##### Table of Contents



United States Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
 Commission file number 000-24498
 DIAMOND HILL INVESTMENT GROUP, INC
  Ohio
    
    65-0190407(State or incorporation)
    
    (I.R.S. Employer Identification No.)325 John H. McConnell Blvd., Suite 200, Columbus, Ohio 43215
    
    614-255-3333(Address of principal executive offices) (Zip Code)
    
    (Registrants telephone number)
  Common Shares, no par value
  o þ
 o þ
 þ o
 þ
 
 o þ o
 o þ




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##### 



Required Information
    
    PagePart IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    7Item 1B. Unresolved Staff Comments
    
    
    8Item 2. Properties
    
    
    8Item 3. Legal Proceedings
    
    
    8Item 4. Submission of Matters to a Vote of Security Holders
    
    
    8Part IIItem 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    
    8Item 6. Selected Financial Data
    
    
    10Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operation
    
    
    11Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 8. Financial Statements and Supplementary Data
    
    
    16Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
    
    
    32Item 9A. Controls and Procedures
    
    
    32Item 9B. Other Information
    
    
    34Part IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    34Item 11. Executive Compensation
    
    
    34Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    34Item 13. Certain Relationships and Related Transactions
    
    
    34Item 14. Principal Accountant Fees and Services
    
    
    34Part IVItem 15. Exhibits and Financial Statement Schedules
    
    
    35SignaturesEX-10.9EX-10.10EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I
 
 Item 1. Business
  General
   Assets Under Management
  Assets Under Management by ProductAs of December 31,(in millions)
    
    2006
    
    2005
    
    2004Mutual funds
    
    $
    2,518
    
    
    $
    907
    
    
    $
    238Separate accounts
    
    
    875
    
    
    
    513
    
    
    
    265Private investment funds
    
    
    315
    
    
    
    111
    
    
    
    21Total
    
    $
    3,708
    
    
    $
    1,531
    
    
    $
    524
 3




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##### Table of Contents



Assets Under Management by ObjectiveAs of December 31,(in millions)
    
    2006
    
    2005
    
    2004Small and Small-Mid Cap
    
    $
    807
    
    
    $
    406
    
    
    $
    83Large Cap and Select
    
    $
    919
    
    
    $
    437
    
    
    $
    169Long-Short
    
    $
    1,720
    
    
    $
    474
    
    
    $
    114Strategic and fixed income
    
    $
    262
    
    
    $
    214
    
    
    $
    158Total
    
    $
    3,708
    
    
    $
    1,531
    
    
    $
    524
 Investment Advisory Activities
     Marketing
  Diamond Hill Funds
  4




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##### Table of Contents



Diamond Hill FundsAssets by Distribution Channelas of December 31,(in millions)
    
    2006
    
    2005Independent registered Investment advisors and broker/dealers
    
    $
    1,161
    
    
    $
    421Wirehouse and regional broker/dealers
    
    
    917
    
    
    
    392Defined contribution (401k)
    
    
    157
    
    
    
    33Institutions
    
    
    132
    
    
    
    41Other
    
    
    40
    
    
    
    20Total
    
    $
    2,407
    
    
    $
    907
 Separate Accounts and Private Investment Funds
  Growth Prospects
   
    
    establishing new selling relationships,
    
    adding additional marketing and support staff,
    
    attending and sponsoring booths at key industry conferences, and
    
    creating additional marketing material for the funds and separately managed accounts.
    5




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##### Table of Contents



Competition
  Corporate Investment Portfolio
  Regulation
  Contractual Relationships with the Diamond Hill Funds
  Employees
  SEC Filings
  6




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##### Table of Contents



ITEM 1A: Risk Factors
  Investment Performance.
 The Companys assets under management, which impact revenue, are subject to significant
fluctuations.
 The Companys success depends on its key personnel, and its financial performance could be
negatively affected by the loss of their services.
 The Company is subject to substantial competition in all aspects of its business.
 
    
    asset management firms,
    
    mutual fund companies,
    
    commercial banks and thrift institutions,
    
    insurance companies,
    
    hedge funds, and
    
    brokerage and investment banking firms.
  7




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A significant portion of the Companys revenues are based on contracts with the Diamond Hill
Funds that are subject to termination without cause and on short notice.
 The Companys business is subject to substantial governmental regulation.
  
 ITEM 1B: Unresolved Staff Comments
 
 ITEM 2: Description of Property
   
 ITEM 3: Legal Proceedings
  
 ITEM 4: Submission of Matters to a Vote of Security Holders
  
 PART II
 
 ITEM 5: Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  8




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##### Table of Contents



TM TM
 
 12/31/01
    
    
    12/31/01
    
    
    12/31/01
    
    
    12/31/01
    
    
    12/31/01
    
    
    12/31/01Diamond Hill Investment Group, Inc.
    
