##### 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, 2007
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
 nd




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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
    
    9Part IIItem 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    9Item 6. Selected Financial Data
    
    11Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operation
    
    11Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    18Item 8. Financial Statements and Supplementary Data
    
    19Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
    
    34Item 9A. Controls and Procedures
    
    34Item 9B. Other Information
    
    35Part IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    35Item 11. Executive Compensation
    
    35Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    35Item 13. Certain Relationships and Related Transactions, and
Director Independence
    
    35Item 14. Principal Accounting Fees and Services
    
    35Part IVItem 15. Exhibits, Financial Statement Schedules
    
    36Signatures
    
    37EX-10.6EX-10.7EX-10.8EX-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)
    
    2007
    
    2006
    
    2005Mutual funds (including sub-advised)
    
    $
    2,910
    
    
    $
    2,518
    
    
    $
    907Separate accounts
    
    
    998
    
    
    
    875
    
    
    
    513Private investment funds
    
    
    495
    
    
    
    315
    
    
    
    111Total
    
    $
    4,403
    
    
    $
    3,708
    
    
    $
    1,531
 Assets Under Management by ObjectiveAs of December 31,(in millions)
    
    2007
    
    2006
    
    2005Small and Small-Mid Cap
    
    $
    597
    
    
    $
    807
    
    
    $
    406Large Cap and Select
    
    
    1,031
    
    
    
    919
    
    
    
    437Long-Short
    
    
    2,500
    
    
    
    1,720
    
    
    
    474Strategic and Fixed Income
    
    
    275
    
    
    
    262
    
    
    
    214Total
    
    $
    4,403
    
    
    $
    3,708
    
    
    $
    1,531
 3




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##### Table of Contents



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)
    
    2007
    
    2006
    
    2005Independent registered investment advisors
and broker/dealers
    
    $
    1,405
    
    
    $
    1,161
    
    
    $
    421Wirehouse and regional broker/dealers
    
    
    1,020
    
    
    
    917
    
    
    
    392Defined contribution (401k)
    
    
    229
    
    
    
    157
    
    
    
    33Institutions
    
    
    105
    
    
    
    132
    
    
    
    41Other
    
    
    35
    
    
    
    40
    
    
    
    20Total
    
    $
    2,794
    
    
    $
    2,407
    
    
    $
    907
 Separate Accounts and Private Investment Funds
  Growth Prospects
   
    
    adding additional marketing and support staff,
    
    attending and sponsoring at key industry conferences, and
    
    creating additional marketing material for the funds and separately managed accounts.
    5




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##### Table of Contents



New Business Subsidiary
  Competition
  Corporate Investment Portfolio
  Regulation
  Contractual Relationships with the Diamond Hill Funds
  6




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##### Table of Contents



Employees
  SEC Filings
  
 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,
 7




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##### Table of Contents




    
    commercial banks and thrift institutions,
    
    insurance companies,
    
    hedge funds, and
    
    brokerage and investment banking firms.
  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
  8




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##### Table of Contents



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
 TM TM
 
 12/31/2002
    

12/31/2003
    

12/31/2004
    

12/31/2005
    

12/31/2006
    

12/31/2007Diamond Hill Investment Group, Inc.
    
    
    100
    
    
    
    177
    
    
    
    427
    
    
    
    798
    
    
    
    2,136
    
    
    
    1,865Russell MicrocapTMIndex
    
    
    100
    
    
    
    166
    
    
    
    190
    
    
    
    195
    
    
    
    227
    
    
    
    209Peer Group*
    
    
    100
    
    
    
    124
    
    
    
    144
    
    
    
    157
    
    
    
    184
    
    
    
    240
 
 *
    
    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. 9




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##### Table of Contents



2007
    
    2006High Price
    
    Low Price
    
    Close Price
    
    High Price
    
    Low Price
    
    Close PriceQuarter ended:March 31
    
    $
    113.85
    
    
    $
    80.82
    
    
    $
    97.51
    
    
    $
    46.33
    
    
    $
    29.75
    
    
    $
    41.22June 30
    
    $
    109.99
    
    
    $
    82.01
    
    
    $
    90.66
    
    
    $
    52.00
    
    
    $
    36.38
    
    
    $
    47.03September 30
    
    $
    92.85
    
    
    $
    69.02
    
    
    $
    81.00
    
    
    $
    67.44
    
    
    $
    44.00
    
    
    $
    63.25December 31
    
    $
    87.40
    
    
    $
    69.50
    
    
    $
    73.10
    
    
    $
    89.30
    
    
    $
    56.25
    
    
    $
    83.73
   Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  Total Number of
    
    Maximum NumberShares Purchased as
    
    of Shares That MayTotal Number
    
    
    
    
    
    part of a Publicly
    
    Yet Be Purchasedof Shares
    
    Average Price
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Purchased
    
    Paid Per Share
    
    or Programs
    
    Programs (1)October 1, 2007 throughOctober 31, 2007
    
    
    
