UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
One)




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




For the
fiscal year ended December 31, 2008




 ̈
            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
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)999
      Eighteenth Street, Ste. 3000, Denver, CO
            
            80202(Address
      of principal executive offices)
            
            (Zip
      Code)




Issuer’s
telephone number (303) 357-4802




Securities
registered under Section 12(b) of the Exchange Act:


None




Securities
registered under Section 12(g) of the Exchange Act:


Title of
Each Class:


Units
consisting of one share of Common Stock, $.0001 par value per share, and two
Warrants


Common
Stock, $.0001 par value per share


Warrants
to purchase shares of Common Stock




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.




YES            ̈           NO           x







Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.




YES            ̈           NO           x




Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods as the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




YES           x           NO            ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   ̈




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




Large
      accelerated filer  ̈
                          Accelerated
      filer  ̈
                          Non-accelerated
      filer  ̈
                          Smaller
      reporting company x(Do
      not check if a smallerreporting
      company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).




YES            ̈           NO           x




As of
June 30, 2008, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $6,657,427, computed by
reference to the closing sales price of such Common Stock on June 30, 2008, as
reported on the OTC Bulletin Board. In determining the market value of the
voting stock held by any non-affiliates, shares of Common Stock of the
Registrant beneficially owned by directors, officers and holders of more than
10% of the outstanding shares of common stock of the Registrant have been
excluded. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.




As of
March 2, 2009, there were 9,118,740 shares of common stock, $0.0001 par value
per share, outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE: None





TABLE OF
CONTENTS




PART
      I
                                                                    3ITEM
      1.
                                                                    BUSINESS
                                                                    3ITEM
      1A.
                                                                    RISK
      FACTORS
                                                                    11ITEM
      1B.
                                                                    UNRESOLVED
      STAFF COMMENTS
                                                                    20ITEM
      2.
                                                                    PROPERTIES
                                                                    21ITEM
      3.
                                                                    LEGAL
      PROCEEDINGS
                                                                    21ITEM
      4.
                                                                    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                                    21PART
      II
                                                                    22ITEM
      5.
                                                                    MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                                                                    22ITEM
      6.
                                                                    SELECTED
      FINANCIAL DATA
                                                                    24ITEM
      7.
                                                                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                                                    24ITEM
      7A.
                                                                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                                    39ITEM
      8.
                                                                    FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                                                                    39ITEM
      9.
                                                                    CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                                                                    39ITEM
      9A.
                                                                    CONTROLS
      AND PROCEDURES
                                                                    40ITEM
      9B.
                                                                    OTHER
      INFORMATION
                                                                    40PART
      III
                                                                    41ITEM
      10.
                                                                    DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                                                    41ITEM
      11.
                                                                    EXECUTIVE
      COMPENSATION
                                                                    43ITEM
      12.
                                                                    SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                                                                    44ITEM
      13.
                                                                    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                                                                    50ITEM
      14.
                                                                    PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                                                                    52PART
      IV
                                                                    54ITEM
      15.
                                                                    EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                                                                    54SIGNATURES
                                                                    58




i


FORWARD
LOOKING STATEMENTS




This
Annual Report on Form 10-K 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. These forward-looking statements can be identified by the use of
forward-looking terminology, including the words “believes,” “contemplates,”
“continues,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or
“should,” or, in each case, their negative or other variations or comparable
terminology. You should read statements that contain these words carefully
because they:




·
            discuss
      future expectations;




·
            contain
      projections of future results of operations or financial condition;
      or




·
            state
      other “forward-looking”
information.




We
believe it is important to communicate to our stockholders our reasonable
expectations, beliefs and assumptions which are based on information that is
currently available to us. However, there may be events in the future that we
are not able to predict accurately or over which we have no control. The risk
factors and cautionary language discussed in this Annual Report provide examples
of risks, uncertainties and events that may cause actual results to differ
materially from the expectations described by us in such forward-looking
statements, including among other things:




·
            the
      impact of legislative and regulatory actions and reforms and regulatory,
      supervisory or enforcement actions of government agencies relating to
      us;




·
            changes
      in political, economic or industry conditions, the interest rate
      environment or financial and capital markets, which could result in
      changes in demand for products or services or in the value of assets under
      management;




·
            terrorist
      activities and international hostilities, which may adversely affect the
      general economy, financial and capital markets, specific industries, and
      us;




·
            changing
      conditions in global financial markets generally and in the equity markets
      particularly, and decline or lack of sustained growth in these
      markets;




·
            our
      business strategy and plans;





·
            the
      introduction, withdrawal, success and timing of business initiatives and
      strategies;




·
            the
      unfavorable resolution of legal proceedings and/or harm to our
      reputation;




·
            fluctuations
      in customer demand;




·
            management
      of rapid growth;




·
            the
      impact of fund performance on
redemptions;





·
            changes
      in investors’ preference of investing
styles;




·
            changes
      in or loss of sub-advisers;







·
            the
      impact of increased competition;




·
            the
      results of future financing
efforts;




·
            the
      impact of future acquisitions or
divestitures;




·
            the
      relative and absolute investment performance of our investment
      products;




·
            investment
      advisory agreements subject to termination or
  non-renewal;




·
            a
      substantial reduction in fees received from third
  parties;




·
            our
      success in finding or acquiring additional investment management firms on
      favorable terms and consummating acquisitions of investment management
      firms;




·
            the
      ability to retain major clients;




·
            the
      ability to attract and retain highly talented
    professionals;




·
            significant
      limitations or failure of software
applications;




·
            expenses
      subject to significant
fluctuations;




·
            the
      impact, extent and timing of technological changes and the adequacy of
      intellectual property protection;




·
            the
      impact of capital improvement
projects;




·
            the
      extent and timing of any share repurchases;
and




·
            the
      impact of changes to tax legislation and, generally, the tax position of
      Highbury.




By
their nature, forward-looking statements involve risks and uncertainties because
they relate to events and depend on circumstances that may or may not occur in
the future. We caution you that forward-looking statements are not guarantees of
future performance and that our actual results of operations, financial
condition and liquidity, and developments in the industry in which we operate
may differ materially from those made in or suggested by the forward-looking
statements contained in this Annual Report. In addition, even if our results of
operations, financial condition and liquidity, and developments in the industry
in which we operate, are consistent with the forward-looking statements
contained in this Annual Report, those results or developments may not be
indicative of results or developments in subsequent periods. You are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of such statements.




All
forward-looking statements included herein are expressly qualified in their
entirety by the cautionary statements contained or referred to in this Annual
Report. Except to the extent required by applicable laws and regulations,
Highbury undertakes no obligation to update these forward-looking statements to
reflect events or circumstances after the date of this Annual Report or to
reflect the occurrence of unanticipated events.




Unless
otherwise provided in this Annual 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 and the former U.S. mutual fund business of ABN
AMRO. For the period prior to the acquisition, we refer to the former U.S.
mutual fund business of ABN AMRO as the “acquired business”.


2




PART
I




ITEM
      1.
            BUSINESS




General




Highbury,
a Delaware corporation formed on July 13, 2005, 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 future
acquisitions, although Highbury may execute add-on acquisitions for our current
or future affiliates. We seek to augment and diversify our sources of revenue by
asset class, investment style, distribution channel, client type and management
team. We intend to fund future acquisitions with our revolving credit facility,
other external borrowings, retained earnings (if any), additional equity and
other sources of capital, including seller financing and contingent
payments.




Aston
Business Strategy




Aston, a
65%-owned subsidiary of Highbury, is a platform for internal growth and add-on
acquisitions. Aston was formed by Highbury for the purpose of acquiring the U.S.
mutual fund business of ABN AMRO. Aston is a registered investment adviser and
the investment manager for a family of 26 no-load mutual funds and a limited
number of separately managed accounts. Aston’s mutual fund platform is built
upon providing investment advisory, sales, marketing, compliance, finance,
operations and administration resources to mutual funds using sub-advisers that
produce institutional quality investment products. Pursuant to the asset
purchase agreement, dated as of April 20, 2006, referred to in this Annual
Report on Form 10-K 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, on November 30,
2006, Highbury acquired substantially all of the sellers’ business of providing
investment advisory, administration, distribution and related services to the
U.S. mutual funds specified in the asset purchase agreement. Pursuant to the
limited liability company agreement of Aston which Highbury entered into with
Aston and members of the Aston management team, 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. Currently, 18.2% of total revenue
is allocated to Highbury and 9.8% of total revenue is allocated to the Aston
management members.




As of
December 31, 2008, Aston managed approximately $3.5 billion in total assets,
including mutual fund and separate account assets under management. Aston
provides investment advisory services to the Aston Funds.  As of December 31, 2008, the Aston Funds were
comprised of 26 no-load, open-end mutual funds with approximately $3.4
billion in client assets. The Aston Funds account for approximately 97% of our
assets under management. The mutual fund assets of the acquired business have
historically grown internally, through market appreciation and net positive
asset flows, from approximately $100 million in assets under management in 1993
to $7.3 billion at its peak in mid-2004, although since 2004 cumulative net
redemptions and negative market appreciation have reduced the mutual fund assets
to approximately $3.4 billion as of December 31, 2008. Aston also advises
approximately $115 million of assets under management in separate accounts as of
December 31, 2008. In managing historical growth and planning for future growth,
the acquired business was, and Aston is, guided by the following business
strategies.


3


Maintain
and Improve Investment Performance




Aston has
a long-term record of achieving competitive, risk-adjusted returns on the mutual
funds managed by its sub-advisers based on ratings from Morningstar RatingsTM. As of
December 31, 2008, 13 of the 26 funds carried at least a three-star rating from
Morningstar RatingsTM . These
ratings are based on past performance, which may not be predictive of future
results. Aston’s key strategy is to maintain and improve its investment
performance by actively monitoring its sub-advisers to ensure consistent
application of the specifically mandated investment philosophy and process while
the sub-advisers actively manage Aston’s portfolios to achieve distinct balances
of risk and reward. In terms of improving performance, Aston seeks to partner
with additional investment managers with proven track records as well as provide
additional support to its current sub-advisers in order to improve the
sub-advisers’ ability to generate competitive returns while maintaining
acceptable levels of risk for clients.




Morningstar
RatingsTM are a
standard performance measure used in the mutual fund industry to evaluate the
relative performance of similar mutual funds. Aston believes that many investors
rely heavily on Morningstar RatingsTM to
select mutual funds in which to invest. As a result, Aston regularly uses
Morningstar RatingsTM to
evaluate the relative performance of its mutual funds. For each fund with at
least a three-year history, Morningstar calculates a Morningstar RatingTM based
on a Morningstar risk-adjusted return measure that accounts for variation in a
fund’s monthly performance (including the effects of sales charges, loads and
redemption fees), placing more emphasis on downward variations and rewarding
consistent performance. The top 10% of funds in each category receive five
stars, the next 22.5% receive four stars, the next 35% receive three stars, the
next 22.5% receive two stars and the bottom 10% receive one star. (Each share
class is counted as a fraction of one fund within this scale and rated
separately, which may cause slight variations in the distribution percentages.)
The overall Morningstar RatingTM for a
fund is derived from a weighted average of the performance figures associated
with its 3-, 5- and 10-year (if applicable) Morningstar RatingTM
metrics.




Selectively
Expand Aston’s Investment Strategies




Since the
introduction of its first equity funds in 1993, the acquired business has
expanded its product offerings to include multiple strategies within the equity
and fixed income asset classes. Historically, Aston has entered into
sub-advisory agreements with qualified sub-advisers to create new products in
response to demand in the market. Aston intends to continue to expand
selectively its investment strategies where it believes the application of its
core competencies and process can produce attractive risk-adjusted returns.
Aston believes that by doing so it can enhance its ability to increase assets
under management as well as augment and further diversify its sources of
revenue.




Selectively
Expand Aston’s Products and Distribution Relationships




Aston
strives to develop investment products and distribution channels that best
deliver its strategies to clients of the Aston Funds. It seeks continued
opportunities to expand its investment products and relationships for the
delivery of these products. The combination of capacity and established
investment performance track records creates potential to drive future growth.
For example, Aston’s client relationship management team continuously identifies
sources of demand for the funds working closely with a broad network of
consultants and financial planners and providing information regarding Aston’s
investment strategies and performance. Aston also continuously expands existing
relationships and initiates new relationships within a variety of channels for
mutual funds, including 401(k) platforms, fund supermarkets, broker dealers and
financial planners. These third party distribution resources support a variety
of defined contribution plans and independent financial advisers with demand for
the quality institutional investment styles of Aston.




Aston’s
sales force includes 17 sales and client service professionals which provide
Aston with national distribution for new and existing products. Aston’s status
as an independent, open-architecture platform enables it to incubate new
products with a variety of investment management firms, regardless of their
affiliations. Open-architecture refers to an investment platform that can
distribute investment products that are advised or sub-advised by other firms.
Previously, the sellers had generally limited new advisory relationships to
affiliates of the sellers. Aston’s flexibility allows it to establish additional
mutual funds and new product lines with a broad range of existing and new
sub-advisers.




Aston is
currently evaluating additional business lines that may offer opportunities for
growth. Between the closing of the acquisition and December 31, 2008, Aston
created 13 new funds. These funds are included in the table set forth below in
the section entitled “Investment Products.” Over the same period, Aston closed
or merged six mutual funds as a result of poor investment performance, portfolio
manager turnover or other reasons.  Aston closed two additional funds
in February 2009.  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. Aston intends to develop a full suite of open-end
investment products in order to offer clients a diversified portfolio of
investment options.


4




Build
Aston as a Brand Name




The
growth of the acquired business occurred under the Alleghany Corporation, or
Alleghany, and the sellers’ brands. With the addition of the Aston brand,
co-branded with outstanding institutional sub-advisers, Aston intends to build
upon the historical success of the acquired business’ strategy to enhance the
credibility, reputation and acceptance of the Aston brand name.




Selectively
Pursue Accretive Acquisitions




We expect
that prudent, accretive acquisitions will be a source of growth for Aston’s
business in the future. Aston’s employees have substantial experience acquiring,
integrating and managing investment management firms. Prior to the acquisition,
Aston’s employees were involved in the acquisition or founding of six investment
management firms over ten years and also founded the acquired business while at
Alleghany. These initiatives helped fuel the growth of Alleghany’s investment
businesses from 1986 until its sale to ABN AMRO in 2001. In our efforts to
pursue accretive acquisitions for Aston, Highbury may elect to finance
transactions using one or more of the following sources: equity and other
sources ofcapital
from Highbury, external debt, seller financing or contingent payments. Highbury
also intends to seek acquisitions independent of Aston which may be funded by
its revolving credit facility, other external borrowings, retained earnings (if
any), additional equity and other sources of capital, including seller financing
and contingent payments.




Mutual
Fund Assets Under Management




The
following chart displays the amount, since inception, of Aston’s mutual fund
assets under management (in billions) as of December 31 for each calendar year.
The chart does not include Aston’s separate account assets under
management.









Investment
Products




Aston
markets its investment services to its clients through a variety of funds
designed to suit a client’s individual investment needs. The acquired business
introduced its first mutual fund in 1993, and as of December 31, 2008 Aston
managed 26no-load,
open-end mutual funds, including 25equity funds and one
fixed income fund, with approximately $3.3 billion and $70 million,
respectively, of mutual fund assets under management. The open-architecture
platform utilized 16 different entities to manage the funds, as of December 31,
2008.


5




Fees
and Revenues




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 agreed with newly organized funds that their expenses will not exceed
a specified percentage of their net assets during an initial operating period.
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
December 31, 2008, Aston was reimbursing 22mutual funds whose
expenses exceed the applicable expense cap. The Aston/Montag & Caldwell
Growth Fund, the Aston/Optimum Mid Cap Fund and the Aston/TAMRO Small Cap Fund
accounted for approximately 35%, 16% and 11%, respectively, of the revenues of
Aston in the month of December 2008. Additionally, as of December 31, 2008,
approximately 11% of our assets under management and approximately 10% of our
revenues are generated by customers sourced through a firm which was previously
affiliated with the sellers but was subsequently sold to an unaffiliated third
party. The following table sets forth the inception date, assets under
management, Morningstar category, overall Morningstar RatingTM and the
expense reimbursement status for each mutual fund managed as of December 31,
2008. These ratings are based on past performance, which may not be predictive
of future results.




Fund
                
                Inception
                
                Assets Under
                    Management
                    (in millions)
                
                Morningstar
                    Category
                
                Morningstar
                    RatingTM
                
                Currently in
                    Reimbursement?Equity
      Funds:Aston/Montag
      & Caldwell Growth
                
                1994
                
                $
                1,301
                
                Large
      Growth
                
                
                *****
                
                NoAston/Optimum
      Mid Cap
                
                1994
                
                
                576
                
                Mid-Cap
      Blend
                
                
                ***
                
                NoAston/TAMRO
      Small Cap
                
                2000
                
                
                360
                
                Small
      Blend
                
                
                ***
                
                YesAston/River
      Road Small Cap Value
                
                2005
                
                
                274
                
                Small
      Value
                
                
                ****
                
                YesAston
      Value
                
                1993
                
                
                202
                
                Large
      Value
                
                
                ****
                
                YesAston
      Growth
                
                1993
                
                
                178
                
                Large
      Growth
                
                
                ****
                
                NoAston/River
      Road Small-Mid Cap Fund
                
                2007
                
                
                134
                
                Small
      Value
                
                
                -
                
                YesAston/Veredus
      Select Growth
                
                2001
                
                
                68
                
                Large
      Growth
                
                
                ****
                
                YesAston/River
      Road Dynamic All Cap
                
                2005
                
                
                63
                
                Mid-Cap
      Value
                
                
                *****
                
                YesAston/Veredus
      Aggressive Growth
                
                1998
                
                
                50
                
                Small
      Growth
                
                
                ***
                
                YesAston/Fortis
      Real Estate
                
                1997
                
                
                24
                
                Specialty-Real
      Estate
                
                
                ***
                
                YesAston/Montag
      & Caldwell Balanced
                
                1994
                
                
                18
                
                Moderate
      Allocation
                
                
                ****
                
                YesAston
      Balanced
                
                1995
                
                
                17
                
                Moderate
      Allocation
                
                
                **
                
                NoAston/MB
      Enhanced Equity Income
                
                2008
                
                
                15
                
                Long-Short
                
                
                -
                
                YesAston/New
      Century Absolute Return ETF
                
                2008
                
                
                14
                
                Moderate
      Allocation
                
                
                -
                
                Yes  6
  Fund
                  
                  Inception
                  
                  Assets Under
                      Management
                      (in millions)
                  
                  Morningstar
                      Category
                  
                  Morningstar
                      RatingTM
                  
                  Currently in
                      Reimbursement?
 Aston/Fortis
      Global Real Estate
                            
                            2007
                            
                            
                            10
                            
                            Global
      Real Estate
                            
                            
                            -
                            
                            YesAston/Smart
      Portfolios
                            
                            2008
                            
                            
                            9
                            
                            Conservative Allocation
                            
                            
                            -
                            
                            YesAston/TAMRO
      All Cap
                            
                            2000
                            
                            
                            8
                            
                            Large
      Blend
                            
                            
                            ***
                            
                            YesAston/Neptune
      International
                            
                            2007
                            
                            
                            8
                            
                            Foreign
      Large Growth
                            
                            
                            -
                            
                            YesAston/Barings
      International
                            
                            2007
                            
                            
                            6
                            
                            Foreign
      Large Blend
                            
                            
                            -
                            
                            YesAston/Optimum
      Large Cap Opportunity
                            
                            2006
                            
                            
                            3
                            
                            Large
      Growth
                            
                            
                            -
                            
                            YesAston/Montag
      & Caldwell Mid Cap Growth
                            
                            2007
                            
                            
                            2
                            
                            Mid-Cap
      Growth
                            
                            
                            -
                            
                            YesAston/SGA
      International Small-Mid Cap
                            
                            2007
                            
                            
                            1
                            
                            Foreign
      Small/Mid Growth
                            
                            
                            -
                            
                            YesAston/Cardinal
      Mid Cap Value
                            
                            2007
                            
                            
                            1
                            
                            Mid-Cap
      Value
                            
                            
                            -
                            
                            YesAston/ClariVest
      Mid Cap Growth
                            
                            2007
                            
                            >0
                            
                            Mid-Cap
      Growth
                            
                            
                            -
                            
                            YesTotal
      Equity Funds
                            
                            
                            
                            
                            3,342Fixed
      Income Funds:Aston/TCH
      Fixed Income
                            
                            1993
                            
                            
                            70
                            
                            Intermediate-Term
      Bond
                            
                            
                            ***
                            
                            YesTotal
      Fixed Income Funds
                            
                            
                            
                            
                            70Total
      Funds
                            
                            
                            
                            $
                            3,412




Distribution




Each of
the Aston Funds has a distinct investment objective that has been developed to
provide a broad, comprehensive selection of investment opportunities. This
strategy gives Aston access to many possible customers and distribution
channels. Aston distributes the Aston Funds to individuals and institutions.
While institutions may invest directly through Aston, individuals generally
purchase shares through retail financial intermediaries. All Aston Funds are
sold exclusively on a no-load basis, i.e., without a sales commission. No-load
mutual funds offer investors a low-cost and relatively easy method of investing
in a variety of stock and bond portfolios. Aston’s “N” class of fund shares is
sold through financial intermediaries. Those “N” class shares incur an
additional annual expense equal to 0.25% of the fund’s assets under management
which is payable to the financial intermediaries for distribution and
recordkeeping. The institutional “I” class of fund shares, however, bears no
such fee.




Aston
pays all of the advertising and promotion expenses for the Aston Funds and
receives reimbursement from the Aston Funds pursuant to a 12b-1 plan. This
reimbursement mitigates, but does not completely offset, the advertising and
promotional expenses. These expenses include advertising and direct mail
communications to potential fund shareholders as well as a substantial staff and
communications capability to respond to investor inquiries. Marketing efforts
have traditionally been focused on fee-based intermediaries, including due
diligence teams, brokers, advisers, financial planners and consultants. However,
the independent registered advisory channel as well as the 401(k) channel are
also a specific focus. Aston has a significant focus on marketing efforts
directed toward participant-directed defined contribution plans such as 401(k)
plans that invest in mutual funds. Advertising and promotion expenditures vary
over time based on investor interest, market conditions, new investment
offerings and the development and expansion of new marketing
initiatives.




7




Technology
and Intellectual Property




The
day-to-day mutual fund technology requirements of Aston are outsourced to PNC
Global Investment Servicing Inc., including fund accounting, sub-administration,
custody and transfer agency functions. Sub-administration is the provision of
services related to the administration of a mutual fund on an out-sourced basis.
Aston also utilizes a web based CRM system, which maintains contact information
of both clients and prospects and is hosted by interlink ONE, Inc. Aston’s
website is hosted by Sysys Corporation.




Competition




We face
substantial competition in every aspect of our business. Competitive factors
affecting our business include brand recognition, business reputation,
investment performance, quality of service and the continuity of client
relationships. Fee competition also affects the business, as do compensation,
administration, commissions and other expenses paid to
intermediaries.




Performance
and price are the principal methods of competition for Aston. Prospective
clients and mutual fund shareholders will typically base their investment
decisions on a fund’s ability to generate returns that exceed a market or
benchmark index, i.e. its performance, and on its fees, i.e. its price.
Individual mutual fund investors may also base their investment decisions on the
ability to access the mutual funds Aston manages through a particular
distribution channel. Institutional clients are often advised by consultants who
may include other factors in their decisions for these clients.




We
compete with a large number of global and U.S. investment advisers, commercial
banks, brokerage firms and broker-dealers, insurance companies and other
financial institutions. According to the Investment Company Institute, mutual
fund managers in the United States managed more than $9.6 trillion in over 8,000
funds as of December 31, 2008. Aston is considered a small to mid-sized
investment advisory firm. Many competing firms are parts of larger financial
services companies and attract business through numerous means including retail
bank offices, investment banking and underwriting contacts, insurance agencies
and broker-dealers. U.S. banks and insurance companies have entered into
affiliations with securities firms which has accelerated consolidation within
the investment advisory and financial services businesses. It has also increased
the variety of competition for traditional investment advisory firms with
businesses limited to investing assets on behalf of institutional and individual
clients. Foreign banks and investment firms have also entered the U.S.
investment advisory business, either directly or through partnerships or
acquisitions. A number of factors serve to increase our competitive
risks:




·
                some
      of Aston’s competitors have greater capital and other resources, and offer
      more comprehensive lines of products and services than
    Aston;




·
                consolidation
      within the investment management industry, and the securities industry in
      general, has served to increase the size and strength of a number of our
      competitors;




·
                there
      are relatively few barriers to entry by new investment management firms,
      and the successful efforts of new entrants, including major banks,
      insurance companies and other financial institutions, have resulted in
      increased competition;
and




·
                other
      industry participants will from time to time seek to recruit Aston’s
      employees away from
Aston.




