SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from:                             to


Commission File Number 001-33761

PZENA INVESTMENT MANAGEMENT, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of incorporation or organization)

20-8999751(I.R.S. Employer
Identification No.)120 West 45th Street
New York, New York(Address of principal executive offices)

10036(Zip Code)


(212) 355-1600(Registrant's telephone number including area code)

Not Applicable(Former name, former address, and former fiscal year if changed since last report)

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

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 the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

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

Smaller reporting company o


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

As of November 13, 2008 there were 6,123,494 outstanding shares of the registrant's Class A common stock, par value $0.01 per share.

As
of November 13, 2008 there were 57,950,910 outstanding shares of the registrant's Class B common stock, par value $0.000001 per share.



---





PZENA INVESTMENT MANAGEMENT, INC.  FORM 10-Q  TABLE OF CONTENTS

PagePART I  FINANCIAL INFORMATION

1Item 1.

Consolidated Statements of Financial Condition of Pzena Investment Management, Inc. as of September 30, 2008
(unaudited) and December 31, 2007

1Consolidated Statements of Operations (unaudited) of Pzena Investment Management, Inc. for the Three and Nine Months
Ended September 30, 2008 and September 30, 2007

2Consolidated Statements of Cash Flows (unaudited) of Pzena Investment Management, Inc. for the Three and Nine Months
Ended September 30, 2008 and September 30, 2007

3Consolidated Statements of Changes in Equity (unaudited) of Pzena Investment Management, Inc. for the Nine Months Ended
September 30, 2008 and September 30, 2007

4Notes to Consolidated Financial Statements (unaudited)

5Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

30Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46Item 4T.

Controls and Procedures

47PART II  OTHER INFORMATION

48Item 1.

Legal Proceedings

48Item 1A.

Risk Factors

48Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

64Item 3.

Defaults Upon Senior Securities

64Item 4.

Submission of Matters to a Vote of Security Holders

64Item 5.

Other Information

65Item 6.

Exhibits

65


---





EXPLANATORY NOTE

On October 30, 2007, Pzena Investment Management, Inc. (the "Company") consummated an initial public offering of
6,100,000 shares of its Class A common stock in which it received net proceeds of approximately $98.9 million that it used to purchase 6,100,000 membership units of Pzena Investment
Management, LLC, representing 9.5% of the then outstanding membership units of Pzena Investment Management, LLC. Concurrently with the consummation of this initial public offering,
(i) the operating agreement of Pzena Investment Management, LLC (the "Operating Agreement") was amended and restated such that, among other things, the Company became the sole managing
member of Pzena Investment Management, LLC and (ii) related reorganization transactions were consummated. Accordingly, as of and subsequent to October 30, 2007, (i) the
Company will consolidate the financial results of Pzena Investment Management, LLC with its own and reflect the remaining membership interest in Pzena Investment Management, LLC as a
non-controlling interest in its consolidated financial statements, and (ii) the Company's income will be generated by its economic interest in Pzena Investment
Management, LLC's net income. As of September 30, 2008, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company
held approximately 9.6% and 90.4%, respectively, of the economic interests in the operations of the business. Therefore, this Quarterly Report on Form 10-Q presents the following
financial statements:



"We,"
"us," "our," and the "Company" refer to: (i) Pzena Investment Management, Inc. and its subsidiaries, including Pzena Investment Management, LLC and all of its
subsidiaries, following the consummation of the above-referenced initial public offering, amendment and restatement of the Operating Agreement and related reorganization transactions on
October 30, 2007, and (ii) to Pzena Investment Management, LLC and all of its subsidiaries prior to the consummation of these transactions. The "operating company" refers to Pzena
Investment Management, LLC.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

Forward-looking
statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ
materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including
the factors described in Item 1A, "Risk Factors" in Part II of this Quarterly Report on Form 10-Q. Accordingly, you should not unduly rely on these forward-looking statements,
which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly revise any forward-looking statements to

ii

---



reflect
circumstances or events after the date of this Quarterly Report on Form 10-Q, or to reflect the occurrence of unanticipated events. You should, however, review the factors
and risks we describe in the reports we will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q.

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



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

iii

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

PZENA INVESTMENT MANAGEMENT, INC.        CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION        (in thousands, except share and per-share amounts)

As ofSeptember 30,
2008

December 31,
2007(unaudited)ASSETSCash and Cash Equivalents

$
31,760

$
27,184Due from Broker


31


268Advisory Fees Receivable


20,612


26,061Investments in Marketable Securities, at Fair Value


30,940


27,465Receivable from Related Parties


406


351Other Receivables


325


1,040Prepaid Expenses and Other Assets


1,028


881Deferred Tax Assets


3,840


68,233Property and Equipment, Net of Accumulated Depreciation of $1,780 and $1,412, respectively


2,954


3,163TOTAL ASSETS

$
91,896

$
154,646LIABILITIES AND EQUITYLiabilities:Accounts Payable and Accrued Expenses

$
15,173

$
8,542Securities Sold Short, at Fair Value


3,393


1,028Due to Broker


5,300


4,101Dividends Payable


306


7,045Debt


47,000


60,000Liability to Selling Shareholders


4,650


58,391Other Liabilities


1,431


1,105TOTAL LIABILITIES


77,253


140,212Non-Controlling Interests


16,161


16,355Equity:Preferred Stock (Par Value $0.01; 200,000,000 Shares Authorized; None Outstanding)





Class A Common Stock (Par Value $0.01; 750,000,000 Shares Authorized; 6,123,494 and 6,111,118 Shares Issued and Outstanding in 2008 and 2007,
respectively)


61


61Class B Common Stock (Par Value $0.000001; 750,000,000 Shares Authorized; 57,950,910 and 57,937,910 Shares Issued and Outstanding in 2008 and 2007,
respectively)





Additional Paid-In Capital


7,123


(2,043
)Retained Earnings


(8,702
)

61TOTAL EQUITY


(1,518
)

(1,921
)TOTAL LIABILITIES AND EQUITY

$
91,896

$
154,646


See
accompanying notes to consolidated financial statements

1

---





PZENA INVESTMENT MANAGEMENT, INC.  (Prior to October 30, 2007Pzena Investment Management, LLC)        UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
    (in thousands, except share and per-share amounts)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,2008

2007

2008

2007REVENUE

$
25,072

$
40,217

$
83,389

$
112,355EXPENSESCompensation and Benefits Expense


8,160


8,807


25,773


121,213General and Administrative Expenses


2,626


2,958


8,321


7,587TOTAL OPERATING EXPENSES


10,786


11,765


34,094


128,800Operating Income/(Loss)


14,286


28,452


49,295


(16,445
)OTHER INCOME/(EXPENSE)Interest Income


256


389


682


954Interest Expense


(777
)

(798
)

(2,814
)

(798
)Dividend Income, Net


217


187


828


458Realized and Unrealized Loss, Net on Marketable Securities and Securities Sold Short


(4,075
)

(1,218
)

(10,955
)

(263
)Equity in Loss of Affiliates





(148
)




(3
)Other


53,704


(33
)

53,716


(8
)Total Other Income/(Expense)


49,325


(1,621
)

41,457


340Income/(Loss) Before Income Taxes and Non-Controlling Interests


63,611


26,831


90,752


(16,105
)Provision for Income Taxes


63,964


1,269


66,962


3,876Non-Controlling Interests


8,357


(711
)

30,900


(74
)Income/(Loss) Before Interest on Mandatorily Redeemable Units


(8,710
)

26,273


(7,110
)

(19,907
)Interest on Mandatorily Redeemable Units











16,575Net Income/(Loss)

$
(8,710
)
$
26,273

$
(7,110
)
$
(36,482
)Net Loss for Basic Earnings per Share

$
(8,710
)



$
(7,110
)Basic Earnings per Share

$
(1.42
)



$
(1.16
)Basic Weighted Average Shares Outstanding


6,123,494





6,122,229Net Loss for Diluted Earnings per Share

$
(8,710
)



$
(7,110
)Diluted Earnings per Share

$
(1.42
)



$
(1.16
)Diluted Weighted Average Shares Outstanding


6,123,494





6,122,229


See
accompanying notes to consolidated financial statements

2

---





PZENA INVESTMENT MANAGEMENT, INC.  (Prior to October 30, 2007Pzena Investment Management, LLC)        UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
    (in thousands)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,2008

2007

2008

2007OPERATING ACTIVITIESNet Income/(Loss)

$
(8,710
)
$
26,273

$
(7,110
)
$
(36,482
)Adjustments to Reconcile Net Income/(Loss) to CashProvided by Operating Activities:Depreciation


135


109


368


267Non-Cash Compensation


272





905


82,887Non-Cash Interest on Mandatorily Redeemable Units











(2,420
)Director Share Grant








140


Realized and Unrealized Loss, Net on Marketable Securities and Securities Sold Short


4,075


1,219


10,955


264Non-Controlling Interests


8,357


(711
)

30,900


(74
)Equity in Losses of Affiliates





148





3Write-down of Liability to Selling Shareholders


(53,337
)




(53,337
)

Deferred Income Taxes


63,165


(48
)

64,229


(42
)Changes in Operating Assets and Liabilities:Advisory Fees Receivable


(115
)

(377
)

5,449


(1,214
)Due from Broker


58


114


237


852Restricted Cash





(23
)




(60
)Prepaid Expenses and Other Assets


(588
)

(1,086
)

569


(2,238
)Due to Broker


1,844


(42
)

1,199


(2,740
)Accrued Expenses, Accounts Payable and Other Liabilities


2,969


6,082


6,253


14,332Purchases of Marketable Securities andSecurities Sold Short


(5,990
)

(10,704
)

(28,133
)

(20,209
)Proceeds from Sale of Marketable Securities andSecurities Sold Short


4,211


3,608


16,067


13,051Net Cash Provided by Operating Activities


16,346


24,562


48,691


46,177INVESTING ACTIVITIESReceivable from Related Parties


(87
)

7


(55
)

83Purchases of Property and Equipment


(76
)

(81
)

(160
)

(1,535
)Net Cash Used in Investing Activities


(163
)

(74
)

(215
)

(1,452
)FINANCING ACTIVITIESContributions from Members for Option Exercise











3,609Contributions from Non-Controlling Interests


149


9,750


7,082


11,971Contribution from Shareholder


172





172


Distributions to Non-Controlling Interests


(83
)

(5,612
)

(1,178
)

(7,679
)Debt Proceeds





60,000





60,000Debt Repayment


(10,000
)




(13,000
)

Dividends


(674
)




(2,018
)

Distributions to Members


(11,194
)

(68,546
)

(34,958
)

(113,455
)Net Cash Used in Financing Activities


(21,630
)

(4,408
)

(43,900
)

(45,554
)NET CHANGE IN CASH

$
(5,447
)
$
20,080

$
4,576

$
(829
)CASH AND CASH EQUIVALENTSBeginning of Period

$
37,207

$
10,011

$
27,184

$
30,920Net Change in Cash


(5,447
)

20,080


4,576


(829
)CASH AND CASH EQUIVALENTSEnd of Period

$
31,760

$
30,091

$
31,760

$
30,091Supplementary Cash Flow Information:Interest Paid:On Mandatorily Redeemable Units

$


$


$


$
18,995Other

$
1,450

$
61

$
3,464

$
61Income Taxes Paid

$
805

$
1,388

$
3,847

$
4,038


See accompanying notes to consolidated financial statements

3

---





PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except share and per-share amounts)

Capital
Units

Shares of
Class A
Common
Stock

Shares of
Class B
Common
Stock

Members'
Capital

Class A
Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Excess
of Liabilities
Over Assets

TotalBalance at December 31, 2007





6,111,118


57,937,910

$


$
61

$
(2,043
)
$
61

$


$
(1,921
)Issuance of Class A Common Stock





12,376











11








11Issuance of Class B Common Stock








13,000

















Net Loss




















(7,110
)




(7,110
)Capital Contribution

















172








172Amortization of Deferred Compensation

















42








42Equity Effect of Operating Company Net Deficit on Non-Controlling Interests

















8,941








8,941Class A Cash Dividends Paid ($0.22 per share)




















(1,347
)




(1,347
)Class A Cash Dividends Declared ($0.05 per share)




















(306
)




(306
)Balance at September 30, 2008





6,123,494


57,950,910

$


$
61

$
7,123

$
(8,702
)
$


$
(1,518
)Balance at December 31, 2006










$


$


$


$


$
(729,966
)
$
(729,966
)Net Loss Before Interest on Mandatorily Redeemable Units























(36,482
)

(36,482
)Interest on Mandatorily Redeemable Units


























Amortization of Deferred Compensation























1,950


1,950Reclassification of Liabilities to Capital Units


63,778,720








875,096








(816,140
)

816,140


875,096Unit Forfeiture


(7,500
)






















Option Excerise


266,690








3,609














3,609Distribution to Members











(113,455
)













(113,455
)Balance at September 30, 2007


64,037,910







$
765,250

$


$


$
(816,140
)
$
51,642

$
752


See accompanying notes to consolidated financial statements

4

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PZENA INVESTMENT MANAGEMENT, INC.  (Prior to October 30, 2007Pzena Investment Management, LLC)        Unaudited Notes to the Consolidated Financial
Statements

Note 1Organization

The Company functions as the holding company through which the business of its operating company, Pzena Investment Management, LLC, is conducted. The Company was incorporated in
the State of Delaware on May 8, 2007. On May 10, 2007, the Company issued 100 shares of its common stock for $100 to Richard S. Pzena, the sole director of the Company as of that date.
On October 30, 2007, the Company consummated an initial public offering of 6,100,000 shares of its Class A common stock, par value $0.01 per share, for net proceeds of approximately
$98.9 million, after payment of underwriting discounts and offering expenses. These net proceeds were used to purchase 6,100,000 membership units of Pzena Investment Management, LLC,
representing 9.5% of its then outstanding membership units, from its two outside investors and one former employee. Concurrently with the consummation of the Company's initial public offering, the
Operating Agreement of Pzena Investment Management, LLC (the "Operating Agreement") was amended and restated such that, among other things, the Company became the sole managing member of Pzena
Investment Management, LLC. The acquisition of the operating company's membership interests by the Company has been treated as a reorganization of entities under common control pursuant to the
guidance set forth in Financial Accounting Standards Board Technical Bulletin No. 85-5,Issues Relating to Accounting for Business
Combinations("FTB 85-5"). Accordingly, the net assets assumed by the Company through the offering have been reported at Pzena Investment Management, LLC's
historical cost basis. As a result of these transactions, as of and subsequent to October 30, 2007, (i) the Company has consolidated the financial results of Pzena Investment
Management, LLC with its own and reflected the membership interest in it that it does not own as a non-controlling interest in its consolidated financial statements, and
(ii) the Company's income will be generated by its economic interest in Pzena Investment Management, LLC's net income. Reported results for the periods prior to October 30, 2007
reflect solely the operations of Pzena Investment Management, LLC.

Pzena
Investment Management, LLC is an investment adviser which is registered under the Investment Advisers Act of 1940 and is headquartered in New York, New York. As of
September 30, 2008, the Company managed assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and international capital markets.

The
Company, through its investment in its operating company, has consolidated the results of operations and financial condition of the following private investment partnerships as of
September 30, 2008:

Entity

Type of Entity (Date of Formation)

Ownership at
September 30,
2008Pzena Large Cap Value Fund

Massachusetts Trust (11/1/2002)


99.6%Pzena Large Cap Value Fund II

Massachusetts Trust (8/1/2006)


99.9%Pzena International Value Service

Delaware Limited Liability Company (12/22/2003)


2.2%Pzena Global Value Service

Delaware Limited Liability Company (12/22/2003)


0.5%Pzena Mega Cap Value Fund

Massachusetts Trust (2/23/2007)


99.9%Pzena Value Partners

Limited Partnership (1/22/2008)


16.7%Pzena Emerging Markets Country Value Service

Delaware Limited Liability Company (12/28/2007)


99.9%Pzena Emerging Markets Focused Value Service

Delaware Limited Liability Company (12/28/2007)


99.9%


Pursuant to its Operating Agreement, the operating company will continue until December 31, 2026, unless a terminating event, as defined in
the Operating Agreement, occurs prior to this date. Operating company members are not liable for repayment, satisfaction or discharge of any debts, liabilities or obligations of the operating company,
except to the extent of their capital accounts.

5

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PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 2Significant Accounting Policies

Basis of Presentation:

The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles and related
Securities and Exchange Commission rules and regulations. The Company's policy is to consolidate all majority-owned subsidiaries in which it has a controlling financial interest and variable interest
entities where the Company is deemed to be the primary beneficiary ("Consolidated Subsidiaries"). Pursuant to the guidance of Emerging Issues Task Force Issue No. 04-5, Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights("EITF 04-5"), the Company also consolidates non-variable-interest entities in which it acts as the general partner or managing member.
All of these entities represent private investment partnerships over which the Company exercises or exercised control. Non-controlling interests recorded on the consolidated financial
statements of the Company includes the non-controlling interests of the outside investors in each of these entities, as well as those of the operating company. All significant
inter-company transactions and balances have been eliminated.

These
consolidated investment partnerships are investment companies under the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies (the
"AICPA Guide"). The Company has retained the specialized accounting for these partnerships pursuant to Emerging Issues Task Force Issue No. 85-12,Retention
of Specialized Accounting for Investments in Consolidation("EITF 85-12"). Thus, the Company reports the investment partnerships' investments in marketable
securities and securities sold short at fair value, with net realized and unrealized gains and losses reported in earnings in the consolidated statements of operations.

Non-controlling
interests in the operations of the Company's consolidated subsidiaries are comprised of the following:

For the Three Months
Ended September 30,2008

2007(in thousands)Non-Controlling Interest of Pzena Investment Management, LLC

$
10,785

$
Non-Controlling Interest in Consolidated Subsidiaries


(2,428
)

(711
)Non-Controlling Interests

$
8,357

$
(711
)




For the Nine Months
Ended September 30,2008

2007(in thousands)Non-Controlling Interest of Pzena Investment Management, LLC

$
36,997

$
Non-Controlling Interest in Consolidated Subsidiaries


(6,097
)

(74
)Non-Controlling Interests

$
30,900

$
(74
)


6

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 2Significant Accounting Policies (Continued)

As
discussed further in Note 15, the Company did not initially record a non-controlling interest associated with the acquisition of its operating company, as the post
offering net equity of the operating company was less than zero. Pursuant to the guidance in Emerging Issues Task Force Issue No. 95-7,Implementation Issues
Related to the Treatment of Minority Interest in Certain Real Estate Trusts("EITF 95-7"), an operating company non-controlling interest will be
recorded when the initial deficit that existed at acquisition is extinguished.

The
Company acts as the investment manager for four trusts and one offshore investment company, each of which are considered variable-interest entities. All of these entities are
vehicles through which the Company offers its Global Value and/or International Value strategies. The Company is not considered the primary beneficiary of any of these entities. Correspondingly, their
results of operations and financial condition are not consolidated by the Company. The total net assets of these variable-interest entities were approximately $729.5 million and
$902.8 million at September 30, 2008 and December 31, 2007, respectively. The Company is not exposed to losses as a result of its involvement with these entities because it has no
direct investment in them.