    
    
    
    
    
    
    
    1,398
    
    
    
    348,602November 1, 2007 throughNovember 30, 2007
    
    
    874
    
    
    $
    74.30
    
    
    
    2,272
    
    
    
    347,728December 1,
2007 throughDecember 31, 2007
    
    
    2,670
    
    
    $
    72.23
    
    
    
    4,942
    
    
    
    345,058
 
 (1)
    
    - The Companys current share repurchase program was announced on August 9, 2007. The board of
directors authorized management to repurchase up to 350,000 shares of its common stock in the open
market and in private transactions in accordance with applicable securities laws. The Companys
stock repurchase program is not subject to an expiration date. 10




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##### Table of Contents



ITEM 6: Selected Financial Data
  For the Years Ended December 31,2007
    
2006
    
    2005
    
    2004
    
    2003Income Statement Data (in thousands):Total revenues
    
    $
    41,308
    
    
    $
    31,905
    
    
    $
    10,246
    
    
    $
    2,774
    
    
    $
    1,161Net operating income (loss)
    
    
    14,078
    
    
    
    9,769
    
    
    
    1,394
    
    
    
    (664
    )
    
    
    (1,394
    )Net income (loss)
    
    
    9,932
    
    
    
    8,065
    
    
    
    3,651
    
    
    
    (177
    )
    
    
    (994
    )Earnings Per Share:Basic
    
    $
    4.61
    
    
    $
    4.51
    
    
    $
    2.21
    
    
    $
    (0.11
    )
    
    $
    (0.68
    )Diluted
    
    
    4.39
    
    
    
    3.63
    
    
    
    1.83
    
    
    
    (0.11
    )
    
    
    (0.68
    )Weighted Average Shares OutstandingBasic
    
    
    2,155,829
    
    
    
    1,787,390
    
    
    
    1,654,935
    
    
    
    1,566,385
    
    
    
    1,458,264Diluted
    
    
    2,264,234
    
    
    
    2,219,580
    
    
    
    1,996,176
    
    
    
    1,566,385
    
    
    
    1,458,264
 At December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003Balance Sheet Data (in thousands):Total assets
    
    $
    53,284
    
    
    $
    37,236
    
    
    $
    12,748
    
    
    $
    3,968
    
    
    $
    3,314Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    39,308
    
    
    
    20,483
    
    
    
    10,861
    
    
    
    3,566
    
    
    
    3,175Assets Under Management (in millions):
    
    $
    4,403
    
    
    $
    3,708
    
    
    $
    1,531
    
    
    $
    524
    
    
    $
    250
 
 ITEM 7:
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation
    11




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##### Table of Contents



Assets Under Management by ProductAs of December 31,(in millions)
    
    2007
    
    
    2006
    
    
    2005Mutual funds
    
    $
    2,910
    
    
    $
    2,518
    
    
    $
    907Separate accounts
    
    
    998
    
    
    
    875
    
    
    
    513Private investment funds
    
    
    495
    
    
    
    315
    
    
    
    111Total AUM
    
    $
    4,403
    
    
    $
    3,708
    
    
    $
    1,531
 (in millions)
    
    2007
    
    
    2006
    
    
    2005AUM at beginning of year
    
    $
    3,708
    
    
    $
    1,531
    
    
    $
    524Net cash inflowsmutual funds
    
    
    362
    
    
    
    1,333
    
    
    
    617separate accounts
    
    
    70
    
    
    
    441
    
    
    
    212private investment funds
    
    
    170
    
    
    
    164
    
    
    
    67602
    
    
    
    1,938
    
    
    
    896Net market appreciation and income
    
    
    93
    
    
    
    239
    
    
    
    111Increase during the year
    
    
    695
    
    
    
    2,177
    
    
    
    1,007AUM at end of year
    
    $
    4,403
    
    
    $
    3,708
    
    
    $
    1,531
 Consolidated Results of Operations
  2007
    
    2006
    
    % Change
    
    2006
    
    2005
    
    % ChangeNet income (in thousands)
    
    $
    9,932
    
    
    $
    8,065
    
    
    
    23
    %
    
    $
    8,065
    
    
    $
    3,651
    
    
    
    121
    %Net income per shareBasic
    
    $
    4.61
    
    
    $
    4.51
    
    
    
    2
    %
    
    $
    4.51
    
    
    $
    2.21
    
    
    
    104
    %Diluted
    
    $
    4.39
    
    
    $
    3.63
    
    
    
    21
    %
    
    $
    3.63
    
    
    $
    1.83
    
    
    
    98
    %Weighted average shares
outstanding (in thousands)Basic
    
    
    2,156
    
    
    
    1,787
    
    
    
    
    
    
    
    1,787
    
    
    
    1,655Diluted
    
    
    2,264
    
    
    
    2,220
    
    
    
    
    
    
    
    2,220
    
    
    
    1,996
 Year Ended December 31, 2007 compared with Year Ended December 31, 2006
   §
    
    Employee compensation expense increased by 10%, or $1,859,016 primarily due to an
increase in overall staff from 31 to 42.§
    
    Consistent with continued growth in mutual fund assets under management, mutual fund
administration expense increased by 44%, or $734,716.§
    
    Consistent with higher investment advisory incentive fees, third party distribution
expenses increased by 94%, or $730,839. A large portion of this increase was related to an
increase in assets of the Companys private investment funds.
 