These
factors and others could reduce Aston’s revenues and earnings and materially
adversely affect its business. If the funds have poor performance relative to
their peers, they could lose existing clients and may be unable to attract new
clients. These factors may place Aston at a competitive disadvantage, reduce its
earnings and revenues, and materially adversely affect its business. Aston
cannot be sure its strategies and efforts to maintain its existing assets and
attract new business will be successful.




8




In order
to grow the business, we must be able to compete effectively for assets under
management. Specifically, Aston competes principally on the basis
of:




·
                investment
      performance;




·
                quality
      of service provided to
clients;




·
                brand
      recognition and business
reputation;




·
                continuity
      of client relationships and of assets under
  management;




·
                continuity
      of its selling arrangements with
intermediaries;




·
                continuity
      of advisory or sub-advisory agreements with excellent
      managers;




·
                the
      range of products
offered;




·
                level
      of fees and commissions charged for services;
  and




·
                level
      of expenses paid to financial intermediaries related to administration
      and/or distribution.




Historically
the acquired business succeeded in growing aggregate assets under management by
focusing on investment performance and client service and by developing new
products and new distribution capabilities. In 2008, Aston generated overall net
asset inflows (excluding market value and other changes) as a result of strong
relative investment performance in existing mutual funds and the creation of
several new mutual funds.




Employees




Aston
currently has 37 full-time employees, including five in senior management and
administration, six in marketing and communications, 17 in sales and sales
management and nine in operations and compliance.




Highbury
employs three executive officers, two of whom are also members of our board of
directors. These individuals are not obligated to devote any specific number of
hours to our matters and intend to devote only as much time as they deem
necessary to our affairs.




Regulation




Virtually
all aspects of our company are subject to extensive regulation in the United
States at both the federal and state level. These laws and regulations are
primarily intended to protect investment advisory clients and shareholders of
registered investment companies. Under these laws and regulations, agencies that
regulate investment advisers, such as us, have broad administrative powers,
including the power to limit, restrict or prohibit an investment adviser from
carrying on its business in the event that it fails to comply with such laws and
regulations. Possible sanctions that may be imposed include the suspension of
individual employees, limitations on engaging in certain lines of business for
specified periods of time, revocation of investment adviser and other
registrations, censures, and fines.




9




Aston is
registered as an investment adviser with the Securities and Exchange Commission
or SEC. As a registered investment adviser, it is subject to the requirements of
the Investment Advisers Act of 1940, or the Investment Advisers Act, and the
SEC’s regulations thereunder, as well as to examination by the SEC’s staff. The
Investment Advisers Act imposes substantive regulation on virtually all aspects
of Aston’s advisory business and its relationship with its clients. Applicable
requirements relate to, among other things, fiduciary duties to clients,
engaging in transactions with clients, maintaining an effective compliance
program, performance fees, solicitation arrangements, conflicts of interest,
advertising, and recordkeeping, reporting and disclosure requirements. The Aston
Funds are registered with the SEC under the Investment Company Act of 1940, or
the Investment Company Act. The Investment Company Act imposes additional
obligations, including detailed operational requirements on both the funds and
their advisers. Moreover, an investment adviser’s contract with a registered
fund may be terminated by the fund on not more than 60 days’ notice, and is
subject to annual renewal by the fund’s board of trustees after an initial term
of up to two years. The SEC is authorized to institute proceedings and impose
sanctions for violations of the Investment Advisers Act and the Investment
Company Act, ranging from fines and censures to termination of an investment
adviser’s registration. The failure of Aston or registered funds advised by
Aston to comply with the requirements of the SEC could have a material adverse
effect on us. Under the rules and regulations of the SEC promulgated pursuant to
the federal securities laws, Aston is subject to periodic examination by the
SEC.




The SEC
has adopted rules requiring every registered fund to adopt and implement written
policies and procedures designed to detect and prevent violations of federal
securities law, to review these policies annually for adequacy and
effectiveness, and to designate a chief compliance officer reporting directly to
the fund’s board of directors or trustees. Registered advisers must also adopt a
written compliance program to ensure compliance with the Investment Advisers Act
and appoint a chief compliance officer. Some of the SEC compliance rules, as
well as other disclosure requirements that have been adopted over the past few
years, are intended to deal with abuses in areas of late trading and market
timing of mutual funds. These rules require additional and more explicit
disclosure of market timing policies and procedures, as well as that funds have
formal procedures in place to comply with their representations regarding market
timing policies.




We are
subject to the Employee Retirement Income Security Act of 1974, as amended, or
ERISA, and to regulations promulgated thereunder, insofar as Aston is a
“fiduciary” under ERISA with respect to benefit plan clients. ERISA and
applicable provisions of the Internal Revenue Code of 1986, as amended, impose
certain duties on persons who are fiduciaries under ERISA, prohibit certain
transactions involving ERISA plan clients and provide monetary penalties for
violations of these prohibitions. Our failure to comply with these requirements
could have a material adverse effect on our business.




Available
Information




Highbury
makes available, free of charge on its website, its Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act of 1934 as soon as reasonably practicable after Highbury
electronically files such material with, or furnishes it to, the SEC. Reports
may be viewed and obtained on our website, www.highburyfinancial.com.




The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE., Washington, DC 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxies and information statements, and other information regarding issuers that
file electronically with the SEC at http://www.sec.gov.




10




ITEM
      1A.
            RISK
      FACTORS




In
addition to other information included in this Annual Report on Form 10-K, the
following factors should be considered in evaluating our business and future
prospects. If any of the following risks 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.




Risks
Related to the Financial Services Industry and Aston




The
investment advisory fees we receive may decrease in a market or general economic
downturn, which would decrease our revenues and net income.




Because
we are in the investment advisory business, our net income and revenues are
likely to be subject to wide fluctuations, reflecting the effect of many factors
on our assets under management, including: general economic conditions;
securities market conditions; the level and volatility of interest rates and
equity prices; competitive conditions; liquidity of global markets;
international and regional political conditions; regulatory and legislative
developments; monetary and fiscal policy; investor sentiment and client
retention; availability and cost of capital; technological changes and events;
outcome of legal proceedings; changes in currency values; inflation; credit
ratings; and the size, volume and timing of transactions. These and other
factors subject us to an increased risk of asset volatility.




Substantially
all of our revenues are determined by the amount of assets under management.
Under Aston’s investment advisory contracts with the Aston Funds, the investment
advisory fee is typically based on the market value of assets under management.
In addition, Aston receives asset-based distribution or service fees with
respect to the Aston Funds pursuant to distribution plans adopted under
provisions of Rule 12b-1 of the Investment Company Act. Accordingly, a continued
decline in the prices of securities, due to a market or general economic
downturn or otherwise, may cause our revenue and income to decline
by:




·
                causing
      the value of the assets under management to decrease, which would result
      in lower investment advisory fees and Rule 12b-1 fees;
  or




·
                causing
      some of our clients to withdraw funds from our investment management
      business (a) to satisfy their cash requirements resulting from, among
      other factors, a decline in the value of other assets they hold or
      unemployment or (b) in favor of investments or investment styles they
      perceive as offering greater opportunity and/or lower risk, which in each
      case would result in lower investment advisory
  fees.




A decline
in our assets under management, including due to any of the reasons stated
above, may have a material adverse effect on our results of operations and
financial condition.




The
financial services industry faces substantial regulatory risks and we may
experience reduced revenues and profitability if our services are not regarded
as compliant with the regulatory regime.




The
financial services industry is subject to extensive regulation. Many regulators,
including U.S. government agencies and self-regulatory organizations, as well as
state securities commissions and attorneys general, are empowered to conduct
administrative proceedings and investigations that can result in, among other
things, censure, fine, the issuance of cease-and-desist orders, prohibitions
against engaging in some lines of business or the suspension or expulsion of an
investment adviser. The requirements imposed by regulators are designed to
ensure the integrity of the financial markets and not to protect our
stockholders.




Governmental
and self-regulatory organizations, including the SEC, the Financial Industry
Regulatory Authority, or FINRA, and national securities exchanges such as the
New York Stock Exchange (through its regulatory entity, NYSE Regulation, Inc.),
impose and enforce regulations on financial services companies. The types of
regulations to which investment advisers and managers are subject are extensive
and include, among other things: recordkeeping, fee arrangements, client
disclosure, custody of customer assets, and the conduct of officers and
employees.




11




The
regulatory environment in which we operate is also subject to modifications and
further regulations. For example, the growing trend of separating the fees
mutual fund managers pay brokerage firms for investment research from brokerage
commissions may trigger restrictions under the Investment Advisers Act of 1940.
New laws or regulations or changes in the enforcement of existing laws or
regulations applicable to us, including any changes stemming from the ongoing
global credit crisis, may adversely affect our business, and our ability to
function in this environment depends on our ability to constantly monitor and
react to these changes.




We
may face legal liability that may result in reduced revenues and
profitability.




In recent
years, the volume of claims and amount of damages claimed in litigation and
regulatory proceedings against financial services firms has been increasing.
Aston’s investment advisory contracts include provisions designed to limit our
exposure to legal claims relating to services, but these provisions may not
protect us or may not be adhered to in all cases. We may also be subject to
claims arising from disputes with employees for alleged discrimination or
harassment, among other things. The risk of significant legal liability is often
difficult to assess or quantify and its existence and magnitude often remain
unknown for substantial periods of time. As a result, we may incur significant
legal expenses in defending against litigation. Substantial legal liability or
significant regulatory action against us could materially adversely affect our
business, financial condition or results of operations or cause significant harm
to our reputation, which could seriously harm our business.




There
have been a number of highly publicized cases involving fraud or other
misconduct by employees in the financial services industry in recent years, and
we run the risk that employee misconduct could occur. It is not always possible
to deter or prevent employee misconduct and the precautions we take to prevent
and detect this activity may not be effective in all cases.




We
face strong competition from financial services firms, many of whom have the
ability to offer clients a wider range of products and services than we offer,
which could lead to pricing pressures that could have a material adverse affect
on our revenue and profitability.




We
compete with other firms – both domestic and foreign – in a number of areas,
including investment performance, the quality of our employees, transaction
execution, products and services, innovation, reputation and price. We also face
significant competition as a result of a recent trend toward consolidation in
the investment management industry. In the past several years, there has been
substantial consolidation and convergence among companies in this industry. In
particular, a number of large commercial banks, insurance companies and other
broad-based financial services firms have established or acquired broker-dealers
or have merged with other financial institutions. Many of these firms have the
ability to offer a wide range of products such as loans, deposit-taking,
insurance, brokerage, investment management and investment banking services,
which may enhance their competitive positions. They also have the ability to
support investment management activity with commercial banking, investment
banking, insurance and other financial services revenue in an effort to gain
market share, which could result in pricing pressure on our business. We
believe, in light of increasing industry consolidation, that competition will
continue to increase from providers of financial services products. We may fail
to attract new business and may lose clients if, among other reasons, we are not
able to compete effectively.




Aston’s
investment advisory contracts are subject to termination on short notice.
Termination of a significant number of investment advisory contracts will have a
material impact on our results of operations.




Aston
derives almost all of its revenue from investment advisory contracts with the
Aston Funds. These contracts are typically terminable by the fund trustees
without penalty upon relatively short notice (generally not longer than 60
days). We cannot be certain that we will be able to retain the Aston Funds as
clients. Because the Aston Funds all have the same trustees, it is possible that
all of the contracts with them could be terminated simultaneously. If the
trustees of the Aston Funds terminate Aston’s investment advisory contracts we
would lose substantially all of our revenues.




12




To
the extent Aston is forced to compete on the basis of price, it may not be able
to maintain its current fee structure.




The
investment management business is highly competitive and has relatively low
barriers to entry. To the extent Aston is forced to compete on the basis of
price, it may not be able to maintain its current fee structure. Although
Aston’s investment management fees vary from product to product, historically
the acquired business competed primarily on the performance of its products and
not on the level of its investment management fees relative to those of its
competitors. In recent years, however, there has been a trend toward lower fees
in the investment management industry. In order to maintain its fee structure in
a competitive environment, Aston must be able to continue to provide clients
with investment returns and services that make investors willing to pay its
fees. In addition, the board of trustees of the mutual funds managed by Aston
must make certain findings as to the reasonableness of these fees. We cannot be
certain that Aston will succeed in providing investment returns and service that
will allow it to maintain its current fee structure. Fee reductions on existing
or future new business could have an adverse effect on our profit margins and
results of operations.




Termination
of Aston’s sub-advisory contracts could have a material adverse impact on the
Aston Funds’ performance, and consequently, on our revenues and operating
results.




As of
December 31, 2008, Aston managed 26 no-load mutual funds, comprised of
25 equity funds and one fixed income fund, with approximately $3.4
billion of total mutual fund assets under management. As of December 31, 2008,
Aston utilized 16 different entities to manage the funds, of which
five were current or former affiliates of the sellers and 11 were
independent. The sub-advisory contracts with the sellers’ current and former
affiliates, which are not terminable by the sub-advisers until November 30,
2011, include limited non-compete provisions and certain capacity guarantees in
appropriate products to benefit the acquired business. While these arrangements
are intended to ensure that the investment philosophy and process guiding the
mutual funds in the future are consistent with their historical investment
philosophy and process, there can be no assurances that these arrangements will
remain in place. The sub-advisory agreements with
the 11 independent sub-advisors are terminable at any time.If one or
more of these sub-advisory contracts is terminated, it could have a material
adverse impact on the Aston Funds’ performance and on our revenues and operating
results.




Aston
depends on third-party distribution channels to market its investment products
and access its client base. A substantial reduction in fees from assets under
management generated by third-party intermediaries could have a material adverse
effect on its business.




The
potential investor base for mutual funds and managed accounts is limited, and
Aston’s ability to distribute mutual funds and access clients for managed
accounts is highly dependent on access to the distribution systems and client
bases of national and regional securities firms, banks, insurance companies,
defined contribution plan administrators and other intermediaries, which
generally offer competing internally and externally managed investment products.
For open-end funds, such intermediaries are paid for their services to fund
shareholders, in part, through Rule 12b-1 fees. Rule 12b-1 fees are those fees
designated for promotions, sales, or any other activity connected with the
distribution of the fund’s shares. In the case of no-load funds, Rule 12b-1 fees
are usually, but not always, 0.25% of net assets and are used to cover
advertising and marketing costs. Access to such distribution systems and client
bases is substantially dependent upon our ability to charge Rule 12b-1 fees to
our funds. If regulatory initiatives prohibit or limit the imposition of Rule
12b-1 or similar fees, our access to these distribution systems and client bases
may be foreclosed in the future. To a lesser extent, the managed account
business depends on referrals from financial planners and other professional
advisers, as well as from existing clients. We cannot assure you that these
channels and client bases will continue to be accessible to Aston. The inability
to have such access could have a material adverse effect on our
earnings.




While we
expect Aston to continue to diversify and add new distribution channels for its
mutual funds and managed accounts, a significant portion of Aston’s assets under
management in recent years has been accessed through intermediaries. As of
December 31, 2008, substantially all of the assets under management of Aston
were attributable to accounts that it accessed through third-party
intermediaries. These intermediaries generally may terminate their relationships
on short notice. Loss of any of the distribution channels afforded by these
intermediaries, and the inability to access clients through new distribution
channels, could decrease assets under management and adversely affect our
results of operations and growth. For example, as of December 31, 2008,
approximately 11% of our assets under management and approximately 10% of our
revenue are generated by customers sourced through a firm which was previously
affiliated with the sellers but was subsequently sold to an unaffiliated third
party. If any of these intermediaries were to cause their customers to withdraw
all or a significant portion of these assets, our assets under management and
revenue could decrease materially.




13




A
change of control of our company would automatically terminate our investment
management agreements with our clients, unless our managed account clients
consent and, in the case of fund clients, the funds’ board of trustees and
shareholders voted to continue the agreements.




Under the
Investment Company Act, an investment management agreement with a fund must
provide for its automatic termination in the event of its assignment. Under the
Investment Advisers Act, a client’s investment management agreement may not be
“assigned” by the investment adviser without the client’s consent. An investment
management agreement is considered under both acts to be assigned to another
party when a controlling block of the adviser’s securities is transferred. An
assignment of our investment management agreements may occur if, among other
things, we sell or issue a certain number of additional common shares in the
future. We cannot be certain that our clients will consent to assignments of our
investment management agreements or approve new agreements with us if a change
of control occurs. This restriction may discourage potential purchasers from
considering an acquisition of a controlling interest in Highbury.




If
Aston’s advisory contracts are assigned, we may receive a benefit in connection
with the sale of Aston’s business only if certain conditions are
met.




If Aston
sells its business and, as a result, its advisory contracts with registered
investment companies are assigned, we may receive a benefit in connection with
its sale of its business only if certain conditions are met following the sale
and assignment of the advisory contracts. Among these conditions is a
requirement that no “unfair burden” be imposed on the investment companies as a
result of the transaction. An unfair burden will be deemed to exist if, during
the two years after the transaction, the predecessor or successor adviser or any
interested person thereof is entitled to compensation from any person engaged in
transactions with Highbury or from Highbury or its shareholders for other than
bona fide advisory or administrative services. This restriction may discourage
potential purchasers from considering an acquisition of a controlling interest
in Highbury.




Investors
in open-end funds can redeem their investments in these funds at any time
without prior notice, which could adversely affect our earnings.




Open-end
fund investors may redeem their investments in those funds at any time without
prior notice. Investors may reduce the aggregate amount of assets under
management for any number of reasons, including, particularly in the current
economic environment, to meet cash requirements, investment performance, changes
in prevailing interest rates and financial market performance. Poor performance
relative to other asset management firms tends to result in decreased purchases
of mutual fund shares and increased redemptions of mutual fund shares.
Cumulative net redemptions and recent negative market performance have reduced
the mutual fund assets under management of the acquired business from $7.3
billion in mid-2004 to approximately $3.4 billion as of December 31, 2008. The
pace of mutual fund redemptions may accelerate in a declining stock market. The
redemption of investments in mutual funds managed by Aston would adversely
affect our revenues, which are substantially dependent upon the assets under
management in our funds. If net redemptions of investments in the Aston Funds
increase, it would cause our revenues to decline, which would have a material
adverse effect on our earnings.




Changes
in investors’ preference of investing styles could lead to a decline in our
assets under management, revenues and earnings.




A decline
in the performance of one or more of the Aston Funds, due to market conditions
or otherwise, may cause investors to redeem their shares in the fund. While the
revenues of Aston are diversified across investment styles, the large
capitalization growth style of investing accounts for approximately 46% of
assets under management as of December 31, 2008. Large capitalization style
implies a restriction imposed on the portfolio manager to select for investment
by the fund predominantly equity securities of companies that have an average
market capitalization of more than $10 billion and companies whose earnings are
expected to grow at a rate that is above average for their industries or the
overall market. If investor preferences were to turn away from the large
capitalization style, investors may redeem their shares in the
fund.








14




Loss
of key employees could lead to the loss of clients, a decline in revenue and
disruptions to our business.




Highbury’s
ability to attract and retain personnel is important to executing its business
plan of making accretive acquisitions. Aston’s ability to attract and retain
personnel is important to its ability to add new clients and maintain existing
clients. The market for senior executives, qualified wholesalers,
compliance professionals, marketing professionals, key managers at the
sub-advisers and other professionals is competitive.  We do not have
employment agreements with any of our executive officers and none of our
executive officers is subject to a contractual restriction limiting his ability
to compete with us or to solicit our clients or employees.   Also, we
believe our executive officers are compensated at below market rates in
comparison to similarly situated executive officers in our
industry.    Such compensation may or may not be sufficient to
retain these executive officers.  As a result of these factors, we may
have a greater risk of losing one or more of our executive officers than other
firms whose executive officers are subject to employment or restrictive covenant
agreements or who pay their executive officers at market rates.  We,
Aston and the sub-advisers may not be successful in our efforts to recruit and
retain the required personnel to maintain or grow our business. Loss of a
significant number of key personnel may lead to the loss of clients, a decline
in revenue and disruptions to our business.




Any
significant limitation or failure of Aston’s software applications and other
technology systems that are critical to its operations could constrain its
operations.




Aston is
highly dependent upon the use of various proprietary and third-party software
applications and other technology systems to operate the business. Aston uses
its technology to, among other things, provide reports and other customer
services to its clients. Any inaccuracies, delays or systems failures in these
and other processes could subject Aston to client dissatisfaction and losses.
Although Aston takes protective measures, its technology systems may be
vulnerable to unauthorized access, computer viruses or other events that have a
security impact, such as an authorized employee or vendor inadvertently causing
Aston to release confidential information, which could materially damage Aston’s
operations or cause the disclosure or modification of sensitive or confidential
information. Moreover, loss of confidential customer identification information
could cause harm to our reputation.




Aston
relies heavily on software and technology that are licensed from, and supported,
upgraded and maintained by, third-party vendors. The day-to-day mutual fund
technology requirements of Aston are outsourced to PNC Global Investment
Servicing Inc., including fund accounting, sub-administration and transfer
agency functions.  A suspension or termination of the technology and
services provided by PNC Global Investment Servicing Inc. or certain other
licenses or the related support, upgrades and maintenance could cause temporary
system delays or interruption. Potential system failures or breaches and the
cost necessary to correct them could result in material financial loss,
regulatory action, breach of client contracts, reputational harm or legal claims
and liability, which in turn could negatively impact our revenues and
income.




We
may suffer losses in earnings or revenue if our reputation is
harmed.




Aston’s
reputation is important to the success of Highbury. Aston has strong
relationships with intermediaries and continuity of these relationships is based
on the intermediaries’ trust and confidence in Aston. If Aston’s reputation is
harmed, existing clients of Aston may reduce amounts held in, or withdraw
entirely from, funds that Aston advises or funds may terminate their investment
advisory contracts which could reduce the amount of assets under management of
Aston and cause us to suffer a corresponding loss in earnings or revenues.
Reputational harm may also cause Aston to lose employees, and we may be unable
to continue to attract new employees with similar qualifications, motivations or
skills. If we fail to address, or appear to fail to address, successfully and
promptly, the underlying causes of any reputational harm, we may be unsuccessful
in repairing any existing harm to our reputation, and our future business
prospects would likely be affected.




15




We
rely on a few major clients for a significant majority of our business, and the
loss of any of these clients, or adverse developments with respect to the
financial condition of any of our major clients could reduce our
revenue.




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. The
Aston Funds account for approximately 97% of our assets under management as of
December 31, 2008. Because all these funds have the same trustees, it is
possible that the contracts with them could be terminated simultaneously. Of
these 26 funds, the Aston/Montag & Caldwell Growth Fund, the
Aston/Optimum Mid Cap Fund and the Aston/TAMRO Small Cap Fund account for
approximately 35%, 16% and 11%, respectively, of the revenues of Aston.
Additionally, Aston sources assets under management through a former affiliate
of the sellers. This relationship accounts for approximately 10% of Aston’s
revenues. 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.




If
we issue capital stock or convertible debt securities in connection with the
acquisition of another investment management firm, your equity interest in us
could be reduced.




Highbury
seeks accretive acquisitions as a source of growth for our business. Other than
our outstanding warrants, we currently have no commitments to issue any
additional equity or convertible debt securities. However, we may issue a
substantial number of additional shares of our common stock, preferred stock or
convertible debt securities to complete an acquisition. Our issuance of
additional shares of common stock, preferred stock or convertible debt
securities:




·
                may
      significantly reduce your equity interest in
us;




·
                may
      cause a change in control if a substantial number of our shares of common
      stock are issued; and




·
                may
      adversely affect the then-prevailing market price for our common
      stock.




Difficult
market conditions may adversely affect our ability to execute our business
model, which could materially reduce our revenue and cash flow and adversely
affect our business, results of operations or financial condition.




Our
business is materially affected by conditions in the United States and global
financial markets. Economic conditions are outside our control, such as interest
rates, availability of credit, inflation rates, economic uncertainty, changes in
laws (including laws relating to taxation), commodity prices, and political
circumstances (including wars, terrorist acts or security operations). These
factors may affect the level and volatility of securities prices and the
liquidity and value of investments, and we may not be able to or may choose not
to manage our exposure to these market conditions. A general market downturn, or
a specific market dislocation, may result in lower net inflows or net outflows
and lower returns for Aston, which would adversely affect our
revenues.