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

Prior
to March 31, 2007, the operating company's membership units were categorized as either compensatory units or capital units. Because both types of units had features of both
debt and equity, the operating company accounted for them pursuant to Statement of Financial Accounting Standards No. 123(R),Share-Based Payment("FAS 123(R)"), and Statement of Financial Accounting Standards No. 150,Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and
Equity("FAS 150"), as described further below.

Compensatory
units consisted of units that were granted to employees and members for services rendered. Through March 31, 2007, the distributions associated with these units, and
the subsequent incremental increase or decrease in their redemption value, were accounted for as part of compensation and benefits expense on the consolidated statements of operations, as further
discussed below.

Capital
units included units issued to founders and those purchased by certain employees. Through March 31, 2007, the distributions associated with these units, and the subsequent
incremental increase or decrease in their redemption value, were accounted for as part of interest on mandatorily redeemable units on the consolidated statements of operations.

Effective
March 31, 2007, the operating company amended its Operating Agreement to remove all mandatory redemption provisions. As all of its membership units thereafter had only
equity characteristics, neither distributions, nor subsequent incremental changes to their value, were charged against income from the effective date of the amendment.

7

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 2Significant Accounting Policies (Continued)

Management's Use of Estimates:

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

Fair Values of Financial Instruments:

The carrying amount of all financial instruments in the consolidated statements of financial condition, including investments in
marketable securities, approximates their fair values.

Revenue Recognition:

Revenue, comprised of advisory fee income, is recognized over the period in which investment management services are provided. Advisory
fee income includes management fees that are calculated based on percentages of assets under management, generally billed quarterly, either in arrears or advance, depending on their contractual terms.
Advisory fee income also includes incentive fees that may be earned by the Company depending on the investment return of the assets under management. Incentive fee arrangements generally entitle the
Company to participate, on a fixed-percentage basis, in any returns generated in excess of an agreed-upon benchmark. The Company's participation percentage in such return differentials is
then multiplied by assets under management to determine the incentive fees earned. Returns are calculated on an annualized basis over the contract's measurement period, which may extend up to three
years. Incentive fees are generally payable annually. Pursuant to the preferred accounting method under Emerging Issues Task Force Issue D-96,Accounting for
Management Fees Based on a Formula("EITF D-96"), such incentive fee income is recorded at the conclusion of the contractual performance period, when all
contingencies are resolved. The Company recognized no such incentive fees for the three and nine months ended September 30, 2008. No incentive fees were recorded for the three months ended
September 30, 2007. For the nine months ended September 30, 2007, the Company recognized incentive fees of $0.4 million.

Unit-based Compensation:

Until March 31, 2007, compensation and benefits expense included the distributions made on compensatory units outstanding, as
well as the incremental increases or decreases in the redemption values of these units subsequent to their grant date over their vesting period. Distributions were generally paid on the operating
company's income before non-cash compensation charges. Redemption values were determined based on fair value.

The
Operating Agreement was amended as of March 31, 2007 to eliminate the obligation to redeem units under any circumstance. Since all compensatory units thereafter had only
equity characteristics, neither distributions, nor subsequent incremental changes to these units' value, were charged against income subsequent to March 31, 2007. In addition, as of
March 31, 2007, the operating company accelerated the vesting of all compensatory units then subject to vesting. The operating company recorded a $65.0 million one-time
charge in compensation and benefits expense associated with this acceleration as of March 31, 2007.

8

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 2Significant Accounting Policies (Continued)

Interest on Mandatorily Redeemable Units:

Until the amendment of its Operating Agreement on March 31, 2007, the operating company recorded a net liability for its capital
units equal to the accumulated redemption value as of the balance sheet date of all such outstanding units. This liability also included any undistributed earnings attributable to such units. As such,
interest on mandatorily redeemable units included distributions made on capital units outstanding, as well as the incremental increases or decreases in the redemption values of these units.
Distributions were generally paid on the operating company's income before non-cash compensation charges. Redemption values were determined based on fair value.

Prior
to March 31, 2007, capital units were required to be redeemed on the death of a member. Effective March 31, 2007, the Operating Agreement was amended to eliminate the
obligation to redeem units under any circumstance. Since all capital units thereafter had only equity characteristics, neither distributions, nor subsequent incremental changes to these units' value,
were charged against income subsequent to the effective date of the amendment. The $16.6 million charge recorded in 2007 represents the distributions and incremental changes to these units'
fair value through March 31, 2007.

Earnings per Share:

Prior to October 30, 2007, reported results of operations are solely those of Pzena Investment Management, LLC. Since the
operating company is a private limited liability company, no historical earnings per share calculations have been reported prior to this date. Subsequent to October 30, 2007, earnings per share
reflect the per share allocation of the Company's economic interest in its operating company.

Basic
earnings per share is computed by dividing the Company's net income or loss by the weighted-average number of shares outstanding during the reporting period. Diluted earnings per
share adjusts this calculation to reflect the impact of all outstanding operating company membership units, as well as outstanding operating company options and phantom units, to the extent that they
would have a dilutive effect on net income per share for the reporting period. Net income for diluted earnings per share generally assumes all operating company membership units are converted into
Company stock at the beginning of the reporting period and the resulting change to Company net income associated with its increased interest in the operating company is taxed at the Company's
effective tax rate. Should the additional assumed incremental units and/or income result in a reduction of a per share loss, the assumed effects of such a conversion are excluded from the calculation
of diluted loss per share. For the three and nine months ended September 30, 2008, 57,950,910 operating company units, 954,310 options to purchase operating company units and 89,826 phantom
operating company units were excluded from the calculation of diluted net loss per share, as their inclusion would have had an antidilutive effect for both periods.

9

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 2Significant Accounting Policies (Continued)

The
Company's basic and diluted earnings per share, generated from its economic interest in the operating company, were determined as follows (in thousands, except for share and
per-share amounts):

For the Three
Months Ended
September 30, 2008Net Loss for Basic Earnings per Share

$
(8,710
)Basic Weighted Average Shares Outstanding


6,123,494Basic Earnings per Share

$
(1.42
)Net Loss for Diluted Earnings per Share

$
(8,710
)Diluted Weighted Average Shares Outstanding


6,123,494Diluted Earnings per Share

$
(1.42
)




For the Nine
Months Ended
September 30, 2008Net Loss for Basic Earnings per Share

$
(7,110
)Basic Weighted Average Shares Outstanding


6,122,229Basic Earnings per Share

$
(1.16
)Net Loss for Diluted Earnings per Share

$
(7,110
)Diluted Weighted Average Shares Outstanding


6,122,229Diluted Earnings per Share

$
(1.16
)


Cash and Cash Equivalents:

The Company considers all highly-liquid debt instruments with an original maturity of three months or less at the time of purchase to
be cash equivalents.

Interest
on cash and cash equivalents is recorded as interest income on the consolidated statements of operations.

Due to/from Broker:

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

Investments in Securities:

Investments in marketable securities and securities sold short represent primarily the securities held by the Company's consolidated
investment partnerships. All such securities are recorded at fair

10

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 2Significant Accounting Policies (Continued)

value,
with net realized and unrealized gains and losses reported in earnings in the consolidated statements of operations.

The
Company adopted the provisions of Statement of Financial Accounting Standard No. 157,Fair Value Measurements("FAS 157"), on January 1, 2008. FAS 157 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date. FAS 157 also establishes a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the
valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy contains
three levels: (i) valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets (Level 1); (ii) valuation inputs are quoted prices for
identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets and other observable inputs directly or indirectly related to
the asset or liability being measured (Level 2); and (iii) valuation inputs are unobservable and significant to the fair value measurement (Level 3).

The
Company's fair value measurements relate to its interest rate swap, as well as its investments in marketable securities and securities sold short, which are primarily exchange-traded
securities with quoted prices in active markets. The fair value measurement of the interest rate swap has been determined primarily based upon the market prices for interest rate swaps with similar
provisions and the use of forward interest rate curves, and has been classified as Level 2. The fair value measurements of the securities have been classified as Level 1.

The
following table presents these instruments' fair value at September 30, 2008 (in thousands):

Level 1

Level 2

Level 3Marketable Securities

$
30,940

$


$
Securities Sold Short


(3,393
)




Interest Rate Swap





315


Total Fair Value

$
27,547

$
315

$



Securities Valuation:

Investments in marketable equity securities and securities sold short which are traded on a national securities exchange are carried at
fair value based on the last reported sales price on the valuation date. If no reported sales occurred on the valuation date, investments in securities are valued at the bid price and securities sold
short are valued at the ask price. Securities transactions are recorded on the trade date.

The
net realized gain or loss on sales of securities and securities sold short is determined on a specific identification basis and is included in realized and unrealized loss, net on
marketable securities and securities sold short in the consolidated statements of operations.

Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash
equivalents, amounts due from brokers and advisory fees receivable. The

11

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 2Significant Accounting Policies (Continued)

Company
maintains its cash and temporary cash investments in bank deposits and other accounts whose balances, at times, exceed federally insured limits.

The
concentration of credit risk with respect to advisory fees receivable is generally limited due to the short payment terms extended to clients by the Company. On a periodic basis, the
Company evaluates its advisory fees receivable and establishes an allowance for doubtful accounts, if necessary, based on a history of past write-offs and collections and current credit
conditions. For the three months ended September 30, 2008 and 2007, approximately 13.1% and 19.3%, respectively, of the Company's advisory fees were generated from an advisory agreement with
one client. For the nine months ended September 30, 2008 and 2007, fees generated from this agreement comprised 14.4% and 21.6%, respectively, of the Company's total advisory fees. At
September 30, 2008 and December 31, 2007, no allowance for doubtful accounts has been deemed necessary.

Financial Instruments:

On February 28, 2008, the operating company entered into an interest rate swap agreement to manage its exposure to changes in
interest rates associated with the credit agreement discussed in Note 10 (the "Credit Agreement"). The counterparty to this agreement is a major financial institution. The Company designated
the interest rate swap agreement as a cash flow hedge of the Credit Agreement effective February 28, 2008. Pursuant to Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Certain Hedging Activities("FAS 133"), the Company recorded the cash flow hedge at fair value as a
component of prepaid expenses and other assets on the consolidated statement of financial condition. Additionally, the Company's pro rata share of the changes in the fair value of this agreement were
recorded as a component of accumulated other comprehensive income.

During
the three months ended September 30, 2008, the Company changed the designation of its swap agreement from a cash flow hedge to a trading derivative. Accordingly, the
Company reclassified the cumulative changes in fair value related to this swap from accumulated other comprehensive income to other income/(expense). In addition, the Company recorded all subsequent
changes to the swap's fair value as a component of other income/(expense). For the three and nine months ended September 30, 2008, the Company recognized approximately $0.3 million in
other income associated with these adjustments.

At
September 30, 2008, the approximate fair value of the swap agreement was $0.3 million.

Property and Equipment:

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

Business Segments:

The Company views its operations as comprising one operating segment.

12

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 2Significant Accounting Policies (Continued)

Income Taxes:

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

The
Company and its consolidated subsidiaries account for all state, local and federal taxation pursuant to the asset and liability method, which requires deferred income tax assets and
liabilities to be recorded for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on
enacted tax laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. At September 30, 2008, the Company recorded a $62.7 million valuation allowance against the deferred tax asset recorded as part of the
Company's initial public offering. At December 31, 2007, no such valuation allowances were deemed necessary. The income tax provision, or credit, is the tax payable or refundable for the
period, plus or minus the change during the period in deferred tax assets and liabilities.

Foreign Currency:

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

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

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

New Accounting Pronouncements:

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value
Option for Financial Assets and Financial Liabilities("FAS 159"). FAS 159 permits an entity to elect to measure certain financial instruments and certain other
items at fair value with changes in fair

13

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 2Significant Accounting Policies (Continued)

value
recognized in earnings. FAS 159 is effective for fiscal years beginning after November 15, 2007. Since the Company chose not to elect this fair value option, the impact of the
adoption of this statement was not material.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007),Business Combinations("FAS 141R") which replaces Statement of Financial Accounting Standards No. 141,Business Combinations. FAS 141R establishes the
principles and requirements for how an acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain
purchase; and (iii) discloses the business combination. FAS 141R applies to all transactions in which an entity obtains control of one or more businesses, including transactions that
occur without the transfer of any type of consideration. FAS 141R is effective on a prospective basis for all business combinations on or after December 15, 2008, with the exception of
the accounting for valuation allowances on deferred taxes and acquired tax contingencies. Early adoption is not allowed. The Company is in the process of assessing the impact of this standard on its
consolidated financial statements.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51("FAS 160"). FAS 160 amends ARB No. 51 and establishes accounting and reporting standards that
require non-controlling interests (previously referred to as minority interest) to be reported as a component of equity, changes in a parent's ownership interest while the parent retains
its controlling interest be accounted for as equity transactions, and upon a loss of control, retained ownership interest will be remeasured at fair value, with any gain or loss recognized in
earnings. FAS 160 is effective for the Company on January 1, 2009, except for the presentation and disclosure requirements, which will be applied retrospectively. Early adoption is not
allowed. The Company is in the process of assessing the impact of this standard on its consolidated financial statements.

In
March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,Disclosures about Derivative Instruments and Hedging
Activities("FAS 161"). FAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company is in the process of assessing the impact of this standard on its consolidated financial statements.

In
June 2008, the FASB issued EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities("EITF 03-6-1"). The EITF release states that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company
is in the process of assessing the impact of this standard on its consolidated financial statements.

14

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 3Property and Equipment

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

As ofSeptember 30,
2008

December 31,
2007(in thousands)Computer Hardware

$
906

$
796Computer Software


188


152Furniture and Fixtures


1,161


1,156Office Equipment


243


243Leasehold Improvements


2,236


2,228Total


4,734


4,575Less: Accumulated Depreciation


(1,780
)

(1,412
)Total

$
2,954

$
3,163


Depreciation
is included in general and administrative expenses and totaled $0.1 million for each of the three months ended September 30, 2008 and 2007, respectively. Such
expenses totaled $0.4 million and $0.3 million for the nine months ended September 30, 2008 and 2007, respectively.

Note 4Related Party Transactions

For the three and nine months ended September 30, 2008, the Company earned $1.6 million and $5.3 million, respectively, in investment advisory fees from
unconsolidated entities for which it acts as the investment manager. For the three and nine months ended September 30, 2007, such advisory fees totaled $2.1 million and
$5.6 million, respectively.

At
September 30, 2008 and December 31, 2007, the Company had advanced $0.1 million to an international investment company for organization and start-up
costs, which are included in receivable from related parties on the consolidated statements of financial condition. The Company is the sponsor and investment manager of this entity.

At
both September 30, 2008 and December 31, 2007, receivable from related parties included $0.1 million of loans to employees. These loans are in the form of
forgivable promissory notes which are amortized through compensation expense pursuant to their terms.

Employees
of the Company who are considered accredited investors have the ability to open separately-managed accounts, or invest in certain of the Company's consolidated investment
partnerships, without being assessed advisory fees. Investments by employees in separately-managed accounts are permitted only at the discretion of the Executive Committee of the Company, but are
generally not subject to the same minimum investment levels that are required of outside investors. Some of the investment advisory fees that are waived on separately managed accounts for employees
are for strategies that typically have account fee minimums, which vary by strategy, but typically average approximately $50,000 per account per year.

During
the nine months ended September 30, 2008, a shareholder who held more than 10% of the Company's outstanding shares sold shares in transactions deemed to be short-swing
sales. Under Section 16(b) of the Securities Exchange Act of 1934, the shareholder was required to disgorge to the

15

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 4Related Party Transactions (Continued)

Company
the $0.2 million in profits realized from these stock sales. The Company recognized these proceeds as a capital contribution from a shareholder and reflected a corresponding increase to
additional paid-in capital in its consolidated statements of changes in equity. Proceeds from these transactions did not affect the Company's consolidated statements of operations.

Note 5Investments in Affiliates

The Company held an investment in, and acted as manager of, an unconsolidated investment partnership which was accounted for under the equity method. Summary financial information
related to this entity is as follows:

PAI Hedged Value
Fund, LLCFor the Three Months
Ended September 30,2008

2007(in thousands)Net Investment Income/(Loss)

$


$
10Net Realized and Unrealized Loss





(547
)Net Income (Loss)

$


$
(537
)Company's Equity in Income (Loss)

$


$
(148
)Ownership Percentage


0%


28%




PAI Hedged Value
Fund, LLCFor the Nine Months
Ended September 30,2008

2007(in thousands)Net Investment Income (Loss)

$


$
1Net Realized and Unrealized Income (Loss)





(49
)Net Income (Loss)

$


$
(48
)Company's Equity in Income (Loss)

$


$
(3
)Ownership Percentage


0%


28%


In
the fourth quarter of 2007, the decision was made to dissolve the PAI Hedged Value Fund, LLC. This entity was consolidated beginning October 1, 2007, the effective date
of the withdrawal of the external joint venture partner, until it was fully liquidated on December 28, 2007.

Note 6Commitments and Contingencies

In the normal course of business, the Company enters into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants. In
certain cases, the Company may have recourse against third parties with respect to these indemnities. The Company

16

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 6Commitments and Contingencies (Continued)

maintains
insurance policies that may provide coverage against certain claims under these indemnities. FASB issued Interpretation No. 45,Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others("FIN 45"), providing accounting and disclosure requirements for certain
guarantees. The Company has had no claims or payments pursuant to these agreements, and it believes the likelihood of a claim being made is remote. Utilizing the methodology in FIN 45, the
Company's estimate of the value of such guarantees is de minimis, and, therefore, an accrual has not been made in the consolidated financial statements.

The
Company may be subject to various legal and administrative proceedings in the normal course of business. On November 21, 2007 and January 16, 2008, substantively
identical putative class action lawsuits were commenced in the United States District Court for the Southern District of New York against the Company and Richard S. Pzena, the Company's chief
executive officer, seeking remedies under Section 11 of the Securities Act of 1933, as amended. The Court consolidated the lawsuits and appointed co-lead plaintiffs, who filed a
consolidated amended complaint. The consolidated amended complaint names as defendants the Company, Richard S. Pzena, and two of the underwriters of the Company's initial public offering, Goldman
Sachs & Co., Inc. and UBS Securities LLC. Plaintiffs seek to represent a class of all persons who purchased or otherwise acquired Class A common stock issued
pursuant or traceable to the Company's initial public offering. The consolidated amended complaint alleges that the registration statement and prospectus relating to the initial public offering of the
Company's Class A common stock contained material misstatements and omissions and wrongfully failed to disclose net redemptions in the John Hancock Classic Value Fund, for which the Company
acts as sub-investment advisor. The consolidated amended complaint seeks damages in an unspecified amount including rescission or rescissory damages. The Court granted Company's motion to
dismiss the consolidated amended complaint and, on September 4, 2008, the Court entered a judgment in favor of the Company. Plaintiffs have filed a Notice of Appeal of the Court's judgment to
the United States Court of Appeals for the Second Circuit. The Company
believes that the allegations and claims are without merit and will continue to contest these claims vigorously.

The
Company leases office space under a non-cancelable operating lease agreement which expires on October 31, 2015. The Company reflects lease expense over the lease
term on a straight-line basis. In early 2007, the Company agreed to lease additional office space at the Company's headquarters at 120 West 45th Street, New York, New York. The
Company took possession of this space on March 1, 2007. The new lease is co-terminous with the Company's existing lease.