 12




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##### Table of Contents



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 to an increase in AUM of $2.2 billion during 2006.§
    
    Performance incentive fees increased by 172% due to increased 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.
 Revenue
 (in Thousands)
    
    2007
    
    
    2006
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeInvestment advisory
    
    $
    35,165
    
    
    $
    20,247
    
    
    
    74
    %
    
    $
    20,247
    
    
    $
    6,489
    
    
    
    212
    %Performance incentive
    
    
    174
    
    
    
    7,947
    
    
    
    -98
    %
    
    
    7,947
    
    
    
    2,916
    
    
    
    173
    %Mutual fund administration, net
    
    
    5,969
    
    
    
    3,710
    
    
    
    61
    %
    
    
    3,710
    
    
    
    841
    
    
    
    341
    %Total
    
    
    41,308
    
    
    
    31,904
    
    
    
    29
    %
    
    
    31,904
    
    
    
    10,246
    
    
    
    211
    %
 Revenue
for the Year Ended December 31, 2007 compared with Year Ended
December 31, 2006
  Investment Advisory Fees.
 Performance Incentive Fees.
 Mutual Fund Administration Fees.
 13




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##### Table of Contents



Revenue
for the Year Ended December 31, 2006 compared with Year Ended
December 31, 2005
  Investment Advisory Fees.
 Performance Incentive Fees.
 Mutual Fund Administration Fees.
 Expenses
 (in Thousands)
    
    2007
    
    2006
    
    % Change
    
    2006
    
    2005
    
    % ChangeCompensation and related costs
    
    $
    20,007
    
    
    $
    18,148
    
    
    
    10
    %
    
    $
    18,148
    
    
    $
    6,878
    
    
    
    164
    %General and administrative
    
    
    2,659
    
    
    
    1,137
    
    
    
    134
    %
    
    
    1,137
    
    
    
    679
    
    
    
    67
    %Sales and marketing
    
    
    632
    
    
    
    384
    
    
    
    65
    %
    
    
    384
    
    
    
    248
    
    
    
    55
    %Third party distribution
    
    
    1,512
    
    
    
    781
    
    
    
    94
    %
    
    
    781
    
    
    
    222
    
    
    
    252
    %Mutual fund administration
    
    
    2,420
    
    
    
    1,686
    
    
    
    44
    %
    
    
    1,686
    
    
    
    825
    
    
    
    104
    %Total
    
    
    27,230
    
    
    
    22,136
    
    
    
    23
    %
    
    
    22,136
    
    
    
    8,852
    
    
    
    150
    %
 Expenses for the Year Ended December 31, 2007 compared with Year Ended December 31, 2006
 Compensation and Related Costs.
 General and Administrative.
 Sales and Marketing.
 14




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##### Table of Contents



Third Party Distribution.
 Mutual Fund Administration.
 Expenses for the Year Ended December 31, 2006 compared with Year Ended December 31, 2005
 Compensation and Related Costs.
 General and Administrative.
 Sales and Marketing.
 Third Party Distribution.
 Mutual Fund Administration.
 Liquidity and Capital Resources
    15




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##### Table of Contents



Selected Quarterly Information
  At or For the Quarter Ended2007
    
    
    2006(in thousands)
    
    
    12/31
    
    
    
    09/30
    
    
    
    06/30
    
    
    
    03/31
    
    
    
    12/31
    
    
    
    09/30
    
    
    
    06/30
    
    
    
    03/31Assets Under Management
(in millions)
    
    $
    4,403
    
    
    $
    4,380
    
    
    $
    4,479
    
    
    $
    4,169
    
    
    $
    3,708
    
    
    $
    3,117
    
    
    $
    2,734
    
    
    $
    2,181Total revenue
    
    
    10,883
    
    
    
    10,701
    
    
    
    10,369
    
    
    
    9,355
    
    
    
    13,420
    
    
    
    6,655
    
    
    
    6,249
    
    
    
    5,580Total operating expenses
    
    
    6,847
    
    
    
    7,168
    
    
    
    6,947
    
    
    
    6,268
    
    
    
    8,973
    
    
    
    4,634
    
    
    
    4,443
    
    
    
    4,086Operating income
    
    
    4,036
    
    
    
    3,533
    
    
    
    3,422
    
    
    
    3,087
    
    
    
    4,447
    
    
    
