. Foote
	Richard S. Foote President and Chief Executive Officer (Principal Executive Officer)

Dated: November 7, 2007	By: /s/ R. Bradley Forth
	R. Bradley Forth Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description of Document
31.1	Section 302 Certification by CEO.
31.2	Section 302 Certification by CFO.
32	Section 906 Certification by CEO and CFO.

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