##### Table of Contents

---

U.S. Securities and Exchange Commission

Washington, D.C. 20549



---



Form 10-QSB



---



|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



For the transition period from  to



Commission file number 000-24498



---



DIAMOND HILL INVESTMENT GROUP, INC

(Name of small business issuer in its charter)



---



|                                |  |                    
|------------------------------- |  | -------------------
|Ohio                            |  | 65-0190407         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)



375 North Front
Street, Suite 300, Columbus, Ohio 43215

(Address of principal executive offices) (Zip Code)



Issuers telephone number (614) 255-3333



---



State the number of shares outstanding of each of the issuers classes of common equity, as of June 30, 2004:

Common Stock: 1,545,569 shares



Transitional Small Business Disclosure Format (check one):    Yes ̈;    No  x



---



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



|                                                   |  |                       |  |                                                                                                                    |  |      
|-------------------------------------------------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | -----
|                                                   |  |                       |  |                                                                                                                    |  | PAGE 
|Part I:                                            |  | FINANCIAL INFORMATION |  | 3-22                                                                                                              
|                                                   |  |                       | 
|                                                   |  | Item 1.               |  | Financial Statements:                                                                                              |  | 3-16 
|                                                   |  |                       |  | Consolidated Statements of Financial Condition as of June 30, 2004 (unaudited)                                     |  | 4    
|                                                   |  |                       |  | Consolidated Statements of Operations for the Six Months and Three Months Ended June 30, 2004 and 2003 (unaudited) |  | 5    
|                                                   |  |                       |  | Consolidated Statements of Cash Flow for the Six Months Ended June 30, 2004 and 2003 (unaudited)                   |  | 6    
|                                                   |  |                       |  | Notes to the Consolidated Financial Statements                                                                     |  | 7-16 
|                                                   |  |                       | 
|                                                   |  | Item 2.               |  | Managements Discussion and Analysis or Plan of Operation                                                          |  | 17-21
|                                                   |  |                       | 
|                                                   |  | Item 3.               |  | Controls and Procedures                                                                                            |  | 22   
|                                                   |  |                      
|Part II:                                           |  | OTHER INFORMATION     |  | 22-23                                                                                                             
|                                                   |  |                       | 
|                                                   |  | Item 1.               |  | Legal Proceedings                                                                                                  |  | 22   
|                                                   |  |                       | 
|                                                   |  | Item 2.               |  | Changes in Securities                                                                                              |  | 22   
|                                                   |  |                       | 
|                                                   |  | Item 3.               |  | Defaults Upon Senior Securities                                                                                    |  | 22   
|                                                   |  |                       | 
|                                                   |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                                |  | 22   
|                                                   |  |                       | 
|                                                   |  | Item 5.               |  | Other Information                                                                                                  |  | 22   
|                                                   |  |                       | 
|                                                   |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                                   |  | 23   
|                                                   |  |                      
|Signatures                                         |  |                       |  | 24                                                                                                                
|                                                   | 
|Certifications for Quarterly Report on Form 10-QSB |  |                      



2



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



PART I FINANCIAL INFORMATION



ITEM 1: Financial Statements



The
accompanying consolidated financial statements, which should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003,
are unaudited, but have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.



Operating results for the six months and three months ended June 30, 2004 are
not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2004.



3



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

As of June 30, 2004



UNAUDITED



|                                                                                                    |  |   |            |  
|--------------------------------------------------------------------------------------------------- |  | - | ---------- | -
|ASSETS                                                                                              |  |   |            |  
|Cash                                                                                                |  | $ | 11,901     |  
|Investment portfolio (note 3 and 4):                                                                |  |   |            |  
|Mutual fund shares and limited partnership interests                                                |  |   | 2,448,454  |  
|Not readily marketable equity securities, at estimated fair value                                   |  |   | 9,993      |  
|Accounts receivable:                                                                                |  |   |            |  
|Investment products                                                                                 |  |   | 279,999    |  
|Refundable income taxes                                                                             |  |   | 31,950     |  
|Other receivables                                                                                   |  |   | 133        |  
|Property and equipment, net of accumulated depreciation of $148,968                                 |  |   | 123,421    |  
|Deposits and other                                                                                  |  |   | 217,732    |  
|                                                                                                    |  |   |            |  
|Total assets                                                                                        |  | $ | 3,123,583  |  
|                                                                                                    |  |   |            |  
|LIABILITIES                                                                                         |  |   |            |  
|                                                                                                    | 
|Unearned fee income                                                                                 |  | $ | 1,480      |  
|Note payable  line of credit (note 4)                                                              |  |   | 48,700     |  
|Accrued expenses                                                                                    |  |   | 146,971    |  
|                                                                                                    |  |   |            |  
|Total liabilities                                                                                   |  |   | 197,151    |  
|                                                                                                    |  |   |            |  
|SHAREHOLDERS EQUITY                                                                                |  |   |            |  
|                                                                                                    | 
|Common stock: (note 5)                                                                              |  |   |            |  
|No par value, 7,000,000 shares authorized, 1,827,972 shares issued and 1,545,569 shares outstanding |  |   | 10,103,449 |  
|Treasury stock, at cost (282,403 shares)                                                            |  |   | (1,615,792 | )
|Deferred compensation                                                                               |  |   | (139,248   | )
|Accumulated deficit                                                                                 |  |   | (5,421,977 | )
|                                                                                                    |  |   |            |  
|Total shareholders equity                                                                          |  |   | 2,926,432  |  
|                                                                                                    |  |   |            |  
|Total liabilities and shareholders equity                                                          |  | $ | 3,123,583  |  
|                                                                                                    |  |   |            |  



The accompanying notes
are an integral part of these consolidated financial statements.