    2,021
    
    
    
    1,806
    
    
    
    1,494Net income
    
    $
    2,876
    
    
    $
    2,648
    
    
    $
    2,414
    
    
    $
    1,994
    
    
    $
    4,082
    
    
    $
    1,362
    
    
    $
    1,368
    
    
    $
    1,253Diluted EPS
    
    $
    1.23
    
    
    $
    1.14
    
    
    $
    1.05
    
    
    $
    0.91
    
    
    $
    1.72
    
    
    $
    0.61
    
    
    $
    0.62
    
    
    $
    0.58Diluted shares outstanding
    
    
    2,335
    
    
    
    2,322
    
    
    
    2,302
    
    
    
    2,196
    
    
    
    2,281
    
    
    
    2,239
    
    
    
    2,200
    
    
    
    2,172
 Contractual Obligations
  Total
    
    2008
    
    2009-2010
    
    2011-2012
    
    LaterOperating lease obligations
    
    $
    1,329,000
    
    
    $
    231,000
    
    
    $
    469,000
    
    
    $
    499,000
    
    
    $
    130,000Purchase obligations
    
    $
    1,800,000
    
    
    $
    1,700,000
    
    
    $
    100,000
    
    
    $
    
    
    
    $
    
 16




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##### Table of Contents



Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
 Provisions for Income Tax Taxes.
 Revenue Recognition on Incentive-Based Advisory Contracts.
 Newly Issued But Not Yet Adopted Accounting Standards
  17




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##### Table of Contents



ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
    Fair Value Assuming
    
    
    Fair Value AssumingFair Value as of
    
    
    a Hypothetical 10%
    
    
    a Hypothetical 10%December 31, 2007
    
    
    Increase
    
    
    DecreaseEquity investments
    
    $
    30,270,597
    
    
    $
    33,297,657
    
    
    $
    27,243,537Bond fund investments
    
    
    3,765,566
    
    
    
    4,142,123
    
    
    
    3,389,009Total
    
    $
    34,036,163
    
    
    $
    37,439,780
    
    
    $
    30,632,546
 18




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##### Table of Contents



ITEM 8. Financial Statements and Supplementary Data
 Report of Independent Registered Public  Accounting Firm on Consolidated Financial Statements
 
      
 19




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##### Table of Contents



Diamond Hill Investment Group, Inc.
Consolidated Balance Sheets
 December 31,2007
    
    
    2006ASSETSCash and cash equivalents
    
    $
    11,783,278
    
    
    $
    9,836,989Investment portfolio
    
    
    34,036,163
    
    
    
    19,108,682Accounts receivable
    
    
    5,694,274
    
    
    
    6,924,008Prepaid expenses
    
    
    1,115,728
    
    
    
    869,501Fixed assets, net of depreciation, and other assets
    
    
    654,500
    
    
    
    497,297Total assets
    
    $
    53,283,943
    
    
    $
    37,236,477LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable and accrued expenses
    
    $
    979,467
    
    
    $
    1,217,114Accrued incentive compensation
    
    
    12,450,000
    
    
    
    13,637,000Deferred taxes
    
    
    546,944
    
    
    
    1,899,106Total liabilities
    
    
    13,976,411
    
    
    
    16,753,220Commitments and contingencies
    
    
    
    
    
    
    Shareholders EquityCommon stock, no par value7,000,000 shares authorized;2,243,653 issued and outstanding at December 31, 20071,848,472 issued 1,838,435 outstanding at December 31, 2006
    
    
    27,719,024
    
    
    
    16,515,256Preferred
stock, undesignated, 1,000,000 shares authorized and unissued
    
    
    
    
    
    
    Treasury stock, at cost0 shares at December 31, 200710,037 shares at December 31, 2006
    
    
    
    
    
    
    (95,736
    )Deferred compensation
    
    
    (4,056,015
    )
    
    
    (2,355,499
    )Retained earnings
    
    
    15,644,523
    
    
    
    6,419,236Total shareholders equity
    
    
    39,307,532
    
    
    
    20,483,257Total liabilities and shareholders equity
    
    $
    53,283,943
    
    
    $
    37,236,477
  20




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##### Table of Contents



Diamond Hill Investment Group, Inc.
Consolidated Statements of Income
 Year Ended December 31,2007
    
    
    2006
    
    
    2005REVENUES:Investment advisory
    
    $
    35,165,043
    
    
    $
    20,246,624
    
    
    $
    6,488,767Performance incentive
    
    
    174,292
    
    
    
    7,947,434
    
    
    
    2,915,771Mutual fund administration, net
    
    
    5,968,603
    
    
    
    3,710,141
    
    
    
    841,527Total revenue
    
    
    41,307,938
    
    
    
    31,904,199
    
    
    
    10,246,065OPERATING EXPENSES:Compensation and related costs
    
    
    20,006,542
    
    
    
    18,147,526
    
    
    