    
    100
    
    
    
    98
    
    
    
    174
    
    
    
    419
    
    
    
    783
    
    
    
    2,093Russell Microcap TMIndex
    
    
    100
    
    
    
    84
    
    
    
    140
    
    
    
    159
    
    
    
    163
    
    
    
    190Peer Group *
    
    
    100
    
    
    
    65
    
    
    
    82
    
    
    
    96
    
    
    
    106
    
    
    
    125
 
 *
    
    The following companies are included in the Peer Group: Westwood Holdings Group, Inc.; U.S.
Global Investors, Inc.; GAMCO Investors, Inc.; Waddell & Reed Financial, Inc.; Affiliated Managers
Group, Inc.; Federated Investors, Inc.; Janus Capital Group, Inc.; Eaton Vance Corp. 2006
    
    2005High Price
    
    Low Price
    
    Close Price
    
    High Price
    
    Low Price
    
    Close PriceQuarter ended:March 31
    
    $
    46.33
    
    
    $
    29.75
    
    
    $
    41.22
    
    
    $
    20.40
    
    
    $
    16.41
    
    
    $
    18.48June 30
    
    $
    52.00
    
    
    $
    36.38
    
    
    $
    47.03
    
    
    $
    22.00
    
    
    $
    14.01
    
    
    $
    17.50September 30
    
    $
    67.44
    
    
    $
    44.00
    
    
    $
    63.25
    
    
    $
    30.50
    
    
    $
    17.00
    
    
    $
    25.85December 31
    
    $
    89.30
    
    
    $
    56.25
    
    
    $
    83.73
    
    
    $
    37.75
    
    
    $
    24.78
    
    
    $
    31.30
    9




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##### Table of Contents



ITEM 6: Selected Financial Data
  For the Years Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Income Statement Data (in thousands):Net revenues
    
    $
    31,905
    
    
    $
    10,246
    
    
    $
    2,774
    
    
    $
    1,161
    
    
    $
    669Net operating income (loss)
    
    
    9,769
    
    
    
    1,394
    
    
    
    (664
    )
    
    
    (1,394
    )
    
    
    (2,397
    )Net income (loss)
    
    
    8,065
    
    
    
    3,651
    
    
    
    (177
    )
    
    
    (994
    )
    
    
    (2,464
    )Earnings Per Share:Basic
    
    $
    4.51
    
    
    $
    2.21
    
    
    $
    (0.11
    )
    
    $
    (0.68
    )
    
    $
    (1.73
    )Diluted
    
    
    3.63
    
    
    
    1.83
    
    
    
    (0.11
    )
    
    
    (0.68
    )
    
    
    (1.73
    )Weighted Average Shares OutstandingBasic
    
    
    1,787,390
    
    
    
    1,654,935
    
    
    
    1,566,385
    
    
    
    1,458,264
    
    
    
    1,424,602Diluted
    
    
    2,219,580
    
    
    
    1,996,176
    
    
    
    1,566,385
    
    
    
    1,458,264
    
    
    
    1,424,602
 At December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Balance Sheet Data (in thousands):Total assets
    
    $
    37,236
    
    
    $
    12,748
    
    
    $
    3,968
    
    
    $
    3,314
    
    
    $
    3,893Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    20,483
    
    
    
    10,861
    
    
    
    3,566
    
    
    
    3,175
    
    
    
    3,637Assets Under Management (in millions):
    
    $
    3,708
    
    
    $
    1,531
    
    
    $
    524
    
    
    $
    250
    
    
    $
    128
 10




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##### Table of Contents



ITEM 7: Managements Discussion and Analysis of Financial Condition and Results of Operation
    Assets Under Management by ProductAs of December 31,(in millions)
    
    2006
    
    2005
    
    2004Mutual funds
    
    $
    2,518
    
    
    $
    907
    
    
    $
    238Separate accounts
    
    
    875
    
    
    
    513
    
    
    
    265Private investment funds
    
    
    315
    
    
    
    111
    
    
    
    21Total
    
    $
    3,708
    
    
    $
    1,531
    
    
    $
    524
 11




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Consolidated Results of Operations
 2006
    
    2005
    
    % Change
    
    2005
    
    2004
    
    % ChangeNet income (in thousands)
    
    $
    8,065
    
    
    $
    3,651
    
    
    
    121
    %
    
    $
    3,651
    
    
    $
    (176,500
    )
    
    
    n.mPro-forma net income (in thousands)
    
    $
    8,065
    
    
    $
    1,208
    
    
    
    568
    %
    
    $
    1,208
    
    
    $
    (176,500
    )
    
    
    n.mNet income (loss) per shareBasic
    
    $
    4.51
    
    
    $
    2.21
    
    
    
    104
    %
    
    $
    2.21
    
    
    $
    (0.11
    )
    
    
    n.mPro-forma Basic
    
    $
    4.51
    
    
    $
    0.73
    
    
    
    518
    %
    
    $
    0.73
    
    
    $
    (0.11
    )
    
    
    n.mDiluted
    
    $
    3.63
    
    
    $
    1.83
    
    
    
    98
    %
    
    $
    1.83
    
    
    $
    (0.11
    )
    
    
    n.mPro-forma Diluted
    
    $
    3.63
    
    
    $
    0.61
    
    
    
    495
    %
    
    $
    0.61
    
    
    $
    (0.11
    )
    
    
    n.mWeighted average shares
outstanding (in thousands)Basic
    
    
    1,787
    
    
    
    1,655
    
    
    
    
    
    
    
    1,655
    
    
    
    1,566Diluted
    
    
    2,220
    
    
    
    1,996
    
    
    
    
    
    
    
    1,996
    
    
    
    1,566n.m. - not meaningful
  Year ended December 31, 2006 compared with Year Ended December 31, 2005
 
    
    The Companys investment advisory fee and mutual fund administration fee increase is
substantially due an increase in AUM of $2.2 billion during 2006.
    
