You should read this discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 4, 2009.

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 wholly owned 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 the equity 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 Aston 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 additional investments in Aston, 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 our Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 4, 2009 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 which arise 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.

Overview

Highbury is an investment management holding company. Aston Asset Management LLC, Highbury's wholly owned subsidiary, or Aston, is an investment management firm that is the investment adviser to the Aston Funds, a Delaware business trust, and a variety of separately managed accounts. Historically, Highbury has pursued acquisition opportunities and sought to establish accretive partnerships with high-quality investment management firms. We are currently evaluating strategic alternatives, and while we evaluate strategic alternatives, we will not pursue acquisition opportunities other than add-on acquisitions for Aston. Aston intends to expand its assets under management with a combination of internal growth, new product development and accretive acquisitions.

As of September 30, 2009, we had approximately $6.2 billion of total assets under management, compared to approximately $5.1 billion as of June 30, 2009 and approximately $4.5 billion as of September 30, 2008. As of September 30, 2009, Aston managed 24 no-load mutual funds, comprised of 23 equity funds and one fixed income fund, with approximately $6.0 billion of mutual fund assets under management. Aston had $4.9 billion and $4.3 billion of mutual fund assets under management as of June 30, 2009 and September 30, 2008, respectively. As of September 30, 2009, 14 of the mutual funds carried an overall Morningstar RatingTM of three stars or better, including eight four-star funds. Of the 24 funds, ten are relatively new and are not currently rated by Morningstar. The 23 equity funds are classified across each of the nine Morningstar RatingTM style boxes, giving Aston wide coverage of the public equity investment spectrum and multiple sources of revenue. As of September 30, 2009, Aston also managed approximately $160 million of separate account assets, compared to approximately $132 million as of June 30, 2009 and approximately $159 million as of September 30, 2008.

Business Combination. On November 30, 2006, we acquired from ABN AMRO Asset Management Holdings, Inc. ("ABN AMRO") and certain of its affiliates, or the sellers, substantially all of the sellers' business of providing investment advisory, administration, distribution and related services to the funds specified in the asset purchase agreement, or the acquired business.

The acquired business was founded in 1993 within Alleghany Corporation 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. Historically, the acquired business utilized seven different entities to manage the equity funds, of which five were current or former affiliates of the sellers and two were independent. Aston now employs 15 different sub-advisers of which three are current affiliates of the sellers, two are former affiliates of the sellers and ten are unrelated to the sellers. In connection with the consummation of the acquisition, Aston entered into agreements with each of the sellers that managed the funds prior to the acquisition, pursuant to which each such seller now acts as a sub-adviser to the applicable fund, each of which is now rebranded as an Aston Fund. Pursuant to the asset purchase agreement, the sellers have agreed not to terminate these agreements prior to November 30, 2011. In general, sub-advisers unaffiliated with the sellers may terminate their sub-advisory contracts upon 60 days' written notice. Aston's relationship with the sub-advisers currently or formerly affiliated with the sellers 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.

Between the consummation of the acquisition and September 30, 2009, Aston opened 14 new equity mutual funds. These funds are set forth in the table below.

Fund                                          Morningstar Category

Aston/Optimum Large Cap Opportunity           Large Growth
Aston/River Road Small-Mid Cap Fund           Small Value
Aston/Neptune International                   Foreign Large Growth
Aston/Resolution Global Equity Fund           World Stock
Aston/ABN AMRO Global Real Estate             Specialty-Real Estate
Aston/SGA International Small-Mid Cap         Foreign Small/Mid Growth
Aston/Barings International                   Foreign Large Blend
Aston/Montag & Caldwell Mid Cap Growth        Mid-Cap Growth
Aston/Cardinal Mid Cap Value                  Mid-Cap Value
Aston/ClariVest Mid Cap Growth                Mid-Cap Growth
Aston/Smart Allocation ETF Fund               Large Blend
Aston/M.D. Sass Enhanced Equity Income Fund   Large Value
Aston/New Century Absolute Return ETF Fund    Moderate Allocation
Aston/Lake Partners LASSO Alternatives Fund   Long-Short

Between the consummation of the acquisition and September 30, 2009, Aston closed or merged nine mutual funds as a result of poor investment performance, portfolio manager turnover or other reasons. Aston intends to manage its family of mutual funds in response to client demands, and may open new funds or close existing funds over time, as appropriate.

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

· 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 Prior to August 10, 2009. From the consummation of the acquisition through August 10, 2009, Highbury owned 65% of the membership interests of Aston, and eight employees of Aston, or the Management Stockholders, owned 35% of the membership interests of Aston.