    6,877,929General and administrative
    
    
    2,658,649
    
    
    
    1,137,319
    
    
    
    678,939Sales and marketing
    
    
    631,911
    
    
    
    383,994
    
    
    
    247,972Third party distribution
    
    
    1,512,095
    
    
    
    781,256
    
    
    
    221,871Mutual fund administration
    
    
    2,420,252
    
    
    
    1,685,536
    
    
    
    825,040Total operating expenses
    
    
    27,229,449
    
    
    
    22,135,631
    
    
    
    8,851,751NET OPERATING INCOME
    
    
    14,078,489
    
    
    
    9,768,568
    
    
    
    1,394,314Investment Return
    
    
    909,134
    
    
    
    2,526,620
    
    
    
    594,777INCOME BEFORE TAXES
    
    
    14,987,623
    
    
    
    12,295,188
    
    
    
    1,989,091Income tax (provision) / benefit
    
    
    (5,055,308
    )
    
    
    (4,230,055
    )
    
    
    1,661,675NET INCOME
    
    $
    9,932,315
    
    
    $
    8,065,133
    
    
    $
    3,650,766Earnings per shareBasic
    
    $
    4.61
    
    
    $
    4.51
    
    
    $
    2.21Diluted
    
    $
    4.39
    
    
    $
    3.63
    
    
    $
    1.83Weighted average shares outstandingBasic
    
    
    2,155,829
    
    
    
    1,787,390
    
    
    
    1,654,935Diluted
    
    
    2,264,234
    
    
    
    2,219,580
    
    
    
    1,996,176
  21




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##### Table of Contents



Diamond Hill Investment Group, Inc.
Consolidated Statements of Shareholders Equity
 RetainedShares
    
    
    Common
    
    
    Treasury
    
    
    Deferred
    
    
    EarningsOutstanding
    
    
    Stock
    
    
    Stock
    
    
    Compensation
    
    
    (Deficit)
    
    
    TotalBalance at January 1, 2005
    
    
    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
    
    
    $
    20,483,257Deferred compensation
    
    
    36,000
    
    
    
    3,089,280
    
    
    
    
    
    
    
    (3,089,280
    )
    
    
    
    
    
    
    Recognition of current year
deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,388,764
    
    
    
    
    
    
    
    1,388,764Issuance of stock grants
    
    
    57,254
    
    
    
    5,628,641
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,628,641Issuance of stock related to
401k plan match
    
    
    2,582
    
    
    
    202,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202,019FAS 123R compensation expense
    
    
    
    
    
    
    8,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,152Tax benefit from options and
warrants exercised
    
    
    
    
    
    
    6,015,186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,015,186Payment of taxes withheld related
to option exercises
    
    
    (85,518
    )
    
    
    (8,020,273
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,020,273
    )Purchase of treasury stock related
to option exercises
    
    
    (15,797
    )
    
    
    
    
    
    
    (1,344,958
    )
    
    
    
    
    
    
    
    
    
    
    (1,344,958
    )Sale of treasury stock for
issuance of stock grant
    
    
    614
    
    
    
    25,874
    
    
    
    38,903
    
    
    
    
    
    
    
    
    
    
    
    64,777Sale of treasury stock for
401k plan match
    
    
    2,423
    
    
    
    57,061
    
    
    
    177,435
    
    
    
    
    
    
    
    
    
    
    
    234,496Sale of treasury stock related
to option exercises
    
    
    22,585
    
    
    
    57,084
    
    
    
    1,224,356
    
    
    
    
    
    
    
    (707,028
    )
    
    
    574,412Exercise of options/warrants for
common stock
    
    
    390,017
    
    
    
    4,500,478
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,500,478Repurchase of common stock
    
    
    (4,942
    )
    
    
    (359,734
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (359,734
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,932,315
    
    
    
    9,932,315Balance at December 31, 2007
    
    
    2,243,653
    
    
    $
    27,719,024
    
    
    $
    
    
    
    $
    (4,056,015
    )
    
    $
    15,644,523
    
    
    $
    39,307,532
  22




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##### Table of Contents



Diamond Hill Investment Group, Inc.  Consolidated Statements of Cash Flow
 Year Ended December 31,2007
    
    
    2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net Income
    
    $
    9,932,315
    
    
    $
    8,065,133
    
    
    $
    3,650,766Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation on property and equipment
    
    
    147,059
    
    
    
    69,165
    
    
    
    39,950Amortization of deferred compensation
    
    
    1,388,764
    
    
    
    343,486
    
    
    
    61,669(Increase) decrease in accounts receivable
    
    
    1,229,734
    
    
    
    (5,026,307
    )
    
    
    (532,201
    )Increase (decrease) in deferred income taxes
    
    
    (1,352,162
    )
    
    
    4,071,965
    
    
    
    (1,661,675
    )Stock option expense
    
    
    8,152
    
    
    