Lease
expenses were $0.5 million for each of the three months ended September 30, 2008 and 2007. Such expenses totaled $1.5 million and $1.2 million, for the
nine months ended September 30, 2008 and 2007, respectively.

Note 7Retirement Plan

The Company maintains a defined contribution pension plan which covers substantially all members and employees. The Company may make contributions to the plan at the discretion of
management. Under the terms of the plan, all such contributions vest immediately. The Company recognized $0.4 million in expense associated with this plan for each of the three months ended
September 30, 2008 and 2007. Such expenses totaled $1.4 million and $1.1 million for the nine months ended September 30, 2008 and 2007, respectively. These expenses are
included in compensation and benefits expense in the consolidated statements of operations.

17

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 8Compensation and Benefits

As discussed further in Note 14, the operating company issued compensatory units to employees and members which had redemption features that required them to be classified as
liabilities in the consolidated statements of financial condition prior to March 31, 2007. Until this date, distributions on the compensatory units outstanding, and changes in these units'
redemption values, were recorded as compensation and benefits expense.

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

For the Three Months
Ended September 30,2008

2007(in thousands)Cash Compensation and Other Benefits

$
7,888

$
8,807Distributions on Compensatory Units





Change in Redemption Value of Compensatory Units





Acceleration of Vesting of Compensatory Units





Other Non-Cash Compensation


272


Total Compensation and Benefits Expense

$
8,160

$
8,807




For the Nine Months
Ended September 30,2008

2007(in thousands)Cash Compensation and Other Benefits

$
24,868

$
26,239Distributions on Compensatory Units





12,087Change in Redemption Value of Compensatory Units





15,969Acceleration of Vesting of Compensatory Units





64,968Other Non-Cash Compensation


905


1,950Total Compensation and Benefits Expense

$
25,773

$
121,213


Distributions
on compensatory units included cash distributions paid on, as well as the net increase or decrease in undistributed earnings attributable to, compensatory units.

As
of March 31, 2007, the effective date of the amendment to the Operating Agreement to eliminate the operating company's obligation to redeem units under any circumstance, the
unit-based compensation awards previously categorized as liabilities were reclassified as equity. Further, as of March 31, 2007, the operating company accelerated the vesting of all
compensatory units then subject to vesting. Subsequent to this date, distributions on these units have not been considered a component of compensation and benefits expense but are instead recorded as
a direct reduction of members' capital.

18

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 8Compensation and Benefits (Continued)

The change in liability for the redemption of compensatory units, through the date of the amendment of the Operating Agreement described above, is as follows (in thousands):

Balance at December 31, 2006

$
263,980Value of Units Vested During the Year


79,199Increase in Value of Units Previously Vested


1,738Change in Undistributed Earnings


Compensation Expense Associated with Unvested Units


Payment of Liabilities


(953
)Reclassification due to Amendment of Operating Agreement


(343,964
)Balance at March 31, 2007

$



For
the three months ended September 30, 2008 and 2007, the operating company granted no options to purchase units pursuant to the Pzena Investment Management, LLC 2006
Equity Incentive Plan. For the nine months ended September 30, 2008 and 2007, the operating company granted 446,000 and 645,000 such options, respectively. The options had varying vesting
schedules and were issued at strike prices equal to the assessed fair market value per unit at the time of award issuance. The Company determined that the total grant-date fair value of
the options awarded during the nine months ended September 30, 2008 and 2007 was approximately $1.2 million and $2.0 million, respectively. For the three and nine months ended
September 30, 2008, the Company recognized approximately $0.1 million and $0.2 million, respectively, in compensation and benefits expense associated with the amortization of the
awards. For each of the three and nine months ended September 30, 2007, such amortization was approximately $2.0 million.

Pursuant
to the operating company's bonus plan, which became effective January 1, 2007, eligible employees whose cash compensation is in excess of certain thresholds have a
portion of that excess mandatorily deferred. Amounts deferred may be credited to an investment account or take the form of phantom Class B units, at the employee's discretion, and vest ratably
over four years commencing January 1, 2008. At September 30, 2008, the liability associated with such investment accounts was approximately $0.5 million, and has been included as
a component of other liabilities on the consolidated statement of financial condition. For the three and nine months ended September 30, 2008, the Company recognized approximately $0.2 and
$0.7 million, respectively, in compensation and benefits expense associated with the amortization of deferred compensation awards.

Note 9Short Term Borrowings

Simultaneously with the Credit Agreement described below, on July 23, 2007, the operating company obtained a $20.0 million revolving credit facility, expiring on
July 23, 2010, in order to finance its short term working capital needs. This facility carries a commitment fee of 0.2% on any unused amounts, and the Company's approximately
$1.8 million letter of credit reduces the amounts otherwise available to be used. On February 11, 2008, the operating company entered into Amendment No. 1 to its Credit Agreement.
The amendment changed a number of Credit Agreement provisions, including reducing the capacity of the revolving credit facility from $20.0 million to $5.0 million. On
September 19, 2008, the operating company entered into Amendment No. 2 to its Credit Agreement. The amendment reduced the capacity of the revolving credit facility from
$5.0 million to $3.0 million

19

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 9Short Term Borrowings (Continued)

and
extended its maturity to July 23, 2011. As of and for the period ended September 30, 2008, and as of December 31, 2007, no balance was outstanding against the facility.

Note 10Debt

On July 23, 2007, the operating company entered into a $60.0 million, three-year Credit Agreement, the proceeds of which were used to finance a
one-time distribution to its members. The principal amount borrowed bore interest at a variable rate based, at the Company's option, on (i) the one, two, three, nine or twelve-month
LIBOR rate plus 1.00%, or (ii) the higher of the lender's prime rate and the Federal Funds Rate. The principal amount was payable in full at the end of the three-year term, with no
penalty for prepayment. Approximately $0.1 million in debt issuance costs were incurred in association with this loan. Such costs have been recorded in prepaid expenses and other assets on the
consolidated statements of financial condition and are being amortized over the term of the loan.

On
February 11, 2008, the operating company entered into Amendment No. 1 to the Credit Agreement. The agreement, as amended, required the operating company to maintain
assets under management of at least $15.0 billion and generate consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined, of at least
$40.0 million in any consecutive four fiscal quarterly periods. Pursuant to the terms of the amended agreement, term loan amortization was required beginning in any period when assets under
management were less than $20.0 billion and ending when assets under management was greater than $21.5 billion. Further, a 50% excess cash flow sweep was required if assets under
management were below $17.5 billion. Additionally, the LIBOR interest rate option was increased to LIBOR plus 1.50%. For the period from February 11, 2008 through July 23,
2008, the interest rate in effect was 6.91%, which was equal to the twelve-month LIBOR rate in effect at the time of the closing of the agreement of 5.41%, plus 1.50%. During the three months ended
June 30, 2008, the Company's assets under management fell below $20 billion. On June 30, 2008, the Company made a required amortization payment of $3.0 million.

On
September 19, 2008, the operating company entered into Amendment No. 2 to its Credit Agreement. The agreement, as amended, requires the operating company to maintain
assets under management of at least $12.0 billion and to make minimum quarterly amortization payments of $2.0 million until maturity, which was extended to July 23, 2011.
Additionally, the LIBOR interest rate option was increased to LIBOR plus 1.75% and the EBITDA financial covenant stipulated in Amendment No. 1 was eliminated. The excess cash flow sweep was
also increased to 75% of excess cash flow. On September 22, 2008, the Company made a required amortization payment of $5.0 million as a condition
precedent to the effectiveness of this amendment. On September 30, 2008, the Company made a quarterly amortization payment of $5.0 million.

Note 11Interest Rate Swap

The Company manages its exposure to changes in market rates of interest. The Company's use of derivative instruments is limited to an interest rate swap used to manage the interest rate
exposure related to its Credit Agreement. The Company monitors its position and the credit rating of the counterparty and does not anticipate non-performance by such counterparty.

On
February 28, 2008, the operating company entered into a $60.0 million notional amount interest rate swap agreement that commenced on July 23, 2008. The swap,
which expires July 23, 2010,

20

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 11Interest Rate Swap (Continued)

obligates
the operating company to pay a 2.825% fixed rate of interest on the notional amount and requires the counterparty to pay the operating company a floating interest rate based on the monthly
LIBOR interest rate. The spread on the Credit Agreement is in addition to these amounts.

Concurrently
with the amortization of the Credit Agreement described above, the Company executed a $13.0 million reduction in the notional amount of its interest rate swap. The
proceeds received from the counterparty in exchange for these reductions were less than $0.1 million for both the three and nine months ended September 30, 2008.

During
the three months ended September 30, 2008, the Company changed the designation of its swap agreement from a cash flow hedge to a trading derivative. Accordingly, the
Company reclassified the cumulative changes in fair value related to this swap from accumulated other comprehensive income to other income/(expense). Additionally, the Company recorded all subsequent
changes to the swap's fair
value as a component of other income/(expense). For the three and nine months ended September 30, 2008, the Company recognized approximately $0.3 million in other income associated with
these adjustments.

Note 12Income Taxes

The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes. Neither it nor the Company's other consolidated subsidiaries has
made a provision for federal or state income taxes because it is the personal responsibility of each of these entities' members (including the Company) to separately report their proportionate share
of the respective entity's taxable income or loss. The operating company has made a provision for New York City UBT. Subsequent to the offering and reorganization on October 30, 2007, the
Company, as a "C" corporation under the Internal Revenue Code, is liable for federal, state and local taxes on the income derived from its economic interest in its operating company, which is net of
UBT. Correspondingly, in its consolidated financial statements, the Company reports both the operating company's provision for UBT as well as its provision for federal, state and local corporate
taxes. The components of the provision for income taxes are as follows:

For the Three Months
Ended September 30,2008

2007(in thousands)Current Provision:Unincorporated Business Taxes

$
824

$
1,317Local Corporate Tax


(3
)

State Corporate Tax


(2
)

Federal Corporate Tax


(20
)

Total Current Provision

$
799

$
1,317


21

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 12Income Taxes (Continued)



For the Three Months
Ended September 30,2008

2007(in thousands)Deferred Provision:Unincorporated Business Taxes

$
(55
)
$
(48
)Local Corporate Tax


50


State Corporate Tax


116


Federal Corporate Tax


334


Total Deferred Provision

$
445

$
(48
)Deferred Income Tax Valuation Allowance


62,720


Total Provision for Income Taxes

$
63,964

$
1,269




For the Nine Months
Ended September 30,2008

2007(in thousands)Current Provision:Unincorporated Business Taxes

$
2,758

$
3,918Local Corporate Tax


(3
)

State Corporate Tax


(2
)

Federal Corporate Tax


(20
)

Total Current Provision

$
2,733

$
3,918Deferred Provision:Unincorporated Business Taxes

$
(164
)
$
(42
)Local Corporate Tax


176


State Corporate Tax


338


Federal Corporate Tax


1,159


Total Deferred Provision

$
1,509

$
(42
)Deferred Income Tax Valuation Allowance


62,720


Total Provision for Income Taxes

$
66,962

$
3,876


Prior
to October 30, 2007, the operating company was a cash basis taxpayer. As the result of the Company's acquisition of membership units in conjunction with the offering, the
operating company was required to become an accrual basis taxpayer. Pursuant to Section 481 of the Internal Revenue Code, the cumulative difference between the two methods of taxpaying are
amortizable over four years. These differences generated approximately $0.5 and $0.7 million in deferred tax liabilities as of September 30, 2008 and December 31, 2007,
respectively. Such amounts are recorded in other liabilities in the consolidated statements of financial condition.

The
acquisition of the operating company membership units noted above has allowed the Company to make an election under Section 754 of the Internal Revenue Code to step up its tax
basis

22

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 12Income Taxes (Continued)

in
the net assets acquired. This step up is deductible for tax purposes over a 15-year period. Based on the net proceeds of the offering and tax basis of the operating company as of
October 30, 2007, this election gave rise to a deferred tax asset of approximately $68.7 million. Pursuant to a Tax Receivable Agreement signed between the members of the operating
company and the Company, 85% of the cash savings generated by this election will be distributed to the selling shareholders upon this benefit's realization.

At
September 30, 2008, the Company evaluated the asset associated with this election and determined that, after weighing both positive and negative evidence, a portion of its
benefits were more likely than not to go unrealized due to estimates of future taxable income. Correspondingly, the Company established a $62.7 million valuation allowance to reduce the net
deferred tax asset to an amount more likely than not to be realized. This deferred tax asset remains available to the Company and can be used to reduce taxable income in future years. The Company
similarly reduced the associated liability to selling shareholders to reflect this change in the estimated realization of the asset. The Company recorded an approximate $53.3 million credit to
other income associated with the reduction in the liability to selling shareholders on September 30, 2008.

As
of September 30, 2008 and December 31, 2007, the net value of this deferred tax asset was approximately $3.8 million and $68.2 million, respectively. As of
September 30, 2008 and December 31, 2007, the liability to selling shareholders was approximately $4.7 million and $58.4 million, respectively.

For
the three and nine months ended September 30, 2008, the Company's income, derived solely from its economic interest in its operating company, was determined as follows:

For the Three
Months Ended
September 30, 2008(in thousands)Income Before Taxes and Non-Controlling Interests

$
63,611Unincorporated Business Taxes


(769
)Non-Controlling Interests


(8,357
)Income Before Corporate Income Taxes

$
54,485




For the Nine
Months Ended
September 30, 2008(in thousands)Income Before Taxes and Non-Controlling Interests

$
90,752Unincorporated Business Taxes


(2,594
)Non-Controlling Interests


(30,900
)Income Before Corporate Income Taxes

$
57,258


23

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 12Income Taxes (Continued)

In September 2006, the Financial Accounting Standards Board issued Interpretation No. 48,Accounting for Uncertainty in Income
Taxes("FIN 48"). FIN 48 establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax return positions in financial
statements. It is the Company's policy to recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision. For the three and nine months ended
September 30, 2008 and 2007, no such expenses were recognized, and as of September 30, 2008 and December 31, 2007, no accruals were recorded.

The
Company and the operating company are generally no longer subject to U.S federal, or state and local income tax examinations by tax authorities for any year prior to 2004. All tax
years subsequent to this date are considered open and subject to examination by tax authorities.

Note 13Investments in Marketable Securities

Investments in marketable securities and securities sold short consisted of the following at September 30, 2008:

Cost

Unrealized
Gain/(Loss)

Fair Value(in thousands)Equities

$
42,055

$
(11,115
)
$
30,940




Cost

Unrealized
Gain/(Loss)

Fair Value(in thousands)Equity Securities Sold Short

$
4,335

$
(942
)
$
3,393


Investments
in marketable securities and securities sold short consisted of the following at December 31, 2007:

Cost

Unrealized
Gain/(Loss)

Fair Value(in thousands)Equities

$
28,738

$
(1,273
)
$
27,465




Cost

Unrealized
Gain/(Loss)

Fair Value(in thousands)Equity Securities Sold Short

$
1,047

$
(19
)
$
1,028


Note 14Members' Equity Interests of Operating Company

Prior to March 31, 2007, all operating company ownership interests were required to be repurchased in the event of the holder's death or, if applicable, termination of employment.
These

24

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 14Members' Equity Interests of Operating Company (Continued)

redemption
features caused all of the operating company's units to be classified as liabilities as of the effective date of FAS 150 with respect to the operating company, which was
July 1, 2003.

Prior
to March 31, 2007, distributions made with respect to compensatory units were classified as compensation and benefits expense. Incremental changes to these units' redemption
values subsequent to the grant date were also included as a component of compensation and benefits expense at each reporting period. For the operating company's non-compensatory units
(capital units), distributions and incremental changes in the net liability associated with these units' redemption values have been recorded as components of interest on mandatorily redeemable units
in the consolidated statements of operations for all periods prior to March 31, 2007.

The
Operating Agreement was amended as of March 31, 2007 to eliminate the operating company's obligation to redeem units under any circumstance. As a result, all units that were
categorized as liabilities in the consolidated financial statements were reclassified as equity as of March 31, 2007. Subsequent to this date, distributions paid on unit-based
compensation and incremental changes to these units' value are not considered a component of compensation and benefits expense and are instead recorded as a direct reduction of undistributed earnings.
As of March 31, 2007, the operating company accelerated the vesting of all compensatory units then subject to vesting. The one-time charge associated with this acceleration,
approximately $65.0 million, was recorded on March 31, 2007.

Compensation
and benefits expense associated with the operating company's compensatory units is comprised of the following:

For the Three Months
Ended September 30,2008

2007(in thousands)Distributions on Compensatory Units

$


$
Change in Redemption Value of Compensatory Units





Acceleration of Vesting of Compensatory Units





Other Non-Cash Compensation


272


Total Compensation and Benefits Expense

$
272

$





For the Nine Months
Ended September 30,2008

2007(in thousands)Distributions on Compensatory Units

$


$
12,087Change in Redemption Value of Compensatory Units





15,969Acceleration of Vesting of Compensatory Units





64,968Other Non-Cash Compensation


905


1,950Total Compensation and Benefits Expense

$
905

$
94,974


25

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 14Members' Equity Interests of Operating Company (Continued)

For
the three months ended September 30, 2008 and 2007, the operating company granted no options to purchase units pursuant to the Pzena Investment Management, LLC 2006
Equity Incentive Plan. For the nine months ended September 30, 2008 and 2007, the Company granted 446,000 and 645,000 such options, respectively. The options had varying vesting schedules and
were issued at strike prices equal to the assessed fair market value per unit at the time of award issuance. The Company determined that the total grant-date fair value of the options
awarded during the nine months ended September 30, 2008 and 2007 was approximately $1.2 million and $2.0 million, respectively, using the Black-Scholes option pricing model. The
weighted-average grant date fair values for options issued during the nine months ended September 30, 2008 and 2007 were $2.64 and $3.02, respectively.

On
January 1, 2008, the operating company granted 13,000 restricted Class B units to certain members pursuant to the Pzena Investment Management, LLC 2006 Equity
Incentive Plan. On January 1, 2008, the operating company also issued 89,826 phantom Class B units as part of its Bonus Plan. These grants each vest ratably over a four-year
period commencing January 1, 2008.

As
of March 31, 2007, the operating company accelerated the vesting of all options then subject to vesting. The non-cash compensation charge associated with this
accelerated amortization was approximately $1.9 million.

Except
as otherwise provided by law, the liability of a member of the operating company is limited to the amount of its capital account. A member may transfer or assign all, or any part
of, its membership interest to any other party (a "Transferee"). A Transferee of such membership interest shall not become a member unless its membership in the operating company is unanimously
approved by the then existing member(s) in writing. Any Transferee admitted as a member shall succeed to the capital account or portion thereof transferred or assigned, as if no such transfer or
assignment had occurred.

On
February 13, 2007, the operating company accelerated the vesting of 285,000 of the 315,500 Class A units that were granted on January 1, 2007 pursuant to its 2006
Equity Incentive Plan and repurchased them from a departing employee. The charge associated with this acceleration was approximately $3.8 million and has been included in compensation and
benefits expense for the three months ended March 31, 2007.

On
July 17, 2007, the operating company effected a 5-for-1 unit split. All unit and per unit amounts have been adjusted to reflect this split.