Pursuant to the limited liability company agreement in place during the period from the consummation of the acquisition through August 10, 2009, 28% of the total revenues of Aston net of sub-administrative fees, which we refer to as the owners' allocation, was allocated to the owners of Aston. The owners' allocation was allocated among the members of Aston according to their relative ownership interests. Between the consummation of the acquisition and August 10, 2009, 18.2% of total revenues net of sub-administrative fees was allocated to Highbury and 9.8% of total revenues net of sub-administrative fees was allocated to the Management Stockholders. The remaining revenues, which we refer to as the operating allocation, of Aston were used to pay operating expenses of Aston, including salaries and bonuses of all employees of Aston (including the Management Stockholders).

Highbury's contractual share of revenues had priority over the distributions to the Management Stockholders in the event Aston's actual operating expenses exceeded the operating allocation. As a result, excess expenses first reduced the portion of the owners' allocation allocated to the Management Stockholders until the Management Stockholders' allocation was eliminated, then Highbury's allocation was reduced. Any reduction in the distribution of revenues to be paid to Highbury was required to be paid to Highbury out of any future excess operating allocation and the portion of future owners' allocation allocated to the Management Stockholders, with interest. Aston's operating expenses in the period from January 1, 2009 through August 10, 2009 exceeded the operating allocation by $57,614. These excess expenses were funded by a reduction in the Management Stockholders' share of the owners' allocation.

Accretive Acquisition of Minority Interest in Aston. On August 10, 2009, Highbury entered into an Exchange Agreement (the "Aston Exchange Agreement") with the holders (the "B Investors") of Series B limited liability company interests (the "Series B LLC Units") of Aston and the Management Stockholders each of whom owned interests in certain of the B Investors. Pursuant to the Exchange Agreement, the B Investors sold all of their Series B LLC Units to Highbury in exchange for shares of Series B Convertible Preferred Stock, par value $0.0001 per share, of Highbury ("Series B Preferred Stock"). As a result of the Aston Exchange Agreement, Aston became a wholly owned subsidiary of Highbury. A description of the terms of the Aston Exchange Agreement can be found in Part II, Item 2 "Unregistered Sales of Equity Securities and Use of Proceeds - Aston Exchange Agreement" included elsewhere herein. Highbury incurred $822,499 of one-time, non-recurring transaction expenses related to this acquisition. These expenses include approximately $803,551 of professional fees (including but not limited to legal, accounting and financial advisory fees), $14,898 of travel expenses and $4,050 of other expenses.

In connection with the Aston Exchange Agreement, the Company entered into a management agreement with the Management Stockholders and Aston which delegates certain powers to a management committee composed initially of certain Management Stockholders to operate the business of Aston. Pursuant to the management agreement, the operating allocation of Aston continues to be 72% of Aston's total revenues net of sub-administrative fees and may be allocated by Aston's management committee to pay the operating expenses of Aston, including salaries and bonuses. In addition, the owner's allocation continues to be 28% of Aston's total revenues net of sub-administrative fees and is paid to Highbury as the sole owner of the business. Highbury's contractual share of revenues has priority over any payment of the operating allocation. Any reduction in revenues to be paid to Highbury as a result of operating expenses exceeding the operating allocation is required to be paid to Highbury out of future operating allocation before any compensation may be paid to the Management Stockholders.

Business Overview. 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, 2009, Aston was reimbursing 14 mutual funds whose expenses exceeded the applicable expense cap.

Relationships with a limited number of clients account for a significant majority of the revenue of Aston and, therefore, Highbury. Aston's client, the Aston Funds, which accounts for approximately 97% of our assets under management as of September 30, 2009, is comprised of 24 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 24 funds, the Aston/Montag & Caldwell Growth Fund, the Aston/Optimum Mid Cap Fund, Aston/TAMRO Small Cap Fund and the Aston/River Road Small Cap Value Fund contributed approximately 37%, 16%, 15% and 10% of the revenues of Aston, respectively, in the month of September 2009. In the month of September 2008, the Aston/Montag & Caldwell Growth Fund, the Aston/Optimum Mid Cap Fund and Aston/TAMRO Small Cap Fund contributed approximately 33%, 18% and 13% of the revenues of Aston, respectively. These client concentrations leave the Company vulnerable to any adverse change in the financial condition of any of its major clients. The loss of any of these relationships may have a material adverse impact on the Company's revenue.

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;

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

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

· 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.