    27,597
    
    
    
    634,712(Increase) decrease in unrealized gains
    
    
    389,771
    
    
    
    (2,110,524
    )
    
    
    (487,300
    )Increase (decrease) in accrued liabilities
    
    
    (1,424,647
    )
    
    
    12,991,309
    
    
    
    1,485,277Other changes in assets and liabilities
    
    
    (246,227
    )
    
    
    (289,392
    )
    
    
    (330,237
    )Net cash provided by operating activities
    
    
    10,072,759
    
    
    
    18,142,432
    
    
    
    2,860,961CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (304,262
    )
    
    
    (454,599
    )
    
    
    (28,322
    )Investment portfolio activity
    
    
    (15,317,252
    )
    
    
    (11,142,788
    )
    
    
    (3,241,940
    )Net cash used in investing activities
    
    
    (15,621,514
    )
    
    
    (11,597,387
    )
    
    
    (3,270,262
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payment for repurchase of common shares
    
    
    (359,734
    )
    
    
    
    
    
    
    Payment of taxes withheld on option/warrant exercises
    
    
    (8,020,273
    )
    
    
    
    
    
    
    Proceeds from common stock issuance
    
    
    16,346,324
    
    
    
    90,000
    
    
    
    Purchase of treasury stock
    
    
    (1,344,958
    )
    
    
    
    
    
    
    Sale of treasury stock
    
    
    873,685
    
    
    
    669,610
    
    
    
    2,839,069Net cash provided by financing activities
    
    
    7,495,044
    
    
    
    759,610
    
    
    
    2,839,069CASH AND CASH EQUIVALENTSNet change during the period
    
    
    1,946,289
    
    
    
    7,304,655
    
    
    
    2,429,768At beginning of period
    
    
    9,836,989
    
    
    
    2,532,334
    
    
    
    102,566At end of period
    
    $
    11,783,278
    
    
    $
    9,836,989
    
    
    $
    2,532,334Cash paid during the period for:Interest
    
    $
    
    
    
    $
    
    
    
    $
    Income taxes
    
    
    435,682
    
    
    
    91,000
    
    
    
    
  23




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##### Table of Contents



Diamond Hill Investment Group, Inc.
Notes to Consolidated Financial Statements
 Organization
    Significant Accounting Policies
  Principles of Consolidation
  Segment Information
  Cash and Cash Equivalents
  Accounts Receivable
  24




---



##### Table of Contents



Significant Accounting Policies (Continued)
 Valuation of Investment Portfolio
  Limited Partnership Interests
  Property and Equipment
  Treasury Stock
  Revenue Recognition  General
  25




---



##### Table of Contents



Significant Accounting Policies (Continued)
 Revenue Recognition  Performance Incentive Revenue
  As Of December 31,2007
    
    
    2006
    
    
    2005AUM  Contractual Period Ends Quarterly
    
    $
    193,342,530
    
    
    $
    240,725,253
    
    
    $
    117,327,715AUM  Contractual Period Ends Annually
    
    
    387,466,713
    
    
    
    133,128,473
    
    
    
    Total AUM Subject to Performance Incentive
    
    $
    580,809,243
    
    
    $
    373,853,726
    
    
    $
    117,327,715
 For The Period Ending December 31,2007
    
    2006
    
    2005Performance Incentive Fees  Method 1
    
    $
    174,292
    
    
    $
    7,947,434
    
    
    $
    2,915,771Performance Incentive Fees  Method 2
    
    
    174,292
    
    
    
    7,947,434
    
    
    
    2,915,771
  Revenue Recognition  Mutual Fund Administration
  26




---



##### Table of Contents



Year Ended December 31,2007
    
    
    2006
    
    
    2005Mutual fund admin revenue, gross
    
    $
    8,226,438
    
    
    $
    5,795,110
    
    
    $
    1,736,346Mutual fund admin, fund related expense
    
    
    2,393,732
    
    
    
    2,183,599
    
    
    
    927,043Mutual fund admin revenue, net of fund related expenses
    
    
    5,832,706
    
    
    
    3,611,511
    
    
    
    809,303C-Share advance repayments
    
    
    1,970,006
    
    
    
    1,210,697
    
    
    
    579,285C-Share amortization of advances
    
    
    1,834,109
    
    
    
    1,112,067
    
    
    
    547,061C-Share financing activity, net
    
    
    135,897
    
    
    
    98,630
    
    
    
    32,224Mutual fund administration revenue, net
    
    $
    5,968,603
    
    
    $
    3,710,141
    
    
    $
    841,527
 Third Party Distribution Expense
  Income Taxes
 
  Earnings Per Share
  Reclassifications
  27




---



##### Table of Contents



Investment Portfolio
  Year Ended December 31,2007
    
    
    2006Diamond Hill Small Cap Fund
    
    $
    1,039,517
    
    
    $
    65,371Diamond Hill Small-Mid Cap Fund
    
    
    1,016,243
    
    
    
    330,546Diamond Hill Large Cap Fund
    
    
    1,017,340
    
    
    
    292,369Diamond Hill Select Fund
    
    
    1,015,803
    
    
    
    342,121Diamond Hill Long-Short Fund
    
    
    1,027,615
    
    
    
    295,953Diamond Hill Financial Long-Short Fund
    
    
    1,025,356
    
    
    
    300,000Diamond Hill Strategic Income Fund
    
    
    3,765,566
    
    
    
    2,916,069Diamond Hill Investment Partners, L.P.
    