    Performance incentive fees increased by 172% due to increase AUM and strong investment
performance.
    
    Investment income grew by $1.9 million due to a larger investment in the private
investment funds and strong investment performance.
  
    
    Employee compensation expense increased by 163%, or $11.3 million primarily due to
higher incentive compensation and an overall staff increase of 52%, primarily on the
investment team.
    
    Consistent with continued growth in mutual fund assets under management, mutual fund
administration expense increased by 104%, or $860,496.
    
    Consistent with higher investment advisory and performance incentive fees, third party
distribution expenses increased by 252%, or $559,385. A large portion of this increase was
related to the new third party placement firm hired during 2006 to focus on distribution of
the private investment funds.
 Year ended December 31, 2005 compared with Year Ended December 31, 2004
 12




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Revenue
 (in Thousands)
    
    2006
    
    2005
    
    % Change
    
    2005
    
    2004
    
    % ChangeInvestment advisory
    
    
    20,247
    
    
    
    6,489
    
    
    
    212
    %
    
    
    6,489
    
    
    
    2,290
    
    
    
    183
    %Performance incentive
    
    
    7,947
    
    
    
    2,916
    
    
    
    173
    %
    
    
    2,916
    
    
    
    195
    
    
    
    1395
    %Mutual fund administration, net
    
    
    3,710
    
    
    
    841
    
    
    
    341
    %
    
    
    841
    
    
    
    289
    
    
    
    191
    %Total
    
    
    31,904
    
    
    
    10,246
    
    
    
    211
    %
    
    
    10,246
    
    
    
    2,774
    
    
    
    269
    %
  Investment Advisory Fees.
 Performance Incentive Fees.
 Mutual Fund Administration Fees.
 13




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Expenses
 (in Thousands)
    
    2006
    
    2005
    
    % Change
    
    2005
    
    2004
    
    % ChangeCompensation and related costs
    
    
    18,148
    
    
    
    6,878
    
    
    
    164
    %
    
    
    6,878
    
    
    
    2,277
    
    
    
    202
    %General and administrative
    
    
    1,137
    
    
    
    679
    
    
    
    67
    %
    
    
    679
    
    
    
    501
    
    
    
    36
    %Sales and marketing
    
    
    384
    
    
    
    248
    
    
    
    55
    %
    
    
    248
    
    
    
    191
    
    
    
    30
    %Third party distribution
    
    
    781
    
    
    
    222
    
    
    
    252
    %
    
    
    222
    
    
    
    16
    
    
    
    1288
    %Mutual fund administration
    
    
    1,686
    
    
    
    825
    
    
    
    104
    %
    
    
    825
    
    
    
    453
    
    
    
    82
    %Total
    
    
    22,136
    
    
    
    8,852
    
    
    
    150
    %
    
    
    8,852
    
    
    
    3,438
    
    
    
    157
    %
 Compensation and Related Costs.
 General and Administrative.
 Sales and Marketing.
 Third Party Distribution.
 Mutual Fund Administration.
 Liquidity and Capital Resources
   14




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ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
    Fair Value Assuming a
    
    
    Fair Value Assuming aFair Value as of
    
    
    Hypothetical 10%
    
    
    Hypothetical 10%December 31, 2006
    
    
    Increase
    
    
    DecreaseEquity fund investments
    
    $
    16,192,613
    
    
    $
    17,811,874
    
    
    $
    14,573,352Bond fund investments
    
    
    2,916,069
    
    
    
    3,207,676
    
    
    
    2,624,462Total
    
    $
    19,108,682
    
    
    $
    21,019,550
    
    
    $
    17,197,814
 15




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ITEM 8. Financial Statements and Supplementary Data
 Report of Independent Registered Public Accounting  Firm on Consolidated Financial Statements
 
     
 16




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17




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Diamond Hill Investment Group, Inc.
Consolidated Balance Sheets
 December 31,2006
    
    
    2005ASSETSCash and cash equivalents
    
    $
    9,836,989
    
    
    $
    2,532,334Investment portfolio
    
    
    19,108,682
    
    
    
    5,855,370Accounts receivable
    
    
    6,924,008
    
    
    
    1,897,701Prepaid expenses
    
    
    869,501
    
    
    
    580,109Fixed assets, net of depreciation, and other assets
    
    
    497,297
    
    
    
    111,863Deferred taxes
    
    
    
    
    
    
    1,770,132Total assets
    
    $
    37,236,477
    
    
    $
    12,747,509LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable and accrued expenses
    