Note 15Shareholders' Equity

The Company was incorporated in the State of Delaware on May 8, 2007. On May 10, 2007, the Company issued 100 shares of its common stock, par value $0.01 per share (the
"Old Common Stock"), for $100 to Richard S. Pzena, the sole director of the Company as of that date. On October 5, 2007, the Company effected a 100-for-6 reverse stock
split of all shares of its Old Common Stock then outstanding. All share amounts have been adjusted to reflect this split. As of the effectiveness of the amendment and restatement of the Company's
certificate of incorporation on October 30, 2007, each share of the Old Common Stock outstanding immediately prior to effectiveness was reclassified as one share of the Company's Class A
common stock, par value $0.01 per share.

26

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 15Shareholders' Equity (Continued)

On
October 30, 2007, the Company consummated an initial public offering of 6,100,000 shares of its Class A common stock, par value $0.01 per share, for net proceeds of
approximately $98.9 million, after payment of underwriting discounts and estimated offering expenses. These net proceeds were used to purchase 6,100,000 membership units of the operating
company, representing 9.5% of its then outstanding membership units, from its two outside investors and one former employee. Concurrently
with the consummation of the Company's initial public offering, the Operating Agreement of the operating company was amended and restated such that, among other things, (i) the Company became
the sole managing member of the operating company, (ii) the 6,100,000 membership units of the operating company that the Company acquired were reclassified as Class A units of the
operating company, (iii) an additional 11,118 Class A units were issued to the Company in respect of its issuance of 11,112 shares of Class A common stock to certain directors of
the Company on October 30, 2007, and contribution of the $100 initial investment the Company received in exchange for issuance of six shares of Class A common stock on May 10,
2007, and (iv) the holders of the remaining 90.5% of the outstanding membership units of the operating company were reclassified as Class B units of the operating company. Class A
and Class B units of the operating company have the same economic rights per unit. Accordingly, immediately following the consummation of the offering and reorganization, the holders of
Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately 9.5% and 90.5%, respectively, of the economic interests in the
operations of the business. As of September 30, 2008, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held
approximately 9.6% and 90.4%, respectively, of the economic interests in the operations of the business.

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

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

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

27

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 15Shareholders' Equity (Continued)

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

The
acquisition of the operating company's membership interests by the Company has been treated as a reorganization of entities under common control pursuant to the guidance set forth in
FTB 85-5. Accordingly, the net assets assumed by the Company through the offering have been reported at the operating company's historical cost basis. As a result of these transactions, as
of and subsequent to October 30, 2007, (i) the Company has consolidated the financial results of the operating company with its own and reflected the membership interest in it that it
does not own as a non-controlling interest in its consolidated financial statements, and (ii) the Company's income will be generated by its economic interest in the operating
company's net income.

This
acquisition of membership units in the operating company has allowed the Company to make an election to step up its tax basis in the net assets acquired. This step up is deductible
for tax purposes over a 15-year period. Pursuant to a tax receivable agreement between the Company and the operating company, 85% of the benefits of this election will be returned to the
selling unitholders of the operating company as they are realized.

The
Company did not initially record a non-controlling interest associated with the acquisition of its operating company, as the post offering net equity of the operating
company was less than zero. Pursuant to the guidance in EITF 95-7, an operating company non-controlling interest is recorded when the initial deficit that existed at
acquisition is extinguished.

On
March 4, 2008, the Company's Board of Directors declared a quarterly dividend of $0.11 per share of Class A common stock, paid on April 11, 2008 to shareholders
of record as of March 27, 2008.

On
June 3, 2008, the Company's Board of Directors declared a quarterly dividend of $0.11 per share of Class A common stock, paid on July 11, 2008 to shareholders of
record as of June 27, 2008.

On
September 3, 2008, the Company's Board of Directors declared a quarterly dividend of $0.05 per share of Class A common stock, payable on October 10, 2008 to
shareholders of record as of September 26, 2008. The liability associated with this payment is recorded in dividends payable on the consolidated statement of financial condition as of
September 30, 2008.

Note 16Subsequent Events

On October 28, 2008, the operating company entered into Amendment No. 3 to its Credit Agreement. This amendment provided for the following changes to the Credit Agreement,
among others:



28

---



PZENA INVESTMENT MANAGEMENT, INC.
(Prior to October 30, 2007Pzena Investment Management, LLC)

Unaudited Notes to the Consolidated Financial Statements (Continued)

Note 16Subsequent Events (Continued)



Conditions
precedent to the execution of this amendment included, among others, (i) the repayment by the operating company of $25.0 million of the $47.0 million
principal amount outstanding under the Credit Agreement as of October 28, 2008, and (ii) the grant by the operating company and one of its subsidiaries of a security interest in their
accounts receivable.

In
order to fund the $25.0 million repayment by the operating company, the Company used $9.0 million in cash reserves and the proceeds from the issuance by the operating
company of an aggregate of $16.0 million principal amount of Senior Subordinated Notes (collectively, the "Notes") to entities established by Richard Pzena, the Company's Chief Executive
Officer, for the benefit of certain of his family members, an entity controlled by a Company director, and a former employee. The issuance of these Notes was approved by the three independent members
of the Company's Board of Directors.

The
Notes were issued on October 28, 2008. Each of these Notes is unsecured, has a ten-year maturity and bears interest at 6.30% per annum. The provisions of the Notes
include a restricted payments covenant (including dividends), a prohibition on incurring indebtedness which is not subordinated to the Notes, and events of default based on failure to make payments,
bankruptcy, change of control and acceleration of material indebtedness. In addition, the Notes are subordinated to the repayment in full of the loans under the Credit Agreement.

In
October 2008, the selling unitholders agreed to waive any payments that the Company is or will be required to make to them for the 2008 and 2009 tax years pursuant to the Tax
Receivable Agreement.

On
October 31, 2008, the Company's assets under management were approximately $11.9 billion.

29

---





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

Overview

We are an investment management firm that utilizes a classic value investment approach in each of our investment strategies. We
currently manage assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and international capital markets. At September 30, 2008,
our assets under management, or AUM, were $15.5 billion. We manage separate accounts on behalf of institutions and high net worth individuals and act as sub-investment adviser for a
variety of SEC-registered mutual funds and offshore funds.

We
function as the holding company through which the business of our operating company, Pzena Investment Management, LLC, is conducted. Following our initial public offering and
reorganization on October 30, 2007, we became the sole managing member of Pzena Investment Management, LLC. As such, we now control its business and affairs and, therefore, consolidate
its financial results with ours. In light of our employees' and other investors' collective membership interest in our operating company, we reflect their ownership as a non-controlling
interest in our consolidated financial statements. As a result, subsequent to October 30, 2007, our income is generated by our
economic interest in our operating company's net income. Results for the periods prior to October 30, 2007 reflect solely the operations of Pzena Investment Management, LLC. As of
September 30, 2008, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately 9.6% and 90.4%,
respectively, of the economic interests in the operations of the business.

Revenue

We generate revenue from management fees and incentive fees, which we collectively refer to as our advisory fees, by managing assets on
behalf of separate accounts and acting as a sub-investment adviser for mutual funds and certain other investment funds. Our advisory fee income is recognized over the period in which
investment management services are provided. Pursuant to the preferred accounting method under Emerging Issues Task Force Issue D-96,Accounting for Management Fees
Based on a Formula("EITF D-96"), income from incentive fees is recorded at the conclusion of the contractual performance period, when all contingencies are
resolved.

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



For
our separately-managed accounts, we are paid fees according to a schedule, which varies by investment strategy. The substantial majority of these accounts pay us management fees
pursuant to a

30

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schedule
in which the rate we earn on the AUM declines as the amount of AUM increases, subject to a minimum fee to manage each account. Certain of these clients pay us fees according to the
performance of their accounts relative to certain agreed-upon benchmarks, which results in a slightly lower base fee, but allows us to earn higher fees if the relevant investment strategy
outperforms the agreed-upon benchmark.

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

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

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



Expenses

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



Compensation and Benefits Expense

Our largest expense is compensation and benefits, which includes the salaries, bonuses, equity-based compensation and related benefits
and payroll costs attributable to our members and employees. All compensation and benefits packages, including those of our executive officers, are benchmarked against relevant industry and geographic
peer groups in order to attract and retain qualified personnel. We have experienced a general decrease in cash compensation and benefits expense commensurate with lower revenue-based variable
compensation costs and a decline in headcount. The table included

31

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in
the section below describes the components of our compensation expense for the three and nine months ended September 30, 2008 and 2007:

For the Three Months
Ended September 30,2008

2007(in thousands)Cash Compensation and Other Benefits

$
7,888

$
8,807Distributions on Compensatory Units





Change in Redemption Value of Compensatory Units





Acceleration of Vesting of Compensatory Units





Other Non-Cash Compensation


272


Total Compensation and Benefits Expense

$
8,160

$
8,807




For the Nine Months
Ended September 30,2008

2007(in thousands)Cash Compensation and Other Benefits

$
24,868

$
26,239Distributions on Compensatory Units





12,087Change in Redemption Value of Compensatory Units





15,969Acceleration of Vesting of Compensatory Units





64,968Other Non-Cash Compensation


905


1,950Total Compensation and Benefits Expense

$
25,773

$
121,213


As
discussed further in Note 14 to our consolidated financial statements, the operating company issued compensatory units to employees and members which had redemption features
that required them to be classified as liabilities in the consolidated statements of financial condition prior to March 31, 2007. Until this date, distributions on the compensatory units
outstanding, and changes in these units' redemption values, were recorded as compensation and benefits expense. As of March 31, 2007, the effective date of the amendment to the Operating
Agreement to eliminate the operating company's obligation to redeem units under any circumstance, the unit-based compensation awards previously categorized as liabilities were reclassified
as equity. Further, as of March 31, 2007, the operating company accelerated the vesting of all compensatory units then subject to vesting. Subsequent to this date, distributions on these units
are not considered a component of compensation and benefits expense and are instead recorded as a direct reduction of members' capital.

On
January 1, 2007, we adopted the PIM LLC 2006 Equity Incentive Plan, pursuant to which we have issued restricted units, and options to acquire units, in our operating
company, both of which vest ratably over a four-year period. We used a fair-value method in recording the compensation expense associated with the granting of these restricted
units, and options to acquire units, to new and existing members under the PIM LLC 2006 Equity Incentive Plan. Under this method, compensation expense is measured at the grant date based on the
estimated fair value of the award and is recognized over the award's vesting period. The fair value of the units is be determined by reference to the market price of our Class A common stock on
the date of grant, since these units are exchangeable for shares of our Class A common stock on a one-for-one basis. The fair value of the options to acquire units will
be determined by using an appropriate option pricing model on the grant date.

On
January 1, 2007, we instituted a deferred compensation plan, in which employees who earn in excess of $600,000 per year are required to defer a portion of their compensation in
excess of this amount. These deferred amounts may be invested, at the employee's discretion, in certain of our investment strategies, restricted phantom units of our operating company, or money market
funds. All

32

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of
these deferred amounts vest ratably over a four-year period beginning January 1, 2008 and, therefore, will be reflected in our expenses over this period. Accordingly, our 2007
cash compensation expense was lower than it would have been had we not instituted a deferred compensation plan. For the four-year period beginning January 1, 2008, we expect the
non-cash portion of our compensation expense associated with this deferred compensation plan to increase each successive year to the extent that these and subsequently deferred amounts are
amortized through income.

General and Administrative Expenses

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

As
a result of our offering on October 30, 2007, we have incurred and expect to incur, additional expenses associated with being a public company for, among other things, director
and officer insurance, director fees, SEC reporting and compliance (including Sarbanes-Oxley compliance), transfer agent fees, professional fees and other similar expenses. These additional expenses
have and will reduce our net income.

Other Income/(Expense)

Other income/(expense) is derived primarily from interest income generated on our excess cash balances, investment income arising from
our investments in various private investment vehicles that we employ to incubate new strategies, interest expense on our amended Credit Agreement, and mark-to-market movements
on our swap agreement. Other income/(expense) is also affected by changes in our estimates of the liability incurred to our selling shareholders subsequent to our reorganization and offering on
October 30, 2007. We
expect the interest and investment components of other income, in the aggregate, to fluctuate based on market conditions and the performance of our investment strategies.

Non-Controlling Interests

Our operating company has historically consolidated the results of operations of the private investment partnerships over which we
exercise a controlling influence. After our reorganization, we became the sole managing member of our operating company and now control its business and affairs and, therefore, consolidate its
financial results with ours. In light of our employees' and outside investors' interest in our operating company, we have reflected their membership interests as a non-controlling interest
in our consolidated financial statements. As a result, subsequent to October 30, 2007, our income is generated by our economic interest in our operating company's net income. As of
September 30, 2008, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately 9.6% and 90.4%,
respectively, of the economic interests in the operations of the business.

Provision for Income Tax

While our operating company has historically not been subject to U.S. federal and certain state income taxes, it has been subject to
New York City UBT. As a result of our reorganization, we are now subject to taxes applicable to C-corporations. As such, our effective tax rate, and the absolute dollar amount of our tax
expense, has increased as a result of our reorganization. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

33

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Interest on Mandatorily Redeemable Units

Until the amendment of its Operating Agreement on March 31, 2007, the operating company recorded a net liability for its capital
units equal to the accumulated redemption value as of the balance sheet date of all such outstanding units. This liability also included any undistributed earnings attributable to such units. As such,
interest on mandatorily redeemable units included distributions made on capital units outstanding, as well as the incremental increases or decreases in the redemption values of these units.
Distributions were generally paid on the operating company's income before non-cash compensation charges. Redemption values were determined based on fair value.

Prior
to March 31, 2007, capital units were required to be redeemed on the death of a member. Effective March 31, 2007, the operating company's Operating Agreement was
amended to eliminate its obligation to redeem units under any circumstance. Since all capital units thereafter had only equity characteristics, neither distributions, nor subsequent incremental
changes to these units' value, were charged against income subsequent to the effective date of the amendment. The $16.6 million charge recorded in 2007 represents the distributions and
incremental changes to these units' fair value through March 31, 2007.

Operating Results

General

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

The
global financial crisis that began in 2007 worsened during the third quarter of 2008, and was characterized by volatility of the worldwide capital and credit markets, falling real
estate prices, and rising unemployment, all of which have had a negative impact on the financial markets and, therefore, the performance of our investment strategies. Our AUM declined by
$13.4 billion, or 46.4%, from $28.9 billion at September 30, 2007, to $15.5 billion at September 30, 2008, due to negative performance
of $9.6 billion and net outflows of $3.8 billion. We experienced net outflows of AUM from our sub-advised accounts of $1.0 billion for the nine months ended
September 30, 2008, attributable in part to the weaker performance of our sub-advised funds compared to that of our peers. Similarly, we experienced net outflows of
$1.0 billion in our separately-managed accounts for the nine months ended September 30, 2008. Prior to the latter half of 2007, our AUM had grown significantly as a result of several
factors including, among others, the exceptional investment performance for the since inception, five-year and three-year periods for each of our investment strategies.

Our
average AUM fluctuates based on changes in the market value of accounts advised and sub-advised by us and on fund flows. Accordingly, revenues during 2008 are expected to
decline from the comparable 2007 periods to the extent that the markets continue to be unfavorable for our value investment strategy, and results in our inability to increase our AUM. A decrease in
revenue results in lower operating income and net income.

We
expect that we will experience continued pressure on our operating margins in the future if AUM continues to decline. We expect our operating expenses, exclusive of
unit-based compensation charges, to decline modestly in 2008 from the comparable 2007 periods, as we identify and implement potential cost savings opportunities.

34

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Assets Under Management and Flows

The change in AUM in our separately-managed accounts and our sub-advised accounts for the three and nine months ended
September 30, 2008 and 2007 is described below:

For the Three
Months
Ended September 30,Assets Under Management

2008

2007(in billions)Separately-Managed AccountsBeginning of Period Assets

$
11.4

$
16.5Net Flows


(1.4
)

0.7Appreciation


(0.6
)

(1.2
)End of Period Assets

$
9.4

$
16.0Sub-Advised AccountsBeginning of Period Assets

$
7.1

$
14.1Net Flows


(0.3
)

(0.3
)Appreciation


(0.7
)

(0.9
)End of Period Assets

$
6.1

$
12.9TotalBeginning of Period Assets

$
18.5

$
30.6Net Flows


(1.7
)

0.4Appreciation


(1.3
)

(2.1
)End of Period Assets

$
15.5

$
28.9




For the Nine
Months
Ended September 30,Assets Under Management

2008

2007(in billions)Separately-Managed AccountsBeginning of Period Assets

$
14.0

$
14.5Net Flows


(1.0
)

1.5Appreciation


(3.6
)

0.0End of Period Assets

$
9.4

$
16.0Sub-Advised AccountsBeginning of Period Assets

$
9.6

$
12.8Net Flows


(1.0
)

0.2Appreciation


(2.5
)

(0.1
)End of Period Assets

$
6.1

$
12.9TotalBeginning of Period Assets

$
23.6

$
27.3Net Flows


(2.0
)

1.7Appreciation


(6.1
)

(0.1
)End of Period Assets

$
15.5

$
28.9


35

---



At September 30, 2008, our $15.5 billion of AUM were invested in eleven value-oriented investment strategies which represent distinct capitalization segments of the U.S and
international markets. The following table describes the allocation of our AUM as of September 30, 2008 among our seven largest investment strategies and the aggregate of our other investment
strategies:

Investment Strategy

AUM at
September 30, 2008(in billions)Large Cap Value

$
8.1Value Service


3.0Global Value


2.5Small Cap Value


0.8International Value


0.4Mid Cap Value


0.3All Cap Value


0.1Other Strategies(1)


0.3Total

$
15.5






Three Months Ended September 30, 2008 versus September 30, 2007

At September 30, 2008, the Company managed $15.5 billion in total assets, a decrease of $13.4 billion, or 46.4%,
from $28.9 billion at September 30, 2007. The decrease year-over-year in AUM was due largely to $9.6 billion in market depreciation and net outflows of
$3.8 billion.

The
Company managed $9.4 billion in separately-managed accounts and $6.1 billion in sub-advised accounts, for a total of $15.5 billion in assets at
September 30, 2008. At September 30, 2007, the Company managed $16.0 billion in separately-managed accounts and $12.9 billion in sub-advised accounts, for a
total of $28.9 billion in assets. Assets in separately-managed accounts decreased by $2.0 billion, or 17.5%, during the three months ended September 30, 2008, due to
$1.4 billion in net outflows and $0.6 billion in market depreciation. This compared to a decrease in separately managed accounts of $0.5 billion, or 3.0%, during the three months
ended September 30, 2007, which resulted from $1.2 billion in market depreciation, offset by $0.7 billion of net inflows. Assets in our sub-advised funds decreased by
$1.0 billion, or 14.1%, during the three months ended September 30, 2008, as a result of $0.7 billion of market depreciation and $0.3 in net outflows. This compared to a decrease
in sub-advised accounts of $1.2 billion, or 8.5%, during the three months ended September 30, 2007, due to $0.9 billion of market depreciation and $0.3 billion
in net outflows.

Nine Months Ended September 30, 2008 versus September 30, 2007

At September 30, 2008, the Company managed $15.5 billion in total assets, a decrease of $13.4 billion, or 46.4%,
from $28.9 billion at September 30, 2007. The decrease year-over-year in AUM was due largely to $9.6 billion in market depreciation and net outflows of
$3.8 billion.