    
    10,070,021
    
    
    
    9,744,285Diamond Hill Investment Partners II, L.P.
    
    
    5,058,702
    
    
    
    4,821,968Other marketable equity securities
    
    
    9,000,000
    
    
    
    Total Investment Portfolio
    
    $
    34,036,163
    
    
    $
    19,108,682
  December 31,2007
    
    2006
    
    2005Total partnership assets
    
    $
    360,372,685
    
    
    $
    357,375,152
    
    
    $
    176,442,538Total partnership liabilities
    
    
    80,007,267
    
    
    
    146,918,057
    
    
    
    69,122,518Net partnership assets
    
    
    280,365,418
    
    
    
    210,457,095
    
    
    
    107,320,020Net partnership income
    
    
    6,581,829
    
    
    
    35,961,019
    
    
    
    20,215,378DHCMs portion of net assets
    
    
    15,128,723
    
    
    
    14,566,253
    
    
    
    4,051,059DHCMs portion of net income
    
    
    562,469
    
    
    
    6,515,194
    
    
    
    2,972,757
  28




---



##### 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
  29




---



##### Table of Contents



Stock-Based Compensation (Continued)
   Options
    
    WarrantsWeighted Average
    
    
    
    
    
    Weighted AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise PriceOustanding 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
    
    
    
    14.38Oustanding 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
    
    
    
    17.88Oustanding December 31, 2006
    
    
    283,102
    
    
    
    14.60
    
    
    
    249,400
    
    
    
    12.57Exercisable December 31, 2006
    
    
    243,102
    
    
    
    16.26
    
    
    
    249,400
    
    
    
    12.57Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired / Forfeited
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    Exercised
    
    
    190,602
    
    
    
    16.64
    
    
    
    222,000
    
    
    
    8.65Oustanding December 31, 2007
    
    
    92,500
    
    
    $
    10.40
    
    
    
    25,400
    
    
    $
    47.00Exercisable December 31, 2007
    
    
    72,500
    
    
    $
    12.03
    
    
    
    25,400
    
    
    $
    47.00
   Options
    
    WarrantsRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    RemainingNumber
    
    Life
    
    Number
    
    
    
    
    
    Number
    
    Life
    
    NumberOutstanding
    
    In Years
    
    Exercisable
    
    Exercise Price
    
    Outstanding
    
    In Years
    
    Exercisable
    
    Exercise Price10,000
    
    
    2.61
    
    
    
    10,000
    
    
    $
    7.95
    
    
    
    14,000
    
    
    
    0.36
    
    
    
    14,000
    
    
    $
    73.758,000
    
    
    2.97
    
    
    
    8,000
    
    
    
    8.44
    
    
    
    400
    
    
    
    1.00
    
    
    
    400
    
    
    
    22.2019,500
    
    
    2.97
    
    
    
    19,500
    
    
    
    28.10
    
    
    
    3,000
    
    
    
    1.37
    
    
    
    3,000
    
    
    
    22.505,000
    
    
    3.25
    
    
    
    5,000
    
    
    
    8.45
    
    
    
    6,000
    
    
    
    2.16
    
    
    
    6,000
    
    
    
    11.2550,000
    
    
    5.43
    
    
    
    30,000
    
    
    
    4.50
    
    
    
    2,000
    
    
    
    2.36
    
    
    
    2,000
    
    
    
    8.7592,500
    
    
    4.28
    
    
    
    72,500
    
    
    
    
    
    
    
    25,400
    
    
    
    1.08
    
    
    
    25,400
  Outstanding
    
    $
    6,471,510Exercisable
    
    $
    5,099,510
 30




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##### Table of Contents



Note 6 Operating Leases
  2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013$224,000
    
    $
    231,000
    
    
    $
    238,000
    
    
    $
    245,000
    
    
    $
    254,000
    
    
    $
    130,000
  31




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##### Table of Contents



INCOME TAXES
  2007
    
    
    2006
    
    
    2005Current city income tax provision (benefit)
    
    $
    197,760
    
    
    $
    158,090
    
    
    $
    Deferred federal income tax provision (benefit)
    
    
    4,857,548
    
    
    
    4,071,965
    
    
    