4



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Six Months and Three Months Ended June 30, 2004 and June 30, 2003



UNAUDITED



|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|------------------------------------------ |  | -------------- | --------- | - | -------------- | - | --------- | -------- |  | - | -------- | - |  | - | -------- | -
|                                           |  | 6 MONTHS ENDED |           |   | 3 MONTHS ENDED |  
|                                           |  | JUN 2004       |           |   | JUN 2003       |   |           | JUN 2004 |  |   | JUN 2003 |  
|INVESTMENT MANAGEMENT FEES:                |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|Mutual funds                               |  | $              | 404,585   |   |                | $ | 189,561   |          |  | $ | 214,747  |   |  | $ | 101,564  |  
|Managed accounts                           |  |                | 513,369   |   |                |   | 253,291   |          |  |   | 269,317  |   |  |   | 146,505  |  
|Private Partnership                        |  |                | 67,491    |   |                |   | 24,807    |          |  |   | 35,322   |   |  |   | 12,552   |  
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|Total investment management fees           |  |                | 985,445   |   |                |   | 467,659   |          |  |   | 519,386  |   |  |   | 260,621  |  
|                                           |  |                |           |  
|OPERATING EXPENSES:                        |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|Salaries, benefits and payroll taxes       |  |                | 925,915   |   |                |   | 768,299   |          |  |   | 502,449  |   |  |   | 389,402  |  
|Legal and audit                            |  |                | 58,535    |   |                |   | 39,636    |          |  |   | 25,637   |   |  |   | 29,393   |  
|General and administrative                 |  |                | 187,592   |   |                |   | 218,069   |          |  |   | 92,470   |   |  |   | 86,168   |  
|Sales and marketing                        |  |                | 90,807    |   |                |   | 82,549    |          |  |   | 50,191   |   |  |   | 50,714   |  
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|Total operating expenses                   |  |                | 1,262,849 |   |                |   | 1,108,553 |          |  |   | 670,747  |   |  |   | 555,677  |  
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|Mutual fund administration, net (Note 7)   |  |                | (76,907   | ) |                |   | (160,660  | )        |  |   | (47,078  | ) |  |   | (97,860  | )
|                                           |  |                |           |  
|Mutual fund distribution, net (Note 8)     |  |                | (67,302   | ) |                |   | (55,639   | )        |  |   | (41,262  | ) |  |   | (23,100  | )
|                                           |  |                |           |  
|Broker-dealer activity, net (Note 9)       |  |                | (714      | ) |                |   | (13,270   | )        |  |   | (1,225   | ) |  |   | (6,633   | )
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|NET OPERATING INCOME (LOSS)                |  |                | (422,327  | ) |                |   | (870,463  | )        |  |   | (240,926 | ) |  |   | (422,649 | )
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|Investment return, net of interest expense |  |                | 108,299   |   |                |   | 185,281   |          |  |   | 7,120    |   |  |   | 240,839  |  
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|INCOME (LOSS) BEFORE TAXES                 |  |                | (314,028  | ) |                |   | (685,182  | )        |  |   | (233,806 | ) |  |   | (181,810 | )
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|Income Tax Provision (Credit)              |  |                |          |   |                |   |          |          |  |   |         |   |  |   |         |  
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|NET INCOME (LOSS)                          |  | $              | (314,028  | ) |                | $ | (685,182  | )        |  | $ | (233,806 | ) |  | $ | (181,810 | )
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|Basic Earnings (Loss) Per Share            |  | $              | (0.21     | ) |                | $ | (0.49     | )        |  | $ | (0.15    | ) |  | $ | (0.13    | )
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  
|Diluted Earnings (Loss) Per Share          |  | $              | (0.21     | ) |                | $ | (0.49     | )        |  | $ | (0.15    | ) |  | $ | (0.13    | )
|                                           |  |                |           |   |                |   |           |          |  |   |          |   |  |   |          |  



The accompanying notes
are an integral part of these consolidated financial statements.