The
Company managed $9.4 billion in separately-managed accounts and $6.1 billion in sub-advised accounts, for a total of $15.5 billion in assets at
September 30, 2008. At September 30, 2007, the Company managed $16.0 billion in separately-managed accounts and $12.9 billion in sub-advised accounts, for a
total of $28.9 billion in assets. Assets in separately-managed accounts decreased by $4.6 billion, or 32.9%, during the nine months ended September 30, 2008, due to
$3.6 billion in market depreciation and $1.0 billion in net outflows. This compared to an increase in separately-managed accounts of $1.5 billion, or 10.3%, during the nine months
ended September 30, 2007, which resulted

36

---



from
$1.5 billion in net inflows. Assets in our sub-advised funds decreased by $3.5 billion or 36.5%, during the nine months ended September 30, 2008, as a result of
$2.5 billion of market depreciation and $1.0 billion in net outflows. This compared to an increase in sub-advised accounts of $0.1 billion, or 0.8%, during the nine
months ended September 30, 2007, due to $0.1 billion of market depreciation, offset by $0.2 billion of net inflows.

At
September 30, 2008, separately managed accounts represented 60.6% of our total AUM, as compared to 55.4% at September 30, 2007. At September 30, 2008, our Global
Value and International
Value investment strategies accounted for 18.7% of our AUM, compared to 12.1% at September 30, 2007.

Revenues

Our revenues from advisory fees earned on our separately-managed accounts and our sub-advised accounts for the three and
nine months ended September 30, 2008 and 2007 is described below:

For the Three Months
Ended September 30,Revenue

2008

2007(in millions)Separately-Managed Accounts

$
18.2

$
26.6Sub-Advised Accounts


6.9


13.6Total

$
25.1

$
40.2




For the Nine Months
Ended September 30,Revenue

2008

2007(in millions)Separately-Managed Accounts

$
60.4

$
75.6Sub-Advised Accounts


23.0


36.8Total

$
83.4

$
112.4


Three Months Ended September 30, 2008 versus September 30, 2007

Our total revenue decreased $15.1 million, or 37.6%, to $25.1 million for the three months ended September 30,
2008, from $40.2 million for the three months ended September 30, 2007. This change was driven primarily by a reduction in weighted-average AUM, which decreased $11.8 billion, or
40.1%, to $17.6 billion for the three months ended September 30, 2008 from $29.4 billion for the three months ended September 30, 2007, offset modestly by an increase in
our weighted average fees.

Our
weighted average fees were 0.569% and 0.547% for the three months ended September 30, 2008 and 2007, respectively. Weighted-average assets in separately-managed accounts
decreased $5.2 billion, or 32.5%, to $10.8 billion for the three months ended September 30, 2008, from $16.0 billion for the three months ended September 30, 2007,
and had weighted average fees of 0.671% and 0.663% for the three months ended September 30, 2008 and 2007, respectively. Weighted-average assets in sub-advised accounts decreased
$6.6 billion, or 49.3%, to $6.8 billion for the three months ended September 30, 2008, from $13.4 billion for the three months ended September 30, 2007, and had
weighted average fees of 0.406% and 0.408% for the three months ended September 30, 2008 and 2007, respectively.

Nine Months Ended September 30, 2008 versus September 30, 2007

Our total revenue decreased $29.0 million, or 25.8%, to $83.4 million for the nine months ended September 30,
2008, from $112.4 million for the nine months ended September 30, 2007. This change

37

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was
driven primarily by a reduction in weighted-average AUM, which decreased $9.0 billion, or 30.9%, to $20.1 billion for the nine months ended September 30, 2008, from
$29.1 billion for the nine months ended September 30, 2007, offset modestly by an increase in our weighted average fees.

Our
weighted average fees were 0.551% and 0.515% for the nine months ended September 30, 2008 and 2007, respectively. Weighted-average assets in separately-managed accounts
decreased $3.3 billion, or 21.0%, to $12.4 billion for the nine months ended September 30, 2008, from $15.7 billion for the nine months ended September 30, 2007, and
had weighted average fees of 0.650% and 0.643% for the nine months ended September 30, 2008 and 2007, respectively. Weighted-average assets in sub-advised accounts decreased
$5.7 billion, or 42.5%, to $7.7 billion for the nine months ended September 30, 2008, from $13.4 billion for the nine months ended September 30, 2007, and had
weighted average fees of 0.395% and 0.365% for the nine months ended September 30, 2008 and 2007, respectively.

Expenses

Our operating expenses are driven primarily by our compensation costs. The table below describes the components of our compensation
expense for the three and nine months ended September 30, 2008 and 2007. Much of the historical variability in our compensation costs had been driven by distributions made on our compensatory
units then outstanding, and the incremental increases or decreases in their redemption value subsequent to their grant date. As of March 31, 2007, these items are no longer reflected in
compensation expense.

For the Three Months Ended September 30,2008

2007(in thousands)Cash Compensation and Other Benefits

$
7,888

$
8,807Distributions on Compensatory Units





Change in Redemption Value of Compensatory Units





Acceleration of Vesting of Compensatory Units





Other Non-Cash Compensation


272


Total Compensation and Benefits Expense

$
8,160

$
8,807




For the Nine Months Ended September 30,2008

2007(in thousands)Cash Compensation and Other Benefits

$
24,868

$
26,239Distributions on Compensatory Units





12,087Change in Redemption Value of Compensatory Units





15,969Acceleration of Vesting of Compensatory Units





64,968Other Non-Cash Compensation


905


1,950Total Compensation and Benefits Expense

$
25,773

$
121,213


Three Months Ended September 30, 2008 versus September 30, 2007

Total operating expenses decreased by $1.0 million, or 8.5%, to $10.8 million for the three months ended
September 30, 2008, from $11.8 million for the three months ended September 30, 2007, primarily as a result of lower revenue-based variable compensation costs and decreased
professional and data systems costs arising from ongoing efforts to reduce overall operating expenditures.

38

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Compensation
and benefits expense decreased by $0.6 million, or 6.8%, to $8.2 million for the three months ended September 30, 2008, from $8.8 million for the
three months ended September 30, 2007, primarily as a result of a reduction in variable compensation costs and staffing decreases, offset modestly by deferred compensation amortization, which
commenced on January 1, 2008.

General
and administrative expenses decreased by $0.4 million, or 13.3%, to $2.6 million for the three months ended September 30, 2008, from $3.0 million for
the three months ended September 30, 2007. This decrease was mainly attributable to a $0.3 million decrease in professional fees.

Nine Months Ended September 30, 2008 versus September 30, 2007

Total operating expenses decreased by $94.7 million, or 73.5%, to $34.1 million for the nine months ended
September 30, 2008, from $128.8 million for the nine months ended September 30, 2007. This decrease was primarily attributable to a decrease in compensation and benefits expense
resulting from the $65.0 million charge taken in March 2007 associated with the acceleration of compensatory unit vesting that was not replicated in 2008. This decrease was also attributable to
the amendment of the Operating Agreement, on March 31, 2007, that removed all mandatory redemption provisions related to our membership units.

Compensation
and benefits expense decreased by $95.4 million, or 78.7%, to $25.8 million for the nine months ended September 30, 2008, from $121.2 million for
the nine months ended September 30, 2007. This decrease was primarily attributable to the $94.6 million in unit-based compensation charges incurred in the nine months ended
September 30, 2007 that was not replicated in 2008.

General
and administrative expenses increased by $0.7 million, or 9.2%, to $8.3 million for the nine months ended September 30, 2008, from $7.6 million for
the nine months ended September 30, 2007. This increase was mainly attributable to a $0.4 million increase in professional and outside services fees and a $0.3 million increase in
insurance costs associated with our reorganization and ensuing status as a public company.

Other Income/(Expense)

Three Months Ended September 30, 2008 versus September 30, 2007

Other income/(expense) was income of $49.3 million for the third quarter of 2008 and consisted primarily of a
$53.3 million credit to other income associated with the reduction
in the liability to selling shareholders on September 30, 2008. This was partially offset by $4.0 million in losses related to the negative performance of our investments in our own
products. Other income/(expense) was an expense of $1.6 million for the three months ended September 30, 2007, and consisted primarily of $1.2 million in losses related to the
negative performance of our investments in our own products and $0.4 million in net interest expense.

Nine Months Ended September 30, 2008 versus September 30, 2007

Other income/(expense) was income of $41.5 million for the nine months ended September 30, 2008, and consisted primarily
of a $53.3 million credit to other income associated with the reduction in the liability to selling shareholders on September 30, 2008. This was partially offset by $11.0 million
in losses related to the negative performance of our investments in our own products. Other income/(expense) was income of $0.3 million for the nine months ended September 30, 2007, and
consisted primarily of net interest and dividend income, offset partially by the negative performance of our investments in our own products.

Provision for Income Taxes

Three Months Ended September 30, 2008 versus September 30, 2007

The provision for income taxes increased by $62.7 million, from $1.3 million for the three months ended
September 30, 2007, to $64.0 million for the three months ended September 30, 2008, due to the

39

---



establishment,
on September 30, 2008, of a $62.7 million valuation allowance assessed against the deferred tax asset recorded as part of our initial public offering. A comparison of the
effective tax rate for the three months ended September 30, 2008 to the effective tax rate for the three months ended September 30, 2007 is not meaningful due to the valuation allowance
and the effect of our liability for C-corporation taxation in 2008.

Nine Months Ended September 30, 2008 versus September 30, 2007

The provision for income taxes increased by $63.1 million, from $3.9 million for the nine months ended
September 30, 2007, to $67.0 million for the nine months ended September 30, 2008, due primarily to the establishment, on September 30, 2008, of a $62.7 million
valuation allowance assessed against the deferred tax asset recorded as part of our initial public offering. A comparison of the effective tax rate for the nine months ended September 30, 2008
to the effective tax rate for the nine months ended September 30, 2007 is not meaningful due to the effect of the valuation allowance and the effect of our liability for
C-corporation taxation in 2008, and the equity-based compensation charges of $65.0 million in 2007. This charge was not deductible for tax purposes.

Non-Controlling Interests

Three Months Ended September 30, 2008 versus September 30, 2007

Non-controlling interests were $8.4 million for the three months ended September 30, 2008, compared to a
negative $0.7 million for the three months ended September 30, 2007. This change primarily reflects our employees' and outside investors' interest in our operating company subsequent to
the consummation of our reorganization on October 30, 2007. This change also reflects, to a lesser extent, the impact to our non-controlling interests of the less favorable investment
performance of the private investment vehicles we manage during the three months ended September 30, 2008, compared to the three months ended September 30, 2007.

Nine Months Ended September 30, 2008 versus September 30, 2007

Non-controlling interests were $30.9 million for the nine months ended September 30, 2008, compared to a
negative $0.1 million for the nine months ended September 30, 2007. This change primarily reflects our employees' and outside investors' interest in our operating company subsequent to
the consummation of our reorganization on October 30, 2007. This
change also reflects, to a lesser extent, the impact to our non-controlling interests of the less favorable investment performance of the private investment vehicles we manage during the nine months
ended September 30, 2008, compared to the nine months ended September 30, 2007.

Interest on Mandatorily Redeemable Units

Three Months Ended September 30, 2008 versus September 30, 2007

There were no charges associated with interest on mandatorily redeemable units for the three months ended September 30, 2008 and
2007. As of March 31, 2007, the Operating Agreement was amended to remove all mandatory redemption provisions related to our membership units. The removal of these provisions caused our
membership units to be classified as equity, and neither distributions, nor subsequent changes to these units' value, were charged to income following the amendment.

Nine Months Ended September 30, 2008 versus September 30, 2007

Interest on mandatorily redeemable units decreased by $16.6 million to $0.0 million for the nine months ended
September 30, 2008, compared to $16.6 million for the nine months ended September 30, 2007. The decrease was due to the amendment of the Operating Agreement as of March 31,
2007 to remove all mandatory redemption provisions related to our membership units. The removal of these provisions caused our membership units to be classified as equity, and neither distributions,
nor subsequent changes to these units' value, were charged to income following the amendment.

40

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Liquidity and Capital Resources

Historically, the working capital needs of our business have primarily been met through cash generated by our operations. At
September 30, 2008, our cash and cash equivalents were $31.8 million, inclusive of $8.0 million in cash held by our consolidated investment partnerships. We expect that our cash
and liquidity requirements in the next twelve months, and over the long term, will be met primarily through cash generated by our operating company's operations. On July 23, 2007, our operating
company borrowed $60.0 million pursuant to a three-year term loan facility (the "Credit Agreement"), the proceeds of which were used to finance a special one-time
distribution to the members of our operating company as of that date. Concurrently, our operating company also obtained a $20.0 million revolving credit facility to finance our
short-term working capital needs. On February 11, 2008, our operating company entered into Amendment No. 1 to the Credit Agreement. The amendment changed a number of Credit
Agreement provisions, including: (i) the minimum AUM financial covenant was reduced from $20.0 billion to $15.0 billion; (ii) the minimum Earnings Before Interest, Taxes,
Depreciation and Amortization, or EBITDA, financial covenant for each four quarter period was reduced from $60.0 million to $40.0 million; (iii) the capacity of the revolving
credit facility was reduced from $20.0 million to $5.0 million; and (iv) the interest rate was increased from LIBOR plus 1.0% to LIBOR plus 1.5%. In addition, two mandatory
prepayment provisions were added: (a) term loan amortization was required beginning in any period when AUM was less than $20 billion and ending when AUM was greater than
$21.5 billion, and (b) a 50% excess cash flow sweep was required if AUM was below $17.5 billion. During the three months ended June 30, 2008, our assets under management
fell below $20 billion. Pursuant to the provisions of the term loan, as amended, our operating company was required to make an amortization payment of $3.0 million on June 30,
2008.

On
September 19, 2008, our operating company entered into Amendment No. 2 to its Credit Agreement. The agreement, as amended, required the operating company to maintain
assets under management of at least $12.0 billion and to make minimum quarterly amortization payments of $2.0 million until maturity, which was extended to July 23, 2011.
Additionally, the LIBOR interest rate option was increased to LIBOR plus 1.75% and the EBITDA financial covenant stipulated in Amendment No.1
was eliminated. The excess cash flow sweep was also increased to 75% of excess cash flow. On September 22, 2008, our operating company made a required amortization payment of
$5.0 million as a condition precedent to the effectiveness of this amendment. On September 30, 2008, our operating company made a quarterly amortization payment of $5.0 million.

On
October 28, 2008, our operating company entered into Amendment No. 3 to its Credit Agreement. This amendment provided for the following changes to the Credit Agreement,
among others:



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Conditions
precedent to the execution of this amendment included, among others, (i) the repayment by the operating company of $25.0 million of the $47.0 million
principal amount outstanding under the Credit Agreement as of October 28, 2008, and (ii) the grant by the operating company and one of its subsidiaries of a security interest in their
accounts receivable.

In
order to fund the $25.0 million repayment by our operating company, we used $9.0 million in cash reserves and the proceeds from the issuance of an aggregate of
$16.0 million principal amount of Senior Subordinated Notes (collectively, the "Notes") to entities established by Richard Pzena, our Company's Chief Executive Officer, for the benefit of
certain of his family members, an entity controlled by a Company director, and a former employee.

The
Notes were issued on October 28, 2008. Each of these Notes is unsecured, has a ten-year maturity and bears interest at 6.30% per annum. The provisions of the Notes
include a restricted payments covenant (including dividend payments), a prohibition on incurring indebtedness which is not subordinated to the Notes, and events of default based on failure to make
payments, bankruptcy, change of control and acceleration of material indebtedness. In addition, the Notes are subordinated to the repayment in full of the loans under the Credit Agreement.

We
expect to fund the working capital needs of our business in the next twelve months, and over the long term, primarily through cash generated from operations.

Prior
to its reorganization on October 30, 2007, Pzena Investment Management, LLC made a distribution to its existing members representing all of the remaining
undistributed earnings generated through the date of the reorganization, less any amounts required to fund its working capital needs.

We
anticipate that distributions to the members of our operating company, which consisted of 26 of our employees as of September 30, 2008, two outside investors and us, will
continue to be a material use of our cash resources and will vary in amount and timing based on our operating results and dividend policy. We are a holding company and have no material assets other
than our ownership of membership interests in our operating company. As a result, we depend upon distributions from our operating company to pay any dividends we may declare to our Class A
stockholders. We cause our operating company to make distributions to us in an amount sufficient to cover such dividends, if any, declared by us. Our dividend policy has certain risks and limitations,
particularly with respect to liquidity. Although we may pay dividends according to our dividend policy, we may not pay dividends according to our policy, or at all, if, among other things, we do not
have the cash necessary to pay our
intended dividends. Under the terms and conditions of our amended Credit Agreement and Senior Subordinated Notes, we have suspended our regular dividend payment to shareholders. In the future, our
board of directors may, in its discretion and subject to the Company's operating results, debt agreements and applicable law, reinstate the dividend at an amount to be determined by it. To the extent
we do not have cash on hand sufficient to pay dividends in the future, we may decide not to pay dividends. By paying cash dividends rather than investing that cash in our future growth, we risk
slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations or unanticipated capital expenditures, should the need arise.

Our
purchase of membership units of our operating company concurrently with our initial public offering, and the future exchanges by holders of Class B units of our operating
company for shares of our Class A common stock (pursuant to the exchange rights provided for in the Operating Company's operating agreement), has resulted in, and are expected to continue to
result in, increases in our share of the tax basis of the tangible and intangible assets of our operating company at the time of our acquisition and these future exchanges, which will increase the tax
depreciation and amortization deductions that otherwise would not have been available to us. These increases in tax basis and tax depreciation and amortization deductions have reduced and are expected
to continue to reduce, the amount of tax that we would otherwise be required to pay in the future. We have entered into a tax receivable agreement with the current members of our operating company,
the one member of our

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operating
company immediately prior to our initial public offering who sold all of its membership units to us in connection with our initial public offering, and any future holders of Class B
units, that requires us to pay them 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize (or are deemed to realize in the case of an early
termination payment by us, or a change in control, as described in the tax receivable agreement) as a result of the increases in tax basis described above and certain other tax benefits related to
entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

In
October 2008, the selling unitholders agreed to waive any payments that we are or will be required to make to them for the 2008 and 2009 tax years pursuant to the tax receivable
agreement.

Cash Flows

Operating activities provided $16.3 million for the three months ended September 30, 2008, and provided
$24.6 million for the three months ended September 30, 2007. This decline in cash flows from operating activities was driven primarily by a decrease in average AUM from
$29.4 billion for the three months ended September 30, 2007, to $17.6 billion for the three months ended September 30, 2008, which had a corresponding negative impact on
total revenues.

For
the nine months ended September 30, 2008, operating activities provided $48.7 million, and provided $46.2 million for the nine months ended September 30,
2007. This change is due primarily to the fact that beginning on March 31, 2007, the effective date of the amendment of the operating company's Operating Agreement to eliminate its obligation
to redeem a member's units therein under any circumstance, as well as the acceleration of the vesting of all compensatory units then subject to vesting, distributions on all membership units are
classified as financing activities in our consolidated statements of cash flows. As a result, net cash provided by operating activities has increased, and net cash provided by financing activities has
decreased beginning on March 31, 2007. This increase was partially offset by a decline in average AUM, which had a corresponding negative impact on total revenues.