More
specifically, our business model is focused upon growth through accretive
acquisitions by Highbury.  Potentially attractive acquisition targets
may be unwilling to pursue a transaction in the short term if current economic
conditions have decreased the value of their business and, as a result, the
consideration they would receive in a transaction. Current market conditions may
also make it more difficult for us to complete an acquisition through the use of
debt financing because of the reduced availability of debt at appropriate terms.
In addition, if we issue debt to finance an acquisition, a decrease in our
assets under management caused by negative market conditions could have an
adverse effect on the distributions we receive from Aston and potential future
affiliates and limit our ability to repay our borrowings. Our ability to make
accretive acquisitions through the issuance of additional equity is dependent
upon the relationship between the market value of our outstanding common stock
and the pricing of any acquisition. If the price of our common stock remains at
or near its current level, it may be more difficult for us to issue additional
equity to finance an acquisition. The inability to complete accretive
acquisitions, including through the use of debt or equity financing, may
negatively impact our growth, results of operations or financial
condition.




16




Pursuant
to the Office Services Agreement with Berkshire Capital Securities LLC, we
receive office space and certain services at a rate that we believe is more
favorable than that which we would receive from an unaffiliated third party.
Termination of the Office Services Agreement by Berkshire Capital Securities LLC
may lead to an increase in our operating expenses and have a material adverse
effect on our results of operations.




On
October 31, 2007, we entered into an office services agreement with Berkshire
Capital Securities LLC, or Berkshire Capital, which replaces the office and
secretarial services agreement entered into between us and Berkshire Capital
dated December 21, 2005 and amended on November 30, 2006. The office services
agreement provides for a monthly fixed fee of $10,000 for office services
including use and access to our office in Denver, Colorado and those other
office facilities of Berkshire Capital as we may reasonably require as well as
information technology equipment and access to numerous subscription-based
periodicals and databases. In addition, certain employees of Berkshire Capital
provide us with financial reporting, administrative and information technology
support on a daily basis.




We
believe that the fixed fee of $10,000 per month is more favorable than the rate
that an unaffiliated third party would charge.  Berkshire Capital has
the right to terminate the agreement upon six months’ prior
notice.  If Berkshire Capital terminated the agreement, we may be
required to pay a higher rate for comparable office space and services.
Termination of the Office Services Agreement by Berkshire Capital may lead to an
increase in our operating expenses and have a material adverse effect on our
results of operations.




Risks
Related to the Structure of our Business




The
agreed-upon expense allocation under our revenue sharing arrangement with Aston
may not be large enough to pay for all of Aston’s operating
expenses.




Pursuant
to the limited liability company agreement of Aston, we receive a specified
percentage of Aston’s gross revenue, and a percentage of revenue is retained for
use in paying Aston’s operating expenses. The agreement may not properly
anticipate or reflect possible changes in Aston’s revenue and expense base, and
the agreed-upon expense allocation may not be large enough to pay for all of
Aston’s operating expenses. We may elect to defer the receipt of our share of
Aston’s revenue to permit Aston to fund such operating expenses, or we may
restructure our relationship with Aston with the aim of maximizing the long-term
benefits to us. We cannot be certain, however, that any such deferral or
restructured relationship would be of any greater benefit to us. Such a deferral
or restructured relationship might have an adverse effect on our near-term or
long-term profitability and financial condition.




The
failure to receive regular distributions from Aston will adversely affect us. In
addition, our holding company structure results in substantial structural
subordination that may affect our ability to make payments on our
obligations.




Because
we are a holding company, we receive substantially all of our cash from
distributions made to us by Aston. Aston’s payment of distributions to us may be
subject to claims by Aston’s creditors and to limitations applicable to Aston
under federal and state laws, including securities and bankruptcy laws.
Additionally, Aston may default on some or all of the distributions that are
payable to us. As a result, we cannot guarantee we will always receive these
distributions from Aston. The failure to receive the distributions to which we
are entitled under the Aston limited liability company agreement would adversely
affect us, and may affect our ability to make payments on our
obligations.




Our right
to receive any assets of Aston upon its liquidation or reorganization, and thus
the right of our stockholders to participate in those assets, typically would be
subordinated to the claims of Aston’s creditors. In addition, even if we were a
creditor of Aston, our rights as a creditor would be subordinated to any
security interest and indebtedness of Aston that is senior to us.




17




Aston’s
autonomy limits our ability to alter its day-to-day activities, and we may be
held responsible for liabilities it incurs.




Although
the Aston limited liability company agreement gives us the authority to control
or give our consent with respect to Aston’s business activities, we generally
are not directly involved in managing its day-to-day activities, including
satisfaction of the contractual terms of the advisory, sub-advisory and other
contracts, product development, client relationships, compensation programs and
compliance activities. As a consequence, our financial condition and results of
operations may be adversely affected by problems stemming from the day-to-day
operations of Aston.




In
addition, we may be held liable in some circumstances as a control person for
the acts of Aston or its employees. For example, if Highbury exercises or
refuses to exercise its approval right as the manager member to settle potential
litigation and does not use due care in exercising this authority or Aston
issues securities in violation of laws, Highbury may be exposed to liability
related to Aston’s actions. While Highbury maintains directors’ and officers’
insurance and Aston maintains errors and omissions and general liability
insurance in amounts believed to be adequate to cover certain potential
liabilities, we may have claims that exceed the limits of available insurance
coverage. Furthermore, insurers may not remain solvent, meet their obligations
to provide coverage, or coverage may not continue to be available with
sufficient limits and at a reasonable cost. A judgment against us or Aston in
excess of available insurance coverage could have a material adverse effect on
us.




Risks
Relating to Ownership of our Warrants




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. As of the date of this Annual Report on Form 10-K, there is a
currently effective prospectus relating to the common stock issuable upon
exercise of the warrants. The SEC declared Post-Effective Amendment No. 3 to our
Registration Statement relating to the common stock underlying our warrants
effective on May 14, 2007. 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 may not 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.




We
may choose to redeem our outstanding warrants when a prospectus relating to the
common stock issuable upon exercise of such warrants is not current and the
warrants are not exercisable.




We may
redeem the warrants issued as a part of our units (including the warrants sold
in the private placement to insiders of Highbury simultaneously with our initial
public offering, referred to throughout this Annual Report on Form 10-K as the
private placement) at any time after the warrants become exercisable in whole
and not in part, at a price of $0.01 per warrant, upon a minimum of 30 days’
prior written notice of redemption, if and only if, the last sales price of our
common stock equals or exceeds $8.50 per share for any 20 trading days within a
30 trading day period ending three business days before we send the notice of
redemption. Redemption of the warrants could force the warrant holders (i) to
exercise the warrants and pay the exercise price therefor at a time when it may
be disadvantageous for the holders to do so, (ii) to sell the warrants at the
then current market price when they might otherwise wish to hold the warrants or
(iii) to accept the nominal redemption price which, at the time the warrants are
called for redemption, is likely to be substantially less than the market value
of the warrants. In addition, 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.




18




Our
securities are registered only in specific states, and you may not be able to
exercise your warrants if you are not located in one of such
states.




Your
ability to exercise a warrant will depend on the availability of a state
securities exemption for such exercise or on our having registered or qualified
the offer and sale of the shares to be issued upon exercise of the warrant under
the securities laws of the state in which you reside. We registered the sale of
our securities, including the issuance of shares of common stock upon exercise
of the warrants, in Colorado, Delaware, Illinois, Indiana, New York, Rhode
Island and Wyoming. In addition, we have sold our securities in Hawaii, where
both the initial sale and the exercise of warrants is exempt under Hawaii law.
If you are a resident of any state other than the above referenced states, and
there is no available exemption from the registration requirement of the state
in which you reside, we may not be able to issue to you shares of common stock
upon the exercise of your warrants. Holders are not entitled to any cash
settlement or other compensation as a result of their residency in any state in
which we have not registered or qualified or received an exemption from state
securities laws. As such, the value of your warrant will be significantly
reduced and the market for warrants in states for which we have not registered
or qualified or received an exemption from state securities laws may be
significantly impaired.




Our
outstanding warrants may be exercised in the future, which would increase the
number of shares eligible for future resale in the public market and result in
dilution to our stockholders. This might have an adverse effect on the market
price of the common stock.




Outstanding
redeemable warrants to purchase an aggregate of 15,820,000 shares of common
stock became exercisable on January 25, 2007. As of March 2, 2009, none of the
warrants have been exercised. In the first quarter of 2008, we repurchased
1,836,292 warrants resulting in 13,983,708warrants outstanding as
of March 2, 2009. To the extent warrants are exercised, additional shares of our
common stock will be issued, which will result in dilution to our stockholders
and increase the number of shares eligible for resale in the public market.
Sales of substantial numbers of such shares in the public market could adversely
affect the market price of our shares.




Risks
Related to Ownership of our Common Stock




If
our stockholders who acquired their shares or warrants prior to or
contemporaneously with our initial public offering exercise their registration
rights or sell their securities, 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 make up to two demands 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.  Holders may also sell all or a
portion of such shares pursuant to rule 144 under the Securities Act of
1933, as amended. In addition, our initial stockholders hold 166,667 shares
and 333,334 warrants purchased in a private placement contemporaneously with our
initial public offering that are now eligible for registration. The holders of
the majority of these shares and warrants may make up to two demands that we
register the resale of their 166,667 shares and 333,334
warrants.  The 166,667 shares and 333,334 warrants purchased in the
private placement contemporaneously with the initial public offering are also be
eligible for resale pursuant to Rule 144 under the Securities Act of 1933, as
amended. In addition, our initial stockholders have certain “piggy-back”
registration rights with respect to the 1,725,000 shares of common stock owned
by them prior to our initial public offering and the 166,667 shares and
333,334 warrants purchased by them in a private placement contemporaneously with
our initial public offering.  If all these shares are registered,
there will be an additional 1,891,667 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.




Our
securities are quoted on the OTC Bulletin Board, which limits the liquidity and
price of our securities more than if our securities were quoted or listed on The
Nasdaq Stock Market or another national exchange.




Our
securities are traded in the over-the-counter market. They are quoted on the OTC
Bulletin Board, an inter-dealer automated quotation system for equity securities
sponsored and operated by FINRA but not included in The Nasdaq Stock Market.
Quotation of our securities on the OTC Bulletin Board limits the liquidity and
price of our securities more than if our securities were quoted or listed on The
Nasdaq Stock Market or another national exchange. Lack of liquidity limits the
price at which you are able to sell our securities or your ability to sell our
securities at all.




19




The
market price for our common stock could be volatile and could decline, resulting
in a substantial or complete loss of your investment.




The stock
markets on which our common stock trades have experienced significant price and
volume fluctuations. As a result, the market price of our common stock could be
similarly volatile and investors in our common stock may experience a decrease
in the value of their shares, including decreases unrelated to our operating
performance or prospects. The price of our common stock could be subject to wide
fluctuations in response to a number of factors, including:




·
                our
      operating performance and the performance of other similar
      companies;




·
                actual
      or anticipated differences in our operating
  results;




·
                changes
      in our revenues or earnings estimates or recommendations by securities
      analysts;




·
                publication
      of research reports about us or our industry by securities
      analysts;




·
                additions
      and departures of key
personnel;




·
                speculation
      in the press or investment
community;




·
                actions
      by institutional or other
shareholders;




·
                changes
      in accounting
principles;




·
                terrorist
      acts; and




·
                general
      market conditions, including factors unrelated to our
      performance.




Future
sales of our common stock may depress the price of our common
stock.




As of
March 2, 2009, there were 9,118,740 shares of our common stock outstanding. On
January 25, 2007, 15,820,000 warrants became exercisable. We
repurchased 1,836,292 warrants in the first quarter of 2008. If all
13,983,708 warrants are exercised, 13,983,708 additional shares of our common
stock may be issued. Sales of a substantial number of these shares in the public
market could decrease the market price of our common stock. In addition, the
perception that such sales might occur may cause the market price of our common
stock to decline. Future issuances or sales of our common stock could have an
adverse effect on the market price of our common stock.




ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS




None.




20




ITEM
      2.
              PROPERTIES




We do not
own any real estate or other physical properties. The facilities of Highbury are
maintained at 999 18th Street,
Suite 3000, Denver, Colorado 80202. On October 31, 2007, we entered into an
office services agreement with Berkshire Capital Securities LLC which replaces
the office and secretarial services agreement entered into between us and
Berkshire Capital dated December 21, 2005 and amended on November 30, 2006. The
office services agreement provides for a monthly fixed fee of $10,000 for office
services including use and access to our office in Denver, Colorado and those
other office facilities of Berkshire Capital as we may reasonably require as
well as information technology equipment and access to numerous
subscription-based periodicals and databases. In addition, certain employees of
Berkshire Capital provide us with financial reporting, administrative and
information technology support on a daily basis.  Berkshire Capital
has the right, pursuant to the agreement, to relocate us, upon ten days written
notice, to other offices. The term of the agreement is indefinite and the
agreement is terminable by either party upon six months’ prior
notice.




The
facilities of Aston are maintained at 120 North LaSalle Street, Suite 2500,
Chicago, Illinois 60602. The lease expense for the Chicago office was $219,174
for fiscal year 2008. The term of the lease expires in January 2017. Aston also
leases office space for two satellite offices in New Jersey and California under
various leasing arrangements. The lease for the office in New Jersey will expire
in May 2009. The lease for the office in California is on a month-to-month
basis.




We
believe our office facilities are suitable and adequate for our business as it
is presently conducted. Given the nature of our business and the fact that we do
not own real property, we do not anticipate that compliance with federal, state
and local provisions regarding the discharge of materials into the environment,
or otherwise relating to the protection of the environment, will have a material
effect upon our capital expenditures, earnings or competitive
position.




ITEM
      3.
              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
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




No
matters were submitted to a vote of our stockholders during the quarter ended
December 31, 2008, except at the annual meeting of stockholders held on December
8, 2008. At that meeting, the stockholders took the following
action:




(i)
            elected
      Richard S. Foote as Director to serve for a term of three years or until
      his successor is duly elected and qualified, for which voting at the
      meeting was as follows: 6,744,338 votes cast for; 2,121,103 votes
      withheld;




(ii)
            voted
      not to approve the Highbury Financial Inc. 2008 Equity Incentive Plan, for
      which voting at the meeting was as follows: 2,819,642 votes cast for;
      5,303,993 votes cast against; and 741,806 votes abstaining;
      and




(iii)
            voted
      not to approve the Highbury Financial Inc. 2008 Executive Long Term
      Incentive Plan, for which voting at the meeting was as follows: 3,855,775
      votes cast for; 4,267,860 votes cast against; and 741,806 votes
      abstaining.




21




PART
II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Market
Price and Dividend Data for Highbury Securities




Highbury’s
units, common stock and warrants are traded on the Over-the-Counter Bulletin
Board under the symbols HBRFU, HBRF and HBRFW, respectively. Each of Highbury’s
units consists of one share of our common stock and two warrants. The following
table sets forth the range of high and low closing bid prices for the units,
common stock and warrants for the periods indicated.  The
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily reflect actual
transactions.




Units
              
              
              Common
      Stock
              
              
              WarrantsHigh
              
              
              Low
              
              
              High
              
              
              Low
              
              
              High
              
              
              LowFiscal
      Year 2007Quarter
      endedMarch
      31, 2007
              
              $
              8.66
              
              
              $
              7.72
              
              
              $
              5.85
              
              
              $
              5.46
              
              
              $
              1.67
              
              
              $
              1.11June
      30, 2007
              
              $
              10.25
              
              
              $
              8.05
              
              
              $
              6.75
              
              
              $
              5.70
              
              
              $
              1.74
              
              
              $
              1.13September
      30, 2007
              
              $
              9.00
              
              
              $
              5.08
              
              
              $
              6.30
              
              
              $
              4.15
              
              
              $
              1.65
              
              
              $
              0.51December
      31, 2007
              
              $
              6.60
              
              
              $
              5.16
              
              
              $
              5.20
              
              
              $
              4.15
              
              
              $
              0.75
              
              
              $
              0.45Fiscal
      Year 2008Quarter
      endedMarch
      31, 2008
              
              $
              6.00
              
              
              $
              2.85
              
              
              $
              4.85
              
              
              $
              2.70
              
              
              $
              0.72
              
              
              $
              0.15June
      30, 2008
              
              $
              3.49
              
              
              $
              2.50
              
              
              $
              3.05
              
              
              $
              2.30
              
              
              $
              0.20
              
              
              $
              0.07September
      30, 2008
              
              $
              3.50
              
              
              $
              2.60
              
              
              $
              4.00
              
              
              $
              2.57
              
              
              $
              0.25
              
              
              $
              0.08December
      31, 2008
              
              $
              3.25
              
              
              $
              1.50
              
              
              $
              3.90
              
              
              $
              1.60
              
              
              $
              0.13
              
              
              $
              0.002





Holders
of Common Equity




On March
2, 2009, there were seven holders of record of Highbury’s units, eight holders
of record of Highbury’s common stock and one holder of record of Highbury’s
warrants, which do not include beneficial owners of Highbury’s
securities.




Dividends




Highbury
has not paid any cash dividends on its common stock to date and has no present
intention to do so. The payment of dividends in the future will be contingent
upon our revenues and earnings, if any, capital requirements, business strategy
and general financial condition. Such capital requirements include seed capital
investments in new investment funds, working capital reserves to ensure clients
of Aston and potential future affiliates of Highbury’s ability to support the
stability of such affiliates during periods of increased market volatility,
capital to finance the completion of identified potential acquisitions and
capital to enable Highbury to pursue other potential acquisitions by ensuring
financial credibility with acquisition targets and sources of capital such as
senior lenders and equity co-investors.  The payment of any dividends
will be within the discretion of our board of directors. It is the present
intention of our board of directors to retain all earnings, if any, for use in
our business operations. However, our board of directors and our management
continually
review our revenues and earnings, if any, capital requirements, business
strategy and general financial condition. Changes in these factors and other
factors related to market conditions may result in changes to Highbury’s
dividend policy.





22





Highbury
is a holding company and, therefore, our ability to pay dividends, service our
debt and meet our other obligations depends primarily on the ability of our sole
subsidiary, Aston, to make distributions to us. Pursuant to the limited
liability company agreement of Aston, 18.2% of the total revenue of Aston is
allocated to Highbury, 9.8% of the total revenue is allocated to the other
members of Aston and 72% of the total revenue will be retained for use in paying
operating expenses of Aston. In addition, Aston’s payment of distributions to us
may be subject to claims by Aston’s creditors and to limitations applicable to
Aston under federal and state laws, including securities and bankruptcy laws.
See “Risk Factors–Risks related to the Structure of our Business–The agreed upon
expense allocation under our revenue sharing arrangement with Aston may not be
large enough to pay for all of Aston’s operating expenses” and “–The failure to
receive regular distributions from Aston will adversely affect us. In addition
our holding company structure results in substantial structural subordination
that may affect our ability to make payments on our obligations” under Item
1A.




Performance Graph




As a
“Smaller Reporting Company,” we are not required to include a Performance
Graph.




Recent
Sales of Unregistered Securities




Highbury
did not engage in any unregistered sales of securities during the year ended
December 31, 2008.




Issuer
Purchases of Equity Securities




On
December 20, 2007, our board of directors approved a Securities Repurchase
Program, or the 2008 Securities Repurchase Program, authorizing the use of up to
$5,000,000 to acquire common shares, warrants or a combination thereof in the
open market or in any private transaction, from time to time and in accordance
with applicable laws, rules and regulations. The 2008 Securities Repurchase
Program expired on December 31, 2008.




During
the quarter ended December 31, 2008, we did not repurchase any of our
outstanding warrants. The following table sets forth information with respect to
repurchases of our common stock during the quarter ended December 31,
2008:




Period
                
                Total Number of
                  Shares Purchased
                
                
                Average Price Paid
                  per Share
                
                
                Total Number of
                  Shares Purchased
                  as Part of Publicly
                  Announced Plans
                  or Programs(1)
                
                
                Maximum Dollar
                  Value of Securities
                  that May Yet Be
                  Purchased Under
                  the Plans or
                  ProgramsOctober
      1, 2008 to October 31, 2008
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                1,441,343November
      1, 2008 to November 30, 2008
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                1,441,343December
      1, 2008 to December 31, 2008
                
                
                7,888
                
                
                $
                2.01
                
                
                
                7,888
                
                
                $
                1,425,486
                (2)


(1) All
of the above repurchases were made on the open market at prevailing market rates
plus related expenses under our stock repurchase program.




(2) The
2008 Securities Repurchase Program expired on December 31, 2008.




On
January 15, 2009, our board of directors approved a new Securities Repurchase
Program authorizing the use of up to $1,000,000 to acquire common shares,
warrants or a combination thereof in the open market or in any private
transaction, from time to time and in accordance with applicable laws, rules and
regulations. The new Securities Repurchase Program will be in effect until
December 31, 2009 and may be suspended, from time to time and in accordance with
applicable laws, rules and regulations.





23





ITEM
      6.
            SELECTED
      FINANCIAL DATA




As a
“Smaller Reporting Company,” we are not required to include the information
required by this item.




ITEM
      7.
            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 our audited consolidated financial statements
and the related notes appearing elsewhere in this Annual Report on Form 10-K.
The information in this section contains forward-looking statements (see
“Forward-Looking Statements”). Our actual results may differ significantly from
the results suggested by these forward-looking statements and our historical
results. Some factors that may cause our results to differ are described in
“Risk Factors” under Item 1A of this Annual Report on Form 10-K. We wish to
caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date made.




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 asset class, investment style, distribution
channel, client type and management team. We intend to fund future acquisitions
with our revolving credit facility, other external borrowings, retained
earnings (if any), additional equity and other sources of capital, including
seller financing and contingent payments.




Business Combination.
Highbury was formed on July 13, 2005, and closed its initial public offering on
January 31, 2006. On April 20, 2006, Highbury and Aston entered into an asset
purchase agreement with 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.




Pursuant
to the asset purchase agreement, Highbury and Aston paid $38.6 million in cash
to AAAMHI. The asset purchase agreement provided for a contingent payment to be
made on November 30, 2008, 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
ending on November 30, 2008, or the target revenue, (x) exceeded $41.8
million, Highbury would 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) was
less than $34.2 million, AAAMHI would 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 target revenue for the six month period ending November 30, 2008 was
$30,459,205. Therefore, in December 2008, Fortis Investment Management USA,
Inc., or Fortis, the successor entity to AAAMHI, paid us
$3,740,796.




The
acquired business was founded in 1993 within Alleghany 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. In connection with
the consummation of 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 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. One existing fixed income manager and two new managers were
retained to manage three fixed income funds. Between the consummation of the
acquisition and December 31, 2008, Aston opened 13 new mutual funds. As of
December 31, 2008, Aston employed 16 different sub-advisors of which
five were current or former affiliates of the sellers and 11 were
independent. 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.





24





As of
December 31, 2008, Aston managed 26 no-load mutual funds for the Aston Funds, a
Delaware business trust, comprised of 25 equity funds and one fixed income fund,
with approximately $3.4 billion of mutual fund assets under management. As of
December 31, 2008, 13 of the mutual funds carried an overall Morningstar
RatingTM of
three stars or better, including five four-star funds and two five-star funds.
Twelve funds are relatively new and are not currently rated by Morningstar. The
25 equity funds are classified across all of the nine Morningstar RatingTM style
boxes, giving Aston wide coverage of the public equity investment spectrum and
multiple sources of revenue. 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.




Between
the consummation of the acquisition and December 31, 2008, Aston opened 13 new
equity mutual funds. These funds are set forth in the table below.




Fund
              
              Morningstar
      CategoryAston/River
      Road Small-Mid Cap Fund
              
              Small
      ValueAston/Optimum
      Large Cap Opportunity
              
              Large
      GrowthAston/ABN
      AMRO Global Real Estate
              
              Specialty-Real
      EstateAston/Resolution
      Global Equity
              
              World
      StockAston/Neptune
      International
              
              Foreign
      Large GrowthAston/Barings
      International
              
              Foreign
      Large BlendAston/Montag
      & Caldwell Mid Cap Growth
              
              Mid-Cap
      GrowthAston/SGA
      International Small-Mid Cap
              
              Foreign
      Small/Mid GrowthAston/Cardinal
      Mid Cap Value
              
              Mid-Cap
      ValueAston/ClariVest
      Mid Cap Growth
              
              Mid-Cap
      GrowthAston/Smart
      Allocation ETF Fund
              
              Conservative
      AllocationAston/MB
      Enhanced Equity Income Fund
              
              Long-ShortAston/New
      Century Absolute Return ETF Fund
              
              Moderate
      Allocation





Between
the consummation of the acquisition and December 31, 2008, Aston closed or
merged six mutual funds as a result of poor investment performance, portfolio
manager turnover or other reasons.  Aston also closed an additional
two mutual funds in February 2009. 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. 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 employees of the acquired business and ABN AMRO were admitted as members
of Aston (collectively referred to herein 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.