5



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2004 and 2003



UNAUDITED



|                                                                                                   |  |      |          |   |      |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                   |  | 2004 |          |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |      |          |   |      |   |          |  
|Net income (loss)                                                                                  |  | $    | (314,028 | ) |      | $ | (685,182 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |      |          |   |      |   |          |  
|Depreciation and amortization                                                                      |  |      | 19,841   |   |      |   | 19,205   |  
|Amortization of deferred compensation                                                              |  |      | 3,146    |   |      |   | 7,404    |  
|Unrealized (gain) loss                                                                             |  |      | (60,596  | ) |      |   | (230,147 | )
|(Increase) decrease in certain assets:                                                             |  |      |          |   |      |   |          |  
|Investment portfolio                                                                               |  |      | 334,482  |   |      |   | 303,085  |  
|Accounts receivable:                                                                               |  |      |          |   |      |   |          |  
|Investment products                                                                                |  |      | (106,929 | ) |      |   | (8,983   | )
|Other                                                                                              |  |      | 96       |   |      |   | 118      |  
|Refundable income taxes                                                                            |  |      | (31,950  | ) |      |   |         |  
|Deposits and other                                                                                 |  |      | (129,017 | ) |      |   | 20,402   |  
|Increase (decrease) in certain liabilities-                                                        |  |      |          |   |      |   |          |  
|Accounts payable to broker-dealers and other                                                       |  |      | (1,589   | ) |      |   | 1,810    |  
|Accrued expenses and other                                                                         |  |      | 11,206   |   |      |   | (88,363  | )
|                                                                                                   |  |      |          |   |      |   |          |  
|Net cash provided by (used in) operating activities                                                |  |      | (275,338 | ) |      |   | (660,651 | )
|                                                                                                   |  |      |          |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |      |          |   |      |   |          |  
|Purchase of property and equipment                                                                 |  |      | (13,598  | ) |      |   |         |  
|Proceeds from sale of property and equipment                                                       |  |      |          |   |      |   |         |  
|                                                                                                   |  |      |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                                                |  |      | (13,598  | ) |      |   |         |  
|                                                                                                   |  |      |          |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |      |          |   |      |   |          |  
|Exercise of stock options                                                                          |  |      |          |   |      |   | 3,910    |  
|Note Payable  line of credit                                                                      |  |      | 48,700   |   |      |   |          |  
|Sale of treasury stock                                                                             |  |      | 201,152  |   |      |   |         |  
|                                                                                                   |  |      |          |   |      |   |          |  
|Net cash provided (used in) financing activities                                                   |  |      | 249,852  |   |      |   | 3,910    |  
|                                                                                                   |  |      |          |   |      |   |          |  
|NET INCREASE (DECREASE) IN CASH                                                                    |  |      | (39,084  | ) |      |   | (656,741 | )
|                                                                                                   |  |     
|CASH, BEGINNING OF PERIOD                                                                          |  |      | 50,985   |   |      |   | 689,175  |  
|                                                                                                   |  |      |          |   |      |   |          |  
|CASH, END OF PERIOD                                                                                |  | $    | 11,901   |   |      | $ | 32,434   |  
|                                                                                                   |  |      |          |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                  |  |      |          |   |     
|                                                                                                   |  |     
|Cash paid during the period for:                                                                   |  |      |          |   |      |   |          |  
|Interest                                                                                           |  | $    | 596      |   |      | $ | 364      |  
|Income taxes                                                                                       |  |      |         |   |      |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



6



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004



Note 1 ORGANIZATION AND NATURE OF BUSINESS



Diamond Hill Investment Group, Inc. (the Company) is an Ohio corporation incorporated in May 2002, previously a Florida corporation since April 1990. The Company has two subsidiary operating
companies.



Diamond Hill Capital Management, Inc. (DHCM), an
Ohio corporation, is a wholly owned subsidiary of the Company and a registered investment advisor. DHCM is the investment adviser to the Diamond Hill Funds, a series of open-end mutual funds. DHCM is also the investment adviser to the Diamond Hill
Investment Partners, L.P. and offers advisory services to institutional and individual investors.



Diamond Hill Securities, Inc. (DHS), an Ohio corporation, is a wholly owned subsidiary of DHCM and a NASD registered broker-dealer. DHS is registered with the Securities and Exchange Commission
and the securities commissions of six states (including Ohio). DHS trades securities on a fully-disclosed basis and clears customer transactions through an unaffiliated broker-dealer that also maintains the customer accounts. DHS is also a
registered investment adviser. During the quarter ended June 30, 2004, the DHS transitioned most of its services to third party broker-dealers and its advisory business to DHCM. This transition had no material impact to the Companys financial
statements.



Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES



The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses for the periods. Actual
results could differ from those estimates. The following is a summary of the Companys significant accounting policies:



Principles of Consolidation



The accompanying consolidated financial statements include the operations of the Company, DHCM and DHS. All material inter-company transactions and
balances have been eliminated in consolidation.



Cash



The Company has defined cash as demand deposits, certificate
of deposits and money market accounts. The Company maintains its cash in several accounts with two financial institutions.



Accounts Receivable



Accounts receivable are recorded when they are due and are presented in the statement of financial condition net of any allowance for doubtful accounts.
Accounts receivable are written off when they are determined to be uncollectible. Any allowance for doubtful accounts is estimated on the Companys historical losses, existing conditions in the industry, and the financial stability of those
individuals that owe the receivable. No allowance for doubtful accounts was deemed necessary at June 30, 2004.



Valuation of Investment Portfolio



Securities and related options traded on national securities markets and securities not traded on national securities markets, but with readily ascertainable market values, are valued at market
value. Other securities, for which market quotations are not readily available, due to infrequency of transactions, are valued at fair value as determined in good faith by the management of the Company. Realized and unrealized gains and losses are
included in investment profits and losses.



7



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004



Note 2 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)



Limited Partnership
Interests



DHCM is the managing member of Diamond Hill
General Partner, LLC, the General Partner of Diamond Hill Investment Partners, L.P. (DHIP), a limited partnership whose underlying assets consist of marketable securities. DHCMs investment in DHIP is accounted for using the equity method,
under which DHCMs share of the net earnings or losses of the partnership is reflected in income as earned and distributions received are reflected as reductions of the investment. The Company is actively seeking additional unaffiliated
investors for DHIP. Several board members, officers and employees of the Company are members in Diamond Hill General Partner, LLC. The capital of Diamond Hill General Partner, LLC is not subject to a management fee or an incentive fee.



Property and Equipment



Property and equipment, consisting of computer equipment, furniture, and
fixtures, is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over estimated lives of five to seven years.



Revenues



Securities transactions and commissions are accounted for on the trade date basis. Dividend income is recorded on the ex-dividend date and interest income
is accrued as earned. Realized gains and losses from sale of securities are determined utilizing the first-in, first-out method (FIFO).