Investing
activities consist primarily of investments in affiliates and other investment partnerships, as well as capital expenditures. Investing activities used $0.2 million and
$0.1 million for the three months ended September 30, 2008 and 2007, respectively. Investing activities used $0.2 million and $1.5 million for the nine months ended
September 30, 2008 and 2007, respectively. This decrease was due primarily to capital expenditures associated with the build-out of additional space in our New York office, which
occurred during 2007.

Financing
activities consist primarily of contributions from members and contributions from, and distributions to, non-controlling interests. Financing activities used
$21.6 million and $4.4 million for the three months ended September 30, 2008 and 2007, respectively. The increase in cash used in financing activities was attributable primarily
to the $10.0 million in Credit Agreement amortization payments that were made in the three months ended September 30, 2008, and the $4.1 million reduction in net contributions
from non-controlling interests. Financing activities used $43.9 million and $45.6 million for the nine months ended September 30, 2008 and 2007, respectively. This decrease used
in financing activities was due primarily to a $16.5 million net reduction in distributions to members and dividends to shareholders, offset largely by $13.0 million in Credit Agreement
amortization payments that were made in the nine months ended September 30, 2008.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles requires
management to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets

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and
liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not readily available from
other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

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

Unit-based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment
("FAS 123(R)"), which requires the recognition of the cost of equity-based compensation based on the fair value of the award as of its grant date. Prior to the adoption of FAS 123(R), we
accounted for our unit-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to
Employees("APB 25"), and related interpretations. The adoption of FAS 123(R) did not have a material effect on the results of operations or financial condition
of the Company. Pursuant to FAS 123(R), we recognize compensation expense associated with the granting of equity-based compensation based on the fair value of the award as of its grant date if
it is classified as an equity instrument, and on the changes in settlement amount for awards that are classified as liabilities. Prior to March 31, 2007, our compensatory membership
unit-based awards had repurchase features that required us to classify them as liabilities. Accordingly, distributions paid on these membership units were classified as compensation
expense. In addition, changes to their redemption values subsequent to their grant dates have been included in compensation expense. As of March 31, 2007, we accelerated the vesting of all
compensatory units then subject to vesting. The one-time charge associated with this acceleration, approximately $65.0 million, was recorded on March 31, 2007. Our Operating
Agreement was further amended as of March 31, 2007, such that our operating company will no longer be required to redeem any membership units for cash upon a member's termination or death.
Accordingly, beginning with our interim financial statements for the three months ended June 30, 2007, our operating company is no longer required to include in compensation expense the
distributions in respect of these membership units or the change in their redemption value.

Consolidation

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

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

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Income Taxes

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

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

We
believe that the accounting estimate related to the $62.7 million valuation allowance is a critical accounting estimate because the underlying assumptions can change from
period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. If we were not able to realize all or part of
our net deferred tax
assets in the future, an adjustment to our deferred tax assets valuation allowance would be charged to income tax expense in the period such determination was made.

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

Recently Issued Accounting Pronouncements

We adopted the provisions of Statement of Financial Accounting Standards No. 157,Fair Value
Measurements("FAS 157"), on January 1, 2008. Our fair value measurements relate to our interest rate swap, as well as our investments in marketable securities
and securities sold short, which are primarily exchange-traded securities with quoted prices in active markets. The fair value measurements of the securities have been classified as Level 1.
The fair value measurement of the interest rate swap has been classified as Level 2, based upon the market prices for interest rate swaps with similar provisions and forward interest rate
curves.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("FAS 159"). FAS 159 permits an
entity to elect to measure certain financial instruments and certain other items at fair value with changes in fair value
recognized in earnings. FAS 159 is effective for fiscal years beginning after November 15, 2007. Since we chose not to elect this fair value option, the impact of the adoption of this
statement was not material.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007),Business Combinations("FAS 141R") which replaces Statement of Financial Accounting

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Standards
No. 141,Business Combinations.FAS 141R establishes the principles and requirements for how an acquirer: (i) recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; (ii) recognizes and measures
the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) discloses the business combination. This Statement applies to all transactions in which an entity
obtains control of one or more businesses, including transactions that occur without the transfer of any type of consideration. FAS 141R is effective for us on a prospective basis for all
business combinations on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. Early adoption is not allowed.
We are in the process of assessing the impact of this standard on the consolidated financial statements of the Company.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51("FAS 160"). FAS 160 amends ARB No. 51 and establishes accounting and reporting standards that
require non-controlling interests (previously referred to as minority interest) to be reported as a component of equity, changes in a parent's ownership interest while the parent retains
its controlling interest be accounted for as equity transactions, and upon a loss of control, retained ownership interest will be remeasured at fair value, with any gain or loss recognized in
earnings. FAS 160 is effective for us on January 1, 2009, except for the presentation and disclosure requirements, which will be applied retrospectively. Early adoption is not allowed.
We are in the process of assessing the impact of this standard on the consolidated financial statements of the Company.

In
March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,Disclosures about Derivative Instruments and Hedging Activities
("FAS 161").FAS 161 is intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are in the process of assessing the impact of this standard on the consolidated financial
statements of the Company.

In
June 2008, the FASB issued EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities". The
EITF release states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class method. EITF 03-6-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those years. The Company is in the process of assessing the impact of the standard on its consolidated financial statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Our exposure to market risk is directly related to our role as investment adviser for the separate accounts we manage and the funds for
which we act as
sub-investment adviser. All of our revenue for the three and nine months ended September 30, 2008 was derived from advisory fees, which are typically based on the market value of
our AUM. Accordingly, a decline in the prices of securities would cause our revenue and income to decline, due to a decrease in the value of the assets we manage. In addition, such a decline could
cause our clients to withdraw their funds in favor of investments offering higher returns or lower risk, which would cause our revenue and income to decline further.

We
are also subject to market risk due to a decline in the prices of our investments in affiliates and the value of the holdings of our Consolidated Subsidiaries, both of which consist
primarily of

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marketable
securities. At September 30, 2008, the fair value of these assets was $27.5 million. Assuming a 10% increase or decrease, the fair value would have increased or decreased by
$2.8 million at September 30, 2008.

Interest Rate Risk

The amounts that our operating company borrowed pursuant to the Credit Agreement described above, and any amounts our operating company
borrows under the related revolving credit facility, will accrue interest at variable rates. The operating company entered into an equivalent interest rate swap agreement that commenced on
July 23, 2008. The swap, which expires on July 23, 2010, obligates us to pay a 2.825% fixed rate of interest on the notional amount and requires the counterparty to pay us a floating
interest rate based on the monthly LIBOR interest rate. The spread on the Credit Agreement is in addition to these amounts. Interest rate changes may, therefore, affect the amount of our interest
payments related to any potential differential between the notional amount of the interest rate swap and amounts outstanding under the Credit Agreement, as well as any amounts borrowed under the
revolving credit facility. Such changes would correspondingly affect our future earnings and cash flows. In addition, we have not entered any arrangement to hedge our exposure to interest rates from
July 23, 2010 to July 23, 2011. For this one year period, interest rate changes would affect our future earnings and cash flows. Based on the consolidated debt obligations that we have
as of September 30, 2008, we believe that our hedge would be unaffected in the event that interest rates were to increase by one percentage point.

Item 4T.Controls and Procedures.

During the course of their review of our consolidated financial statements as of September 30, 2008, our management, including
our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of
September 30, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2008, our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective to ensure that information we are required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There
was no change in our internal control over financial reporting that occurred during the third quarter of 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings.

In the normal course of business, we may be subject to various legal and administrative proceedings. On November 21, 2007 and
January 16, 2008, substantively identical putative class action lawsuits were commenced in the United States District Court for the Southern District of New York against us and Richard S.
Pzena, our chief executive officer, seeking remedies under Section 11 of the Securities Act of 1933, as amended. The Court consolidated the lawsuits and appointed co-lead
plaintiffs, who filed a consolidated amended complaint. The consolidated amended complaint names as defendants us, Richard S. Pzena, and two of the underwriters of our initial public offering, Goldman
Sachs & Co., Inc. and UBS Securities LLC. Plaintiffs seek to represent a class of all persons who purchased or otherwise acquired Class A common stock issued
pursuant or traceable to our initial public offering. The consolidated amended complaint alleges that the registration statement and prospectus relating to the initial public offering of our
Class A
common stock contained material misstatements and omissions and wrongfully failed to disclose net redemptions in the John Hancock Classic Value Fund for which we act as sub-investment
advisor. The consolidated amended complaint seeks damages in an unspecified amount including rescission or rescissory damages. The Court granted defendants' motion to dismiss the consolidated amended
complaint and, on September 4, 2008, the Court entered a judgment in favor of defendants. Plaintiffs have filed a Notice of Appeal of the Court's judgment to the United States Court of Appeals
for the Second Circuit. We believe that the allegations and claims are without merit and we intend to contest these claims vigorously.

Item 1A.    Risk Factors.

We face a variety of significant and diverse risks, many of which are inherent in our business. Described below
are certain risks that we currently believe could materially affect us. Other risks and uncertainties that we do not presently consider to be material, or of which we are not presently aware, may
become important factors that affect us in the future. The occurrence of any of the risks discussed below could materially and adversely affect our business, prospects, financial condition, results of
operations or cash flow.

Risks Related to Our Business

We depend on Richard S. Pzena, John P. Goetz, A. Rama Krishna and William L. Lipsey and the loss of the services of any of them could have a material adverse effect on us.

The success of our business depends on the participation of Richard S. Pzena, John P. Goetz, A. Rama Krishna and William L. Lipsey,
whom we collectively refer to as our managing principals. Their professional reputations, expertise in investing and relationships with our clients and within the investing community in the U.S. and
abroad, are critical elements to executing our business strategy and attracting and retaining clients. Accordingly, the retention of our managing principals is crucial to our future success. There is
no guarantee that they will not resign, join our competitors or form a competing company. The terms of the current operating agreement of our operating company restrict each of
Messrs. Pzena, Goetz and Lipsey from competing with us or soliciting our clients or other employees during the term of their employment with us and for three years thereafter. Under the terms
of his employment agreement, Mr. Krishna has agreed not to compete with us for a period of 18 months following (i) his notice of resignation, which must be given six months prior
to the termination of his employment with us pursuant to his agreement, or (ii) the date of any other termination of his employment with us. The penalty for their breach of these restrictive
covenants will be the forfeiture of a number of Class B units held by the managing principal that is equal to 50% of the number of membership units collectively held by the managing principal
and his permitted transferees as of the earlier of the date of his breach or the termination of his employment, unless our

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board
of directors, in its sole discretion, determines otherwise. Although we may also seek specific performance of these restrictive covenants, there can be no assurance that we would be successful
in obtaining this relief. Further, after this post-employment restrictive period, we will not be able to prohibit them from competing with us or soliciting our clients or employees. If any
of our managing principals were to join a competitor or form a competing company, some of our current clients or other prominent members of the investing community could choose to invest with
that competitor rather than us. Furthermore, we do not carry any "key man" insurance that would provide us with proceeds in the event of the death or disability of any of our managing principals. The
loss of the services of any of our managing principals could have a material adverse effect on our business and could impact our future performance.

If our investment strategies perform poorly, we could lose clients or suffer a decline in AUM which would impair our revenues and earnings.

The performance of our investment strategies is one of the most important factors in retaining clients and AUM and competing for new
business. If our investment strategies perform poorly, it could impair our earnings because:



In
2006, 2007 and year-to-date 2008, our investment strategies have underperformed their respective benchmarks, and there can be no assurance that such
underperformance will not continue. The annualized gross returns (which represents annualized returns prior to payment of advisory fees) of our Large Cap Value strategy (which represented
approximately 52% of our AUM as of September 30, 2008) for the 1-year, 3-year, 5-year and since inception (October 2000) periods ended September 30,
2008 were (35.0)%, (7.0)%, 2.8%, and 3.5%, respectively. This compares to the returns of the Russell 1000® Value Index, the market index most commonly used by our clients to compare the
performance of our Large Cap Value strategy, during the same periods of (23.6)%, 0.1%, 7.1%, and 3.6%, respectively.

During
periods of declining AUM and revenues, such as we are currently experiencing, there can be no assurance that we will be able to reduce our expenses at a commensurate rate,
potentially leading to accelerated profitability declines. Additionally, given the nature of our business, there is a minimum expense base necessary to retain our employees and maintain our
operations, and it may be difficult to reduce expenses beyond certain levels.

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Our sub-investment advisory relationships with mutual funds advised by John Hancock Advisers represent a significant source of our revenues, and the termination
of these relationships would impair our revenues and earnings.

We currently act as a sub-investment adviser to the John Hancock Classic Value Fund, the John Hancock Classic Value Fund
II, the John Hancock International Classic Value Fund and the John Hancock Classic Value Mega Cap Fund, each of which are SEC-registered mutual funds advised by John Hancock Advisers. Our
sub-investment advisory relationships with these four mutual funds represented, in the aggregate, 21.9% and 26.3% of our AUM at September 30, 2008 and December 31, 2007,
respectively. For the nine months ended September 30, 2008 and the years ended December 31, 2007, 2006 and 2005, 14%, 20%, 20% and 14%, respectively, of our total revenue was generated
from these relationships. Our sub-investment advisory agreement with the John Hancock Classic Value Fund represented all, or substantially all, of this revenue during these periods. There
can be no assurance that our agreements with respect to any of these four mutual funds will remain in place. In addition, these agreements would terminate automatically in the event that the
investment management agreement between John Hancock Advisers and each individual fund is assigned or terminated. Such a termination of our sub-investment advisory agreements would
significantly reduce our revenues and we may not be able to establish relationships with other mutual funds' investment advisers and/or significant institutional separate accounts in order to replace
the lost revenues.

Because our clients can reduce the amount of assets we manage for them, or terminate our agreements with them, on short notice, we may experience unexpected declines in
revenue and profitability.

Our investment advisory and sub-investment advisory agreements are generally terminable upon short notice. Our
sub-investment advisory agreements with thirteen SEC-registered mutual funds, such as the four mutual funds advised by John Hancock Advisers, each have an initial
two-year term and are subject to annual renewal by the fund's board of directors pursuant to the Investment Company Act of 1940, as amended, or the Investment Company Act. Eleven of these
thirteen sub-investment advisory agreements are beyond their initial two-year term, including the agreement for the John Hancock Classic Value Fund. Institutional and
individual clients, and the funds with which we have sub-investment advisory agreements, can terminate their relationships with us, or reduce the aggregate amount of AUM, for a number of
reasons, including investment performance, changes in prevailing interest rates, and financial market performance, or to shift their funds to competitors who may charge lower advisory fee rates, or
for no stated reason. Poor performance relative to that of other investment management firms tends to result in decreased investments in our investment strategies, increased withdrawals from our
investment strategies and the loss of institutional or individual accounts or sub-investment advisory relationships. In addition, the ability to terminate relationships may allow clients
to renegotiate for lower fees paid for asset management services. If our investment advisory agreements are terminated, or our clients reduce the amount of AUM, either of which may occur on short
notice, we may experience declines in revenue and profitability.

We
experienced declines in AUM during the past five quarters, and declines in revenue and profitability during the past four quarters, and there can be no assurance that there will not
be continued declines in our AUM, revenue and profitability in the future. During the past five quarters, our AUM declined from $30.6 billion at June 30, 2007, to $15.5 billion at
September 30, 2008. This decline was due to $11.7 billion in market depreciation and $3.4 billion in net outflows. There was a corresponding decline in revenue and profitability
during this period. During the past five quarters, our AUM in separately-managed accounts declined from $16.5 billion at June 30, 2007, to $9.4 billion at September 30,
2008. This decline was due to $6.8 billion in market depreciation and net outflows of $0.3 billion. During the past five quarters, our AUM in sub-advised funds declined from
$14.1 billion at June 30, 2007 to $6.1 billion at September 30, 2008. This decline was due to $4.9 billion in market

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depreciation
and net outflows of $3.1 billion. Our advisory agreement with the John Hancock Classic Value Fund represented the majority of our sub-advised assets during this period.

Difficult market conditions can adversely affect our business by reducing the market value of the assets we manage or causing our clients to withdraw funds.

Our business would be expected to generate lower revenue in a declining stock market or general economic downturn. Under our advisory
fee arrangements, the fees we receive typically are based on the market value of our AUM. Accordingly, a decline in the prices of securities held in our clients' portfolios would be expected to cause
our revenue and profitability to decline by:



As
mentioned above, we experienced declines in AUM during the past five quarters, and declines in revenue and profitability during the past four quarters, and there can be no assurance
that there will not be continued declines in our AUM, revenue and profitability in the future.

The volatility and disruption of the capital and credit markets, and adverse changes in the global economy have negatively impacted our AUM, revenues and profitability.

The capital and credit markets have been experiencing volatility and disruption for more than a year. The global financial crisis that
began in 2007 worsened during the third quarter of 2008 and into the fourth quarter of 2008. The decline in global market conditions has resulted, and may continue to result, in decreases in our AUM
and revenues. Such declines may adversely impact our operating results, financial condition, and liquidity. We believe the disruption in the financial markets continues to cause widespread investor
uncertainty. We cannot predict how long the global financial crisis will last or what its impact will be on our financial results. If U.S. and international financial markets continue to experience
negative performance and volatility, demand for our products and services may decline, and our revenue, profitability, liquidity, and other financial results could suffer.

U.S. and international credit markets and economic conditions could adversely affect our liquidity and financial condition. The recent downturn in the credit markets has
increased the cost of borrowing and has made financing difficult to obtain, each of which may have an adverse effect on our results of operations and business.

Global markets and economic conditions continue to be volatile, causing disruption, which has been particularly acute in the financial
sector. Continued turbulence in the U.S. and international markets and economy may adversely affect our liquidity, financial condition and profitability. The cost and availability of funds may be
adversely affected by illiquid credit markets. Some lenders are imposing more stringent restrictions on the terms of credit, and there may be a general reduction in the amount of credit available in
the markets in which we conduct business. The negative impact on the tightening of the credit markets may have a material adverse effect on us resulting from, but not limited to, an inability to
obtain additional financing, if we require it in the future, or, if financing is available, it may be subject to significant restrictive covenants. The negative impact of the recent adverse changes in
the credit markets may have an adverse effect on our results of operations and business. Federal and state governments could pass additional legislation responsive to current credit conditions, the
impact of which on us is uncertain.

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Our periodic interest and amortization payment obligations under our financing facilities could adversely affect our results of operations, financial condition or liquidity.
Our current financing facilities restrict our ability to make cash distributions to our Class A stockholders.

Pursuant to a credit agreement, dated as of July 23, 2007 and as amended as of October 28, 2008, among our operating
company, as the borrower, certain of its subsidiaries, as guarantors, and Bank of America, N.A., as the administrative agent, the letter of credit issuer and a lender, a $22.0 million term loan
and $1.8 million letter of credit are currently outstanding. Pursuant to this credit agreement, our operating company must make quarterly amortization payments of $2.0 million on the
term loan until its maturity on July 23, 2011, which may adversely affect our financial condition and liquidity. Our interest payment obligations under the credit agreement are floating rate
obligations based on the London Interbank Offering Rate, or LIBOR, and the interest expense we incur will vary with changes in the applicable LIBOR reference rate. As a result, an increase in
short-term interest rates will increase our interest costs, which may adversely affect our earnings and liquidity. We have entered into a swap agreement to hedge our interest rate exposure
on the current outstanding balance of the term loan through July 23, 2010. However, we have not entered any arrangement to hedge our exposure to fluctuations in interest rates from
July 23, 2010 to July 23,
2011. For this one year period, we may be exposed to adverse changes in interest rates that may correspondingly affect our future earnings and cash flow.