    
    1,217,114
    
    
    
    336,497Accrued incentive compensation
    
    
    13,637,000
    
    
    
    1,550,000Deferred taxes
    
    
    1,899,106
    
    
    
    Total Liabilities
    
    
    16,753,220
    
    
    
    1,886,497Commitments and contingencies
    
    
    
    
    
    
    Shareholders EquityCommon stock, no par value
7,000,000 shares authorized; 1,848,472 issued
1,838,435 outstanding at December 31, 2006
1,755,899 outstanding at December 31, 2005
    
    
    16,515,256
    
    
    
    13,199,444Preferred stock, undesignated, 1,000,000 shares
authorized and unissued
    
    
    
    
    
    
    Treasury stock, at cost
10,037 shares at December 31, 2006
72,073 shares at December 31, 2005
    
    
    (95,736
    )
    
    
    (412,370
    )Deferred compensation
    
    
    (2,355,499
    )
    
    
    (292,381
    )Retained earnings / (Accumulated deficit)
    
    
    6,419,236
    
    
    
    (1,633,681
    )Total shareholders equity
    
    
    20,483,257
    
    
    
    10,861,012Total liabilities and shareholders equity
    
    $
    37,236,477
    
    
    $
    12,747,509
  18




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Diamond Hill Investment Group, Inc.
Consolidated Statements of Income
 Year Ended December 31,2006
    
    
    2005
    
    
    2004REVENUES:Investment advisory
    
    $
    20,246,624
    
    
    $
    6,488,767
    
    
    $
    2,290,324Performance incentive
    
    
    7,947,434
    
    
    
    2,915,771
    
    
    
    194,524Mutual fund administration, net
    
    
    3,710,141
    
    
    
    841,527
    
    
    
    288,960Total revenue
    
    
    31,904,199
    
    
    
    10,246,065
    
    
    
    2,773,808OPERATING EXPENSES:Compensation and related costs
    
    
    18,147,526
    
    
    
    6,877,929
    
    
    
    2,276,797General and administrative
    
    
    1,137,319
    
    
    
    678,939
    
    
    
    500,507Sales and marketing
    
    
    383,994
    
    
    
    247,972
    
    
    
    190,869Third party distribution
    
    
    781,256
    
    
    
    221,871
    
    
    
    16,358Mutual fund administration
    
    
    1,685,536
    
    
    
    825,040
    
    
    
    453,064Total operating expenses
    
    
    22,135,631
    
    
    
    8,851,751
    
    
    
    3,437,595NET OPERATING INCOME (LOSS)
    
    
    9,768,568
    
    
    
    1,394,314
    
    
    
    (663,787
    )Investment Return
    
    
    2,526,620
    
    
    
    594,777
    
    
    
    487,287INCOME (LOSS) BEFORE TAXES
    
    
    12,295,188
    
    
    
    1,989,091
    
    
    
    (176,500
    )Income tax (provision) / benefit
    
    
    (4,230,055
    )
    
    
    1,661,675
    
    
    
    NET INCOME (LOSS)
    
    $
    8,065,133
    
    
    $
    3,650,766
    
    
    $
    (176,500
    )Earnings (loss) per shareBasic
    
    $
    4.51
    
    
    $
    2.21
    
    
    $
    (0.11
    )Diluted
    
    $
    3.63
    
    
    $
    1.83
    
    
    $
    (0.11
    )Weighted average shares outstandingBasic
    
    
    1,787,390
    
    
    
    1,654,935
    
    
    
    1,566,385Diluted
    
    
    2,219,580
    
    
    
    1,996,176
    
    
    
    1,566,385
  19




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Diamond Hill Investment Group, Inc.
Consolidated Statements of Shareholders Equity
 RetainedShares
    
    
    Common
    
    
    Treasury
    
    
    Deferred
    
    
    EarningsOutstanding
    
    
    Stock
    
    
    Stock
    
    
    Compensation
    
    
    (Deficit)
    
    
    TotalBalance at January 1, 2004
    
    
    1,523,999
    
    
    $
    10,025,711
    
    
    $
    (1,739,206
    )
    
    $
    (3,744
    )
    
    $
    (5,107,947
    )
    
    $
    3,174,814Deferred compensation
    
    
    15,000
    
    
    
    55,200
    
    
    
    85,800
    
    
    
    (141,000
    )
    
    
    
    
    
    
    Recognition of current year
deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,194
    
    
    
    
    
    
    
    20,194Sale of treasury stock
    
    
    74,061
    
    
    
    123,803
    
    
    
    424,028
    
    
    
    
    
    
    
    
    
    
    
    547,831Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176,500
    )
    
    
    (176,500
    )Balance at December 31, 2004
    
    
    1,613,060
    
    
    $
    10,204,714
    
    
    $
    (1,229,378
    )
    
    $
    (124,550
    )
    
    $
    (5,284,447
    )
    
    $
    3,566,339Deferred compensation
    
    
    15,000
    
    
    
    143,700
    
    
    
    85,800
    
    
    
    (229,500
    )
    
    
    
    
    