Earnings Per Share



Basic and diluted earnings per common share are computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings per
Share. A reconciliation of the numerators and denominators used in these calculations is shown below:



For the six months ended June 30, 2004:



|                 |  |           |          |   |             |           |        |   |       |  
|---------------- |  | --------- | -------- | - | ----------- | --------- | ------ | - | ----- | -
|                 |  | Numerator |          |   | Denominator |           | Amount |  
|Basic Earnings   |  | $         | (314,028 | ) |             | 1,529,588 |        | $ | (0.21 | )
|                 |  |           |         
|Diluted Earnings |  | $         | (314,028 | ) |             | 1,529,588 |        | $ | (0.21 | )



For the six months
ended June 30, 2003:



|                 |  |           |          |   |             |           |        |   |       |  
|---------------- |  | --------- | -------- | - | ----------- | --------- | ------ | - | ----- | -
|                 |  | Numerator |          |   | Denominator |           | Amount |  
|Basic Earnings   |  | $         | (685,182 | ) |             | 1,409,417 |        | $ | (0.49 | )
|                 |  |           |         
|Diluted Earnings |  | $         | (685,182 | ) |             | 1,409,417 |        | $ | (0.49 | )



8



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004



Note 2 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)



Earnings Per Share
(Continued)



For the three months ended June 30, 2004:



|                 |  |           |          |   |             |           |        |   |       |  
|---------------- |  | --------- | -------- | - | ----------- | --------- | ------ | - | ----- | -
|                 |  | Numerator |          |   | Denominator |           | Amount |  
|Basic Earnings   |  | $         | (233,806 | ) |             | 1,533,715 |        | $ | (0.15 | )
|                 |  |           |         
|Diluted Earnings |  | $         | (233,806 | ) |             | 1,533,715 |        | $ | (0.15 | )



For the three months
ended June 30, 2003:



|                 |  |           |          |   |             |           |        |   |       |  
|---------------- |  | --------- | -------- | - | ----------- | --------- | ------ | - | ----- | -
|                 |  | Numerator |          |   | Denominator |           | Amount |  
|Basic Earnings   |  | $         | (181,810 | ) |             | 1,409,467 |        | $ | (0.13 | )
|                 |  |           |         
|Diluted Earnings |  | $         | (181,810 | ) |             | 1,409,467 |        | $ | (0.13 | )



Stock options and
warrants have not been included in the denominator of the diluted per-share computations because the effect of their inclusion would be anti-dilutive.



Fair Value of Financial Instruments



Substantially all of the Companys financial instruments are carried at fair value or amounts approximating fair value. Assets, including accounts
receivable, notes and interest receivable and securities owned are carried at amounts that approximate fair value. Similarly, liabilities, including accounts payable and accrued expenses are carried at amounts approximating fair value.



Note 3 INVESTMENT PORTFOLIO



Investment portfolio balances, which consist of securities classified as
trading, are comprised of the following at June 30, 2004:



|                                                    |  |        |           |      |   |                 |  |                  |         |  |   |          |  
|--------------------------------------------------- |  | ------ | --------- | ---- | - | --------------- |  | ---------------- | ------- |  | - | -------- | -
|                                                    |  | Market |           | Cost |   | UnrealizedGains |  | UnrealizedLosses |        
|Mutual fund shares and limited partnership interest |  | $      | 2,448,454 |      | $ | 1,960,891       |  | $                | 489,954 |  | $ | (2,391   | )
|                                                    |  |        |           |     
|Not readily marketable equity securities            |  |        | 9,993     |      |   | 190,010         |  |                  |        |  |   | (180,017 | )
|                                                    |  |        |           |      |   |                 |  |                  |         |  |   |          |  
|Total                                               |  | $      | 2,458,447 |      | $ | 2,150,901       |  | $                | 489,954 |  | $ | (182,408 | )
|                                                    |  |        |           |      |   |                 |  |                  |         |  |   |          |  



DHCM is the managing
member of the General Partner of Diamond Hill Investment Partners, L.P., whose underlying assets consist primarily of marketable securities. The General Partner is contingently liable for all of the partnerships liabilities.



9



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004



Note 3 INVESTMENT PORTFOLIO
(Continued)



Summary financial information, including the
Companys carrying value and income from this partnership at June 30, 2004 and 2003 and for the six months then ended, is as follows:



|                                  |  |      |            |      |   |           
|--------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                  |  | 2004 |            | 2003
|Total assets                      |  | $    | 29,662,715 |      | $ | 17,148,892
|Total liabilities                 |  |      | 13,351,788 |      |   | 6,134,977 
|Net assets                        |  |      | 16,310,927 |      |   | 11,013,915
|Net fair market value of earnings |  |      | 988,200    |      |   | 687,832   
|                                  |  |     
|DHCMs carrying value             |  |      | 1,490,082  |      |   | 1,184,815 
|DHCMs income                     |  |      | 126,632    |      |   | 75,107    



DHCMs income
from this partnership includes its pro-rata capital allocation and its share of an incentive allocation from the limited partners. In addition, DHCM earns a management fee payable quarterly at the rate of .25% of the value of the limited
partners capital accounts.



Note 4 LINE OF CREDIT



The Company obtained a line of credit loan with a maximum
principal amount of $325,000 on August 28, 2003 at an annual percentage interest rate of prime plus 0.50%, which is currently 4.50%. The balance due on the line of credit loan at June 30, 2004 was $48,700. The Company has pledged $390,000 of its
fixed income mutual fund investments to secure this line. The line of credit loan is due to mature on August 28, 2004, at which time management intends to renew the line.



Note 5 CAPITAL STOCK



Common Stock



The Company has only one class of securities, Common Stock.