On
October 28, 2008, certain of our directors and executive officers, and entities relating to them, loaned an aggregate of $16.0 million to our operating company pursuant
to the terms of $16.0 million aggregate principal amount of senior subordinated notes issued by the operating company. These notes are unsecured, have a ten-year maturity and bear
interest at 6.30% per annum.

As
our obligations under the credit agreement and the senior subordinated notes become due, we may be required to either refinance any amounts then outstanding by entering into new
financing facilities, which could result in higher borrowing costs, or issue equity, which would dilute existing stockholders. Our operating company could also repay them by using cash on hand or cash
from the sale of our assets. No assurance can be given that we, or our operating company, will be able to enter into new financing facilities, issue equity in the future, on attractive terms, or at
all, have sufficient cash on hand, or be able to raise cash through asset sales, in order to satisfy these obligations.

Under
the terms and conditions of our amended credit agreement and senior subordinated notes, our operating company is generally restricted from making cash distributions to us in
respect of our approximate 9.6% member interest therein. Since this is our sole source of making distributions to our Class A stockholders, we had to suspend our regular dividend payments to
stockholders. Our flexibility as to how to deploy our cash flow will be negatively impacted while we are subject to these debt agreements.

If an event of default under our credit agreement occurs, our lenders thereunder may foreclose on the collateral pledged to them under the related security agreement which
could adversely affect our liquidity.

In connection with the amendment to our credit agreement on October 28, 2008, we entered into a related security agreement with
the lenders thereunder pursuant to which we granted these lenders a continuing first priority security interest in our accounts receivable, among other of our assets. Upon the occurrence of an event
of default under our credit agreement, which include defaults on our payment obligations thereunder, failure to perform or observe the various affirmative covenants under the credit agreement, the
occurrence of cross-defaults with other of our debt obligations, certain bankruptcy events, among other events, the lenders may, among other things, exercise their right to foreclose on these assets.
Our inability to access these assets while a default is continuing, or our loss of these assets could adversely affect our liquidity.

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Our ability to retain our senior investment professionals and attract additional qualified investment professionals is critical to our success. A decline in our revenues and
profitability may have an adverse effect on our business and our ability to attract and retain employees.

Our success depends on our ability to retain the senior members of our investment team and to recruit additional qualified investment
professionals. However, we may not be successful in our efforts to retain them, as the market for investment professionals is extremely competitive. Our portfolio managers possess substantial
experience and expertise in investing and, in particular, our classic value investment approach, which requires significant qualitative judgments as to the future earnings power of currently
underperforming businesses. Our portfolio managers also have significant relationships with our clients. Accordingly, the loss of any one of our senior investment professionals could limit our ability
to successfully execute our classic value investment approach and, therefore, sustain the performance of our investment strategies, which, in turn, could have a material adverse effect on our results
of operations.

Future growth of our business may be difficult to achieve, and may place significant demands on our resources and employees, and may increase our expenses.

Future growth of our business may be difficult to achieve, and may place significant demands on our infrastructure, our investment team
and other employees, and may increase our expenses. In addition, we are required to continuously develop our infrastructure in response to the increasing sophistication of the investment management
market, as well as due to legal and regulatory developments.

As
a result of our investment strategies underperforming their respective benchmarks in 2006, 2007 and year-to-date 2008, our future growth may be more
challenging, as this may impact our ability to attract inflows of AUM. Additionally, the current overall market environment, with equity markets broadly and significantly down, may impact potential
investors' interest in committing new capital to equity strategies such as those offered by us, thereby making growth more difficult.

The
future growth of our business, if achieved, will depend, among other things, on our ability to maintain an infrastructure and staffing levels sufficient to address its growth and may
require us to incur significant additional expenses and commit additional senior management and operational resources. We may face significant challenges in maintaining adequate financial and
operational controls, implementing new or updated information and financial systems and procedures and training, managing and appropriately sizing our work force and other components of our business
on a timely and cost-effective basis. In addition, our efforts to retain or attract qualified investment professionals may result in significant additional expenses. There can be no
assurance that we will be able to manage the growth of our business effectively or that we will be able to continue to grow, and any failure to do so could adversely affect our ability to generate
revenue and control our expenses.

The investment management business is intensely competitive.

Competition in the investment management business is based on a variety of factors, including:



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We
compete in all aspects of our business with a large number of investment management firms, commercial banks, broker-dealers, insurance companies and other financial institutions. Our
competitive risks are heightened by the fact that some of our competitors may invest according to different investment styles or in alternative asset classes which the markets may perceive as more
attractive than our investment approach in the public equity markets. If we are unable to compete effectively, our earnings and revenues could be reduced, and our business could be materially
adversely affected.

Reductions in business sourced through third-party distribution channels, or their poor reviews of us or our products, could materially reduce our revenue and ability to
attract new clients.

New accounts sourced through consultant-led searches have been a large driver of the growth of our AUM in the past and are
expected to be a major component of our future growth. In addition, we have established relationships with certain mutual fund providers, most significantly John Hancock Advisers, who have offered us
opportunities to access new market segments through sub-investment advisory roles. We have also accessed the high-net-worth segment of the investing community
through relationships with well respected wealth advisers who utilize our investment strategies in investment programs they construct for their clients. If we fail to successfully maintain these
third-party distribution and sub-investment advisory relationships, our business could be materially adversely affected. In addition, many of these parties review and evaluate our products
and our organization. Poor reviews or evaluations of either the particular product or of us may result in client withdrawals or may impact our ability to attract new assets through such
intermediaries.

A change of control of us could result in termination of our sub-investment advisory and investment advisory agreements.

Pursuant to the Investment Company Act of 1940 ("Investment Company Act"), each of the sub-investment advisory agreements
for the SEC-registered mutual funds that we sub-advise automatically terminates upon its deemed "assignment" and a fund's board and shareholders must approve a new agreement in
order for us to continue to act as its sub-investment adviser. In addition, pursuant to the Investment Advisers Act of 1940 ("Investment Advisers Act"), each of our investment advisory
agreements for the separate accounts we manage may not be "assigned" without the consent of the client. A sale of a controlling block of our voting securities and certain other transactions would be
deemed an "assignment" pursuant to both the Investment Company Act and the Investment Advisers Act. Such an assignment may be deemed to occur in the event that the holders of the Class B units
of our operating company exchange enough of their Class B units for shares of our Class A common stock such that they no longer own a controlling interest in us. If such a deemed
assignment occurs, there can be no assurance that we will be able to obtain the necessary consents from clients whose funds are managed pursuant to separate accounts or the necessary approvals from
the boards and shareholders of the SEC-registered funds that we sub-advise. An assignment, actual or constructive, would trigger these termination and consent provisions and,
unless the necessary approvals and consents are obtained, could adversely affect our ability to continue managing client accounts, resulting in the loss of AUM and a corresponding loss of revenue.

Our failure to comply with guidelines set by our clients could result in damage awards against us and a loss of AUM, either of which would cause our earnings to decline or
affect our ability to remain in business.

As an investment adviser, we have a fiduciary duty to our clients. When clients retain us to manage assets on their behalf, they may
specify certain guidelines regarding investment allocation and strategy that we are required to observe in the management of their portfolios. Our failure to comply with these guidelines and other
limitations could result in losses to a client account that the client could seek to recover from us and could result in the client withdrawing its assets from our

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management
or terminating our investment advisory agreement with them. Any of these events could cause our earnings to decline or affect our ability to remain in business.

Extensive regulation of our business limits our activities and exposes us to the potential for significant penalties, including fines or limitations on our ability to
conduct our business.

We
are subject to extensive regulation of our investment management business and operations. As a registered investment adviser, the SEC oversees our activities pursuant to its
regulatory authority under the Investment Advisers Act. In addition, we must comply with certain requirements under the Investment Company Act with respect to the SEC-registered funds for
which we act as sub-investment adviser. We are also subject to regulation by the Department of Labor under ERISA. Each of the regulatory bodies with jurisdiction over us has regulatory
powers dealing with many aspects of financial services, including the authority to grant, and in specific circumstances to cancel, permissions to carry on particular businesses. A failure to comply
with the obligations imposed by the Investment Advisers Act on investment advisers, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on
fraudulent activities, could result in investigations, sanctions and reputational damage. Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of
personnel or other sanctions, including revocation of our registration as an investment adviser. Even if a sanction imposed against us or our personnel is small in monetary amount, the adverse
publicity arising from the imposition of sanctions against us by regulators could harm our reputation, result in withdrawal by our clients from our investment strategies and impede our ability to
retain clients and develop new client relationships, which may reduce our revenues.

We
face the risk of significant intervention by regulatory authorities, including extended investigation and surveillance activity, adoption of costly or restrictive new regulations and
judicial or administrative proceedings that may result in substantial penalties. Among other things, we could be fined or be prohibited from engaging in some of our business activities. The
requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us, and are not designed to protect
our stockholders. Consequently, these regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements.

In
addition, the regulatory environment in which we operate is subject to modifications and further regulation. New laws or regulations, or changes in the enforcement of existing laws or
regulations, applicable to us and our clients also may adversely affect our business, and our ability to function in this environment will depend on our ability to constantly monitor and react to
these changes. For investment management firms in general, there have been a number of highly publicized regulatory inquiries that focus on the mutual fund industry. These inquiries already have
resulted in increased scrutiny in the industry and new rules and regulations for mutual funds and their investment managers. This regulatory scrutiny may limit our ability to engage in certain
activities.

Specific
regulatory changes also may have a direct impact on our revenue. In addition to regulatory scrutiny and potential fines and sanctions, regulators continue to examine different
aspects of the asset management industry. New regulation regarding the annual approval process for mutual fund sub-investment advisory agreements may result in the reduction of fees or
possible terminations of these agreements. These regulatory changes and other proposed or potential changes may result in a reduction of revenue associated with these activities.

Operational risks may disrupt our business, result in losses or limit our growth.

We rely heavily on our financial, accounting, trading, compliance and other data processing systems. Any failure or interruption of
these systems, whether caused by fire, other natural disaster, power or telecommunications failure, act of terrorism or war or otherwise, could result in a disruption

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of
our business, liability to clients, regulatory intervention or reputational damage, and thus materially adversely affect our business. Although we have back-up systems in place, our
back-up procedures and capabilities in the event of a failure or interruption may not be adequate. The inability of our systems to accommodate an increasing volume of transactions also
could constrain our ability to expand our businesses. In recent years, we have substantially upgraded and expanded the capabilities of our data processing systems and other operating technology, and
we expect that we will need to continue to upgrade and expand these capabilities in the future to avoid disruption of, or constraints on, our operations.

Furthermore,
we depend on our headquarters in New York City for the continued operation of our business. A disaster or a disruption in the infrastructure that supports our business, or
directly affecting our headquarters, may have a material adverse impact on our ability to continue to operate our business without interruption. Although we have disaster recovery programs in place,
there can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially
reimburse us for our losses.

The investment management industry faces substantial litigation risks which could materially adversely affect our business, financial condition or results of operations or
cause significant reputational harm to us.

We depend to a large extent on our relationships with our clients and our reputation for integrity and high-caliber
professional services to attract and retain clients. As a result, if a client is not satisfied with our services, such dissatisfaction may be more damaging to our business than to other types of
businesses. We make investment decisions on behalf of our clients which could result in substantial losses to them. In order for our classic value investment strategies to yield attractive returns, we
expect to have to hold securities for multi-year periods and, therefore, our investment strategies may not perform well in the short term. If our clients suffer significant losses, or are
otherwise dissatisfied with our services, we could be subject to the risk of legal liabilities or actions alleging negligent misconduct, breach of fiduciary duty or breach of contract. These risks are
often difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. 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 reputational
harm to us. For information on our current legal proceedings, see "Part II, Item 1Legal Proceedings."

In May 2007, our management and our independent auditors identified material weaknesses in our internal control over financial reporting that, if not properly remediated,
could result in a material misstatement of our financial statements and our management's inability to report that our internal controls are effective for 2008 and thereafter, as required by the
Sarbanes-Oxley Act of 2002, either of which could cause investors to lose confidence in our reported financial information or our Class A common stock to lose value.

Our most recent annual report on Form 10-K does not include a report of management's assessment regarding internal control over
financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the SEC for newly-public companies.

The
material weaknesses in our internal control over financial reporting that are discussed below were identified in connection with the audit of our 2006 consolidated financial
statements, and not in connection with an audit of our internal controls over financial reporting. As discussed in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007, in May 2007, in connection with their audits of our consolidated financial statements as of and for the year ended December 31, 2006 for the purpose of including such
consolidated financial statements in our Registration Statement on Form S-1 (No. 333-1436660), and related prospectus, for our initial public offering, our
independent auditors informed us that they identified material weaknesses in our internal control over financial reporting for

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complex
and non-routine transactions, as well as inadequate internal review. The material weaknesses related to errors in our accounting for stock-based compensation, liabilities
associated with our existing membership units, and the consolidation of investment partnerships in our consolidated financial statements. The errors occurred as a result of not having sufficient
access to accounting resources with technical accounting expertise to analyze complex and non-routine transactions, as well as inadequate internal review. We corrected these errors and
believe that the consolidated financial statements included in this report reflect the proper treatment for the complex and non-routine transactions identified by our independent auditors.

The
existence of material weaknesses in internal control over financing reporting is an indication that there is a reasonable possibility that a material misstatement of our financial
statements will not be prevented or detected in a future period. The process of designing and implementing effective internal controls requires us to continually expend significant resources in order
to establish and maintain a system of internal controls that satisfies our financial reporting obligations as a public company. In addition, we cannot assure you that we will have effective internal
control over our financial reporting, or that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be discovered, in the future. If we
fail to maintain effective controls and procedures, we may be unable to provide required financial information in a timely and reliable manner, or otherwise comply with the standards applicable to us
as a public company, and our management may not be able to report that our internal control over financial reporting is effective for the year ending December 31, 2008, as would be required by
Section 404 of the Sarbanes-Oxley Act of 2002, or thereafter. If our management is not able to do so, our independent auditors would not be able to certify that our internal control over
financial reporting is effective. Matters impacting our internal control over financial reporting may cause us to be unable to report our financial information on a timely basis and thereby subject us
to adverse regulatory consequences, including sanctions by the SEC, or violations of the NYSE listing rules. There could also be a negative reaction in the financial markets due to a loss of investor
confidence in us and the reliability of our consolidated financial statements. Confidence in the reliability of our consolidated financial statements is also likely to suffer if our independent
auditors report any additional material weakness in our internal control over financial reporting. This could lead to a decline in the price of our Class A common stock.

Fulfilling our public company financial reporting and other regulatory obligations has been and will be expensive and time consuming.

Since becoming a public company, we have been required to implement specific corporate governance practices and adhere to a variety of
reporting requirements and complex accounting rules under the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, as well as the rules of the NYSE. Compliance with these
requirements has and will increase our legal and accounting compliance costs and place significant additional demands on our accounting and finance staff, and on our accounting, financial and
information systems. We have hired, and may need to hire, additional accounting and finance staff with appropriate public company financial reporting experience and technical accounting knowledge,
which has and may increase our compensation expense.

As
described above, our management will be required to conduct an annual assessment of the effectiveness of our internal controls over financial reporting and include a report on our
internal controls in our annual reports on Form 10-K pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we will be required to have our independent
registered public accounting firm attest to and report on the effectiveness of our internal controls over financial reporting. Under current rules, we will be subject to these requirements beginning
with our annual report on Form 10-K for our fiscal year ending December 31, 2008. We will continue to incur incremental costs in order to improve our internal control over
financial reporting and comply with Section 404 of the Sarbanes-Oxley Act of 2002, including increased auditing and legal fees, and costs associated with hiring additional accounting, internal
audit, information technology, compliance and administrative staff.

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The historical consolidated financial information included in the current report and our previously filed public company reports may not necessarily be indicative of our
future financial results.

The historical consolidated financial information included in the current report and our previously filed public company reports may
not necessarily be indicative of our future financial results. We do not expect our AUM or revenue to grow at the same rate as they grew in the five years ended December 31, 2007. Also, similar
growth rates and profitability may not be achievable in the future. As mentioned above, we experienced declines in AUM during the past five quarters, and declines in revenue and profitability during
the past four quarters, and there can be no assurance that there will not be continued declines in our AUM, revenue and profitability in the future. Although in 2007, we re-opened the
Large Cap Value, Value Service, Small Cap Value, Mid Cap Value and All Cap Value strategies, we may close these strategies again at any time. In addition, the historical consolidated financial
information included in the current report and our previously filed public company reports with respect to the periods prior to the consummation of the reorganization of our operating company and the
concurrent initial public offering of our Class A common stock on October 30, 2007 do not reflect all the added costs that we expect to incur as a public company. For example, because we
operated through a limited liability company prior to October 30, 2007 and paid little or no taxes on our profits, our historical consolidated financial information prior to October 30,
2007 do not reflect the tax impact of our adoption of a corporate holding company structure.

See
"Part I, Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements included
elsewhere in this report.

Risks Related to Our Investment Strategies

Our results of operations depend on the performance of our investment strategies. Poor performance of our
investment strategies will reduce or minimize the value of our assets under management, on which our advisory fees are based. Since advisory fees comprise all of our operating revenues, poor
performance of our investment strategies will have a material adverse impact on our results of operations. In addition, poor performance will make it difficult for us to retain or attract clients and
to grow our business. The performance of our strategies is subject to some or all of the following risks.

Our classic value investments in concentrated portfolios subject the performance of our investment strategies to the risk that the companies in which we invest may not
achieve the level of earnings recovery that we initially expect, or at all.

We generally invest in companies after they have experienced a shortfall in their historic earnings, due to an adverse business
development, management error, accounting scandal or other disruption, and before there is clear evidence of earnings recovery or business momentum. While very few investors are willing to invest when
companies lack earnings visibility, our classic value investment approach seeks to capture the return that can be obtained by investing in a company before the market has a level of confidence in its
ability to achieve earnings recovery. However, our investment approach entails the risk that the companies included in our portfolios are not able to execute the turnaround that we had expected when
we originally invested in them, thereby reducing the performance of our strategies. Our strategy of constructing concentrated portfolios, generally ranging from 30 to 60 holdings, of companies
underperforming their historical earnings power, is subject to a higher risk of underperformance relative to benchmarks than the investment approaches of some of our competitors. Further, since our
positions in these investments are often substantial, there is the risk that we may be unable to find willing purchasers for our investments when we decide to sell them.

Since
we apply the same investment process across all of our investment strategies, utilizing one team, and given the overlapping universes of many of our investment strategies, we could
have common positions and industry or sector concentrations across many of our investment strategies at the same time. As such, factors leading one of our investment strategies to underperform may
lead other

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strategies
to underperform simultaneously. For example, we have been overweight the financial services sector in most of our investment strategies in recent periods, and given this sector has
performed poorly during that time period, most of our strategies have been negatively impacted by this.

Our investment strategies may not obtain attractive returns in certain periods or during certain market conditions.