    (1,661,675
    )Provision (benefit) for income taxes
    
    $
    5,055,308
    
    
    $
    4,230,055
    
    
    $
    (1,661,675
    )
  2007
    
    
    2006
    
    
    2005Income tax computed at statutory rate
    
    $
    5,095,792
    
    
    $
    4,180,364
    
    
    $
    676,291City income taxes, net of federal benefit
    
    
    197,760
    
    
    
    104,339
    
    
    
    Other
    
    
    (238,244
    )
    
    
    (54,648
    )
    
    
    104,594Valuation allowance
    
    
    
    
    
    
    
    
    
    
    (2,442,560
    )Income tax expense (benefit)
    
    $
    5,055,308
    
    
    $
    4,230,055
    
    
    $
    (1,661,675
    )
  2007
    
    
    2006Deferred tax benefit of NOL Carryforward
    
    $
    
    
    
    $
    248,686Stock-based compensation
    
    
    700,723
    
    
    
    111,207Unrealized (gains) losses
    
    
    (1,332,895
    )
    
    
    (2,264,114
    )Other assets and liabilities
    
    
    85,228
    
    
    
    5,115Net deferred tax assets (liabilities)
    
    $
    (546,944
    )
    
    $
    (1,899,106
    )
    32




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##### Table of Contents



Earnings Per Share
  Year ended December 31,2007
    
    
    2006
    
    
    2005Basic and Diluted net income
    
    $
    9,932,315
    
    
    $
    8,065,133
    
    
    $
    3,650,766Weighted average number of
outstanding sharesBasic
    
    
    2,155,829
    
    
    
    1,787,390
    
    
    
    1,654,935Diluted
    
    
    2,264,234
    
    
    
    2,219,580
    
    
    
    1,996,176Earnings per shareBasic
    
    $
    4.61
    
    
    $
    4.51
    
    
    $
    2.21Diluted
    
    $
    4.39
    
    
    $
    3.63
    
    
    $
    1.83
  Commitments and Contingencies
  Subsequent Event
  33




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##### Table of Contents



ITEM 9:
    
    Changes In and Disagreements With Accountants or Accounting and Financial Disclosures-
None
 
 ITEM 9A: Controls and Procedures
   Managements Annual Report on Internal Control Over Financial Reporting
    /s/ R. H. Dillon
    
    
    
    /s/ James F. LairdR. H. Dillon
    
    
    
    James F. LairdChief Executive Officer and President
    
    
    
    Chief Financial OfficerMarch 7, 2008
    
    
    
    March 7, 2008
 34




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##### Table of Contents



ITEM 9B: Other Information
 
 PART III
 
 ITEM 10: Directors, Executive Officers and Corporate Governance
  
 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, and Director Independence
  
 ITEM 14: Principal Accounting Fees and Services
  35




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##### Table of Contents



PART IV:
 
 ITEM 15: Exhibits, Financial Statement Schedules
 (1)
    
    Financial Statements: See Part II. Item 8, Financial Statements and Supplementary Data.(2)
    
    Financial Statement Schedules are omitted because they are not required or the required
information is included in the financial statements or notes thereto.(3)
    
    Exhibits
 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
    
    Fifth 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 April 30, 2007;
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
    
    Amendment to Award Agreement under the 1993 non-Qualified and Incentive Stock Option
Plan dated November 9, 2006. (Incorporated by reference from Form 10-K Annual Report
filed with the SEC on March 16, 2007; File No. 
000-24498.)10.5
    
    Amendment to Warrant Agreement between the Company and Roderick H. Dillon dated
November 9, 2006. (Incorporated by reference from Form 10-K Annual Report filed with
the SEC on March 16, 2007; File No. 000-24498.)10.6
    
    2005 Employee and Director Equity Incentive Plan, as amended January 1, 2008.10.7
    
    2006 Performance-Based Compensation Plan, as amended January 1, 2008.10.8
    
    Employment Agreement between the Company and Roderick H. Dillon, Jr. dated August 10,
2006, as amended February 28, 2008.14.1
    
    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.
 36




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##### Table of Contents



SIGNATURES
   By: /S/ R. H. DillonR. H. Dillon, President, Chief Executive Officer and a Director
    
    March 14,
2008
  Signature
    
    Title
    
    Date/S/ R. H. Dillon
    
    President, Chief Executive Officer,
and a Director
    
    March 14, 2008R. H. Dillon/S/ James F. Laird
    
    Chief Financial Officer, Treasurer,
and Secretary
    
    March 14, 2008James F. Laird/S/ David P. Lauer
    
    Director
    
    March 14, 2008David P. Lauer/S/ James G. Mathias
    
    Director
    
    March 14, 2008James G. Mathias/S/ David R. Meuse
    
    Director
    
    March 14, 2008David R. Meuse/S/ Diane D. Reynolds
    
    Director
    
    March 14, 2008Diane D. Reynolds/S/ Donald B. Shackelford
    
    Director
    
    March 14, 2008Donald B. Shackelford
 37