Treasury Stock



On July 17, 2000, the Company announced a program to repurchase up to 400,000 shares of its Common Stock through open market purchases and privately negotiated transactions. From July 17, 2000 through December 31,
2001, the Company purchased 281,597 shares of its Common Stock for $1,716,407. For the year ended December 31, 2002, the Company purchased 71,300 shares of its Common Stock for $292,700. For the six months and three months ended June 30, 2004, the
Company did not purchase any of its shares of Common Stock. As of June 30, 2003, the Company has purchased 352,897 shares for $2,009,107 pursuant to the aforementioned 400,000 share repurchase program. During the six months ending June 30, 2004, The
Company has issued 21,570 shares of Treasury Stock (15,000 shares to employees in the form a restricted stock grant and 6,570 to fulfill the Companys match under the Companys 401k Plan). The Companys total Treasury Stock share
balance as of June 30, 2004 is 282,403.



Authorization of
Preferred Stock



The Companys Articles of
Incorporation authorize the issuance of 1,000,000 shares of blank check preferred stock with such designations, rights and preferences, as may be determined from time to time by the Companys Board of Directors. The Board of
Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights, which could adversely affect the voting or other rights of the holders of the Common Stock. There were no
shares of preferred stock issued or outstanding at June 30, 2004.



10



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



Note 6 OPERATING LEASES



The Company leases office space under an operating lease agreement effective
May 1, 2002, which terminates on May 31, 2005. Total lease expenses for the six months and three months ended June 30, 2004 were $60,000 and $30,000, respectively. The future minimum lease payments under the operating lease are as follows:



|           |  |        
|---------- |  | -------
|Year Ended |  | Amount 
|2004       |  | 120,000
|2005       |  | 50,000 



Note 7 MUTUAL FUND
ADMINISTRATION



DHCM has an administrative, fund
accounting and transfer agency services agreement with Diamond Hill Funds, an Ohio business trust, under which DHCM performs certain services for each series of the trust. These services include mutual fund administration, accounting, transfer
agency and other related functions. For performing these services, each series of the trust compensates DHCM a fee at an annual rate of 0.45% times each series average daily net assets. DHCM collected $250,762 and $101,941 for mutual fund
administration revenue for the six months ended June 30, 2004 and 2003, respectively; and for the three months ended June 30, 2004 and 2003, DHCM collected $131,677 and $52,881 for administration revenue, respectively. In fulfilling its role under
this agreement, DHCM has engaged several third-party providers, and the cost for their services is paid by DHCM. Mutual fund administration expense for the six months ended June 30, 2004 and 2003 was $327,669 and $262,601, respectively, and for the
three months ended June 30, 2004 and 2004 was $178,755 and $150,741, respectively.



Note 8 MUTUAL FUND DISTRIBUTION



On April 30, 2004, DHS discontinued providing mutual fund distribution services as the principal underwriter for Diamond Hill Funds. Prior to April 30, 2004 DHS collected front-end and back-end sales loads, ranging from 1.00% to 5.75%
and/or underwriting fees of 0.50% on fund investments. DHS also collected 12b-1 fees at an annual rate ranging from 0.25% to 1.00% times each series average daily net assets. Mutual fund distribution revenue for the six months ended June 30,
2004 and 2003 was $121,617 and $62,307, respectively; and for the three months ended June 30, 2004 and 2003, DHS collected $42,666 and $33,404 for distribution revenue. DHS also paid for the production of marketing materials used in the distribution
of the Diamond Hill Funds. Mutual fund distribution expense for the six months ended June 30, 2004 and 2003 was $188,919 and $117,946, respectively, and for the three months ended June 30, 2004 and 2003 was $83,928 and $56,504, respectively.



Note 9 BROKER-DEALER ACTIVITY



DHS is a registered full-service broker-dealer transacting security trades
through its clearing broker under a correspondent agreement. For the six months ended June 30, 2004 and 2003, broker-dealer activity expenses, principally clearing charges and regulatory fees, totaled $11,275 and $32,605, respectively, and for the
three months ended June 30, 2004 and 2003 totaled $5,356 and $10,335, respectively. DHS earns commissions and service fees related to business transacted through its clearing broker, along with gains and losses from market-making activities.
Broker-dealer activity revenue for the six months ended June 30, 2004 and 2003 was $10,561 and $19,335, respectively. For the three months ended June 30, 2004 and 2003, broker-dealer activity revenue was $4,131 and $3,702, respectively. During the
quarter ended June 30, 2004, DHS transitioned most of its services to third party broker-dealers and its advisory business to DHCM. This transition had no material impact on the Companys financial statements.



11



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004



Note 10 EMPLOYEE INCENTIVE PLANS



Incentive Compensation Plan



All full-time employees of the Company are eligible to participate in the
Diamond Hill Investment Group Incentive Compensation Plan. The Plan provides that a bonus fund will be established in an amount equal to 20% of the pre-tax realized profits of the Company in excess of a 15% pre-tax return on equity. The amount of
the bonus fund is calculated each fiscal quarter on a cumulative basis. The allocation of the bonus fund is to be made by the President of the Company. The Company did not incur any expense under the Plan for the six months and three months ended
June 30, 2004 and 2003.



Equity Compensation Grants



On May 13, 2004 the Companys shareholders approved
terms and conditions of certain equity compensation grants to three key employees. Under the terms approved a total of 75,000 shares of restricted stock and restricted stock units were issued to the key employees on May 31, 2004. The restricted
stock and restricted stock units are restricted from sale and do not vest until May 31, 2009.