In July 2009, three of our stockholders sent letters to our Board of Directors requesting, among other things, changes to our management and the composition of our Board of Directors. In response to the initiatives of these stockholders, in August 2009, our Board of Directors formed a Special Committee consisting of, Hoyt Ammidon Jr., who chairs the Special Committee, Theodore M. Leary Jr. and Aidan J. Riordan, each of whom is an independent director, to explore and evaluate strategic alternatives aimed at enhancing value for all of our stockholders. The Special Committee hired the investment banking firm of Sandler O'Neill & Partners, L.P. and the law firm of Debevoise & Plimpton LLP to provide financial advisory and legal services, respectively, to the Special Committee. We have incurred and may continue to incur significant fees and expenses associated with the Special Committee and considering appropriate responses to these stockholders. These fees include an annual fee of $40,000 to be paid to the chairman of the Special Committee, an annual fee of $20,000 to be paid to other members of the Special Committee, a fee of $1,000 to be paid to each member of the Special Committee for each meeting of the Special Committee attended, whether in person or by telephonic conference, and financial advisory fees and legal fees paid to the advisers to the Special Committee.

In addition, one of our stockholders has filed a preliminary proxy statement in connection with our 2009 annual meeting which includes two non-binding stockholder proposals and nominates a candidate for election to our Board of Directors. As a result, we will incur fees and expenses in excess of the fees and expenses associated with an uncontested proxy solicitation.

For the quarter ended September 30, 2009, we incurred $685,583 of expenses related to the Special Committee and the contested proxy solicitation in connection with our 2009 annual meeting. These expenses include approximately $662,910 of professional fees (including but not limited to legal, accounting and financial advisory fees), $15,142 of travel expenses and $7,531 of other expenses. Such expenses may continue to be incurred beyond the quarter ended September 30, 2009 in amounts which cannot presently be estimated, but which may continue to be substantial. These additional expenses have had a negative impact on our results of operations during the quarter ended September 30, 2009 and may have a negative impact on our results in future periods.

Key Operating Measures

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

· Assets Under Management. 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, 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 of the total revenue, net of sub-administrative fees, earned by Aston. Between the consummation of the acquisition and August 10, 2009, Highbury received 18.2% of Aston's total revenue, net of sub-administrative fees. Subsequent to the consummation of the Aston Exchange Agreement, Highbury receives 28.0% of Aston's total revenue, net of sub-administrative fees. In addition, Highbury earns interest income on its cash balances which we recognize as other income in the condensed consolidated financial statements.

· Weighted Average Fee Basis. The weighted average fee basis is equal to the total revenue 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.

· 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 Aston's operating expenses (including distribution and sub-advisory costs and excluding certain non-cash, non-recurring items) to equal approximately 72% of the total revenue of Aston. In the period from January 1, 2009 through August 9, 2009, Aston's operating expenses exceeded the operating allocation by $57,614. These excess expenses were funded by a reduction in the Management Stockholders' share of the owners' allocation. In the period from August 10, 2009 through September 30, 2009, Aston's operating expenses, including compensation, equaled approximately 72% of the total revenue of Aston. At the Highbury level, we incurred operating expenses in connection with our pursuit of accretive acquisitions, although as of August 2009 our Board of Directors has determined to cease pursuing acquisitions unrelated to Aston while we are pursuing strategic alternatives. We also incur legal and accounting expenses in connection with our SEC filing requirements and expenses of directors' and officers' insurance.

Description of Certain Line Items

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

· 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. Aston also generates advisory fees based on a fixed percentage of either monthly or quarterly assets under management for a variety of separately managed accounts. 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 Fortis Investment Management USA, Inc. or Fortis, in return for providing administration services to six money market funds which are advised by Fortis. On June 8, 2009, Fortis terminated this agreement with Aston, and in July 2009, withdrew all of its assets under administration from Aston. Under the terms of the administration agreement, Fortis has continued and will continue to pay a monthly fee to Aston through December 8, 2009. This fee from Fortis accounted for approximately 1% of our revenues for the three month period ended September 30, 2009.

· Distribution and Sub-advisory Costs. Aston has contracted on a non-exclusive basis with approximately 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, or sub-advisers, 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 November 16, 2009, Aston employed 37 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 employs three executive officers. For the three and nine months ended September 30, 2009, the compensation and related expenses of Highbury included base salaries for the executive officers and related payroll taxes. Highbury did not pay compensation of any kind in the three and nine months ended September 30, 2008.

· Other Operating Expenses. The most significant components of other operating expenses include sub-administration fees, 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 condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The preparation of these condensed consolidated 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.

The Company's significant accounting policies are presented in Note 1 to its . . .