25





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, then 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. 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 December 31, 2008, Aston was reimbursing
22 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, accounts for approximately 97% of our assets
under management. Because all these funds have the same trustees, it is possible
that the contracts with them could be terminated simultaneously. Of these 26
funds, the Aston/Montag & Caldwell Growth Fund, the Aston/Optimum Mid Cap
Fund and the Aston/TAMRO Small Cap Fund account for approximately 35%, 16% and
11%, respectively, of the revenues of Aston. Additionally, as of December 31,
2008, approximately 11% of our assets under management and approximately 10% of
our revenues are generated by customers sourced through a firm which was
previously affiliated with the sellers but was subsequently sold to an
unaffiliated third party. 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.




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




26





·
            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.




Investments




Highbury’s
working capital was approximately $12.8 million at December 31, 2008, net of
Aston’s working capital.  Since the Aston acquisition, Highbury has
used $5.9 million of working capital to seed eight new Aston mutual funds or
mutual fund share classes.  At December 31, 2008, the outstanding
balance of such seed capital in our two remaining seed capital investments
totaled $725,752.  The balance of Highbury’s working capital is held
in reserve to provide Highbury with the financial credibility to pursue
discussions of acquisitions with potential targets and potential sources of
capital, such as senior lenders and equity co-investors, and to finance
acquisitions of identified potential targets.  Highbury also maintains
working capital reserves to assure clients of Aston and potential future
affiliates of Highbury’s ability to support the stability of such affiliates
during periods of increased market volatility.




Pending
the use of Highbury’s working capital for one of the preceding purposes,
Highbury invests its working capital according to an investment policy statement
approved by its board of directors.  The investment policy statement
sets forth Highbury’s risk tolerance, return objectives, time horizon, liquidity
requirements, liabilities, tax considerations and legal, regulatory and other
unique circumstances.  Highbury’s risk tolerance is low due, among
other factors, to its substantial exposure to the U.S. domestic equity market as
a result of its investment management business and to the potential need to fund
acquisitions upon short notice.  Highbury’s investments seek to hedge
risks to the value of its working capital and the value of its investment
management business as adjusted for changes in purchasing power over
time.  Changes in purchasing power can occur due to changes in
monetary aggregates, nominal price levels, currency values, and supply and
demand fundamentals.  All investments must be made without borrowed
money.  In the present economic environment Highbury is unwilling to
bear credit risk.  Highbury’s return objective is to earn a return
adequate to preserve the purchasing power of its working capital and to earn
returns negatively correlated to changes in the value of its investment
management business.  Because Highbury’s working capital may need to
be deployed upon short notice, investments with price volatility, including seed
capital investments, may not exceed 50% of Highbury’s working capital without
approval of the board of directors.  With respect to liquidity, all
investments must be able to be liquidated in an orderly manner with little or no
price impact with settlement three days following the trade date.




Recent
Market Developments




In
reaction to the global credit crisis and the recession in the United States and
abroad, global equity markets declined significantly during the final four
months of 2008 and have failed to return to the levels that existed prior to
that time. For example, the S&P 500 Index declined approximately 30% during
the four month period ending December 31, 2008. Our assets under management
declined approximately 27% during the four month period ending December 31,
2008. Continuing deterioration in market conditions and/or declines in our
assets under management could materially impact our revenue, operating margin
and net income throughout fiscal year 2009.




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 monthly), 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.





27





·
            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 (18.2%) of the total revenue, net of sub-administrative
      fees, earned by Aston. In addition, Highbury earns interest income on its
      cash balances which we recognize as non-operating income on the
      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 total operating expenses (including distribution
      and sub-advisory costs and sub-administrative fees and excluding certain
      non-cash, non-recurring items) 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.




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. 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 in return for providing administration services to six
      money market funds which continue to be advised by
  Fortis.




28





·
            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 December 31, 2008, 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 year ended December
      31, 2008, the compensation and related expenses of Highbury include a
      bonus payment to the executive officers and related payroll
      taxes.  Highbury did not pay compensation of any kind in
      2007.




·
            Impairment of
      Intangibles. We recorded impairment charges to the identifiable
      intangible related to Aston’s advisory contract with the Aston Funds
      of $2,288,000 and $4,110,000 in the fourth quarters of 2008 and 2007,
      respectively, as a result of recent negative market performance and net
      asset outflows from the Aston Funds. Highbury also determined that the
      identifiable intangible continued to meet the criteria for indefinite
      life.




·
            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 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.




The
Company’s significant accounting policies are presented in Note 1 to its audited
consolidated financial statements included elsewhere herein, and the following
summaries should be read in conjunction with the consolidated financial
statements and the related notes. While all accounting policies affect the
consolidated financial statements, certain policies may be viewed as critical.
Critical accounting policies are those that are both most important to the
portrayal of the consolidated 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 consolidation, investments, goodwill and intangible assets,
revenue recognition 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 another 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 while the remaining portion of revenue 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 in consolidation.





29





Investments. In 2007, the
Company elected the early adoption provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements” (“SFAS 157”) and
SFAS No. 159 “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). The Company carries its investments at fair value
based on quoted market prices. The Company reflects interest paid and accrued on
money market mutual funds and U.S. Treasury bills in interest income and changes
in fair value of investments in Investment income.




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.  During 2007, the Company
revised its original purchase price allocation by allocating an additional
$2,627,000 to indefinite-lived indentifiable intangibles with a corresponding
reduction to goodwill.




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 is 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.




We
recorded impairment charges to the identifiable intangible related to Aston’s
advisory contract with the Aston Funds of $2,288,000 and $4,110,000 in the
fourth quarters of 2008 and 2007, respectively, as a result of negative market
performance and net asset outflows from the Aston Funds. Highbury also
determined that the identifiable intangible continued to meet the criteria for
indefinite 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. We determined that the goodwill has not been impaired as of
December 31, 2008.




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 values of our intangible assets and goodwill and the
related amortization could be stated differently and our impairment conclusions
could be modified.




Revenue Recognition. Highbury
derives its operating revenues from Aston, its majority-owned subsidiary.
Highbury also earns interest income on its cash balances. Aston earns investment
advisory and administrative fees for services provided to the Aston Funds, six
money market funds advised by Fortis 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.





30





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 assets
and liabilities are primarily the result of future 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 $2,226,059 related to goodwill and
intangible assets in 2008 for income tax purposes. 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 will be amortized for tax purposes over
a 15-year period. These expenses were expensed for financial statement purposes
during Highbury’s development stage but were not deductible for tax purposes.
Highbury amortized $29,356 of this deferred expense in 2008.  Deferred
tax assets and liabilities also result from unrealized investment gains and
losses.  Such unrealized gains and losses are reflected in our
consolidated statements of income, but we do not incur an income tax liability
or receive a benefit until such gains or losses, respectively, are
realized.




As
required by FASB interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”), the Company
recognizes the financial statement benefit of an uncertain tax position only
after considering the probability that a tax authority would sustain the
position in an examination. For tax positions meeting a “more-likely-than-not”
threshold, the amount recognized in the financial statements is the benefit
expected to be realized upon settlement with the tax authority. For tax
positions not meeting the threshold, no financial statement benefit is
recognized.  Since the adoption of FIN 48 at January 1, 2007, the
Company has had no uncertain tax positions.




Recently
Issued Pronouncements




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),
“Business Combinations” (“SFAS 141(R)”), which replaces SFAS No. 141. SFAS
141(R) retains the purchase method of accounting for acquisitions, but requires
a number of changes, including changes in the way assets and liabilities are
recognized in the purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies and requires the
expensing of acquisition-related costs as incurred. SFAS 141(R) is effective for
us beginning January 1, 2009 and will apply prospectively to business
combinations completed on or after that date.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51” (“SFAS 160”), which
changes the accounting and reporting for minority interests. Minority interests
will be recharacterized as noncontrolling interests and will be reported as a
component of equity separate from the parent’s equity, and purchases or sales of
equity interests that do not result in a change in control will be accounted for
as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and, upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for us beginning January 1, 2009
and will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. We are currently assessing the
potential impact that adoption of SFAS 160 would have on our consolidated
financial statements.




In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the list of
factors an entity should consider in developing renewal or extension assumptions
used in determining the useful life of recognized intangible assets under SFAS
No. 142, “Goodwill and Other Intangible Assets.” The new guidance applies to (1)
intangible assets that are acquired individually or with a group of other assets
and (2) intangible assets acquired in both business combinations and asset
acquisitions. Under FSP 142-3, entities estimating the useful life of a
recognized intangible asset must consider their historical experience in
renewing or extending similar arrangements or, in the absence of historical
experience, must consider assumptions that market participants would use about
renewal or extension. For Highbury, this pronouncement will require certain
additional disclosures beginning January 1, 2009 and application to useful life
estimates prospectively for intangible assets acquired after December 31, 2008.
The Company does not expect this standard to have a material impact on its
consolidated results of operations or financial condition.





31





In May
2008, the FASB issued Statement No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements that are presented in
conformity with generally accepted accounting principles in the United
States. SFAS 162 is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411,
“The Meaning of ‘Present Fairly in Conformity with Generally Accepted Accounting
Principles.’” SFAS 162 is not expected to have a material impact on the
Company’s consolidated financial statements.




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




Basis
of Presentation




In the
“Results of Operations” section to follow, we discuss the consolidated financial
results for the Company for fiscal years 2008 and 2007.




Results
of Operations




Year
ended December 31, 2008 for the Company compared to year ended
December 31, 2007 for the Company.




For the year ended
December 31, 2008, the Company earned net income of $486,007 on total revenue of
$35,712,112, as compared to net income of $852,892 on total revenue of
$42,063,995 for the year ended December 31, 2007.




The
following table summarizes the components of revenue, weighted average assets
under management and the weighted average fee basis for the years ended December
31, 2008 and 2007.




For the year ended
                      December 31, 2008Total Fees
                    
                    
                    Weighted
                      Average
                      Assets
                      Under
                      Management
($ millions)
                    
                    
                    Weighted
                      Average Fee
                      Basis
                      (Annualized)Net
      advisory fees
                    
                    $
                    31,200,270
                    
                    
                    $
                    4,459
                    (1)
                    
                    
                    0.70
                    %Net
      administrative fees(2)
                    
                    
                    1,931,170
                    
                    
                    
                    7,244
                    (3)
                    
                    
                    0.03
                    %Money
      market service fees
                    
                    
                    558,027
                    
                    
                    
                    2,937
                    
                    
                    
                    0.02
                    %(4)$
                    33,689,467
                    
                    
                    
                    4,459
                    (5)
                    
                    
                    0.76
                    %(5)




32




For the year ended
                      December 31, 2007Total Fees
                    
                    
                    Weighted
                      Average
                      Assets
                      Under
                      Management
                      ($ millions)
                    
                    
                    Weighted
                      Average Fee
                      Basis
                      (Annualized)Net
      advisory fees
                    
                    $
                    37,095,887
                    
                    
                    $
                    5,268
                    (1)
                    
                    
                    0.70
                    %Net
      administrative fees(2)
                    
                    
                    2,221,523
                    
                    
                    
                    8,335
                    (3)
                    
                    
                    0.03
                    %Money
      market service fees
                    
                    
                    578,120
                    
                    
                    
                    3,223
                    
                    
                    
                    0.02
                    %(4)$
                    39,895,530
                    
                    
                    
                    5,268
                    (5)
                    
                    
                    0.76
                    %(5)





(1)
            Includes long-term mutual fund
      and separate account assets under
  management.





(2)
            Administrative fees are presented
      net of sub-administration fees paid to a third party to be consistent with
      the methodology used in calculating the revenue sharing arrangement with
      Aston. Gross administration fees were $3,953,815 and $4,389,988 for the
      years ended December 31, 2008 and 2007,
    respectively.





(3)
            Aston provides administrative
      services to the Aston Funds, as well as five money market mutual funds
      managed by Fortis.





(4)
            Aston receives a money market
      service fee from Fortis equal to $550,000 per annum plus 0.0001% of the
      weighted average assets under management in the five 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).





As of
December 31, 2008, the Company had approximately $3.5 billion of total assets
under management, compared to approximately $5.1 billion as of December 31,
2007. As of December 31, 2008, mutual fund assets under management were
approximately $3.4 billion, compared to approximately $5.0 billion as of
December 31, 2007, a decrease of approximately 32%. This aggregate decline in
mutual fund assets under management of $1,574 million resulted from a
combination of (i) negative market appreciation and other adjustments, including
distributions of income and gain, reinvestments of distributions, and other
items, of approximately $1,786 million and (ii) net asset inflows, which
represent aggregate contributions from new and existing clients less
withdrawals, of approximately $212 million. During the year ended December 31,
2007, the Company experienced net asset redemptions of approximately $965
million which were partially offset by positive market appreciation and other
adjustments, including distributions of income and gains, reinvestments of
distributions, and other items, of approximately $486 million. The Company
believes that recent improvements in the relative investment performance of many
of the Aston Funds led to our net asset inflows in 2008. During the year ended
December 31, 2008, separate account assets under management decreased from $145
million to $115 million.




The
Company generated total operating revenue during the year ended December 31,
2008 of $35,712,112, as compared to $42,063,995 during the year ended December
31, 2007. This 15% decrease in revenue was largely attributable to the overall
decline in assets under management from 2007 to 2008. Net advisory fees
decreased from $37,095,887 in 2007 to $31,200,270 in 2008, primarily as a result
of lower average mutual fund balances. For the same reason, gross administration
fees decreased from $4,389,988 in 2007 to $3,953,815 in 2008. Net administration
fees declined from $2,221,523 in 2007 to $1,931,170 in 2008. Aston also earned
money market service fees of $558,027 in the year ended December 31, 2008, down
from $578,120 in the year ended December 31, 2007. The Company’s overall
weighted average fee basis remained flat at 0.76% in 2008 as compared to
2007.




Distribution
and sub-advisory costs declined from $19,857,033 for the year ended December 31,
2007 to $16,514,898 in 2008. This 17% decline is attributable to the decline in
weighted average assets under management from 2007 to 2008, as these expenses
are directly related to the value of assets under management.





33





Compensation
and related expenses were $6,037,770 for the year ended December 31, 2008.
Compensation and related expenses were $6,643,587 for the year ended December
31, 2007. The Aston management team participates directly in the profitability
of the business through their retention of any excess operating allocation which
is paid as compensation. Because of the lower level of assets under management
in 2008, as compared to 2007, there was a lower level of excess operating
allocation available to pay as compensation to the Aston management
team.  In addition, 2008 compensation includes $300,000 paid to
Highbury’s executive officers.




Highbury
recorded impairment charges to the identifiable intangible related to Aston's
advisory contract with the Aston Funds of $2,288,000 and $4,110,000 in the
fourth quarters of 2008 and 2007, respectively, as a result of net asset
outflows from the Aston Funds and negative market performance.




The
Company incurred $186,450 of depreciation and amortization expense relating to
Aston’s fixed assets in 2008, compared to $222,114 in 2007.




Other
operating expenses increased from $5,727,206 for the year ended December 31,
2007 to $5,970,130 for the year ended December 31, 2008. These expenses include
the operating expenses of Aston and Highbury for the periods and consist
primarily of legal, accounting, insurance, occupancy and administrative fees.
Aston’s direct operating expenses for 2007 were $3,612,916, as compared to
$3,926,862 in 2008. Highbury’s operating expenses include $40,000 paid to
Highbury’s independent director in 2008.  Highbury’s independent
directors received no director fees in 2007.




Highbury’s
operating expenses, excluding impairment charges, for the years ended December
31, 2008 and 2007 were as follows:




Year Ended December 31,2008
                  
                  
                  2007Professional
      fees
                  
                  $
                  1,495,625
                  
                  
                  $
                  1,461,040Compensation
      and related expenses
                  
                  
                  325,487
                  
                  
                  
                  ―Insurance
                  
                  
                  196,580
                  
                  
                  
                  243,759Administrative
      fees
                  
                  
                  120,000
                  
                  
                  
                  95,000Travel
      and entertainment
                  
                  
                  122,403
                  
                  
                  
                  145,607Other
      expenses
                  
                  
                  108,660
                  
                  
                  
                  168,884$
                  2,368,755
                  
                  
                  $
                  2,114,290





Non-operating
income (loss) consists primarily of earnings on cash and cash equivalent
balances, short-term investments in U.S. Treasury bills and money market mutual
funds and marketable securities. For the year ended December 31, 2008, Highbury
earned interest income on its cash and cash equivalent balances of $155,172. The
Company also had realized losses and net unrealized losses of $663,175 related
to investments in marketable securities. For the year ended December 31, 2007,
Highbury earned $458,105 on its cash and cash equivalent balances and had
unrealized losses of $121,300 related to investments in U.S. Treasury bills and
marketable securities.




Highbury’s
realized and unrealized gains and losses on its marketable securities for the
years ended December 31, 2008 and 2007 were as follows:




Year Ended December 31,2008
                    
                    
                    2007Aston
      mutual fundsRealized
      gains (losses)
                    
                    $
                    (146,492
                    )
                    
                    $
                    7,264Unrealized
      gains (losses)
                    
                    
                    (657,748
                    )
                    
                    
                    (128,564
                    )Other
      marketable securitiesRealized
      gains (losses)
                    
                    
                    —
                    
                    
                    
                    —Unrealized
      gains (losses)
                    
                    
                    141,065
                    
                    
                    
                    —$
                    (663,175
                    )
                    
                    $
                    (121,300
                    )




34





For the
year ended December 31, 2008, the Company recorded income before minority
interest and provisions for income taxes of $4,206,861. Minority interest and
income taxes for the period were $3,309,929 and $410,925, respectively. For the
year ended December 31, 2007, the Company recorded income before minority
interest and provisions for income taxes of $5,840,860. Minority interest and
income taxes for the period were $4,489,176 and $498,792,
respectively.




The
following table outlines Highbury’s income tax expenses for the years ended
December 31, 2008 and 2007.




Year Ended December 31,2008
                    
                    
                    2007Current
                    
                    $
                    556,336
                    
                    
                    $
                    1,363,725Deferred -
      intangible related
                    
                    
                    (37,023
                    )
                    
                    
                    (648,507
                    )Deferred
      - other
                    
                    
                    (108,388
                    )
                    
                    
                    (216,426
                    )Totals
                    
                    $
                    410,925
                    
                    
                    $
                    498,792





For
further discussion of the Company’s income taxes, please refer to Note 10 of the
audited consolidated financial statements included elsewhere
herein.




Highbury
earned net income of $486,007 in 2008 as compared to $852,892 in
2007.




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 best represents
operating performance before non-cash expenses relating to the acquisition of
our interest in Aston. 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 principal 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. We
will 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.




35


Year
      Ended December 31,2008
                
                
                2007Net
      Income
                
                $
                486,007
                
                
                $
                852,892Impairment
      of intangible
                
                
                2,288,000
                
                
                
                4,110,000Intangible-related
      deferred taxes
                
                
                (37,023
                
                
                
                (648,507Affiliate
      depreciation
                
                
                186,450
                
                
                
                222,114Other
      non-cash expenses
                
                
                —
                
                
                
                —Cash
      Net Income
                
                $
                2,923,434
                
                
                $
                4,536,499





Impact
of Inflation




Our
revenue is directly linked to the total assets under management within the 26
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, while we earn interest
income on our cash balances, the current interest rates available to us are less
than the rate of inflation.  As a result, the impact of inflation
erodes our purchasing power. Consistent with our investment policy statement
discussed above, we have invested a portion of our working capital in a manner
intended to protect the real purchasing power of our working capital in an
inflationary environment.  However we cannot be sure this strategy
will be successful.




Liquidity
and Capital Resources




Prior to
the acquisition of the acquired business, Highbury 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.  Since the acquisition, Highbury has funded
its business activities with a combination of operating income and the interest
income earned on its cash and cash equivalent balances and expects to fund
future acquisitions with retained net income or the issuance of debt or equity.
Aston funds its business activities 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. Although our
assets under management, revenue and net income have declined, our business
continues to generate positive after-tax cash flow, and we are not facing
liquidity constraints.




Highbury
has not paid any cash dividends on its common stock to date and has no present
intention to do so. The payment of dividends in the future will be contingent
upon our revenues and earnings, if any, capital requirements, business strategy
and general financial condition. Such capital requirements include seed capital
investments in new investment funds, working capital reserves to ensure clients
of Aston and potential future affiliates of Highbury’s ability to support the
stability of such affiliates during periods of increased market volatility,
capital to finance the completion of identified potential acquisitions and
capital to enable Highbury to pursue other potential acquisitions by ensuring
financial credibility with acquisition targets and sources of capital such as
senior lenders and equity co-investors.




As of
December 31, 2008 and 2007, Highbury had no borrowings outstanding. In the
future, however, we will closely review our ratio of debt to Adjusted EBITDA, as
defined below, (our “leverage ratio”) as an important gauge of our ability to
service debt, make new investments and access capital. The leverage covenant of
our $12.0 million credit facility currently limits our borrowings under the
credit facility to 2.0 times Adjusted EBITDA and our total leverage ratio to 5.0
times 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.




Current
market conditions may make it more difficult for us to complete an acquisition
through the use of debt financing because of the reduced availability of debt at
appropriate terms. A decrease in our assets under management caused by negative
market conditions could have an adverse effect on the distributions we receive
from Aston and potential future affiliates and limit our ability to repay our
borrowings, including any debt issued to finance an acquisition. In addition,
our ability to make accretive acquisitions through the issuance of additional
equity is dependent upon the relationship between the market value of our
outstanding common stock and the pricing of any transaction. If the price of our
common stock remains at or near its current level, it may be more difficult for
us to issue additional equity to finance an acquisition. In addition,
potentially attractive acquisition targets may be unwilling to pursue a
transaction in the short term if current economic conditions have decreased the
value of their business and, as a result, the consideration they would receive
in a transaction. The inability to complete accretive acquisitions may
negatively impact our growth, results of operations or financial
condition.





36





As of
December 31, 2008, the Company had $10,244,469 of cash and cash equivalents,
$4,186,552 of investments and $2,448,572 of accounts receivable as compared to
$7,276,545 of cash and cash equivalents, $4,635,507 of investments and
$3,502,142 of accounts receivable as of December 31, 2007. Pursuant to the asset
purchase agreement, as discussed in Item 1 “Business — Aston Business Strategy”,
we received a contingent payment in December 2008.  The contingent
payment was based on the target revenue, as discussed in Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Overview”.  The target revenue for the six month period ending
November 30, 2008 was $30,459,205. Therefore, in December 2008, Fortis paid
us $3,740,796. The accounts receivable are primarily related to the investment
advisory fees, administrative fees and money market service fees earned by Aston
in December. Aston receives payment of its revenues generally within the first
week of the month following the month in which they are earned. At December 31,
2008, the Company had accounts payable of $3,407,601, primarily attributable to
the revenue sharing payments owed to Aston’s distribution partners and the
investment sub-advisers and accrued compensation payable to Aston’s management
members and employees, as compared to accounts payable of $4,549,216 at December
31, 2007. The payments to Aston’s distribution partners and the investment
sub-advisers are generally paid shortly after the receipt of the revenue
discussed above. 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. We expect Aston will continue to distribute all of its excess
cash on a quarterlybasis to its owners, so
we do not expect large cash balances to accrue within Aston. Highbury will
retain its cash and cash equivalents and investments, and we expect these
balances will increase over time until used to pay operating expenses, 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.




Cash Flow from Operating
Activities. Cash flow from operations represents net income plus non-cash
charges or credits for deferred income taxes, depreciation and amortization and
impairment charges as well as the changes in our consolidated working capital.
In 2008, Highbury had $6,619,896 of net cash flow from its operating activities
as compared to $11,376,820 of net cash flow from its operating activities in
2007. We recorded non-cash impairment charges to the identifiable intangible
related to Aston's advisory contract with the Aston Funds of $2,288,000 and
$4,110,000 in the fourth quarters of 2008 and 2007, respectively, as a result of
negative market performance and net asset outflows from the Aston Funds. In
2008, accounts payable decreased by $837,001 as compared to a 2007 increase of
$2,279,746. This is primarily a result of a reduction in the distributions
payable to the Aston management team and a decrease in the distribution and
sub-advisory costs owed relative to the prior year.




Cash Flow from Investing
Activities. Net cash flow from investing activities will result primarily
from investments in new affiliates, U.S Treasury securities and marketable
securities. In 2008, Highbury invested a total of $5,319,735 in U.S. Treasury
securities and marketable securities as compared to a total of $9,932,233 in
2007. In 2008, the investments in U.S. Treasury securities subsequently matured,
and a portion of the investments in marketable securities were sold generating
proceeds to Highbury of $5,105,515.  In December 2008, we received a
contingent payment of $3,740,796. In 2007, a portion of the investments
subsequently matured or were sold, generating proceeds to Highbury of
$5,296,274. In 2007, we also paid $19,464 for costs indirectly related to our
initial acquisition and spent $117,480 on purchases of fixed
assets.