    
    Recognition of current year
deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,669
    
    
    
    
    
    
    
    61,669FAS 123R compensation expense
    
    
    
    
    
    
    634,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    634,712Tax benefit from options and
warrants exercised
    
    
    
    
    
    
    108,457
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,457Sale of treasury stock
    
    
    127,839
    
    
    
    2,107,861
    
    
    
    731,208
    
    
    
    
    
    
    
    
    
    
    
    2,839,069Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,650,766
    
    
    
    3,650,766Balance at December 31, 2005
    
    
    1,755,899
    
    
    $
    13,199,444
    
    
    $
    (412,370
    )
    
    $
    (292,381
    )
    
    $
    (1,633,681
    )
    
    $
    10,861,012Deferred compensation
    
    
    44,482
    
    
    
    2,246,503
    
    
    
    160,101
    
    
    
    (2,406,604
    )
    
    
    
    
    
    
    Recognition of current year
deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343,486
    
    
    
    
    
    
    
    343,486FAS 123R compensation expense
    
    
    
    
    
    
    27,597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,597Tax benefit from options and
warrants exercised
    
    
    
    
    
    
    426,419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    426,419Sale of treasury stock
    
    
    34,054
    
    
    
    525,293
    
    
    
    156,533
    
    
    
    
    
    
    
    (12,216
    )
    
    
    669,610Exercise of 4,000 warrants
for common stock
    
    
    4,000
    
    
    
    90,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,065,133
    
    
    
    8,065,133Balance at December 31, 2006
    
    
    1,838,435
    
    
    $
    16,515,256
    
    
    $
    (95,736
    )
    
    $
    (2,355,499
    )
    
    $
    6,419,236
    
    
    $
    20,483,257
  20




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##### Table of Contents



Diamond Hill Investment Group, Inc.
Consolidated Statements of Cash Flow
 Year Ended December 31,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net Income (loss)
    
    $
    8,065,133
    
    
    $
    3,650,766
    
    
    $
    (176,500
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation on property and equipment
    
    
    69,165
    
    
    
    39,950
    
    
    
    40,847Amortization of deferred compensation
    
    
    343,486
    
    
    
    61,669
    
    
    
    20,194(Increase) decrease in accounts receivable
    
    
    (5,026,307
    )
    
    
    (532,201
    )
    
    
    (1,192,201
    )Deferred income taxes
    
    
    4,071,965
    
    
    
    (1,661,675
    )
    
    
    Stock option expense
    
    
    27,597
    
    
    
    634,712
    
    
    
    (Increase) decrease in unrealized gains
    
    
    (2,110,524
    )
    
    
    (487,300
    )
    
    
    (352,411
    )Increase (decrease) in accrued liabilities
    
    
    12,991,309
    
    
    
    1,485,277
    
    
    
    263,974Other changes in assets and liabilities
    
    
    (289,392
    )
    
    
    (330,237
    )
    
    
    (34,631
    )Net cash provided by (used in) operating
activities
    
    
    18,142,432
    
    
    
    2,860,961
    
    
    
    (1,430,728
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (454,599
    )
    
    
    (28,322
    )
    
    
    (24,138
    )Investment portfolio activity
    
    
    (11,142,788
    )
    
    
    (3,241,940
    )
    
    
    958,616Net cash (used in) provided by investing
activities
    
    
    (11,597,387
    )
    
    
    (3,270,262
    )
    
    
    934,478CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    90,000
    
    
    
    
    
    
    
    Sale of treasury stock
    
    
    669,610
    
    
    
    2,839,069
    
    
    
    547,831Net cash provided by financing activities
    
    
    759,610
    
    
    
    2,839,069
    
    
    
    547,831CASH AND CASH EQUIVALENTSNet change during the period
    
    
    7,304,655
    
    
    
    2,429,768
    
    
    
    51,581At beginning of period
    
    
    2,532,334
    
    
    
    102,566
    
    
    
    50,985At end of period
    
    $
    9,836,989
    
    
    $
    2,532,334
    
    
    $
    102,566Cash paid during the period for:Interest
    
    $
    
    
    
    $
    
    
    
    $
    1,874Income taxes
    
    
    91,000
    
    
    
    
    
    
    
    
  21




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##### Table of Contents



Diamond Hill Investment Group, Inc.
Notes to Consolidated Financial Statements
 Organization
    Significant Accounting Policies
  Reclassifications
  Principles of Consolidation
  Segment Information
  Cash and Cash Equivalents
  Accounts Receivable
  22




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##### Table of Contents



Significant Accounting Policies (Continued)
 Valuation of Investment Portfolio
  Limited Partnership Interests
  Property and Equipment
  Treasury Stock
  Revenue Recognition
   23




---



##### Table of Contents



Significant Accounting Policies (Continued)
 Revenue Recognition  Mutual Fund Administration
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Mutual fund admin revenue, gross
    
    $
    5,795,110
    
    
    $
    1,736,346
    
    
    $
    619,835Mutual fund admin, fund related expense
    
    
    2,183,599
    
    
    
    927,043
    
    
    