Stock Option Plan



The
Company adopted a Non-Qualified and Incentive Stock Option Plan in 1993 that authorizes the grant of options to purchase an aggregate of 500,000 shares of the Companys Common Stock. The Plan provides that the Board of Directors, or a committee
appointed by the Board, may grant options and otherwise administer the Option Plan. The exercise price of each incentive stock option or non-qualified stock option must be at least 100% of the fair market value of the Common Stock at the date of
grant, and no such option may be exercisable for more than ten years after the date of grant. However, the exercise price of each incentive stock option granted to any shareholder possessing more than 10% of the combined voting power of all classes
of capital stock of the Company on the date of grant must not be less than 110% of the fair market value on that date, and no such option may be exercisable more than five years after the date of grant. This Plan expired by its terms in November
2003. Options issued under this Plan are not affected by the Plans expiration. All outstanding options, reflected in the tables following, were issued under this plan. Of the warrants shown in the tables following, 80,400 were issued pursuant
to this plan.



The Company applies Accounting Principles Board
Opinion 25 and related Interpretations (APB 25) in accounting for stock options and warrants issued to employees and Directors. Accordingly, compensation cost is recognized based on the intrinsic value of the stock options or warrants.



12



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



Note 10 EMPLOYEE INCENTIVE PLANS (Continued)



Stock Option Plan (Continued)



Had compensation cost for all of the Companys stock-based awards been
determined in accordance with FAS 123, the Companys net income and earnings per share would have been reduced to the pro forma amounts indicated below:



|                                                                                                                                            |  |                            |   |  |                          |   |  |          |   |  |          |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | -------- | - |  | -------- | -
|                                                                                                                                            |  | Three Months Ended June 30 |   |  | Six Months Ended June 30 |  
|                                                                                                                                            |  | 2004                       |   |  | 2003                     |   |  | 2004     |   |  | 2003     |  
|Net income, as reported                                                                                                                     |  | (233,806                   | ) |  | (181,810                 | ) |  | (314,028 | ) |  | (685,182 | )
|                                                                                                                                            |  |                            |   | 
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of
related tax effects |  | (32,339                    | ) |  | (76,594                  | ) |  | (72,360  | ) |  | (130,762 | )
|                                                                                                                                            |  |                            |   | 
|Pro forma net income                                                                                                                        |  | (266,145                   | ) |  | (258,404                 | ) |  | (386,388 | ) |  | (815,944 | )
|                                                                                                                                            |  |                            |   | 
|Earnings per share:                                                                                                                         |  |                            |   |  |                          |   |  |          |   |  |          |  
|                                                                                                                                            |  |                            |   | 
|Basic - as reported                                                                                                                         |  | (0.15                      | ) |  | (0.13                    | ) |  | (0.21    | ) |  | (0.49    | )
|Basic - pro forma                                                                                                                           |  | (0.17                      | ) |  | (0.18                    | ) |  | (0.25    | ) |  | (0.58    | )
|                                                                                                                                            |  |                            |   | 
|Diluted - as reported                                                                                                                       |  | (0.15                      | ) |  | (0.13                    | ) |  | (0.21    | ) |  | (0.49    | )
|Diluted - pro forma                                                                                                                         |  | (0.17                      | ) |  | (0.18                    | ) |  | (0.25    | ) |  | (0.58    | )



To make the
computations of pro forma results under FAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: no dividend yield for all years and
expected lives of ten years. The options and warrants granted under these plans are not registered and, accordingly, there is no quoted market price.



13



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



Note 10 EMPLOYEE INCENTIVE PLANS (Continued)



Stock Option Plan (Continued)



A summary of the status of the Companys stock option
and warrants plans as of June 30, 2004 and June 30, 2003 and changes during the six months ending on those dates is presented below:



|                              |  |         |   |          |               |        |        |         |               |   |       
|----------------------------- |  | ------- | - | -------- | ------------- | ------ | ------ | ------- | ------------- | - | ------
|                              |  | Options |   | Warrants
|                              |  | Shares  |   |          | ExercisePrice |        | Shares |         | ExercisePrice
|Outstanding December 31, 2002 |  | 165,902 |   |          | $             | 17.124 |        | 280,400 |               | $ | 12.895
|Granted                       |  | 120,000 |   |          |               | 4.500  |        |        |               |   |      
|Exercised                     |  | 1,000   |   |          |               | 3.910  |        |        |               |   |      
|Expired unexercised           |  | (11,510 | ) |          |               | 28.983 |        |        |               |   |      
|Forfeited                     |  | (25,190 | ) |          |               | 15.468 |        |        |               |   |      
|                              |  |         |   |          |               |        |        |         |               |   |       
|Outstanding June 30, 2003     |  | 248,202 |   |          |               | 10.693 |        | 280,400 |               |   | 13.712
|                              |  |         |   |          |               |        |        |         |               |   |       
|Exercisable June 30, 2003     |  | 102,202 |   |          | $             | 19.023 |        | 200,400 |               | $ | 14.852
|                              |  |         |   |          |               |        |        |         |               |   |       
|Outstanding December 31, 2003 |  | 260,202 |   |          | $             | 10.581 |        | 280,400 |               | $ | 12.897
|Granted                       |  |         |   |          |               |       |        |        |               |   |      
|Exercised                     |  |         |   |          |               |       |        |        |               |   |      
|Expired unexercised           |  |         |   |          |               |       |        |        |               |   |      
|Forfeited                     |  |         |   |          |               |       |        |        |               |   |      
|                              |  |         |   |          |               |        |        |         |               |   |       
|Outstanding June 30, 2004     |  | 260,202 |   |          |               | 10.581 |        | 280,400 |               |   | 12.897
|                              |  |         |   |          |               |        |        |         |               |   |       
|Exercisable June 30, 2004     |  | 138,202 |   |          | $             | 15.459 |        | 280,400 |               | $ | 12.897
|                              |  |         |   |          |               |        |        |         |               |   |       





14



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004



Note 10 EMPLOYEE
INCENTIVE PLANS (Continued)



Stock Option Plan
(Continued)