Cash Flow from Financing
Activities. Net cash flow from financing activities will result primarily
from the issuance of equity or debt and the repayment of any obligations which
may arise thereunder, the repurchase of our outstanding securities and minority
interest distributions paid to Aston’s management members. In 2008, we used
$1,751,467 and $1,823,083 to repurchase outstanding common stock and warrants,
respectively. In 2007, we entered into Unit Purchase Option Repurchase
Agreements with the underwriters of our initial public offering pursuant to
which we repurchased the underwriters’ unit purchase option for aggregate cash
payments of $1,300,000. The unit purchase option was cancelled upon its
repurchase. We also paid distributions of $3,614,543 and $4,276,077 to Aston’s
management members in 2008 and 2007, respectively, related to their minority
interest in Aston.





37





Credit
Facility




On
October 1, 2008, we entered into a Second Amendment to our credit agreement with
City National Bank. The credit agreement, as amended, expires on
September 30, 2009 and provides for a revolving line of credit of up to
$12.0 million. The credit agreement provides for a maximum total leverage ratio
(including debt from all sources) of 5.0 times Adjusted EBITDA, although
borrowings under the credit agreement are limited to 2.0 times Adjusted EBITDA,
and incorporates a minimum fixed charge coverage ratio of 1.25x and a minimum
net worth of $20 million. The credit facility may 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 plus one-half of one percent (0.50%) per year or the
LIBOR interest rate plus two and three-quarters percent (2.75%) 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 September 30, 2009. 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 December 31,
2008, 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. As of December 31, 2008, we were in compliance with all of the
covenant requirements under this credit facility.




Contractual Obligations




As a
“Smaller Reporting Company,” we are not required to include Contractual
Obligations.




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 Adjusted 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 further believe that many investors use this information when
analyzing the financial position of companies in the investment management
industry.




The
following table provides a reconciliation of net income to Adjusted EBITDA for
fiscal years 2008 and 2007:




38


Year
      Ended December 31,2008
                  
                  
                  2007Net
      Income
                  
                  $
                  486,007
                  
                  
                  $
                  852,892Provision
      for income taxes
                  
                  
                  410,925
                  
                  
                  
                  498,792Interest
      expense
                  
                  
                  —
                  
                  
                  
                  —Impairment
      of intangible
                  
                  
                  2,288,000
                  
                  
                  
                  4,110,000Depreciation
      and amortization
                  
                  
                  186,450
                  
                  
                  
                  222,114Other
      non-cash expenses
                  
                  
                  —
                  
                  
                  
                  —Adjusted
      EBITDA
                  
                  $
                  3,371,382
                  
                  
                  $
                  5,683,798


Quantitative
and Qualitative Disclosures About Market Risk




The
investment management business is, by its nature, subject to numerous and
substantial risks, including volatile trading markets and fluctuations in the
volume of market activity. Our revenue, which is based on a percentage of our
assets under management, is largely dependent on the total value and composition
of our assets under management. Additionally, consistent with the terms of
Highbury’s investment policy statement, we invest a portion of our working
capital, from time to time, in marketable securities.  Consequently,
our net income, revenues and working capital investments are likely to be
subject to wide fluctuations, reflecting the effect of many factors, including:
general economic conditions; securities market conditions; the level and
volatility of interest rates and equity prices; competitive conditions;
liquidity of global markets; international and regional political conditions;
regulatory and legislative developments; monetary and fiscal policy; investor
sentiment; availability and cost of capital; technological changes and events;
outcome of legal proceedings; changes in currency values; inflation; credit
ratings; changes in global monetary aggregates; changes in supply and demand
fundamentals for equity and debt securities as well as real commodities; and the
size, volume and timing of transactions. These and other factors could affect
the stability and liquidity of securities and future markets, and the ability of
Highbury, Aston and other financial services firms and counterparties to satisfy
their obligations.




Highbury
is also exposed to market risk as it relates to changes in interest rates
applicable to borrowings under Highbury’s line of credit and investment of
Highbury’s cash balances. Because Highbury had no outstanding debt under its
line of credit as of December 31, 2008, it does not view this interest rate risk
as a material risk.




Certain
of Highbury’s outstanding cash balances are invested in 100% U.S. Treasury money
market mutual funds. We do not have significant exposure to changing interest
rates on invested cash at December 31, 2008. As a result, the interest rate
market risk implicit in these investments at December 31, 2008, if any, is
low.




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 SFAS No. 133 and are
accordingly not accounted for as derivatives for purposes of SFAS No. 133, but
instead are accounted for as equity. See Note 8 to the consolidated financial
statements for a discussion of the warrants.




ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




For
quantitative and qualitative disclosures about how we are affected by market
risk, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Quantitative and Qualitative Disclosures About Market
Risk” in Item 7, which is incorporated herein by reference.




ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




This
information appears following Item 15 of this Report and is incorporated herein
by reference.




ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




None.





39


ITEM
9A.            CONTROLS
AND PROCEDURES
  Disclosure
Controls and Procedures
  We
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and our principal
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e)) as of December 31, 2008.
Based on that evaluation, our chief executive officer and our principal
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 Exchange Act, as amended, is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.
  Internal
Control Over Financial Reporting
  The
management of Highbury and its subsidiaries is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rule 13(a) - 15(f) under the Securities Exchange Act of 1934. The Company’s
internal control over financial reporting is a process designed under the
supervision of the Company’s principal executive officer and principal financial
officer, and effected by the Company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company’s financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America.
  Our
internal control over financial reporting includes policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.
  As of
December 31, 2008, management, including the Company’s principal executive
officer and principal financial officer, assessed the effectiveness of the
Company’s internal control over financial reporting based on the criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
assessment, management has determined that the Company’s internal control over
financial reporting as of December 31, 2008 is effective. Because of the
inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
  This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
  During
the fiscal quarter ended December 31, 2008, there has been no 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.
  ITEM
9B.             OTHER
INFORMATION
  None.
  40
  PART
III
  ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  Directors
and Executive Officers
  Highbury’s
current directors and executive officers are as follows:
  Name
                
                Age
                
                PositionR.
      Bruce Cameron
                
                52
                
                Chairman
      of the BoardRichard
      S. Foote
                
                45
                
                President,
      Chief Executive Officer and DirectorR.
      Bradley Forth
                
                29
                
                Executive
      Vice President, Chief Financial Officer and SecretaryAidan
      J. Riordan
                
                36
                
                DirectorHoyt
      Ammidon Jr.
                
                71
                
                Director
  R. Bruce Cameron,
CFA has been our chairman of the board of directors since our inception.
Mr. Cameron has been the president and chief executive officer of Berkshire
Capital Securities LLC, or Berkshire Capital, a New York-based investment
banking firm, since its formation in May 2004. Mr. Cameron co-founded Berkshire
Capital Corporation, the predecessor firm to Berkshire Capital, in 1983 as the
first independent investment bank covering the financial services industry, with
a focus on investment management and capital markets firms. Mr. Cameron and his
partners have advised on approximately 230 mergers and acquisitions of financial
services companies, including high net worth managers, institutional investment
managers, mutual fund managers, real estate managers, brokerage firms,
investment banks and capital markets firms with aggregate client assets under
management of nearly $446 billion and aggregate transaction value in excess of
$10.3 billion. Mr. Cameron is the managing member of Broad Hollow LLC, an entity
formed for the purpose of facilitating the investments in us made by our
founding shareholders, which owns 776,250 shares of our common stock and 75,000
of our units. Prior to forming Berkshire Capital Corporation, Mr. Cameron was an
associate director of Paine Webber Group Inc.’s Strategic Planning Group from
1981 through 1983. Mr. Cameron began his career at Prudential Insurance Company
from 1978 through 1980, working first in the Comptroller’s Department and then
in the Planning & Coordination Group. Mr. Cameron was graduated from Trinity
College, where he received a B.A. in Economics, and from Harvard Business
School, where he received an M.B.A. Mr. Cameron also attended the London School
of Economics. Mr. Cameron is a CFA charterholder and is on the membership
committee of the New York Society of Security Analysts. Mr. Cameron is a
director of Capital Counsel LLC in New York City, a high net worth investment
management firm he advised when it was established. Mr. Cameron is a Fellow of
the Life Management Institute. He is also a past trustee of the Securities
Industry Institute.
  Richard S. Foote,
CFA has been our president and chief executive officer and a member of
our board of directors since our inception. Mr. Foote has been a managing
director of Berkshire Capital since its formation in May 2004 and a managing
director, principal and vice president of Berkshire Capital Corporation since
1994.  Since 1994, Mr. Foote has advised on 30 completed mergers and
acquisitions of financial services companies, including high net worth managers,
institutional investment managers, mutual fund managers, real estate managers,
brokerage firms, investment banks and capital markets firms with aggregate
client assets under management of approximately $131 billion and aggregate
transaction value of approximately $2.2 billion. Mr. Foote is a director of
Berkshire Capital and serves on its compensation committee, commitment committee
and technology committee. From 1991 through 1994, Mr. Foote was a co-founder and
partner of Knightsbridge Capital Partners, a partnership engaged in investment
banking and merchant banking activities. From 1985 to 1991, Mr. Foote was a vice
president, an associate, and an analyst in the investment banking division of
PaineWebber Incorporated, primarily working on mergers, acquisitions and the
issuance of equity and debt securities. Mr. Foote was graduated from Harvard
College, cum laude, in 1985 with an A.B. in Economics. Mr. Foote is a CFA
charterholder and a member of the CFA Institute, the New York Society of
Security Analysts, the Pension Real Estate Association and the National Council
of Real Estate Investment Fiduciaries.
  41
  R. Bradley Forth,
CFA has been our executive vice president, chief financial officer and
secretary since our inception. Mr. Forth has been a vice president and an
associate at Berkshire Capital since its formation in May 2004 and an associate
and an analyst at Berkshire Capital Corporation since 2001. Mr. Forth has
advised on 19 mergers and acquisitions of financial services companies with
aggregate transaction value of approximately $1.3 billion. He was graduated from
Duke University in 2001 with a B.S. in Economics and a B.A. in Chemistry. Mr.
Forth is a CFA charterholder and a member of the CFA Institute and the New York
Society of Security Analysts.
  Aidan J.
Riordan has been a member of our board of directors since May 2007. Mr.
Riordan is a Partner at Calvert Street Capital Partners, Inc. (“CSCP”), a
Baltimore-based private equity investment firm focused on middle-market
manufacturing and service companies. Previously, he was an Associate with Castle
Harlan, Inc., a New York-based middle-market private equity partnership from
2000 to 2003. Mr. Riordan also served as an Associate for Berkshire Capital
Corporation from 1994 to 1998. He holds a Bachelor of Arts degree in Economics
from the University of Pennsylvania and a Masters in Business Administration
degree in Finance from Columbia Business School. Mr. Riordan currently serves on
the boards of directors for two CSCP portfolio companies: Universal Millennium,
a printing and graphics services company, and ADAPCO, a distributor of specialty
chemicals and equipment.
  Hoyt Ammidon
Jr.has
been a member of our board of directors since December 2008. Mr. Ammidon has
been an Advisory Director for Berkshire Capital since 2004. Prior to this role,
he served as a Managing Director at Berkshire Capital and its predecessor from
1994 to 2004. Mr. Ammidon was previously at Cazenove Incorporated, where he was
President of its U.S. brokerage and investment banking subsidiary from 1988
to 1993. He was also formerly the Managing Director of Chase Investment Bank’s
Merger and Acquisition Division from 1985 to 1987, and Senior Vice
President in E.F. Hutton Company’s Corporate Finance Department from 1977
to 1985. Mr. Ammidon began his career in corporate finance at Morgan Stanley
& Co. from 1963 to 1976 and worked in Paris for three years for
Morgan & Cie. International from 1972 to 1975. He is a former director
of Tetra Technologies, Inc., Balchem Corporation and W. H. Smith Group (USA). He
has also served as a member of the Securities Industry Association’s
International Committee. Mr. Ammidon earned a BA in history from Yale University
in 1959 and then served as a captain and aviator in the United States
Marine Corps from 1959 to 1963.
  Number
and Terms of Directors
  Highbury’s
board of directors has four directors and is divided into three classes with
only one class of directors being elected in each year and each class serving a
three-year term. The term of office of the first class of directors, consisting
of Hoyt Ammidon Jr., will expire on the date of our annual meeting in
2009.  Mr. Ammidon was elected as a director by the board of
directors on December 18, 2008 to fill the vacancy in the first class of
directors. The term of office of the second class of directors, consisting of R.
Bruce Cameron and Aidan J. Riordan, expired at the annual meeting held on
October 29, 2007. Messrs. Cameron and Riordan were re-elected for
three-year terms which will expire on the date of our annual meeting in 2010.
The term of office of the third class of directors, consisting of Richard S.
Foote, expired at our annual meeting held on December 8, 2008.
Mr. Foote was re-elected for a three-year term which will expire on the
date of our annual meeting in 2011.
  Section
16(a) Beneficial Ownership Reporting Compliance
  Section
16(a) of the Exchange Act requires Highbury’s officers and directors, and
persons who own more than ten percent of Highbury’s common stock, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC.
Such persons are required by the SEC regulations to furnish us with copies of
all Forms 3, 4 and 5 that they file. Based on our review of the Forms 3, 4 and 5
filed by such persons, we believe that all Section 16(a) filing requirements
applicable to Highbury’s officers, directors and greater than ten percent
beneficial owners were complied with during the fiscal year ended December 31,
2008, with the following exceptions.  Woodbourne Partners LP, a
beneficial owner of more than 10% of Highbury's outstanding common stock, filed
five Form 4s on February 14, 2008, all five of which were filed
late.  Each Form 4 filed by Woodbourne Partners on February 14, 2008
reflects one transaction.  The Form 4 filed on May 6, 2008 by Potomac
Capital Management LLC, a beneficial owner of more than 10% of Highbury's
outstanding common stock, was filed one day late.  The Form 4 filed by
Potomac Capital Management LLC on May 6, 2008 reflects one
transaction.
  42
  Code
of Business Conduct and Ethics
  Our board
of directors has adopted a Code of Business Conduct and Ethics for our officers
and directors. The text of this Code of Business Conduct and Ethics may be found
on our website at http://www.highburyfinancial.com. Amendments to and waivers
from the Code of Business Conduct and Ethics that require disclosure under
applicable SEC rules will be posted on our website.
  Committees
of the Board of Directors
  Audit Committee. Highbury has
not established an audit committee. Highbury’s entire board of directors
currently carries out the functions customarily undertaken by the Audit
Committee. Highbury’s board of directors has determined that R. Bruce Cameron,
Richard S. Foote and Hoyt Ammidon Jr. each qualify as an “audit committee
financial expert” as that term is defined under Item 407(d)(5)(ii) of Regulation
S-K of the Securities and Exchange Act of 1934, as amended. However, since
Messrs. Cameron and Foote are officers of Highbury, neither is “independent” as
that term is defined under the Nasdaq Capital Market listing
requirements.
  Compensation Committee.In February, 2009, Highbury’s board of directors formed
a Compensation Committee.  The members of the Compensation Committee
are Aidan J. Riordan and Hoyt Ammidon Jr. The Compensation Committee operates
under a written charter adopted by the board of directors, which can be viewed
on our website athttp://www.highburyfinancial.com.
  Nominating Committee.
Highbury’s entire board of directors currently carries out the functions
customarily undertaken by the Nominating Committee. Our board of directors does
not have a formal policy for selection of nominees. The members of our board of
directors make recommendations on the basis of our best interests.
  ITEM 11. EXECUTIVE
COMPENSATION
  As a
“Smaller Reporting Company,” the Company has elected to follow scaled disclosure
requirements for smaller reporting companies with respect to the disclosure
required by Item 402 of Regulation S-K. Under the scaled disclosure obligations,
the Company is not required to provide a Compensation Discussion and Analysis,
Compensation Committee Report and certain other tabular and narrative
disclosures relating to executive compensation.
  SUMMARY
COMPENSATION TABLE
  The
following table sets forth information concerning the compensation of the
Chairman, Chief Executive Officer and Chief Financial Officer of Highbury for
fiscal years 2007 and 2008.
  Name and
                                                  Principal
                                                  Position
                                                
                                                Year
                                                
                                                Salary
                                                  ($)
                                                
                                                
                                                Bonus
                                                  ($)
                                                
                                                
                                                Stock
                                                  Awards
                                                  ($)
                                                
                                                
                                                Option
                                                  Awards
                                                  ($)
                                                
                                                
                                                All Other
                                                  Compensation
                                                  ($)
                                                
                                                
                                                Total
                                                  ($)R.
      Bruce Cameron,
                                                
                                                2007
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Chairman of the
      Board
                                                
                                                2008
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                75,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                75,000Richard
      S. Foote,
                                                
                                                2007
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —President, Chief Executive
      Officer and Director
                                                
                                                2008
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                150,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                150,000R.
      Bradley Forth,
                                                
                                                2007
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Executive Vice President,
      Chief Financial Officer and Secretary
                                                
                                                2008
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                75,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                75,000
  43
  2008
DIRECTOR COMPENSATION
  The
following table sets forth information concerning the compensation of the
independent directors of Highbury for fiscal year 2008.
  Name
                                        
                                        Fees Earned
                                          or Paid in
                                          Cash
                                          ($)
                                        
                                        Stock
                                          Awards
                                          ($)
                                        
                                        Option
                                          Awards
                                          ($)
                                        
                                        All Other
                                          Compensation
                                          ($)
                                        
                                        Total
                                          ($)Aidan
      J. Riordan
                                        
                                        $
                                        40,000
                                        
                                        —
                                        
                                        —
                                        
                                        —
                                        
                                        $
                                        40,000
  Highbury’s
board of directors has approved annual cash fees for each of the Company’s
independent directors of $40,000 for 2009.
  Compensation
Committee Interlocks and Insider Participation
  In
February 2009, Highbury’s board of directors formed a Compensation Committee
consisting of Messrs. Ammidon and Riordan.  However, during the fiscal
year ended December 31, 2008, Highbury’s entire board of directors carried out
the functions customarily undertaken by the Compensation Committee. Two members
of Highbury’s board of directors, Messrs. Cameron and Foote, were executive
officers of Highbury during the fiscal year ended December 31, 2008. In
addition, Messrs. Cameron and Foote are executive officers of, and serve on the
compensation committee of Berkshire Capital. For a description of certain
transactions between us and Messrs. Cameron and Foote, see “Certain
Relationships And Related Transactions, And Director Independence — Share
Issuances to Initial Stockholders” under Item 13. For a description of certain
transactions between us and Berkshire Capital, which will benefit Messrs.
Cameron and Foote to the extent of their interest in Berkshire Capital, see
“Certain Relationships and Related Transactions, And Director Independence -
Office Services Agreement” and “- Financial Adviser Engagement” under Item 13.
During the fiscal year ended December 31, 2008, Messrs. Cameron, Foote and Forth
participated in the deliberations of Highbury’s board of directors concerning
executive officer compensation but did not vote on the executive officer
compensation proposal.
  ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
  The
following table sets forth information as of March 2, 2009 in respect of
beneficial ownership of Highbury’s common stock by each director, by each named
executive officer and by all directors and executive officers of Highbury as a
group, and each person known by us, as a result of such person’s public filings
with the SEC and the information contained therein, to be the beneficial owner
of more than 5% of Highbury’s outstanding shares of common stock. The
percentages of common stock beneficially owned are based on 9,118,740 shares of
common stock outstanding as of March 2, 2009 adjusted for each holders’
exercisable warrants, if any.
  44
  Unless
otherwise indicated, we believe that all persons named in the table have sole
voting and investment power with respect to all shares of common stock
beneficially owned by them.
  Name and address of beneficial owner(1)
                  
                  Amount and
                      Nature of
                      Beneficial
                      Ownership
                  
                  
                  Approximate
                      Percentage of
                      Outstanding
                      Common StockR.
      Bruce Cameron(2)
                  
                  
                  1,223,751
                  
                  
                  
                  13.2
                  %Broad
      Hollow LLC(3)
                  
                  
                  1,001,250
                  
                  
                  
                  10.8
                  %Richard
      S. Foote(4)
                  
                  
                  667,500
                  
                  
                  
                  7.2
                  %R.
      Bradley Forth(5)
                  
                  
                  111,249
                  
                  
                  
                  1.2
                  %Aidan
      J. Riordan(6)
                  
                  
                  3,450
                  
                  
                  <0.1
                  %Hoyt
      Ammidon Jr.(7)
                  
                  
                  0
                  
                  
                  
                  0
                  %Wellington
      Management Company, LLP(8)
                  
                  
                  2,751,951
                  
                  
                  
                  24.5
                  %Jack
      Silver(9)
                  
                  
                  2,804,200
                  
                  
                  
                  23.5
                  %Nisswa
      Master Fund Ltd.(10)
                  
                  
                  1,727,659
                  
                  
                  
                  17.0
                  %Woodbourne
      Partners, L.P.(11)
                  
                  
                  1,368,000
                  
                  
                  
                  15.0
                  %Second
      Curve Capital, LLC(12)
                  
                  
                  1,002,000
                  
                  
                  
                  11.0
                  %Talon
      Opportunity Partners, L.P.(13)
                  
                  
                  997,000
                  
                  
                  
                  10.8
                  %North
      Star Investment Management Corp.(14)
                  
                  
                  855,300
                  
                  
                  
                  9.4
                  %Fairview
      Capital(15)
                  
                  
                  940,000
                  
                  
                  
                  7.6
                  %Ionic
      Capital Partners LP(16)
                  
                  
                  650,300
                  
                  
                  
                  6.7
                  %All
      executive officers and directors as a group (five
      individuals)(2)(4)(5)
                  
                  
                  2,005,950
                  
                  
                  