Our products are best suited for investors with long-term investment horizons. In order for our classic value investment
approach to yield attractive returns, we must typically hold securities for an average of over three years. Our investment strategies may not perform well during certain periods of time, as is
currently the case. In addition, our strategies may not perform well during points in the economic cycle when value-oriented stocks are relatively less attractive, as has been the case for the past
two years. For instance, during the late stages of an economic cycle, investors may purchase relatively expensive stocks in order to obtain access to above average growth, as was the case in the late
1990s. Value-oriented strategies may also experience weakness during periods when the markets are focused on one investment thesis or sector. In 2006, 2007 and year-to-date
2008, our investment strategies have underperformed their respective benchmarks, and there can be no assurance that such underperformance will not continue.

Our investment approach may underperform other investment approaches, which may result in significant withdrawals of client assets or client departures or a reduction in our
AUM.

Even when securities prices are rising generally, portfolio performance can be affected by our investment approach. We employ a classic
value investment approach in all of our investment strategies. This investment approach has outperformed the market in some economic and market environments and underperformed it in others. We are
currently in a period in which this approach has been underperforming. In particular, a prolonged period in which the growth style of investing outperforms the value style may cause our investment
strategy to go out of favor with some clients, consultants or third-party intermediaries. Poor performance relative to peers, coupled with changes in personnel, extensive periods in particular market
environments, or other difficulties may result in significant withdrawals of client assets, client departures or a reduction in our AUM.

We
experienced declines in AUM during the past five quarters, and declines in revenue and profitability during the past four quarters, and there can be no assurance that there will not
be continued declines in our AUM, revenue and profitability in the future. During the past five quarters, our AUM declined from $30.6 billion at June 30, 2007, to $15.5 billion at
September 30, 2008. This decline was due to $11.7 billion in market depreciation and $3.4 billion in net outflows. There was a corresponding decline in revenue and profitability
during this period.

Further economic downturns or recessions could impair the financial position and operating results of the companies in which we invest, which could, in turn, harm our
operating results.

Many of the companies in which we have made or will make investments are, and may be, susceptible to economic downturns or recessions.
President Bush signed the Emergency Economic Stabilization Act of 2008 ("EESA") into law on October 3, 2008. Pursuant to the EESA, the U.S. Treasury would have the authority to, among other
things, purchase up to $700 billion of mortgage-backed and other securities from financial institutions for the purpose of stabilizing the financial markets. There can be no assurance what
impact the EESA will have on the financial markets, including the extreme levels of volatility currently being experienced. The ultimate effects of EESA on the financial markets, the companies in
which we invest, and the economy in general could materially and adversely affect our business, financial condition and results of operations, or the trading price of our common stock.

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Our investment process requires us to conduct extensive fundamental research on any company before investing in it, which may result in missed investment opportunities and
reduce the performance of our investment strategies.

We take a considerable amount of time to complete the in-depth research projects that our investment process requires
before adding any security to our portfolio. Our process requires that we take this time in order to understand the company and the business well enough to make an informed decision as to whether we
are willing to own a significant position in a company whose current earnings are below its historic norms and that does not yet have earnings visibility. However, the time we take to make this
judgment may cause us to miss the opportunity to invest in a company that has a sharp and rapid earnings recovery. Any such missed investment opportunities could adversely impact the performance of
our investment strategies.

Our Global Value, International Value and European Value investment strategies consist primarily of investments in the securities of issuers located outside of the United
States, which may involve foreign currency exchange, political, social and economic uncertainties and risks.

Our Global Value, International Value and European Value investment strategies, which together represented $2.9 billion of our
AUM as September 30, 2008 and may comprise a larger portion of our AUM in the future, are primarily invested in securities of companies located outside the United States. Fluctuations in
foreign currency exchange rates could negatively impact the portfolios of our clients who are invested in these strategies. In addition, foreign currency fluctuations may affect the levels of our AUM
from one reporting period to another. An increase in the value of the U.S. dollar relative to non-U.S. currencies may result in a decrease in the dollar value of our AUM, which, in turn,
would result in lower U.S.-dollar denominated revenue. We do not currently engage in any hedging activities for these portfolios and continue to market these products as unhedged.

Investments
in non-U.S. issuers may also be affected by political, social and economic uncertainty affecting a country or region in which we are invested. Many
non-U.S. financial markets are not as developed, or as efficient, as the U.S. financial market, and, as a result, liquidity may be reduced and price volatility may be higher. The legal and
regulatory environments, including financial accounting standards and practices, may also be different, and there may be less publicly available information in respect of such companies. These risks
could adversely impact the performance of our strategies that are invested in securities of non-U.S. issuers.

Risks Related to Our Structure

Our only material asset after completion of the reorganization and our initial public offering on October 30, 2007 is our interest in our operating company, and we
are accordingly dependent upon distributions from our operating company to make distributions to our Class A stockholders, and to pay taxes and other expenses.

We are a holding company and have no material assets other than our ownership of membership units of our operating company. We have no
independent means of generating revenue and cash flow. Our operating company is treated as a partnership for U.S. federal income tax purposes and, as such, is not itself subject to U.S. federal income
tax. Instead, its taxable income is allocated to its members, including us, pro rata according to the number of membership units each owns. Accordingly, we incur income taxes on our proportionate
share of any net taxable income of our operating company and also incur expenses related to our operations. We intend to cause our operating company to distribute cash to its members in an amount at
least equal to that necessary to cover their tax liabilities, if any, with respect to the earnings of our operating company. To the extent that we need funds to pay our tax or other liabilities or to
fund our operations, and our operating company is restricted from making distributions to us under applicable laws or regulations or does not have sufficient earnings to make these distributions, we
may have to borrow funds to meet these obligations and run our business and, thus, our liquidity and financial condition could be materially adversely affected. There can be no

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assurance
that funds will be available to borrow under such circumstances on terms acceptable to us, or at all.

We are required to pay the two current members and one former member of our operating company who sold to us an aggregate of 6.1 million membership units of our
operating company in October 2007 and the holders of Class B units of our operating company who exchange their Class B units for shares of our Class A common stock most of the tax
benefit of any depreciation or amortization deductions we may claim as a result of the tax basis step up we receive in connection with these sales of membership units and any future exchanges of
Class B units.

We used the net proceeds of our October 2007 initial public offering to purchase an aggregate of 6.1 million membership units of
our operating company from three of its members, or the selling members. These purchases have and are expected to result in increases in our share of the tax basis in the tangible and intangible
assets of our operating company that otherwise would not have been available. Any subsequent exchanges of Class B units of our operating company for shares of our Class A common stock
are also expected to result in increases in our share of the tax basis in the tangible and intangible assets of our operating company that otherwise would not have been available. These increases in
tax basis have and are expected to reduce the amount of tax that we would otherwise be required to pay in the future, although the Internal Revenue Service, or IRS, might challenge all or part of this
tax basis increase, and a court might sustain such a challenge.

Pursuant
to a tax receivable agreement dated October 30, 2007, among the selling members, all holders of Class B units after our October 2007 initial public offering and
us, we are required to pay the selling members and any holders of Class B units who elect to exchange their Class B units for shares of our Class A common stock 85% of the amount
of the cash savings, if any, in U.S. federal, state and local income tax that we realize as a result of the increases in tax basis due to the sale to us of 6.1 million membership units in
October 2007 and any subsequent exchanges of Class B units for shares of our Class A common stock. The actual increase in tax basis, as well as the amount and timing of any payments
under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of our Class A common stock at the time of the exchange, the extent to which
such exchanges are taxable, the amount and timing of our income and the tax rates then applicable. We expect that, as a result of the size and increases in our share of the tax basis in the tangible
and intangible assets of our operating company attributable to our interest therein, the payments that we may make to these members likely will be substantial. In October 2008, each of the selling
members agreed with us to waive any payments that we are or may be required to make to them with respect to the 2008 and 2009 tax years, as a result of their sale to us of an aggregate of
6.1 million membership units in October 2007. There can be no assurance that any of the selling members would grant us similar waivers in the future or that any holder of Class B units
would grant us such a waiver related to any future exchanges.

Were
the IRS to successfully challenge the tax basis increases described above, we would not be reimbursed for any payments made under the tax receivable agreement. As a result, in
certain circumstances, we could make payments under the tax receivable agreement in excess of our cash tax savings.

If we are deemed an investment company under the Investment Company Act, our business would be subject to applicable restrictions under that Act, which could make it
impracticable for us to continue our business as contemplated.

We believe our company is not an investment company under Section 3(b)(1) of the Investment Company Act because we are primarily
engaged in a non-investment company business. We conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company,
restrictions imposed by the Investment Company Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our
business as contemplated.

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Risks Related to Our Class A Common Stock

The market price and trading volume of our Class A common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

The market price of our Class A common stock may be highly volatile and could be subject to wide fluctuations. In addition, the
trading volume in our Class A common stock may fluctuate and cause significant price variations to occur. If the market price of our Class A common stock declines significantly, you may
be unable to resell your shares of Class A common stock at or above your purchase price, if at all. We cannot assure you that the market price of our Class A common stock will not
fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our Class A common stock, or result in fluctuations in the price or trading
volume of our Class A common stock, include:



The market price of our Class A common stock could decline due to the large number of shares of our Class A common stock eligible for future sale upon the
exchange of Class B units of our operating company.

Pursuant to the operating agreement of our operating company, on at least one date designated by us each year (or, if we do not
designate a date by September 30th of any year, on October 30th), each holder of Class B units may exchange up to 15% of its Class B units for an equivalent number
of shares of our Class A common stock, subject to certain restrictions set forth in the operating agreement. Pursuant to the resale and registration rights agreement, dated October 30,
2007, among the holders of Class B units and us, (i) on at least one date designated by us each year (or, if we do not designate a date by September 30th of any year, on a
date that is three business days after October 30th) these holders may resell the shares of Class A common stock issued to them upon the exchange of up to 15% of their Class B
units, and (ii) until October 30, 2011, they may only resell these shares in the manner determined by us. In accordance with our obligations under the operating agreement and the resale
and registration rights agreement, we intend to designate (i) at least one date between now and October 30, 2009 on which we will allow holders of Class B units to exchange up to
an aggregate of approximately 8.7 million Class B units, which represents 15% of the Class B units outstanding immediately after the consummation of our operating company's
reorganization on October 30, 2007, for an equivalent number of shares of Class A common stock and (ii) the date or dates and manner in which we will allow these holders to resell
these shares. In addition, our board of directors may, in its sole discretion, allow holders of Class B units to make exchanges in amounts

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exceeding
those described above. In the near future, we will be filing a Form S-3 registration statement in order to register our issuance to these holders of the total number of
shares of Class A common stock issuable upon exchange of all Class B units outstanding immediately after the consummation of our operating company's reorganization. Although we have not
yet designated any exchange or resale dates, if all current holders of Class B units decided to exercise their exchange and resale rights with respect to the one-year period from
October 30, 2008 to October 30, 2009, it would result in the issuance and sale of approximately 8.7 million shares our Class A common stock. The market price of our
Class A common stock could decline as a result of sales of such a significant number of shares, or the perception that such sales could occur. These sales, or the possibility that these sales
may occur, also might make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate. None of the members of the
Executive Committee of Pzena Investment Management, LLC, who beneficially own a substantial majority of the Class B units currently outstanding, have any present plans to sell any shares of
Class A common stock.

Control by our Class B stockholders, which include our managing principals, 22 of our other employees and three outside investors, of 97.9% of the combined voting
power of our common stock may give rise to conflicts of interest.

Our Class B stockholders collectively hold approximately 97.9% of the combined voting power of our common stock. Among these
stockholders are each of our managing principals, 22 of our other employees and three outside investors. Holders of shares of our Class B common stock have entered into a Class B
stockholders' agreement with respect to all shares of Class B common stock then held by them and any additional shares of Class B common stock they may acquire in the future. Pursuant to
this agreement, they will vote these shares of Class B common stock together on all matters submitted to a vote of our common stockholders. To the extent that we cause our operating company to
issue additional Class B units, which may be granted, subject to vesting, to our employees pursuant to the operating company's 2006 Equity Incentive Plan, these employees will be entitled to
receive an equivalent number of shares of our Class B common stock, subject to the condition that they agree to enter into this Class B stockholders' agreement. Each share of our
Class B common stock entitles its holder to five votes per share for so long as the Class B stockholders collectively hold 20% of the total number of shares of our common stock
outstanding. When a Class B unit is exchanged for a share of our Class A common stock, an unvested Class B unit is forfeited due to the employee holder's failure to satisfy the
conditions of the award agreement pursuant to which it was granted, or any Class B unit is forfeited as result of a breach of any restrictive covenants contained in our operating company's
amended and restated operating agreement, a corresponding share of our Class B common stock will automatically be redeemed by us. For so long as our Class B stockholders hold at least
20% of the total number of shares of our common stock outstanding, they will be able to elect all of the members of our board of directors and thereby control our management and affairs, including
determinations with respect to acquisitions, dispositions, borrowings, issuances of securities, and the declaration and payment of dividends. In addition, they will be able to determine the outcome of
all matters requiring approval of stockholders, and will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors, and could preclude any
unsolicited acquisition of our company. Our Class B stockholders have the ability to prevent the consummation of mergers, takeovers or other transactions that may be in the best interests of
our Class A stockholders. In particular, this concentration of voting power could deprive Class A stockholders of an opportunity to receive a premium for their shares of Class A
common stock as part of a sale of our company, and could ultimately affect the market price of our Class A common stock.

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Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws could discourage a change of control that our stockholders may
favor, which could also adversely affect the market price of our Class A common stock.

Provisions in our amended and restated certificate of incorporation and bylaws may make it more difficult and expensive for a third
party to acquire control of us, even if a change of control would be beneficial to our stockholders. For example, our amended and restated certificate of incorporation authorizes our board of
directors to issue up to 200,000,000 shares of our preferred stock and to designate the rights, preferences, privileges and restrictions of unissued series of our preferred stock, each without any
vote or action by our stockholders. We could issue a series of preferred stock to impede the consummation of a merger, tender offer or other takeover attempt. The anti-takeover provisions
in our amended and restated certificate of incorporation and bylaws may impede takeover attempts, or other transactions, that may be in the best interests of our stockholders and, in particular, our
Class A stockholders. In addition, the market price of our Class A common stock could be adversely affected to the extent that provisions of our amended and restated certificate of
incorporation and bylaws discourage potential takeover attempts, or other transactions, that our stockholders may favor.

On October 28, 2008, we suspended our regular dividend to stockholders, and our ability to pay future regular dividends is limited by the terms and conditions of our
debt agreements, and additionally will be subject to the discretion of our board of directors and may be limited by our holding company structure and applicable provisions of Delaware law.

Due to certain restrictions set forth in our credit agreement and senior subordinated notes, as described above, we have had to suspend
our regular dividend payments to stockholders. In the future, our board of directors may, in its discretion, reinstate the dividend at an amount to be determined by it, subject to the restrictions in
debt agreements, if then in effect. In addition, as a holding company, we depend upon the ability of our operating company to generate earnings and cash flows and distribute them to us so that we may
pay our obligations and expenses and pay dividends to our stockholders. We expect to cause our operating company to make distributions to its members, including us. However, the ability of our
operating company to make such distributions is subject to its operating results, debt agreements to which it is or may be a party, cash requirements and financial condition and applicable Delaware
laws (which may limit the amount of funds available for distribution to its members). If, as a consequence of these various limitations and restrictions, we are unable to generate sufficient
distributions from our business, we may not be able to make, or may have to reduce or eliminate, the payment of future dividends on our Class A common stock.

The disparity in the voting rights among the classes of our common stock may have a potential adverse effect on the price of our Class A common stock.

Shares of our Class A and Class B common stock entitle the respective holders to identical rights, except that each share
of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally, while each share of our Class B common stock entitles its holder to
five votes for so long as the number of shares of Class B common stock represents 20% of the total number of shares of our common stock outstanding. The difference in voting rights could
adversely affect the value of our Class A common stock to the extent that investors view, or any potential future purchaser of our company views, the superior voting rights of the
Class B common stock to have value.

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

None.

Item 3.    Defaults Upon Senior Securities.

None.

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Item 4.    Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 5.    Other Information.

None.

Item 6.    Exhibits.

|     |  |                                                                                                                                                                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|4.1  |  | Pzena Investment Management LLC Senior Subordinated Note for $1,250,000, dated October 28, 2008, issued to The Michele Pzena Family Trust created under the Richard Pzena Descendants Trust dated November 4,
2005, Laura Pzena, Trustee                               
|4.2  |  | Pzena Investment Management LLC Senior Subordinated Note for $1,250,000, dated October 28, 2008, issued to The Daniel Pzena Family Trust created under the Richard Pzena Descendants Trust dated
November 4, 2005, Jeffrey Pzena and William Pearce, Trustees          
|4.3  |  | Pzena Investment Management LLC Senior Subordinated Note for $1,250,000, dated October 28, 2008, issued to The Aaron Pzena Family Trust created under the Richard Pzena Descendants Trust dated November 4,
 2005, Edward Fisher, Trustee                              
|4.4  |  | Pzena Investment Management LLC Senior Subordinated Note for $1,250,000, dated October 28, 2008, issued to The Eric Pzena Family Trust created under the Richard Pzena Descendants Trust dated November 4,
2005, Robin Buchalter, Trustee                              
|4.5  |  | Pzena Investment Management LLC Senior Subordinated Note for $5,000,000, dated October 28, 2008, issued to The Pzena Family 1996 Irrevocable Trust between Richard S. Pzena and Wendy M. Pzena dated
December 30, 1996, Gregory Sawers, Trustee                        
|4.6  |  | Pzena Investment Management LLC Senior Subordinated Note for $5,000,000, dated October 28, 2008, issued to Milestone Associates, L.L.C.                                                                                                                                
|4.7  |  | Pzena Investment Management LLC Senior Subordinated Note for $1,000,000, dated October 28, 2008, issued to Amelia Jones Feinberg                                                                                                                                       
|10.1 |  | Amendment No. 2 to Credit Agreement and Limited Consent and Waiver, dated as of September 22, 2008, among Pzena Investment Management, LLC as Borrower, Pzena Alternative Investments LLC as
Guarantor, and Bank of America, N.A. as Administrative Agent and Lender(1)
|10.2 |  | Amendment No. 3 to Credit Agreement and Limited Consent and Waiver, dated October 28, 2008, among Pzena Investment Management, LLC, as the Borrower, Pzena Alternative Investments, LLC, as Guarantor,
 and Bank of America, N.A., as Administrative Agent and Lender  
|10.3 |  | Security Agreement, dated as of October 28, 2008, among Pzena Investment Management, LLC, Pzena Alternative Investments, LLC, and Bank of America, N.A., as Administrative Agent for each of the Secured
Parties named therein                                         
|10.4 |  | Pzena Investment Management, LLC Amended and Restated Bonus Plan                                                                                                                                                                                                       
|31.1 |  | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15(d)-14(a)                                                                                                                                                                           
|31.2 |  | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15(d)-14(a)                                                                                                                                                                           
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                      
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                      

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SIGNATURES

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

Dated:
November 13, 2008

PZENA INVESTMENT MANAGEMENT, INC.By:

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

/s/ WAYNE A. PALLADINO Name:  Wayne A. Palladino
Title:Chief Financial Officer


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