    340,510Mutual fund admin revenue, net of fund related expenses
    
    
    3,611,511
    
    
    
    809,303
    
    
    
    279,325C-Share broker commission advance repayments
    
    
    1,210,697
    
    
    
    579,285
    
    
    
    226,661C-Share broker commission amortization
    
    
    1,112,067
    
    
    
    547,061
    
    
    
    217,026C-Share financing activity, net
    
    
    98,630
    
    
    
    32,224
    
    
    
    9,635Mutual fund administration revenue, net
    
    $
    3,710,141
    
    
    $
    841,527
    
    
    $
    288,960
 Income Taxes
   Earnings Per Share
  24




---



##### Table of Contents



Investment Portfolio
  Year Ended December 31,2006
    
    
    2005Diamond Hill Small Cap Fund
    
    $
    65,371
    
    
    $
    60,817Diamond Hill Small-Mid Cap Fund
    
    
    330,546
    
    
    
    300,000Diamond Hill Large Cap Fund
    
    
    292,369
    
    
    
    58,918Diamond Hill Select Fund
    
    
    342,121
    
    
    
    300,000Diamond Hill Long-Short Fund
    
    
    295,953
    
    
    
    60,405Diamond Hill Financial Long-Short Fund
    
    
    300,000
    
    
    
    Diamond Hill Strategic Income Fund
    
    
    2,916,069
    
    
    
    1,024,171Diamond Hill Investment Partners, L.P.
    
    
    9,744,285
    
    
    
    4,051,059Diamond Hill Investment Partners II, L.P.
    
    
    4,821,968
    
    
    
    Total Investment Portfolio
    
    $
    19,108,682
    
    
    $
    5,855,370
  December 31,2006
    
    2005
    
    2004Total assets
    
    $
    357,375,152
    
    
    $
    176,442,538
    
    
    $
    40,934,365Total liabilities
    
    
    146,918,057
    
    
    
    69,122,518
    
    
    
    20,194,401Net assets
    
    
    210,457,095
    
    
    
    107,320,020
    
    
    
    20,739,964Net income
    
    
    35,961,019
    
    
    
    20,215,378
    
    
    
    4,519,117DHCMs portion of net assets
    
    
    14,566,253
    
    
    
    4,051,059
    
    
    
    1,078,302DHCMs portion of net income
    
    
    6,515,194
    
    
    
    2,972,757
    
    
    
    614,852
  25




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##### Table of Contents



Capital Stock
 Common Shares
  Authorization of Preferred Shares
  Stock-Based Compensation
 Equity Incentive Plans
 2005 Employee and Director Equity Incentive Plan
  1993 Non-qualified and Incentive Stock Option Plan
  Equity Compensation Grants
  401(k) Plan
  26




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##### Table of Contents



Stock-Based Compensation (Continued)
   Year Ended December 31,2006
    
    
    2005
    
    
    2004Net income (loss), as reported
    
    $
    8,065,133
    
    
    $
    3,650,766
    
    
    $
    (176,500
    )Add:Stock-based employee
compensation expense
included in reported
net income, net of
related tax effects
    
    
    27,597
    
    
    
    523,505
    
    
    
    Deduct:Total stock-based
employee
compensation expense
determined under
fair value based
methods for all
awards net of
related tax effects
    
    
    (27,597
    )
    
    
    (559,139
    )
    
    
    (103,091
    )Pro forma net income (loss)
    
    $
    8,065,133
    
    
    $
    3,615,132
    
    
    $
    (279,591
    )Earnings (loss) per share:Basic  as reported
    
    $
    4.51
    
    
    $
    2.21
    
    
    $
    (0.11
    )Basic  pro forma
    
    $
    4.51
    
    
    $
    2.18
    
    
    $
    (0.18
    )Diluted  as reported
    
    $
    3.63
    
    
    $
    1.83
    
    
    $
    (0.11
    )Diluted  pro forma
    
    $
    3.63
    
    
    $
    1.81
    
    
    $
    (0.18
    )
  Dividend yield:
    
    
    0.0
    %Expected volatility:
    
    
    28
    %Expected life:
    
    5 yearsRisk-free interest rate:
    
    
    3.50
    %
 27




---



##### Table of Contents



Stock-Based Compensation (Continued)
  Options
    
    
    WarrantsWeighted Average
    
    
    
    
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstanding December 31, 2003
    
    
    260,202
    
    
    $
    10.58
    
    
    
    280,400
    
    
    $
    12.90Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired / Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding December 31, 2004
    
    
    260,202
    
    
    
    10.58
    
    
    
    280,400
    
    
    
    12.90Exercisable December 31, 2004
    
    
    154,202
    
    
    
    14.52
    
    
    
    280,400
    
    
    
    12.90Granted
    
    
    71,800
    
    
    
    28.10
    
    
    
    
    
    
    
    Expired / Forfeited
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    14.38Exercised
    
    
    29,000
    
    
    
    13.21
    
    
    
    15,000
    
    
    
    14.38Outstanding December 31, 2005
    
    
    303,002
    
    
    
    14.48
    
    
    