                  21.6
                  %
  (1)
              Unless
      otherwise noted, the business address of each stockholder listed in this
      table is c/o Berkshire Capital Securities LLC, 535 Madison Avenue, 19th
      Floor, New York, New York 10022.
  (2)
              Includes
      851,250 shares owned of record by Broad Hollow LLC and 150,000 shares
      issuable upon exercise of warrants held by Broad Hollow LLC that are now
      exercisable that are attributed to Mr. Cameron, according to Section 13(d)
      of the Exchange Act, due to his position as the managing member of Broad
      Hollow LLC, and 33,334 shares issuable upon exercise of warrants held by
      Mr. Cameron that are now
exercisable.
  (3)
              Includes
      150,000 shares issuable upon exercise of warrants that are now
      exercisable.
  (4)
              Includes
      100,000 shares issuable upon exercise of warrants that are now
      exercisable.
  (5)
              The
      business address of Mr. Forth is c/o Highbury Financial Inc., 999
      Eighteenth Street, Suite 3000, Denver, CO 80202. Includes 16,666 shares
      issuable upon exercise of warrants that are now
    exercisable.
  (6)
              The
      business address of Mr. Riordan is c/o Highbury Financial Inc., 999
      Eighteenth Street, Suite 3000, Denver, Colorado
  80202.
  (7)
              The
      business address of Mr. Ammidon is c/o Highbury Financial Inc., 999
      Eighteenth Street, Suite 3000, Denver, Colorado
  80202.
  (8)
              As
      reported in the Schedule 13G/A filed with the SEC on January 12, 2009 by
      Wellington Management Company, LLP. The business address of Wellington
      Management Company, LLP is 75 State Street, Boston, MA 02109. Wellington
      Management, in its capacity as investment adviser, may be deemed to
      beneficially own 2,751,951 shares of common stock which are held of record
      by clients of Wellington Management. The Schedule 13G does not disclose
      the natural persons that would be deemed the control persons of Wellington
      Management Company, LLP. Based on a Form ADV filed by Wellington
      Management Company, LLP, with the SEC on January 7, 2009 the control
      persons of Wellington Management Company, LLP are Saul Pannell, Perry
      Traquina, Cynthia Clarke, Selwyn Notelovitz, Karl Bandtel, Jean Hynes,
      Edward Steinborn, Lucius Hill, Phillip Perelmuter, Brendan Swords, Edward
      Bousa and James Valone.
  45
  (9)
              As
      reported in the Form 4, filed on December 15, 2008, and Schedule 13D,
      filed December 16, 2008, with the SEC by Jack Silver. The business address
      of Mr. Silver is c/o SIAR Capital LLC, 660 Madison Avenue, New York, New
      York 10021. The 2,804,200 shares beneficially owned by Mr. Silver includes
      2,804,200 shares of common stock issuable upon exercise of warrants that
      are now exercisable.  All of the warrants are held by Sherleigh
      Associates Profit Sharing Plan, a trust of which Jack Silver is the
      trustee.
  (10)
              As
      reported in the Schedule 13G/A filed with the SEC on February 12, 2008 and
      the Form 4 filed with the SEC on April 2, 2008 by Brian Taylor, Pine River
      Capital Management L.P., and Nisswa Master Fund Ltd and a Schedule 13G/A
      filed with the SEC on January 16, 2009 by Brian Taylor, Pine River Capital
      Management L.P., and Nisswa Acquisition Master Fund Ltd. The business
      address of each of these persons is c/o Pine River Capital Management
      L.P., 601 Carlson Parkway, Suite 330, Minnetonka, MN 55305. Includes
      1,013,900 shares issuable upon exercise of warrants that are now
      exercisable. Brian Taylor and Pine River Capital Management L.P. have
      shared voting power and shared dispositive power over 1,013,900 warrants;
      and Nisswa Master Fund Ltd. has shared voting power and shared dispositive
      power over 659,400 of these 1,013,900 warrants. Brian Taylor, Pine River
      Capital Management L.P. and Nisswa Acquisition Master Fund Ltd. have
      shared voting and dispositive power over 713,759
  shares.
  (11)
              As
      reported in a Schedule 13G/A filed with the SEC on February 13, 2009 by
      Woodbourne Partners L.P., Clayton Management Company and John D. Weil. The
      business address of Woodbourne Partners, L.P. is 200 North Broadway, Suite
      825, St. Louis, Missouri 63102. The controlling person of Woodbourne
      Partners, L.P. is Clayton Management Company, its General Partner, and Mr.
      John Weil is the President and controlling person of Clayton Management
      Company. Mr. Weil and Clayton Management Company have sole voting and
      dispositive power over 1,368,000
shares.
  (12)
              As
      reported in a Schedule 13G/A filed with the SEC on February 17, 2009 by
      Second Curve Capital, LLC, Thomas K. Brown and Second Curve Opportunity
      Fund, LP. The business address of each of these persons is 237 Park
      Avenue, 9th
      Floor, New York, NY 10017. Second Curve Capital, LLC and Thomas Brown have
      shared voting power and shared dispositive power with respect to 1,002,000
      shares.  Second Curve Opportunity Fund, LP has shared voting and
      dispositive power with respect to 497,820 of the 1,002,000
      shares.
  (13)
              As
      reported in the Schedule 13G/A filed with the SEC on February 13, 2009 by
      Talon Opportunity Partners, L.P., Talon Opportunity Managers, L.L.C. and
      Talon Asset Management, LLC. The business address of each of these
      entities is One North Franklin, Suite 900, Chicago, Illinois 60606. Talon
      Asset Management, LLC, as manager of Talon Opportunity Managers, L.L.C.,
      the general partner of Talon Opportunity Partners, L.P, holds 1,001,000
      shares, which include 997,000 shares on behalf of Talon Opportunity
      Partners, L.P. and 4,000 shares on behalf of a managed account client of
      Talon Asset Management, LLC. From time to time, Talon Opportunity
      Partners, L.P. may make distributions of partnership income to limited
      partners, none of which has an interest relating to more than 5% of the
      class. The Schedule 13G/A does not disclose the natural persons that would
      be deemed the control persons of Talon Asset Management, LLC. Based on a
      Form ADV filed by Talon Asset Management, LLC with the SEC on March 4,
      2008, the control persons of Talon Asset Management, LLC are Terry
      Diamond, Alan Wilson, Barbara Rumminger, Sophia Erskine, Edwin Ruthman,
      William Wolf, Bruce Beerbower, Talon Asset Management Inc., Diamond JJJD
      Enterprises, LLC, David Kelson, Evan Dreyfuss, Janice Coker, Brian
      Washkoviak, Jamie Schwartz, John Diamond and Jennifer Diamond. Includes
      80,000 shares issuable upon exercise of warrants that are now
      exercisable.
  (14)
              As
      reported in a Schedule 13F filed with the SEC on July 23, 2008 by North
      Star Investment Management Corp. and a Schedule 13G/A filed with the SEC
      on May 1, 2008 by North Star Investment Management Corp. and Peter G.
      Contos II, North Star Investment Management Corp. has sole voting and
      dispositive power over 322,400 of these shares. The business address of
      North Star Investment Management Corp. is 20 North Wacker Drive, Suite
      1416, Chicago, Illinois 60606. As reported in a Schedule 13G filed with
      the SEC on May 1, 2008 by Kuby Gottlieb Special Value Fund, LP and Peter
      G. Contos II, Kuby Gottlieb Special Value Fund, LP has sole voting and
      dispositive power over 532,900 of these shares. The business address of
      Kuby Gottlieb Special Value Fund, LP is 20 North Wacker Drive, Suite 1416,
      Chicago, Illinois 60606.
  46
  (15)
              As
      reported in the Schedule 13G/A filed with the SEC on February 11, 2009 by
      Fairview Capital, Fairview Capital Investment Management, LLC, Andrew F.
      Mathieson, Scott W. Clark and Darlington Partners, L.P. The business
      address of each of the reporting persons is 300 Drakes Landing Road, Suite
      250, Greenbrae, CA 94904. Fairview Capital Investment Management, LLC is
      an investment adviser. It is the general partner and investment adviser of
      Darlington Partners, L.P. Fairview Capital is the manager of Fairview
      Capital Investment Management, LLC. Mr. Mathieson is the controlling
      shareholder and President of Fairview Capital. Mr. Clark is a member and
      portfolio manager of Fairview Capital Investment Management, LLC. The
      reporting persons have shared voting and dispositive power over 940,000
      shares and Mr. Clark has sole voting and dispositive power over an
      additional 3,000 shares. Each of Fairview Capital Investment Management,
      LLC, Fairview Capital, Mr. Mathieson and Mr. Clark disclaims beneficial
      ownership of the 940,000 shares, except to the extent of that person’s
      pecuniary interest therein. Darlington Partners, L.P. disclaims beneficial
      ownership of the 940,000 shares.
  (16)
              As
      reported in the Schedule 13G filed with the SEC on September 4, 2008 by
      Ionic Capital Partners LP, Ionic Capital Management LLC and Ionic Capital
      Master Fund Ltd. The business address of Ionic Capital Partners LP and
      Ionic Capital Management LLC is 366 Madison Avenue, 9th Floor, New York,
      New York 10017. The business address of Ionic Capital Master Fund Ltd. is
      Walkers SPV Limited, Walker House, 87 Mary Street, George Town, Grand
      Cayman KY1-9002, Cayman Islands. Includes 650,300 shares issuable upon
      exercise of warrants that are now presently exercisable. Shares reported
      for Ionic Capital Master Fund Ltd. reflect shares of common stock issuable
      upon the exercise of warrants held of record by Ionic Capital Master Fund
      Ltd. Shares reported for Ionic Capital Partners LP consist of the shares
      reported for Ionic Capital Master Fund Ltd. and shares of common stock
      issuable upon the exercise of warrants held of record by another private
      investment fund of which Ionic Capital Partners LP is the investment
      adviser. Ionic Capital Partners LP has voting and investment control over
      such shares, but disclaims beneficial ownership of the shares reported
      herein except to the extent of its pecuniary interest therein. Shares
      reported for Ionic Capital Management LLC reflect shares reported for
      Ionic Capital Partners LP, of which Ionic Capital Management LLC is the
      general partner, and in such capacity may be deemed to have voting and
      investment control over such shares. Ionic Capital Management LLC
      disclaims beneficial ownership of all such shares except to the extent of
      its pecuniary interest therein.
  47
  Equity
Compensation Plan Information
  Plan Category
                                  
                                  Number of Securities to be
                                    Issued Upon Exercise of
                                    Outstanding Options,
                                    Warrants and Rights
                                  
                                  
                                  Weighted-average Exercise
                                    Price of Outstanding
                                    Options, Warrants and
                                    Rights
                                  
                                  
                                  Number of Securities
                                    Remaining Available for
                                    Future Issuance Under
                                    Equity Compensation Plans
                                    (excluding Securities
                                    reflected in column(a))Equity
      Compensation Plans Approved by Security Holders
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Equity
      Compensation Plans not Approved by Security Holders
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (1
                                  )Total
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
  (1) For a
description of the maximum number of securities remaining available for issuance
under the Equity Incentive Plan see the sections entitled “Maximum Number of Shares Available
for Awards Other Than Qualified Performance-Based Awards”and “Maximum Number of Shares Available
for Qualified Performance-Based Awards” in the summary below, which such
sections are incorporated by reference herein.
  In 2008,
Highbury’s board of directors adopted the Highbury Financial Inc. 2008 Equity
Incentive Plan, or the Equity Incentive Plan. The Equity Incentive Plan is
intended to retain and reward highly qualified employees, executive officers,
consultants and directors of Highbury and its affiliates, and to encourage their
ownership of common stock. The plan was included in the Company’s 2008 proxy
statement but was not approved by Highbury’s stockholders. However, the Equity
Incentive Plan remains in effect, securities are authorized for issuance under
the Equity Incentive Plan, and the board of directors may make awards under this
plan. Below is a summary of the principal provisions of the Equity Incentive
Plan. The summary does not purport to be exhaustive and is qualified by the full
text of the plan.
  Administration. The Equity
Incentive Plan is administered by the compensation committee of the board of
directors. Subject to the provisions of the Equity Incentive Plan, the
compensation committee has discretion to determine the employees, executive
officers, consultants or directors who will receive awards and the form of the
awards. Further, the compensation committee has complete authority to interpret
the Equity Incentive Plan, to prescribe, amend and rescind rules and regulations
relating to it, to determine the terms and provisions of the respective award
agreements (which need not be identical) and to make all other determinations
necessary or advisable for the administration of the Equity Incentive Plan.
Awards may be granted to any employee or executive officer of or consultant to
Highbury or any of its affiliates and to non-employee members of the board of
directors or of any board of directors (or similar governing authority) of any
affiliate. Awards may be granted under the Equity Incentive Plan prior to
October 21, 2018.  There are up to 14,017,334 shares of the Company’s
common stock authorized for issuance under this plan based upon the achievement
of certain long term financial, business and other performance
criteria.
  Maximum Number of Shares Available
for Awards Other Than Qualified Performance-Based Awards.  The
maximum number of shares of common stock available for awards under the Equity
Incentive Plan, other than those awards intended to qualify as Qualified
Performance-Based Awards (as defined below), is 10% multiplied by the sum of (x)
and (y), where (x) is that number of shares of common stock issued and
outstanding as of September 30, 2008, and (y) is the lesser of (i) the number of
warrants to purchase common stock that were issued and outstanding as of
September 30, 2008, and (ii) the number of warrants to purchase common stock
that were issued and outstanding as of September 30, 2008 and that have been
exercised as of the last day of the last possible performance period under the
Equity Incentive Plan (which cannot expire later than twenty years after the
date of adoption of the Equity Incentive Plan) ((x) plus (y) together, the
“Initial Shares”).
  48
  Maximum Number of Shares Available
for Qualified Performance-Based Awards.  The maximum number of
shares of common stock (or their cash equivalent) available for awards intended
to qualify as “performance-based compensation” under Section 162(m) of the Code
(“Qualified Performance-Based Awards”) is the number of “Base Shares” calculated
as of the last day of the last performance period to expire under the Plan
(which cannot expire later than October 21, 2028). This maximum is also reduced
by the Initial Shares and by any shares that are subject to, or have been issued
pursuant to, awards under the Equity Incentive Plan other than Qualified
Performance-Based Awards. The “Base Shares” are the Initial Shares, increased
annually, on a compounded basis, by the least of (i) 4.855%, the 2008 burn rate
cap for non-Russell 3000 diversified financial companies, the industry group
with which Highbury has the most in common, as published by RiskMetrics Group
and adjusted for full value awards, (ii) the future burn rate cap applicable to
Highbury published by RiskMetrics Group, and (iii) any lower rate recommended by
the President and Chief Executive Officer of Highbury and approved by the
compensation committee (the “Burn Rate Cap”). The number of shares of common
stock available for Qualified Performance-Based Awards shall also be subject to
reduction if the “CAGR” for all performance periods under the Equity Incentive
Plan is less than 30%. “CAGR” means the compound annual growth rate in “Cash Net
Income Per Share” over a performance period, expressed as a percentage. “Cash
Net Income Per Share” means, with respect to any year, the quotient obtained by
dividing (i) net income before amortization, intangible-related deferred taxes,
affiliate depreciation and other non-cash expenses (including, without
limitation, any charges related to the Equity Incentive Plan or any other
equity-based or cash-based incentive compensation plan of Highbury), as
determined by the compensation committee based on the audited financial
statements of Highbury for such year, by (ii) the daily weighted average number
of shares of common stock outstanding during such year, determined on a diluted
basis using the treasury stock method to determine the number of common stock
share equivalents issuable pursuant to any dilutive securities, excluding any
shares of common stock issued or issuable pursuant to awards under the Equity
Incentive Plan or under any other equity-based compensation plan of
Highbury.
  Qualified Performance-Based Awards
Subject to Stockholder Approval.  Awards will not qualify as
Qualified Performance-Based Awards unless the material terms of the underlying
performance goals are disclosed to and approved by Highbury’s stockholders prior
to settlement of the Awards.  The material terms of the Equity
Incentive Plan, including a description of the business criteria upon which
performance goals for Qualified Performance-Based Awards may be based, were
disclosed in a proxy statement delivered to Highbury’s stockholders in
connection with the 2008 annual meeting of Highbury stockholders.  At
such meeting the Highbury stockholders did not approve the Equity Incentive
Plan.
  Additional
Limitations.  The maximum Qualified Performance-Based Award
payment to any participant for a performance period is 50% of the maximum number
of shares of common stock (or their cash equivalent at the date of settlement)
that may be issued under the Equity Incentive Plan for Qualified
Performance-Based Awards. Further, in no event shall the number of shares of
common stock covered by awards granted to any one individual in any calendar
year exceed 50% of the aggregate number of shares of common stock subject to the
Equity Incentive Plan.
  Types of
Awards.  Awards under the Equity Incentive Plan may include
incentive stock options, nonstatutory stock options, stock appreciation rights,
restricted stock, restricted stock units, performance units, qualified
performance-based awards, including performance stock units, and stock grants.
Awards of incentive stock options are subject to stockholder approval of the
Equity Incentive Plan within 12 months of the adoption of the plan, or no later
than October 21, 2009. If the stockholders’ timely approval of the Equity
Incentive Plan is not obtained, only nonqualified stock options may be granted
under the plan.
  Effect of Termination of Employment
or Other Association.  Unless the compensation committee
determines otherwise in connection with any particular award, in the event that
a participant’s employment or other association with Highbury or an affiliate
ends for any reason, any outstanding stock options and stock appreciation rights
will generally terminate 90 days following the recipient’s termination of
employment or other association with Highbury, and any other outstanding award
will be forfeited or otherwise subject to return to or repurchase by Highbury on
the terms specified in the applicable award agreement. However, in the case of
performance stock units, if a participant’s employment or other association with
Highbury or an affiliate terminates prior to the end of a performance period due
to (i) termination for any reason within 24 months following a change of control
of Highbury, (ii) total and permanent disability, (iii) death, (iv) involuntary
termination without cause, or (v) voluntary termination for good reason, the
participant (or, in the event of death, the participant’s estate), will be
entitled to receive only a prorated proportion of his performance stock units
based on the number of days in the performance period remaining after the date
of termination, subject to achievement of the performance goals. Except in
certain circumstances approved by the compensation committee, no award under the
Equity Incentive Plan may be transferred by the recipient, and during the life
of the recipient all rights under an award may be exercised only by the
recipient or his or her legal representative.
  49
  ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
  Agreements
Related to Share Issuances to Related Parties
  Prior to
the consummation of our initial public offering, we issued a total of 1,725,000
shares of common stock to our initial stockholders including 172,500 shares to
R. Bruce Cameron, our Chairman of the Board, 517,500 shares to Richard S. Foote,
our President, Chief Executive Officer and Director, 86,250 shares to R. Bradley
Forth, our Executive Vice President, Chief Financial Officer and Secretary and
776,250 shares to Broad Hollow LLC, of which Mr. Cameron is the managing member.
Our initial stockholders also purchased an aggregate of 166,667 units for an
aggregate purchase price of $1 million in a private placement contemporaneously
with our initial public offering.
  The
Company’s initial stockholders are entitled to registration rights with respect
to the shares of common stock, warrants and units of the Company owned by them.
The holders of the majority of the shares purchased prior to the initial public
offering, or the founding shares, and the holders of the majority of the units
purchased in the private placement completed contemporaneously with our initial
public offering are each entitled to make up to two demands that the Company
register these securities and any other securities of the Company owned by them.
In addition, our initial stockholders have certain “piggy-back” registration
rights with respect to such securities on registration statements filed by the
Company. The Company will bear the expenses incurred in connection with the
filing of any of the foregoing registration statements. These securities are
also eligible for resale pursuant to Rule 144 under the Securities Act of 1933,
as amended.
  The
founding shares were placed in escrow until the earliest of: (1) January 31,
2009; (2) the Company’s liquidation; and (3) the consummation of a liquidation,
merger or stock exchange, stock purchase or other similar transaction which
resulted in all of the Company’s stockholders having the right to exchange their
shares of common stock for cash, securities or other property. Subsequent to the
expiration of the escrow period on January 31, 2009, our initial stockholders
are no longer prohibited from selling or transferring their founding
shares.
  Office
Services Agreement
  Commencing
on January 25, 2006, Berkshire Capital made available to us such office space
and certain general and administrative services as we required from time to
time. On November 30, 2006, we entered into a new office services agreement with
Berkshire Capital which provided for a monthly fixed fee for office services of
$7,500. On October 31, 2007, we replaced the November 30, 2006 agreement with a
new office services agreement with Berkshire Capital which provides for a
monthly fixed fee of $10,000 for office and secretarial services including use
and access to our office in Denver, Colorado and those other office facilities
of Berkshire Capital as we may reasonably require as well as information technology equipment and access
to numerous subscription-based periodicals and databases. In addition,
certain employees of Berkshire Capital provide us with financial reporting,
administrative and information technology
support on a daily basis. R. Bruce Cameron, our Chairman of the Board, Richard
S. Foote, our President, Chief Executive Officer and Director, and R. Bradley
Forth, our Executive Vice President, Chief Financial Officer and Secretary are
employees and equity owners of Berkshire Capital. As a result of these
affiliations, these individuals will benefit from the transaction to the extent
of their interest in Berkshire Capital. However, this arrangement is solely for
our benefit and is not intended to provide any of our executive officers
compensation in lieu of a salary. We believe, based on rents and fees for
similar services, that the fee charged by Berkshire Capital is more favorable
than we could have obtained from an unaffiliated third party. This agreement was
ratified in accordance with our Related Person Policy described
below.
  50
  Financial
Adviser Engagement
  We have
engaged Berkshire Capital to act as our non-exclusive financial adviser in
connection with possible 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. R. Bruce Cameron,
our Chairman of the Board, Richard S. Foote, our President, Chief Executive
Officer and Director, and R. Bradley Forth, our Executive Vice President, Chief
Financial Officer and Secretary are employees and equity owners of Berkshire
Capital. As a result of these affiliations, these individuals will benefit from
the transaction to the extent of their interest in Berkshire Capital. We
believe, based on discussions with other investment banks, that the terms of our
engagement of Berkshire Capital are at least as favorable as we could have
obtained from an unaffiliated third party. This transaction was approved in
accordance with our Related Person Policy described below.
  Conflicts
of Interest
  Our
public stockholders should be aware of the following potential conflicts of
interest. Our officers and directors are not required to commit their full time
to our affairs and, accordingly, they may have conflicts of interest in
allocating management time among various business activities. Furthermore,
Messrs. Cameron, Foote and Forth, our executive officers, are affiliated with
Berkshire Capital. Berkshire Capital’s clients may compete with us for
acquisitions in the financial services industry, and Berkshire Capital may have
a duty to present certain acquisition opportunities to its clients before it
presents them to us.
  Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons
  Our board
of directors has adopted certain written policies and procedures for the review,
approval and ratification of related person transactions, which we refer to as
our Related Person Policy. Among other things, our Related Person Policy
provides that any transaction, arrangement or relationship (or any series of
similar transactions, arrangements or relationships) in which we (including any
of our subsidiaries) were, are 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 our board of directors prior
to the consummation or amendment of the transaction. A related person, as
defined in our Related Person Policy, means any person who is, or at any time
since the beginning of our 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 our 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. Our board
of directors reviews these related person transactions and considers all of the
relevant facts and circumstances available to the board of directors, including
(if applicable) but not limited to: the benefits to us; 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 person transactions that
are in, or are not inconsistent with, the best interests of us and of our
stockholders, as the board of directors determines in good faith. At the
beginning of each fiscal year, the board of directors will review any previously
approved or ratified related person transactions that remain ongoing and have a
remaining term of more than six months. The board of directors will consider all
of the relevant facts and circumstances and will determine if it is in the best
interests of us and our stockholders to continue, modify or terminate these
related person transactions.
  51
  The
transactions described in this Item under the caption “— Agreements Related to
Share Issuances to Related Parties” were not approved or ratified in accordance
with our Related Person Policy, which was not in effect at the time such
transactions were consummated. Because all of our directors at that time had an
interest in such transactions, it was not possible to have them approved or
ratified by disinterested directors.
  Independence
of Directors
  Highbury
currently does not have, and is not required to have, a majority of independent
directors. Should Highbury decide to list on a securities exchange, we will be
required to adhere to the independence requirements of that exchange. We believe
that only two of our current four directors, Messrs. Riordan and Ammidon,
would meet the independence requirements applicable to companies listed on the
Nasdaq Capital Market, including those applicable to audit, compensation and
nominating committee members. Our other two directors, Messrs. Cameron and
Foote, would not meet the director independence requirements of the Nasdaq
Capital Market. Highbury’s entire board of directors, including Messrs. Cameron
and Foote who are not independent directors, carries out the functions
customarily undertaken by audit and nominating committees. Messrs. Riordan and Ammidon are the members of the
Compensation Committee.
  ITEM
      14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
  The firm
of J.H. Cohn LLP, or Cohn, which we retained on January 24, 2008, currently acts
as our principal accountant. Cohn performed the audits of our consolidated
financial statements for the 2008 and 2007 fiscal years.
  The firm
of Goldstein Golub Kessler LLP, or GGK, acted as our principal accountant from
our inception through January 23, 2008, at which time we were notified that the
partners of GGK became partners of McGladrey & Pullen, LLP in a limited
asset purchase agreement. As reported on a Current Report on Form 8-K filed on
January 28, 2008 with the SEC, on January 23, 2008, we dismissed GGK as our
principal accountant and declined to appoint McGladrey & Pullen LLP as its
replacement due to a potential conflict of interest.
  The
following is a summary of fees paid or to be paid to Cohn, GGK and RSM
McGladrey, Inc., or RSM, for services rendered.
  Audit
Fees
  During
the fiscal year ended December 31, 2008, we incurred $242,416 in fees from Cohn
for services provided in connection with our Quarterly Reports on Form 10-Q for
the first three quarters of the 2008 fiscal year, our proxy filing for the
annual shareholder meeting and our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.
  During
the fiscal year ended December 31, 2007, we incurred $97,817 in fees for
services provided by GGK in connection with our Quarterly Reports on Form 10-Q
for the first three quarters of the 2007 fiscal year, filing of registration
statements, our proxy filing for the annual stockholder meeting and consultation
regarding accounting for potential acquisition transactions. During the fiscal
year ended December 31, 2007, we incurred $140,584 in fees for services provided
by Cohn in connection with our Annual Report on Form 10-K for fiscal year ended
December 31, 2007.
  Tax
Fees
  In 2007,
we paid RSM $28,025 in connection with the preparation of our 2006 tax returns
and tax consultation.
  52
  Pre-Approval
of Fees
  Our full
board of directors is responsible for appointing, setting compensation, and
overseeing the work of the independent auditor. In recognition of this
responsibility, the board of directors has established a policy to pre-approve
all audit and permissible non-audit services provided by the independent
auditor. We did not pay any fees to Cohn or GGK for services that fall under the
categories “Audit Related Fees”, “Tax Fees” and “All Other Fees” as such
categories are defined in the rules promulgated by the SEC.
  53
  PART
IV
  ITEM
      15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
  1.           Financial
Statements:
  Index to
Financial Statements
  Highbury
      Financial Inc.Report
      of Independent Registered Public Accounting Firm
                          
                          F-2Consolidated
      Balance Sheets at December 31, 2008 and December 31, 2007
                          
                          F-3Consolidated
      Statements of Income for the years ended December 31, 2008 and
      2007
                          
                          F-4Consolidated
      Statements of Changes in Stockholders’ Equity for the years ended December
      31, 2008 and 2007
                          
                          F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007
                          
                          F-6Notes
      to Consolidated Financial Statements
                          
                          F-7
  2.            Financial
Statement Schedule(s):
  No
financial statement schedules are filed herewith because (i) such schedules are
not required or (ii) the information required has been presented in the
aforementioned financial statements.
  3.            Exhibits:
  The
following Exhibits are filed as part of this report:
  Exhibit No.
                    