The following table summarizes information about
fixed stock options and warrants outstanding at June 30, 2004:



|                                |  |         |                 |          |   |                
|------------------------------- |  | ------- | --------------- | -------- | - | ---------------
|                                |  | Options |                 | Warrants
|Exercise price                  |  | $       | 73.750          |          | $ | 73.750         
|Number outstanding              |  |         | 16,202          |          |   | 14,000         
|Weighted-average remaining      |  |         |                 |          |   |                
|Contractual life in years       |  |         | 3.867           |          |   | 3.859          
|Weighted-average exercise price |  | $       | 73.750          |          | $ | 73.750         
|Number exercisable              |  |         | 16,202          |          |   | 14,000         
|                                |  |        
|Range of exercise prices        |  | $       | 7.95 - $ 14.375 |          | $ | 22.20 - $ 22.50
|Number outstanding              |  |         | 54,000          |          |   | 16,400         
|Weighted-average remaining      |  |         |                 |          |   |                
|Contractual life in years       |  |         | 3.354           |          |   | 4.861          
|Weighted-average exercise price |  | $       | 11.461          |          | $ | 22.495         
|Number exercisable              |  |         | 46,000          |          |   | 16,400         
|                                |  |        
|Range of exercise prices        |  | $       | 5.25 - $ 8.45   |          | $ | 8.00 - $ 14.375
|Number outstanding              |  |         | 70,000          |          |   | 250,000        
|Weighted-average remaining      |  |         |                 |          |   |                
|Contractual life in years       |  |         | 7.004           |          |   | 5.294          
|Weighted-average exercise price |  | $       | 5.707           |          | $ | 8.860          
|Number exercisable              |  |         | 36,000          |          |   | 250,000        
|                                |  |        
|Exercise price                  |  | $       | 4.50            |          |   |                
|Number outstanding              |  |         | 120,000         |          |   |                
|Weighted-average remaining      |  |         |                 |          |   |                
|Contractual life in years       |  |         | 8.936           |          |   |                
|Weighted-average exercise price |  | $       | 4.500           |          |   |                
|Number exercisable              |  |         | 40,000          |          |   |                



15



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004



Note 11 REGULATORY
REQUIREMENTS



DHS is subject to the uniform net capital
rule of the Securities and Exchange Commission (Rule 15c3-1), which requires that the ratio of aggregate indebtedness to net capital not exceed 15 to 1 (as those terms are defined by the Rule). DHS had net capital of $72,468
as of June 30, 2004, which was in excess of its required minimum net capital of $50,000. The ratio of aggregate indebtedness to net capital was .20 to 1 as of June 30, 2004. DHS is also subject to regulations of the District of Columbia and nine
states in which it is registered as a licensed broker-dealer.



DHCM and DHS are registered investment advisers and subject to regulation by the SEC pursuant to the Investment Advisors Act of 1940.



Note 12 CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK



DHS, under a correspondent agreement with its clearing broker, has agreed to
indemnify the clearing broker from damages or losses resulting from customer transactions. The Company is, therefore, exposed to off-balance sheet risk of loss in the event that customers are unable to fulfill contractual obligations. The Company
manages this risk by requiring customers to have sufficient cash in their account before a buy order is executed and to have the subject securities in their account before a sell order is executed. The Company has not incurred any losses from
customers unable to fulfill contractual obligations.



Note 13 SUBSEQUENT EVENT



On July 21, 2004,
the Company sold 60,000 shares of the Companys Common Stock from Treasury Stock through a private placement at a price of $7.00, thereby increasing liquidity and capital resources by $420,000. Treasury Stock will be reduced by an average price
of $5.72 per share for this transaction.



16



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



ITEM 2: Managements Discussion and Analysis or Plan of Operation



Forward-looking Statements



Throughout this discussion, the Company may make forward-looking statements relating to such matters as anticipated operating results, prospects for achieving the critical threshold of assets under management,
technological developments, economic trends (including interest rates and market volatility), expected transactions and acquisitions, and similar matters. While the Company believes that the assumptions underlying its forward-looking statements are
reasonable, any of the assumptions could prove to be inaccurate and accordingly, the actual results and experiences of the Company could differ materially from the anticipated results or other expectations expressed by the Company in its
forward-looking statements. Factors that could cause such actual results or experiences to differ from results discussed in the forward-looking statements include, but are not limited to: the adverse effect from a decline in the securities markets;
a decline in the performance of the Companys products; a general downturn in the economy; changes in government policy and regulation; changes in the Companys ability to attract or retain key employees; unforeseen costs and other effects
related to legal proceedings or investigations of governmental and self-regulatory organizations; and other risks identified from time-to-time in the Companys other public documents on file with the SEC.



General



In May of 2000 the board of directors decided to shift the Companys business focus from the broker dealer subsidiary
(DHS) to the investment advisory subsidiary (DHCM). DHS employed a group of individual brokers and analysts focused on offering portfolios of community bank stocks to retail clients. In contrast, DHCM manages funds and separate accounts comprised of
equity and fixed income securities broadly diversified by company and industry, with the exception of the Bank & Financial Fund, which is focused on a single sector. Furthermore, DHCM offers its services through third party financial
intermediaries such as brokers and financial planners, and direct to institutions such as insurance companies, pensions and endowments. In order to make this shift in business focus the Company eliminated a number of positions from DHS and added a
number of positions in DHCM to support the new emphasis. Most of the costs associated with the business transition were incurred in 2000, 2001 and 2002. The final change anticipated under this initiative is the planned transition of the remaining
brokerage and advisory business of DHS to third party firms and to DHCM. This transition is expected to be complete by September 30, 2004 and to have no material impact on the financial statements of the Company. The Company believes that this
process was necessary in order to achieve a critical threshold of assets under management needed to generate sufficient revenue to ultimately achieve profitability. Management believes that the Company can achieve breakeven from operations if assets
under management reach somewhere between $400 - $600 million. However, there can be no assurance that the Company will be able to achieve the critical threshold of assets under management to support future operations.