    259,400
    
    
    
    12.78Exercisable December 31, 2005
    
    
    231,002
    
    
    
    17.53
    
    
    
    259,400
    
    
    
    12.78Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired / Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    19,900
    
    
    
    12.79
    
    
    
    10,000
    
    
    
    17.88Outstanding December 31, 2006
    
    
    283,102
    
    
    $
    14.60
    
    
    
    249,400
    
    
    $
    12.57Exercisable December 31, 2006
    
    
    243,102
    
    
    $
    16.26
    
    
    
    249,400
    
    
    $
    12.57
  Options
    
    
    WarrantsRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    RemainingNumber
    
    
    Life
    
    
    Number
    
    
    
    
    
    
    Number
    
    
    Life
    
    
    NumberOutstanding
    
    
    In Years
    
    
    Exercisable
    
    
    Exercise Price
    
    
    Outstanding
    
    
    In Years
    
    
    Exercisable
    
    
    Exercise Price16,202
    
    
    
    1.36
    
    
    
    16,202
    
    
    $
    73.75
    
    
    
    11,000
    
    
    
    0.18
    
    
    
    11,000
    
    
    $
    10.6310,000
    
    
    
    3.61
    
    
    
    10,000
    
    
    
    7.95
    
    
    
    14,000
    
    
    
    1.36
    
    
    
    14,000
    
    
    
    73.7510,000
    
    
    
    3.97
    
    
    
    10,000
    
    
    
    8.44
    
    
    
    400
    
    
    
    2.00
    
    
    
    400
    
    
    
    22.2066,900
    
    
    
    3.97
    
    
    
    66,900
    
    
    
    28.10
    
    
    
    10,000
    
    
    
    2.37
    
    
    
    10,000
    
    
    
    22.5010,000
    
    
    
    4.25
    
    
    
    10,000
    
    
    
    8.45
    
    
    
    12,000
    
    
    
    3.16
    
    
    
    12,000
    
    
    
    11.2560,000
    
    
    
    4.54
    
    
    
    60,000
    
    
    
    5.25
    
    
    
    2,000
    
    
    
    3.36
    
    
    
    2,000
    
    
    
    8.75110,000
    
    
    
    6.43
    
    
    
    70,000
    
    
    
    4.50
    
    
    
    200,000
    
    
    
    3.36
    
    
    
    200,000
    
    
    
    8.00283,102
    
    
    
    4.90
    
    
    
    243,102
    
    
    
    
    
    
    
    249,400
    
    
    
    3.06
    
    
    
    249,400
  Outstanding
    
    $
    37,317,475Exercisable
    
    $
    34,148,275
 28




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##### Table of Contents



Operating Leases
  2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013$216,777
    
    $
    223,870
    
    
    $
    230,964
    
    
    $
    238,057
    
    
    $
    245,151
    
    
    $
    254,018
    
    
    $
    129,669
  29




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##### Table of Contents



INCOME TAXES
  2006
    
    
    2005
    
    
    2004Current city income tax provision (benefit)
    
    $
    158,090
    
    
    $
    
    
    
    $
    Deferred federal income tax provision (benefit)
    
    
    4,071,965
    
    
    
    (1,661,675
    )
    
    
    Provision (benefit) for income taxes
    
    $
    4,230,055
    
    
    $
    (1,661,675
    )
    
    $
    
  2006
    
    
    2005
    
    
    2004Income tax computed at statutory rate
    
    $
    4,180,364
    
    
    $
    676,291
    
    
    $
    (60,010
    )City income taxes, net of federal benefit
    
    
    104,339
    
    
    
    
    
    
    
    Other
    
    
    (54,648
    )
    
    
    104,594
    
    
    
    Valuation allowance
    
    
    
    
    
    
    (2,442,560
    )
    
    
    60,010Income tax expense (benefit)
    
    $
    4,230,055
    
    
    $
    (1,661,675
    )
    
    $
    
  2006
    
    
    2005Deferred tax benefit of NOL Carryforward
    
    $
    248,686
    
    
    $
    2,627,282Stock-based compensation
    
    $
    111,207
    
    
    $
    111,207Unrealized (gains) losses
    
    
    (2,264,114
    )
    
    
    (964,277
    )Other assets and liabilities
    
    
    5,115
    
    
    
    (4,080
    )Net deferred tax assets (liabilities)
    
    $
    (1,899,106
    )
    
    $
    1,770,132
   30




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##### Table of Contents



Earnings Per Share
  Year ended December 31,2006
    
    
    2005
    
    
    2004Basic and Diluted net income (loss)
    
    $
    8,065,133
    
    
    $
    3,650,766
    
    
    $
    (176,500
    )Weighted average number of outstanding sharesBasic
    
    
    1,787,390
    
    
    
    1,654,935
    
    
    
    1,566,385Diluted
    
    
    2,219,580
    
    
    
    1,996,176
    
    
    
    1,566,385Earnings (loss) per shareBasic
    
    $
    4.51
    
    
    $
    2.21
    
    
    $
    (0.11
    )Diluted
    
    $
    3.63
    
    
    $
    1.83
    
    
    $
    (0.11
    )
  Commitments and Contingencies
  Subsequent Event  2007 Tax Deduction
  31