                    Description3.1(1)
                    
                    Restated
      certificate of incorporation.3.2(2)
                    
                    By-laws.4.1(2)
                    
                    Specimen
      Unit Certificate.4.2(2)
                    
                    Specimen
      Common Stock Certificate.4.3(2)
                    
                    Specimen
      Warrant Certificate.4.4(2)
                    
                    Warrant
      Agreement between Continental Stock Transfer & Trust Company and the
      Company.4.5(2)
                    
                    Unit
      Purchase Option.10.1(2)
                    
                    Subscription
      Agreement between the Registrant and R. Bruce Cameron.10.2(2)
                    
                    Subscription
      Agreement between the Registrant and Richard S. Foote.10.3(2)
                    
                    Subscription
      Agreement between the Registrant and R. Bradley Forth.10.4(2)
                    
                    Subscription
      Agreement between the Registrant and The Hillary Appel
    Trust.10.5(2)
                    
                    Subscription
      Agreement between the Registrant and The Catey Lauren Appel
      Trust.10.6(2)
                    
                    Subscription
      Agreement between the Registrant and Broad Hollow
  LLC.
  54
  Exhibit No.
                  
                  Description10.7(2)
                  
                  Form
      of Letter Agreement between the Registrant and each of R. Bruce Cameron,
      Richard S. Foote, R. Bradley Forth, The Hillary Appel Trust, The Catey
      Lauren Appel Trust, Broad Hollow LLC (the initial stockholders) and
      Russell L. Appel.10.8
                  
                  [Intentionally
      omitted].10.9(2)
                  
                  Form
      of Stock Escrow Agreement between the Registrant and Continental Stock
      Transfer and Trust Company.10.10(2)
                  
                  Registration
      Rights Agreement between the Registrant and the initial
      stockholders.10.11(2)
                  
                  Form
      of Placement Unit Purchase Agreement among the Registrant, ThinkEquity
      Partners LLC, and the initial stockholders.10.12(3)
                  
                  Asset
      Purchase Agreement, dated as of April 20, 2006, by and among the
      Registrant, ABN AMRO Asset Management Holdings, Inc., ABN AMRO Investment
      Fund Services, Inc., ABN AMRO Asset Management, Inc., Montag &
      Caldwell, Inc., Tamro Capital Partners LLC, Veredus Asset Management LLC,
      River Road Asset Management LLC and Aston Asset Management
      LLC.10.13(3)
                  
                  Side
      Letter Agreement, dated as of April 20, 2006, by and among Registrant,
      Aston Asset Management LLC and Veredus Asset Management
    LLC.10.14(3)
                  
                  Side
      Letter Agreement, dated as of April 20, 2006, by and among Registrant,
      Aston Asset Management LLC and River Road Asset Management
      LLC.10.15(1)
                  
                  Side
      Letter Agreement, dated as of November 30, 2006, by and among Registrant,
      Aston Asset Management LLC and Montag & Caldwell,
  Inc.10.16(3)
                  
                  Side
      Letter Agreement, dated as of April 20, 2006, by and among Registrant,
      Aston Asset Management LLC and ABN AMRO Asset Management Holdings,
      Inc.10.17(3)
                  
                  Amended
      and Restated Limited Liability Company Agreement of Aston Asset Management
      LLC, dated as of April 20, 2006.10.18(4)
                  
                  Credit
      Agreement, dated as of November 9, 2006, between City National Bank and
      Registrant.10.19(1)
                  
                  Office
      Service Agreement, between Registrant and Berkshire Capital, dated
      November 30, 2006.10.20(1)
                  
                  Promissory
      Note issued by Aston in favor of Registrant, dated November 30,
      2006.10.21(2)
                  
                  Administrative,
      Compliance and Marketing Services Agreement, dated as of September 1,
      2006, between ABN AMRO Asset Management, Inc., and Aston Asset Management
      LLC.10.22(2)
                  
                  Form
      of Investment Advisory Agreement, between the Aston Funds and Aston Asset
      Management LLC.10.23(5)
                  
                  Letter
      Agreement, dated February 2, 2007, by and between Registrant and Berkshire
      Capital Securities
LLC.
  55
  Exhibit No.
                  
                  Description10.24(6)
                  
                  First
      Amendment to Credit Agreement, dated as of October 31, 2007, between City
      National Bank and Registrant.10.25(6)
                  
                  Office
      Service Agreement, between Registrant and Berkshire Capital, dated October
      31, 2007.10.26(5)
                  
                  Amendment
      to Unit Purchase Option, dated December 15, 2006, by and between
      Registrant and ThinkEquity Partners LLC.10.27(5)
                  
                  Amendment
      to Unit Purchase Option, dated December 15, 2006, by and between
      Registrant and EarlyBirdCapital, Inc.10.28(5)
                  
                  Amended
      and Restated Warrant Clarification Agreement, dated December 15, 2006, by
      and between Registrant and Continental Stock Transfer and Trust
      Company.10.29(7)
                  
                  Second
      Amendment to Credit Agreement, dated as of October 1, 2008, between
      City National Bank and Registrant.10.30(8)
                  
                  Warrant
      Repurchase Agreement, dated as of January 8, 2008, between Context Capital
      Management LLC and Registrant.10.31(9)
                  
                  Share
      Repurchase Agreement, dated as of January 28, 2008, Potomac Capital
      Management LLC, as Investment Manager to certain shareholders of
      Registrant, and Registrant.10.32(10)
                  
                  Highbury
      Financial Inc. 2008 Equity Incentive Plan.10.33(10)
                  
                  Highbury
      Financial Inc. 2008 Executive Long Term Incentive Plan.21.1(5)
                  
                  Subsidiaries
      of Registrant.23.1
                  
                  Consent
      of J.H. Cohn LLP.*31.1
                  
                  Certification
      by Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
                  
                  Certification
      by Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32
                  
                  Certification
      of Principal Executive and Financial Officers 18 U.S.C.
    1350.*
 
 * Filed
herewith.
  (1)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      December 6, 2006.
  (2)
              Incorporated
      by reference from our Registration Statement on Form S-1 (SEC File No.
      333-127272).
  (3)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      April 21, 2006.
  (4)
              Incorporated
      by reference from our Quarterly Report on Form 10-QSB filed with the SEC
      on November 14, 2006.
  56
  (5)
              Incorporated
      by reference from our Annual Report on Form 10-K filed with the SEC on
      March 23, 2007.
  (6)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      November 5, 2007.
  (7)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      October 6, 2008.
  (8)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      January 11, 2008.
  (9)
              Incorporated
      by reference from our Current Report on Form 8-K filed with the SEC on
      February 1, 2008.
  (10)
              Incorporated
      by reference from Amendment No. 1 to Schedule 14-A filed with the SEC on
      October 27, 2008.
  57
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  HIGHBURY
      FINANCIAL INC.By:
                /s/ Richard S. FooteRichard
      S. FootePresident
      and Chief Executive Officer
 Date:  March
4, 2009
  Pursuant
to the requirement of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
  SIGNATURE
                        
                        TITLE
                        
                        DATE/s/ R. Bruce Cameron
                        
                        Chairman
      of the Board
                        
                        March
      4, 2009R.
      Bruce Cameron/s/ Richard S. Foote
                        
                        President
      and Chief Executive
                          Officer
      and Director (principal
                          executive
      officer)
                        
                        March
      4, 2009Richard
      S. Foote/s/ R. Bradley Forth
                        
                        Executive
      Vice President, Chief
                          Financial
      Officer and Secretary
                          (principal
      financial and accounting
                          officer)
                        
                        March
      4, 2009R.
      Bradley Forth/s/ Aidan J. Riordan
                        
                        Director
                        
                        March
      4, 2009Aidan
      J. Riordan/s/ Hoyt Ammidon Jr.
                        
                        Director
                        
                        March
      4, 2009Hoyt
      Ammidon Jr.
  58


HIGHBURY
FINANCIAL INC. AND SUBSIDIARY









Index
to Financial Statements




Report
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets at December 31, 2008 and 2007
                F-3Consolidated
      Statements of Income for the years ended December 31, 2008 and
      2007
                F-4Consolidated
      Statements of Changes in Stockholders’ Equity for the years ended December
      31, 2008 and 2007
                F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007
                F-6Notes
      to Consolidated Financial Statements
                F-7




F-1







REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


Highbury
Financial Inc.




We have
audited the accompanying consolidated balance sheets of Highbury Financial Inc.
and Subsidiary as of December 31, 2008 and 2007 and the related consolidated
statements of income, stockholders’ equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Highbury
Financial Inc. and Subsidiary as of December 31, 2008 and 2007, and their
results of operations and cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.




/s/ J.H.
Cohn LLP





J.
H. COHN LLP


New York,
New York


March 4,
2009





F-2




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY


Consolidated
Balance Sheets







December
      31,2008
                                                
                                                
                                                2007ASSETSCurrent
      assetsCash
      and cash equivalents
                                                
                                                $
                                                10,244,469
                                                
                                                
                                                $
                                                7,276,545Investments
                                                
                                                
                                                4,186,552
                                                
                                                
                                                
                                                4,635,507Accounts
      receivable
                                                
                                                
                                                2,448,572
                                                
                                                
                                                
                                                3,502,142Prepaid
      expenses
                                                
                                                
                                                239,434
                                                
                                                
                                                
                                                270,086Prepaid
      taxes
                                                
                                                
                                                278,444
                                                
                                                
                                                
                                                —Total
      current assets
                                                
                                                
                                                17,397,471
                                                
                                                
                                                
                                                15,684,280Other
      AssetsFixed
      assets, net
                                                
                                                
                                                806,637
                                                
                                                
                                                
                                                991,260Identifiable
      intangibles
                                                
                                                
                                                22,982,000
                                                
                                                
                                                
                                                25,270,000Goodwill
                                                
                                                
                                                3,305,616
                                                
                                                
                                                
                                                7,046,412Deferred
      tax assets
                                                
                                                
                                                1,097,620
                                                
                                                
                                                
                                                952,209Other
      long-term assets
                                                
                                                
                                                157,092
                                                
                                                
                                                
                                                169,464Total
      other assets
                                                
                                                
                                                28,348,965
                                                
                                                
                                                
                                                34,429,345Total
      assets
                                                
                                                $
                                                45,746,436
                                                
                                                
                                                $
                                                50,113,625LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                                                
                                                $
                                                3,407,601
                                                
                                                
                                                $
                                                4,549,216Income
      taxes payable
                                                
                                                
                                                —
                                                
                                                
                                                
                                                97,758Total
      current liabilities
                                                
                                                
                                                3,407,601
                                                
                                                
                                                
                                                4,646,974Deferred
      rent
                                                
                                                
                                                805,707
                                                
                                                
                                                
                                                844,980Total
      Liabilities
                                                
                                                
                                                4,213,308
                                                
                                                
                                                
                                                5,491,954Minority
      interest
                                                
                                                
                                                840,000
                                                
                                                
                                                
                                                840,000Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock, $0.0001 par value, authorized 1,000,000 shares; none
      issued
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Common
      stock, $0.0001 par value, authorized 50,000,000 shares; 9,118,740 and
      9,527,000 shares issued and outstanding as of December 31, 2008 and 2007,
      respectively
                                                
                                                
                                                912
                                                
                                                
                                                
                                                953Additional
      paid-in capital
                                                
                                                
                                                51,818,975
                                                
                                                
                                                
                                                55,393,484Accumulated
      deficit
                                                
                                                
                                                (11,126,759
                                                )
                                                
                                                
                                                (11,612,766
                                                )Total
      stockholders’ equity
                                                
                                                
                                                40,693,128
                                                
                                                
                                                
                                                43,781,671Total
      liabilities and stockholders’ equity
                                                
                                                $
                                                45,746,436
                                                
                                                
                                                $
                                                50,113,625




See
Notes to Consolidated Financial Statements




F-3




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY


Consolidated
Statements of Income







Year
      Ended December 31,2008
                                              
                                              
                                              2007Revenue
                                              
                                              $
                                              35,712,112
                                              
                                              
                                              $
                                              42,063,995Operating
      expensesDistribution
      and sub-advisory costs
                                              
                                              
                                              16,514,898
                                              
                                              
                                              
                                              19,857,033Compensation
      and related expenses
                                              
                                              
                                              6,037,770
                                              
                                              
                                              
                                              6,643,587Depreciation
      and amortization
                                              
                                              
                                              186,450
                                              
                                              
                                              
                                              222,114Impairment
      of intangibles
                                              
                                              
                                              2,288,000
                                              
                                              
                                              
                                              4,110,000Other
      operating expenses
                                              
                                              
                                              5,970,130
                                              
                                              
                                              
                                              5,727,206Total
      operating expenses
                                              
                                              
                                              30,997,248
                                              
                                              
                                              
                                              36,559,940Operating
      income
                                              
                                              
                                              4,714,864
                                              
                                              
                                              
                                              5,504,055Other
      (loss) incomeInterest
      income
                                              
                                              
                                              155,172
                                              
                                              
                                              
                                              458,105Investment
      losses
                                              
                                              
                                              (663,175
                                              )
                                              
                                              
                                              (121,300
                                              )Total
      other (loss) income
                                              
                                              
                                              (508,003
                                              )
                                              
                                              
                                              336,805Income
      before minority interest
                                              
                                              
                                              4,206,861
                                              
                                              
                                              
                                              5,840,860Minority
      interest in net income of subsidiary
                                              
                                              
                                              3,309,929
                                              
                                              
                                              
                                              4,489,176Income
      before provision for income taxes
                                              
                                              
                                              896,932
                                              
                                              
                                              
                                              1,351,684Provision
      for income taxes
                                              
                                              
                                              410,925
                                              
                                              
                                              
                                              498,792Net
      income
                                              
                                              $
                                              486,007
                                              
                                              
                                              $
                                              852,892Weighted
      average shares outstanding, basic
                                              
                                              
                                              9,158,692
                                              
                                              
                                              
                                              9,527,000Net
      income per share, basic
                                              
                                              $
                                              0.05
                                              
                                              
                                              $
                                              0.09Weighted
      average shares outstanding, diluted
                                              
                                              
                                              9,158,692
                                              
                                              
                                              
                                              10,752,904Net
      income per share, diluted
                                              
                                              $
                                              0.05
                                              
                                              
                                              $
                                              0.08




See
Notes to Consolidated Financial Statements





F-4




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY


Consolidated
Statements of Changes in Stockholders’ Equity










Common
      Stock
                                    
                                    
                                    Additional
                                      Paid-In
                                    
                                    
                                    AccumulatedShares
                                    
                                    
                                    Amount
                                    
                                    
                                    Capital
                                    
                                    
                                    Deficit
                                    
                                    
                                    TotalBalance
      at December 31, 2006
                                    
                                    
                                    9,527,000
                                    
                                    
                                    $
                                    953
                                    
                                    
                                    $
                                    56,693,484
                                    
                                    
                                    $
                                    (12,465,658
                                    )
                                    
                                    $
                                    44,228,779Repurchase
      of underwriters’ purchase option
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,300,000
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,300,000
                                    )Net
      income
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    852,892
                                    
                                    
                                    
                                    852,892Balance
      at December 31, 2007
                                    
                                    
                                    9,527,000
                                    
                                    
                                    
                                    953
                                    
                                    
                                    
                                    55,393,484
                                    
                                    
                                    
                                    (11,612,766
                                    )
                                    
                                    
                                    43,781,671Repurchase
      of common stock
                                    
                                    
                                    (408,260
                                    )
                                    
                                    
                                    (41
                                    )
                                    
                                    
                                    (1,751,426
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,751,467
                                    )Repurchase
      of warrants
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,823,083
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,823,083
                                    )Net
      income
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    486,007
                                    
                                    
                                    
                                    486,007Balance
      at December 31, 2008
                                    
                                    
                                    9,118,740
                                    
                                    
                                    $
                                    912
                                    
                                    
                                    $
                                    51,818,975
                                    
                                    
                                    $
                                    (11,126,759
                                    )
                                    
                                    $
                                    40,693,128





See
Notes to Consolidated Financial Statements





F-5




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY


Consolidated
Statements of Cash Flows


Year Ended
      December 31,2008
                                            
                                            
                                            2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                                            
                                            $
                                            486,007
                                            
                                            
                                            $
                                            852,892Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Depreciation
      and amortization
                                            
                                            
                                            186,450
                                            
                                            
                                            
                                            222,114Deferred
      income taxes
                                            
                                            
                                            (145,411
                                            )
                                            
                                            
                                            (864,933
                                            )Interest
      income accrued
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (120,848
                                            )Investment
      losses
                                            
                                            
                                            663,175
                                            
                                            
                                            
                                            121,300Minority
      interest in net income of subsidiary
                                            
                                            
                                            3,309,929
                                            
                                            
                                            
                                            4,489,176Deferred
      rent
                                            
                                            
                                            (39,273
                                            )
                                            
                                            
                                            322,620Impairment
      charge
                                            
                                            
                                            2,288,000
                                            
                                            
                                            
                                            4,110,000Changes
      in operating assets and liabilities:(Increase)
      decrease in :Accounts
      receivable
                                            
                                            
                                            1,053,570
                                            
                                            
                                            
                                            144,280Prepaid
      expenses
                                            
                                            
                                            30,652
                                            
                                            
                                            
                                            (48,866
                                            )Prepaid
      taxes
                                            
                                            
                                            (278,444
                                            )
                                            
                                            
                                            —Other
      current assets
                                            
                                            
                                            —
                                            
                                            
                                            
                                            13,670Increase
      (decrease) in :Accounts
      payable and accrued expenses
                                            
                                            
                                            (837,001
                                            )
                                            
                                            
                                            2,279,746Income
      taxes payable
                                            
                                            
                                            (97,758
                                            )
                                            
                                            
                                            (144,331
                                            )Net
      cash provided by operating activities
                                            
                                            
                                            6,619,896
                                            
                                            
                                            
                                            11,376,820CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of investments
                                            
                                            
                                            (5,319,735
                                            )
                                            
                                            
                                            (9,932,233
                                            )Proceeds
      from sales of investments
                                            
                                            
                                            5,105,515
                                            
                                            
                                            
                                            5,296,274Payment
      of costs of the acquisition
                                            
                                            
                                            
                                            
                                            
                                            
                                            (19,464
                                            )Proceeds
      from contingent payment
                                            
                                            
                                            3,740,796
                                            
                                            
                                            
                                            —Decrease
      in other long term assets
                                            
                                            
                                            12,372
                                            
                                            
                                            
                                            —Purchase
      of fixed assets
                                            
                                            
                                            (1,827
                                            )
                                            
                                            
                                            (117,480
                                            )Net
      cash provided by (used in) investing activities
                                            
                                            
                                            3,537,121
                                            
                                            
                                            
                                            (4,772,903
                                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repurchase
      of underwriters’ purchase option
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (1,300,000
                                            )Repurchase
      of common stock
                                            
                                            
                                            (1,751,467
                                            )
                                            
                                            
                                            —Repurchase
      of warrants
                                            
                                            
                                            (1,823,083
                                            )Distributions
      paid to minority interest holders
                                            
                                            
                                            (3,614,543
                                            )
                                            
                                            
                                            (4,276,077
                                            )Net
      cash used in financing activities
                                            
                                            
                                            (7,189,093
                                            )
                                            
                                            
                                            (5,576,077
                                            )Net
      increase in cash and cash equivalents
                                            
                                            
                                            2,967,924
                                            
                                            
                                            
                                            1,027,840Cash
      and cash equivalents - beginning of year
                                            
                                            
                                            7,276,545
                                            
                                            
                                            
                                            6,248,705Cash
      and cash equivalents - end of year
                                            
                                            $
                                            10,244,469
                                            
                                            
                                            $
                                            7,276,545Supplemental
      schedule of non-cash financing and investing
      activities:


Leasehold
      improvements paid by landlord
                    
                    $
                    —
                    
                    
                    $
                    522,360Supplemental
      disclosure of cash flow information:Cash
      paid for income taxes
                    
                    $
                    932,538
                    
                    
                    $
                    1,508,055




See
Notes to Consolidated Financial Statements




F-6


HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements




1.
            Business
      and Summary of Significant Accounting
Policies





Organization
and Nature of Operations





Highbury
Financial Inc. (“Highbury”, “we” or the “Company”) 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
our shareholders and, in general, does not include integrating future
acquisitions, although we may execute add-on acquisitions for our current or
future affiliates. We seek to augment and diversify our sources of revenue by
asset class, investment style, distribution channel, client type and management
team.





The
consolidated financial statements include the accounts of Highbury and its
majority-owned subsidiary, Aston Asset Management LLC (“Aston”). We were
incorporated in Delaware on July 13, 2005. On November 30, 2006, Highbury and
Aston completed the acquisition of the U.S. mutual fund business of ABN AMRO
Asset Management Holdings, Inc. (“AAAMHI”) from AAAMHI and certain of its
affiliates. See Note 2 for additional information. Subsequent to the completion
of the acquisition, AAAMHI was acquired by Fortis Investment Management USA,
Inc. (“Fortis”).





Aston’s
total assets under management were $3.5 billion and $5.1 billion as of December
31, 2008 and 2007, respectively. Aston provides investment advisory services to
the Aston Funds, a Delaware business trust which includes a family of 26 and 27
no-load, open-end mutual funds with approximately $3.4 billion and $5.0 billion
in client assets as of December 31, 2008 and 2007, respectively. Aston provides
advisory, sales, marketing, compliance and operating resources to mutual funds
using sub-advisers that produce institutional quality investment products. Aston
also has a separate account management platform with approximately $115 million
and $145 million of assets under management as of December 31, 2008 and 2007,
respectively.





The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States (“U.S. GAAP”).





Principles
of Consolidation





The
consolidated financial statements include the accounts of Highbury and Aston, in
which the Company 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 another entity. 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, while the remaining portion of revenue is allocable to the Company
and the other members, with a priority to Highbury. The portion of the income of
Aston allocated to owners other than Highbury (eight individuals collectively
referred to herein as the “Management Members”) is included in minority interest
in the consolidated statements of income. Minority interest in 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 in consolidation.




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 identifiable
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.





F-7




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


Cash
and Cash Equivalents





The
Company considers all highly liquid investments, including money market mutual
funds and U.S. Treasury securities 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.





Investments





In 2007,
the Company elected the early adoption provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements” (“SFAS 157”) and
SFAS No. 159 “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). The Company carries its investments at fair value
based on quoted market prices, a Level 1 input, which is defined by SFAS 157 as
quoted prices (unadjusted) in active markets that are accessible at the
measurement date for identical assets or liabilities. The fair value hierarchy
gives the highest priority to Level 1 inputs. The Company reflected interest
paid and accrued on money market mutual funds and U.S. Treasury bills in
interest income and changes in fair value of marketable securities, including
certain mutual funds managed by Aston, in investment income.





Investments
consist of the following:





As
      of December 31,2008
                  
                  
                  2007U.
      S. Treasury bills
                  
                  $
                  —
                  
                  
                  $
                  3,064,071Aston
      mutual funds
                  
                  
                  725,752
                  
                  
                  
                  1,571,436Other
      marketable securities
                  
                  
                  3,460,800
                  
                  
                  
                  —$
                  4,186,552
                  
                  
                  $
                  4,635,507





Changes
in fair value of investments are included in investment losses and are as
follows:




Year
      Ended December 31,2008
                    
                    
                    2007Aston
      mutual fundsRealized
      gains (losses)
                    
                    $
                    (146,492
                    )
                    
                    $
                    7,264Unrealized
      gains (losses)
                    
                    
                    (657,748
                    )
                    
                    
                    (128,564
                    )Other
      marketable securitiesRealized
      gains (losses)
                    
                    
                    —
                    
                    
                    
                    —Unrealized
      gains (losses)
                    
                    
                    141,065
                    
                    
                    
                    —$
                    (663,175
                    )
                    
                    $
                    (121,300
                    )





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, which is included in other long-term assets.





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.




F-8




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


Under the
terms of Highbury’s credit facility (Note 6), these fixed assets are pledged as
collateral for borrowings under the credit facility.




Acquired Client
Relationships, Goodwill and Impairment Charges





The
purchase price and the capitalized transaction costs incurred in connection with
the acquisition were allocated based on the fair value of the assets acquired,
which was primarily the acquired mutual fund advisory contract. In determining
the allocation of the purchase price to the acquired mutual fund advisory
contract, Highbury has 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 SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS 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. However, the mutual funds’
trustees or directors may terminate the mutual fund advisory contract at any
time upon written notice for any reason. 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 is recorded in an amount
equal to any such excess.





The
excess of purchase price for the acquisition 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.





The
Company recorded impairment charges to the identifiable intangible related to
Aston’s advisory contract with the Aston Funds of $2,288,000 and $4,110,000 in
the fourth quarters of 2008 and 2007, respectively, as a result of negative
market performance and net asset outflows from the Aston Funds.





Income
Taxes





Income
taxes are accounted for under the asset and liability method in accordance with
SFAS No. 109 “Accounting for Income Taxes” (“SFAS 109”). 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. A valuation allowance may be established when necessary to reduce
deferred tax assets to the amount expected to be realized.




F-9




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


As
required by FASB interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”), the Company
recognizes the financial statement benefit of an uncertain tax position only
after considering the probability that a tax authority would sustain the
position in an examination. For tax positions meeting a "more-likely-than-not"
threshold, the amount recognized in the financial statements is the benefit
expected to be realized upon settlement with the tax authority. For tax
positions not meeting the threshold, no financial statement benefit is
recognized.  Since the adoption of FIN 48 at January 1, 2007, the
Company has had no uncertain tax positions.  The Company recognizes
interest and penalties, if any, related to uncertain tax positions in income tax
expense.





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 in the Consolidated Balance Sheets includes capital and undistributed
income owned by the Management Members.





Revenue
Recognition





The
Company, through Aston, earns investment advisory and administrative fees for
services provided to the Aston Funds, five money market funds advised by Fortis
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 the advisory agreements are reported as an offset to investment
advisory fees and accounts receivable. 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.




Deferred
Rent





The
Company recognizes rent on a straight line basis over the life of the lease and
records the difference between the amount expensed and the rent paid as deferred
rent.





Fair
Value of Financial Instruments





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





Share-Based
Compensation





In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123(R), “Share-Based Payment”, (“SFAS 123(R)”). 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 25”) and its related implementation guidance. On
January 1, 2006, the Company adopted the provisions of SFAS 123(R) using the
modified prospective method. SFAS 123(R) requires entities to recognize
compensation expense for awards of stock options and other share-based payments.
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized
compensation expense to be reported as financing cash flows.




F-10


HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
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.





Advertising





Advertising
costs are expensed as incurred and amounted to $969,876 and $519,535 for the
years ended December 31, 2008 and 2007, respectively.





Recent
Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”), which replaces SFAS 141. SFAS 141(R) retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase method of accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies and requires the
expensing of acquisition-related costs as incurred. SFAS 141(R) is effective for
us beginning January 1, 2009 and will apply prospectively to business
combinations completed on or after that date.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51” (“SFAS 160”), which
changes the accounting and reporting for minority interests. Minority interests
will be recharacterized as noncontrolling interests and will be reported as a
component of equity separate from the parent’s equity, and purchases or sales of
equity interests that do not result in a change in control will be accounted for
as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and, upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for us beginning January 1,
2009 and will apply prospectively. We are currently assessing the potential
impact that adoption of SFAS 160 would have on our consolidated financial
statements.





In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the list of
factors an entity should consider in developing renewal or extension assumptions
used in determining the useful life of recognized intangible assets under SFAS
No. 142, “Goodwill and Other Intangible Assets.” The new guidance applies to (1)
intangible assets that are acquired individually or with a group of other assets
and (2) intangible assets acquired in both business combinations and asset
acquisitions. Under FSP 142-3, entities estimating the useful life of a
recognized intangible asset must consider their historical experience in
renewing or extending similar arrangements or, in the absence of historical
experience, must consider assumptions that market participants would use about
renewal or extension. For Highbury, this pronouncement will require certain
additional disclosures beginning January 1, 2009 and application to useful life
estimates prospectively for intangible assets acquired after December 31, 2008.
The Company does not expect this standard to have a material impact on its
consolidated results of operations or financial condition.





In May
2008, the FASB issued Statement No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements that are presented in
conformity with generally accepted accounting principles in the United
States. SFAS 162 is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411,
“The Meaning of ‘Present Fairly in Conformity with Generally Accepted Accounting
Principles.’” SFAS 162 is not expected to have a material impact 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 consolidated financial statements.





F-11




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


2.
            Acquisition





Summary
of the Acquisition





On April
20, 2006, Highbury and Aston Asset Management LLC (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.





Upon the
consummation of the acquisition on November 30, 2006, the Highbury Entities
acquired 100% of the assets necessary to operate the acquired business and such
assets were transferred to Aston Asset Management LLC (“Aston”). Highbury owns a
65% interest in Aston, and eight employees of Aston own the balance of the
membership interests. The Highbury Entities did not acquire any research and
development assets in the acquisition.





Following
the consummation of the acquisition, substantially all of the management and
staff of the acquired business were hired by Aston. A senior officer of AAAMHI
and three other individuals also joined Aston in connection with the
acquisition. In connection with the consummation of the acquisition, Aston
entered into agreements with each of the Sellers that previously managed the
Target Funds pursuant to which each such Seller now acts as a sub-advisor to the
applicable Target Fund. In connection with the consummation of the acquisition,
Aston re-branded the Target Funds as the Aston Funds. Pursuant to the Asset
Purchase Agreement, the Sellers have agreed not to terminate these agreements
prior to November 30, 2011.





Limited
Liability Company Agreement





Pursuant
to the limited liability company agreement of Aston, 72% of the revenue (the
“Operating Allocation”) of Aston is used to pay operating expenses of Aston. The
remaining 28% of the revenues (the “Owners’ Allocation”) of Aston are 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
Management Members. In the event that Aston’s operating expenses are less than
72% of Aston’s revenue, the additional income is allocated to the Management
Members.  From time to time, certain non-cash expenses may be allocated in
a different manner by mutual agreement of Highbury and the Management
Members.





Highbury’s
contractual share of revenues has priority over the distributions to the
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 Management Members until the Management
Members’ allocation is eliminated, and then Highbury’s allocation is reduced.
Any reduction in the distribution of revenues to be paid to Highbury is required
to be repaid to Highbury, with interest, out of any future excess Operating
Allocation and the portion of future Owners’ Allocation allocated to the
Management Members.





Purchase
Price Allocation





The
Highbury Entities purchased the acquired business from the Sellers for a cash
payment of $38,600,000 at the closing. Highbury did not issue any equity
interests to the Sellers in connection with the transaction. The purchase price
and the other costs of the acquisition of the acquired business are allocated
based on the fair value of net assets acquired. In addition to the purchase
price, Highbury incurred $1,859,312 of costs directly attributable to the
transaction. As such, the total cost of the acquisition was as
follows:





F-12




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


Costs
      of the acquisition:Original
      purchase price
                                  
                                  $
                                  38,600,000Transaction
      costs
                                  
                                  
                                  1,859,312Total
      costs
                                  
                                  $
                                  40,459,312




The
Company prepared an allocation of the costs of the acquisition in 2006. 
During 2007, the Company determined that $2,627,000 more should be allocated to
the indefinite-lived identifiable intangibles, and $2,627,000 less should be
allocated to goodwill. The original and revised allocations of the fair values
of the assets acquired in the acquisition are as follows:





Allocation
      of assets received in the acquisition:
                                      
                                      Original
                                        Allocation
                                      
                                      
                                      Revised
                                        AllocationIdentifiable
      intangibles (mutual fund advisory contract)
                                      
                                      $
                                      26,753,000
                                      
                                      
                                      $
                                      29,380,000Goodwill
                                      
                                      
                                      9,673,412
                                      
                                      
                                      
                                      7,046,412Working
      capital (cash)
                                      
                                      
                                      3,500,000
                                      
                                      
                                      
                                      3,500,000Receivable
      from Sellers
                                      
                                      
                                      301,989
                                      
                                      
                                      
                                      301,989Fixed
      assets
                                      
                                      
                                      230,911
                                      
                                      
                                      
                                      230,911Total
      costs
                                      
                                      $
                                      40,459,312
                                      
                                      
                                      $
                                      40,459,312





The
purchase price (i) excluded up to $3.8 million that would have been be payable
if the annualized investment advisory fee revenue generated under investment
advisory contracts for the six months ending November 30, 2008 exceeded $41.8
million and (ii) included up to $3.8 million that was refundable if the
annualized investment advisory fee revenue generated under investment advisory
contracts for the six months ending November 30, 2008 was less than $34.2
million. In December 2008, Highbury received a contingent payment from Fortis in
the amount of $3,740,796 and recorded this receipt as a decrease in the
allocation to goodwill.  As a result, goodwill is reflected on the
December 31, 2008 balance sheet at its adjusted cost of $3,305,616.





Acquired
Assets





The
assets acquired in the acquisition were accounted for under the purchase method
of accounting and recorded at their fair values at the date of acquisition. The
excess of the purchase price over the estimated fair values of the net assets
acquired was recorded as identifiable intangibles and goodwill. The results of
operations of the acquired business have been included in the consolidated
financial statements beginning as of December 1, 2006.





The
Company has determined that the acquired mutual fund advisory contract meets the
indefinite life criteria outlined in SFAS No. 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.




F-13




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


The
excess of purchase price for the acquisition 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.





The
balance of the fixed assets acquired are depreciated on a straight-line basis
over their useful lives.





For
income tax purposes, Highbury has $27,828,761 (after reduction for the receipt
of the contingent payment and accumulated amortization to date) of goodwill and
identifiable intangibles to be amortized over the remaining portion of the
original 15 year period (13 years remaining) as of December 31,
2008.





3.
            Fixed
      Assets and Lease Commitments





Fixed
assets consisted of the following:





At
      December 31,2008
                            
                            
                            2007Leasehold
      improvements
                            
                            $
                            601,666
                            
                            
                            $
                            601,666Furniture
      and fixtures
                            
                            
                            373,164
                            
                            
                            
                            373,164Computer
      equipment
                            
                            
                            142,426
                            
                            
                            
                            140,599Office
      equipment
                            
                            
                            97,945
                            
                            
                            
                            97,9451,215,201
                            
                            
                            
                            1,213,374Accumulated
      depreciation and amortization
                            
                            
                            (408,564
                            )
                            
                            
                            (222,114
                            )Net
      fixed assets
                            
                            $
                            806,637
                            
                            
                            $
                            991,260




Depreciation
and amortization expense was $186,450 and $222,114 in 2008 and 2007,
respectively. Rent expense in 2008 and 2007, which totaled $404,192 and
$369,973, respectively, was solely related to Aston’s operations. 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 2009. The
lease for the office in California is on a month-to-month basis. At December 31,
2008, the Company’s aggregate future minimum payments for the Chicago lease,
which carries a ten year term ending January 2017, are payable as
follows:




Required
                        Minimum
                        Payments
                      
                      
                      Annual
                        Lease
                        ExpenseYear ending December
      31,2009
                      
                      $
                      222,003
                      
                      
                      $
                      219,1742010
                      
                      
                      228,533
                      
                      
                      
                      219,1742011
                      
                      
                      235,062
                      
                      
                      
                      219,1742012
                      
                      
                      241,592
                      
                      
                      
                      219,1742013
                      
                      
                      248,121
                      
                      
                      
                      219,174Thereafter
                      
                      
                      783,539
                      
                      
                      
                      670,129Totals
                      
                      $
                      1,958,850
                      
                      
                      $
                      1,765,999




F-14


HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
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. Under the
terms of Aston’s lease, Aston was 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 ended in December
2007. Management has estimated that the abatement relating to real estate
taxes and operating expenses was 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 and the aforementioned
abatement of the real estate taxes and operating expenses has been recorded as
deferred rent and 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.




4.
            Benefit
      Plans





In 2006,
Aston established a qualified defined contribution retirement plan covering
substantially all of its full-time employees. Under the plan, Aston is able to
make discretionary contributions for the benefit of qualified plan participants
up to IRS limits. The expense related to Aston’s plan for the years ended 2008
and 2007 was $87,520 and $104,172, respectively.





The
Company has adopted the 2008 Equity Incentive Plan effective October 21, 2008
and expiring on October 21, 2018 (the tenth anniversary) unless amended or
terminated earlier by the board of directors. This plan is intended to encourage
ownership of stock by employees, consultants and directors of the Company and to
provide incentives for them to promote the success of the Company’s business
through the grant of awards of or pertaining to shares of the Company’s common
stock.





The
Company has adopted the 2008 Executive Long Term Incentive Plan effective
October 21, 2008 expiring on December 31, 2029 unless amended or terminated
earlier by the board of directors.  The purpose of this plan is to
provide certain executives of the Company with incentive compensation based upon
the achievement of financial, business and other performance
criteria.





These
non-qualified plans have been approved by the board of directors.  No
awards have been granted under either of these plans.





5.
            Accounts
      Payable and Accrued Expenses





Accounts
payable and accrued expenses consisted of the following:




At December
      31,2008
                            
                            
                            2007Payable
      to sub-advisors
                            
                            $
                            802,583
                            
                            
                            $
                            1,173,769Payable
      to brokers
                            
                            
                            321,261
                            
                            
                            
                            455,987Payable
      to minority interest
                            
                            
                            660,887
                            
                            
                            
                            965,500Accrued
      compensation payable
                            
                            
                            436,239
                            
                            
                            
                            1,072,280Accrued
      professional fees
                            
                            
                            552,647
                            
                            
                            
                            473,507Other
      payables
                            
                            
                            633,984
                            
                            
                            
                            408,173Totals
                            
                            $
                            3,407,601
                            
                            
                            $
                            4,549,216





F-15


HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


6.
            Credit
      Facility





Highbury
has available a credit agreement with City National Bank expiring on October 31,
2009. The credit facility provides for a revolving line of credit of up to
$12,000,000 which 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 plus 0.50% or LIBOR plus 2.75%. 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.





The
credit facility is secured by all of the Company’s 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 (including debt from all sources) of 5.0x Adjusted EBITDA,
although borrowings under the credit agreement are limited to 2.0x Adjusted
EBITDA, and incorporate a minimum fixed charge coverage ratio of 1.25x 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 2008 or 2007,
including at December 31, 2008 or 2007. Highbury has maintained compliance with
the applicable covenants of this facility.





7.
            Commitments
      and Contingencies





a. The Company presently occupies office
space provided by Berkshire Capital Securities LLC, an affiliate of our
executive officers. Such affiliate has agreed that it will make such office
space, as well as certain office and secretarial services,information technology equipment and
access to numerous subscription-based periodicals and databases, available to
the Company as may be required by the Company from time to time. The Company had
agreed to pay such affiliate $7,500 per month for such services commencing on
January 26, 2006. The Company agreed to increase this payment to $10,000 per
month effective November 1, 2007. The consolidated statements of income for the
years ended December 31, 2008 and 2007 include $120,000 and $95,000 related to
this agreement. The agreement is terminable by either party upon six months’
prior notice.




b. The Company’s stockholders prior to its
initial public offering (the “Initial Stockholders”) are entitled to
registration rights with respect to the shares of common stock, warrants and
units of the Company owned by them. The holders of the majority of the shares
purchased prior to the initial public offering, or the founding shares, and the
holders of the majority of the units purchased in a private placement completed
simultaneously with our initial public offering are each entitled to make up to
two demands that the Company register these securities and any other securities
of the Company owned by them. In addition, the Initial Stockholders have certain
“piggy-back” registration rights with respect to such securities on registration
statements filed by the Company. The Company will bear the expenses incurred in
connection with the filing of any of the foregoing registration statements.
These securities are also eligible for resale pursuant to Rule 144 under the
Securities Act of 1933, as amended.





The
founding shares were placed in escrow until the earliest of: (1) January 31,
2009; (2) the Company’s liquidation; and (3) the consummation of a liquidation,
merger or stock exchange, stock purchase or other similar transaction which
resulted in all of the Company’s stockholders having the right to exchange their
shares of common stock for cash, securities or other property. Subsequent to the
expiration of the escrow period on January 31, 2009, the Initial Stockholders
are no longer prohibited from selling or transferring their founding
shares.




F-16




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


c. 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 up to 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 December 31, 2008, no shares of preferred stock have been
issued.





Common
Stock





The
Company is authorized to issue up to 50,000,000 shares of common stock, par
value $0.0001 per share. As of December 31, 2008 and 2007, 9,118,740 and
9,527,000 shares of common stock, par value $0.0001 per share, were issued and
outstanding. In the first quarter of 2008, the Company repurchased 400,372
shares for $1,735,611.  In the fourth quarter of 2008, the Company
repurchased 7,888 shares for $15,856.




Common
Stock Commitments





At
December 31, 2008 and 2007, 13,983,708 and 15,820,000 shares of common stock
were reserved for issuance upon exercise of redeemable warrants. All of the
warrants have an exercise price of $5.00 and will expire on 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, only in the event that the last
sale price of the Company’s 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.  In the first quarter of
2008, the Company repurchased 1,836,292 warrants for $1,823,083.





The Company has adopted the 2008 Equity
Incentive Plan effective October 21, 2008 and expiring on October 21, 2018 (the
tenth anniversary) unless amended or terminated earlier by the board of
directors.  There are up to 14,017,334 shares of the Company’s common
stock authorized for issuance under this plan based upon the achievement of
certain long term financial, business and other performance
criteria.  No awards have been granted under this
plan.




9.
            Economic
      Dependency





Relationships
with a limited number of clients account for a significant majority of
Highbury’s revenue. Aston’s client, the Aston Funds, a Delaware business trust,
which accounts for approximately 97% of our assets under management, is
comprised of 26 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 26 funds, the Aston/Montag &
Caldwell Growth Fund, the Aston/Optimum Mid Cap Fund and the Aston/TAMRO Small
Cap Fund contributed approximately 35%, 16% and 11% of the revenues of Aston,
respectively, in the month of December 2008. Additionally, as of December 31,
2008, approximately 11% of our assets under management and approximately 10% of
our revenues are generated by customers sourced through a firm which was
previously affiliated with the sellers but was subsequently sold to an
unaffiliated third party. In the month of December 2007, the Aston/Montag &
Caldwell Growth Fund and the Aston/Optimum Mid Cap Fund contributed
approximately 36% and 18% of the revenues of Aston, respectively.  As
of December 31, 2007, approximately 20% of our assets under management and 23%
of our revenues were generated by customers sourced through a firm which was
previously affiliated with the sellers but was subsequently sold to an
unaffiliated third party.  These various client concentrations leave
Highbury 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.




F-17




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


10.
            Income
      Taxes





The
provisions for income taxes consist of the following:





Year
      ended December 31,2008
                                                                                                              
                                                                                                              
                                                                                                              2007Current:Federal
                                                                                                              
                                                                                                              $
                                                                                                              408,058
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1,161,142State
                                                                                                              
                                                                                                              
                                                                                                              148,278
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              202,583Deferred:Federal
                                                                                                              
                                                                                                              
                                                                                                              (107,459
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (766,248
                                                                                                              )State
                                                                                                              
                                                                                                              
                                                                                                              (37,952
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (98,685
                                                                                                              )Totals
                                                                                                              
                                                                                                              $
                                                                                                              410,925
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              498,792





The total
provision for income taxes differs from that amount which would be computed by
applying the U.S. Federal income tax rate to income before provision for income
taxes as follows:





Year
      Ended December 31,2008
                                                                          
                                                                          
                                                                          2007Statutory
      federal income tax rate
                                                                          
                                                                          
                                                                          34
                                                                          %
                                                                          
                                                                          
                                                                          34
                                                                          %State
      tax net of federal benefit
                                                                          
                                                                          
                                                                          6
                                                                          %
                                                                          
                                                                          
                                                                          4
                                                                          %Permanent
      differences
                                                                          
                                                                          
                                                                          3
                                                                          %
                                                                          
                                                                          
                                                                          (1
                                                                          )%Other
                                                                          
                                                                          
                                                                          3
                                                                          %
                                                                          
                                                                          
                                                                          —Effective
      income tax rate
                                                                          
                                                                          
                                                                          46
                                                                          %
                                                                          
                                                                          
                                                                          37
                                                                          %




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




At
      December 31,2008
                                                              
                                                              
                                                              2007Expenses
      and net unrealized investment losses deferred for income tax
      purposes
                                                              
                                                              $
                                                              492,258
                                                              
                                                              
                                                              $
                                                              383,869(Amortization)
      impairment of intangibles
                                                              
                                                              
                                                              605,362
                                                              
                                                              
                                                              
                                                              568,340Net
      deferred tax assets
                                                              
                                                              $
                                                              1,097,620
                                                              
                                                              
                                                              $
                                                              952,209




F-18


HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


11.
            Earnings
      Per Share





The
calculation of basic earnings per share is computed by dividing income available
to common stockholders by the weighted average number of shares of the Company’s
common stock outstanding during the period. Diluted earnings per share gives
effect to all dilutive potential common shares outstanding during the period.
The following is a reconciliation of the numerator and denominator used in the
calculation of earnings per share available to common stockholders:




Year Ended
      December 31,2008
                                
                                
                                2007Numerator:Net
      income
                                
                                $
                                486,007
                                
                                
                                $
                                852,892Denominator:Average
      shares outstanding - basic
                                
                                
                                9,158,692
                                
                                
                                
                                9,527,000Effect
      of dilutive instruments:Warrants
                                
                                
                                -
                                
                                
                                
                                1,225,904Average
      shares outstanding - diluted
                                
                                
                                9,158,692
                                
                                
                                
                                10,752,904





As of
December 31, 2008 and 2007, the Company’s dilutive instruments outstanding
include 13,983,708 and 15,820,000 warrants, respectively.





There are
no effects of dilutive instruments included in the 2008 calculation because the
Company’s weighted average share price during the period was less than the
warrants’ exercise price. The dilutive effect of the warrants is calculated
using the treasury stock method and the average share price during the
period.





12.
            Related
      Person Transactions





Highbury’s
Board of Directors has adopted certain policies and procedures for the review,
approval and ratification of related person transactions, which the Company
refers to as the Related Person Policy. Among other things, the Related Person
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 Person 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 person 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 person 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 all previously approved or ratified related
person 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 person
transactions.





F-19


HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


As of
December 31, 2006, Highbury had extended $840,000 through four promissory notes
to Aston to fund Aston’s initial formation and operating expenses. Pursuant to
Aston’s mutual fund advisory contracts with the Aston Funds, Aston receives its
revenue at the beginning of each month for the services provided in the prior
month. As such, Aston incurred operating expenses for the month of December 2006
before it received its first revenue from the Aston Funds. The promissory notes
accrue interest per annum at a rate equal to the prime lending rate then in
effect as reported by JPMorgan Chase on the unpaid principal amount outstanding
from time to time. As of December 31, 2006, there was approximately $5,366 in
accrued interest on the promissory notes. The principal, and accrued interest
thereon, of the notes is subject to mandatory prepayment from all monies
allocated as Owners’ Allocation that is payable to the Management Members and
all monies allocated as Operating Allocation prior to any distributions by Aston
to the Management Members. These notes and the interest income related to the
notes have been eliminated in the consolidation of Highbury’s financial results.
These notes were repaid in 2007 and no subsequent loans were made.





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 SFAS No. 57, “Related Party Disclosures” (“SFAS 157”). In
2008 and 2007, Aston earned advisory fees of $30,222,986 and $35,977,121 and
administrative fees of $3,953,815 and $4,389,988 from the Aston Funds. These
fees, in total, accounted for approximately 96% and 96% of Aston’s total revenue
in 2008 and 2007. As of December 31, 2008 and 2007, the Company’s balance sheet
includes accounts receivable of $2,039,687 and $3,093,885, respectively,
associated with these fees, as Aston is generally paid in the first week of the
month following the month in which fees were earned.





Highbury
has 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 engaged Berkshire Capital in the first quarter of 2007.




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, information technology equipment and access to
numerous subscription-based periodicals and databases available to the Company,
as may be required by the Company from time to time. The Company had agreed to
pay Berkshire Capital $7,500 per month for such facilities and services
commencing on January 26, 2006. The Company agreed to increase this payment to
$10,000 per month effective November 1, 2007. The consolidated statements of
income for the years ended December 31, 2008 and 2007 include $120,000 and
$95,000 related to this agreement, respectively. The agreement is terminable by
either party upon six months’ prior notice.





F-20




HIGHBURY
FINANCIAL INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


13.
            Subsequent
      Events





On
January 21, 2009, the Company’s Board of Directors approved a Securities
Repurchase Program authorizing the use of up to $1,000,000 to acquire shares of
Highbury common stock, Highbury warrants or a combination thereof in the open
market or in any private transaction, from time to time and in accordance with
applicable laws, rules and regulations.  Unless amended, this
Securities Repurchase Program will expire on December 31, 2009.





F-21