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##### Table of Contents



ITEM 9: Changes In and Disagreements With Accountants or Accounting and Financial Disclosures
 
 ITEM 9A: Controls and Procedures
   Managements Annual Report on Internal Control Over Financial Reporting
     /s/ R. H. Dillon

R. H. Dillon
    
    /s/ James F. Laird

James F. LairdChief Executive Officer and President
    
    Chief Financial OfficerMarch 6, 2007
    
    March 6, 2007
 32




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##### Table of Contents



Report of Independent Registered Public Accounting  Firm on Internal Control Over Financial Reporting
 
       
 33




---



##### Table of Contents



ITEM 9B: Other Information  None
 
 PART III
 
 ITEM 10: Directors and Executive Officers of the Registrant
  
 ITEM 11: Executive Compensation
  
 ITEM 12: Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  
 ITEM 13: Certain Relationships and Related Transactions
  
 ITEM 14: Principal Accountant Fees and Services
  34




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##### Table of Contents



PART IV:
 
 ITEM 15: Exhibits and Financial Statement Schedules
    3.1
    
    Amended and Restated Articles of Incorporation of the Company. (Incorporated by reference
from Form 8-K Current Report for the event on May 2, 2002 filed with the SEC on May 7,
2002; File No. 000-24498.)3.2
    
    Code of Regulations of the Company. (Incorporated by reference from Form 8-K Current
Report for the event on May, 2002 filed with the SEC on May 7, 2002; File No. 000-24498.)10.1
    
    Representative Investment Management Agreement between Diamond Hill Capital Management,
Inc. and the Diamond Hill Funds. (Incorporated by reference from Form N1-A filed with the
SEC on December 30, 2005; File No. 811-08061.)10.2
    
    Fourth Amended and Restated Administrative, Fund Accounting, and Transfer Agency Services
Agreement between Diamond Hill Capital Management, Inc. and the Diamond Hill Funds.
(Incorporated by reference from Form N1-A filed with the SEC on May 2, 2006; File No.
811-08061.)10.3
    
    1993 Non-Qualified and Incentive Stock Option Plan. (Incorporated by reference from Form
DEF 14A filed with the SEC on July 21, 1998; File No. 000-24498.)10.4
    
    Employment Agreement between the Company and Roderick H. Dillon, Jr. dated August 10,
2006. (Incorporated by reference from Form 8-K Current Report filed with the SEC on
August 10, 2006; file No. 000-24498.)10.5
    
    Employment Agreement between the Company and James F. Laird dated October 24, 2001.
(Incorporated by reference from Form 10-KSB for 2002 filed with the SEC on March 28, 2003;
File No. 000-24498.)10.6
    
    Form of Subscription Agreement for Common Shares of Diamond Hill Investment Group, Inc.
executed by subscribers as part of the private placement on July 21, 2004. (Incorporated
by reference from Form 10-QSB for the quarter ended September 30, 2004 filed with the SEC
on November 15, 2004; File No. 000-24498.)10.7
    
    2005 Employee and Director Equity Incentive Plan. (Incorporated by reference from Form
DEF 14A filed with the SEC on April 5, 2005; File No. 000-24498.)10.8
    
    2006 Performance-Based Compensation Plan. (Incorporated by reference from Form 8-K
Current Report filed with the SEC on May 16, 2006; File No. 000-24498.)10.9
    
    Amendment to the 1993 non-Qualified and Incentive Stock Option Plan dated November 9, 200610.10
    
    Amendment to Warrant Agreement between the Registrant and Roderick H. Dillon dated
November 9, 200614.1
    
    Code of Business Conduct and Ethics. (Incorporated by reference from Form DEF 14A filed
with the SEC on April 9, 2004; File No. 000-24498.)21.1
    
    Subsidiaries of the Company.23.1
    
    Consent of Independent Registered Public Accounting Firm, Plante & Moran, PLLC.31.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).31.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).32.1
    
    Section 1350 Certifications.
 35




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##### Table of Contents



SIGNATURES
   By: /S/R. H. DillonR. H. Dillon, President, Chief Executive Officer and a Director
    
    
    
    March 16, 2007
  Signature
    
    Title
    
    Date/S/R. H. Dillon

R. H. Dillon and a Director
    
    President, Chief Executive Officer,
    
    March 16, 2007/S/James F. Laird

James F. Laird
    
    Chief Financial Officer, Treasurer,
and Secretary
    
    March 16, 2007/S/ David P. Lauer

David P. Lauer
    
    Director
    
    March 16, 2007/S/James G. Mathias

James G. Mathias
    
    Director
    
    March 16, 2007/S/ David R. Meuse

David R. Meuse
    
    Director
    
    March 16, 2007/S/ Diane D. Reynolds

Diane D. Reynolds
    
    Director
    
    March 16, 2007/S/ Donald B. Shackelford

Donald B. Shackelford
    
    Director
    
    March 16, 2007
 36