Assets Under Management



As of June 30, 2004, assets under management totaled $322.0 million, a 29%
increase from December 31, 2003. Assets under management grew by 95% as of June 30, 2004 in comparison to June 30, 2003. Asset growth for the six months and year ended June 30, 2004 is not necessarily indicative of the results that may be expected
for the entire fiscal year ended December 31, 2004. The table below provides a summary of assets under management:



|                              |  |           |             |            |   |             |  |   |            
|----------------------------- |  | --------- | ----------- | ---------- | - | ----------- |  | - | -----------
|                              |  | 6/30/2004 |             | 12/31/2003 |   | 6/30/2003  
|Individually Managed Accounts |  | $         | 183,245,008 |            | $ | 142,606,649 |  | $ | 96,740,603 
|Mutual Funds                  |  |           | 125,405,799 |            |   | 95,864,575  |  |   | 57,181,080 
|Alternative Investment        |  |           | 16,312,863  |            |   | 11,601,281  |  |   | 11,001,945 
|                              |  |           |             |            |   |             |  |   |            
|Total Assets Under Management |  |           | 321,963,670 |            | $ | 250,072,505 |  | $ | 164,923,628



17



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



Three months ended June 30, 2004 compared to Three Months ended June 30,
2003



Investment management revenues for the three months
ended June 30, 2004 increased to $519,386 compared to $260,621 for the three months ended June 30, 2003, a 99% increase. This increase results primarily from the increase in assets under management from which the Company derives its revenues.



The Company increased its investment management fees from all
three of its investment products  mutual funds, managed accounts and a private investment partnership, Diamond Hill Investment Partners, L.P. (DHIP). Fees from mutual funds for the three months ended June 30, 2004 and 2003, were
$214,747 and $101,564, respectively, a 111% increase. Fees from managed accounts posted the largest dollar increase over the three months ended June 30, 2004, with a dollar increase of $122,812, or a 84% increase. Investment management fees
collected from DHIP improved by 181%, over the three months ended June 30, 2003. These fees grew from $12,552 to $35,322. Assets under management increased to $326,171,863 as of June 30, 2004, a 30% increase since December 31, 2003. However, there
can be no assurance that the Company will be able to achieve the critical threshold of assets under management at DHCM to support future operations.



Operating expenses for the three months ended June 30, 2004 increased to $670,747 compared to $555,677 for the three months ended June 30, 2003, an
increase of 20%. Substantially all of this increase was due to an increase in salaries, benefits and payroll taxes which grew by 29% to $502,449 in 2004 versus $389,402 in 2003. Other operating expenses were largely unchanged year over year.



Mutual fund administration, which is administrative services
fees collected in connection with the Companys mutual fund products net of all mutual fund administrative expenses paid by the Company, decreased from a net expense of $97,860 for the three months ended June 30, 2003 to $47,078 for the three
months ended June 30, 2004, a 52% improvement. Administrative fees collected and expenses paid increased for the three months ended June 30, 2004 versus the three months ended June 30, 2003. This increase in fees is primarily due to the increase in
assets under management in the Companys mutual fund products. The increase in expenses is primarily due to the increase in asset-based expenses. DHCM has an administrative, fund accounting and transfer agency services agreement with the
Diamond Hill Funds, where DHCM performs certain services for each series of the trust. These services include mutual fund administration, accounting, transfer agency and other related functions. For performing these administrative services, each
series of the trust compensates DHCM a fee at an annual rate of 0.45% times each series average daily net assets. DHCM collected $131,677 and $52,881 for mutual fund administration revenue for the three months ended June 30, 2004 and 2003,
respectively. In fulfilling its role under this agreement, DHCM has engaged several third-party providers and the cost for their services is paid by DHCM. Mutual fund administration expense for the three months ended June 30, 2004 and 2003 were
$178,755 and $150,741, respectively. As assets under management grow in the mutual fund products, the Company expects fees collected to increase, while the Company expects expenses paid to increase but not as quickly as fees are collected;
therefore, causing the net mutual fund administration expense to decrease.



Mutual fund distribution, which includes distribution fees collected in connection with sales of the Diamond Hill Funds net of all mutual fund distribution expenses paid by the Company, increased to a net expense of
$41,262 for the three months ended June 30, 2004 from $23,100 for the three months ended June 30, 2003. Mutual fund distribution fees and expenses both increased during the three months ended June 30, 2004 versus the three months ended June 30,
2003. For performing these distribution functions, DHS collects front-end and back-end sales loads, ranging from 0.25% to 5.75% or underwriting fees of 0.25% to 0.50% on fund investments. DHS also collects 12b-1 fees at an annual rate ranging from
0.25% to 1.00% times each series average daily net assets. Mutual fund distribution revenue for the three months ended June 30, 2004 and 2003 was $42,666 and $33,404, respectively. This increase in fees is primarily due to the increase in
sales of the Diamond Hill Funds. DHS also pays for the production of marketing materials used in the distribution of the Diamond Hill Funds. Mutual fund distribution expense for the three months ended June 30, 2004 and 2003 was $83,928 and $56,504,
respectively. This increase is the result of increased sales of the mutual fund shares in 2004 versus 2003, in which DHS finances the commissions paid. Effective April 30, 2004, DHS discontinued providing mutual fund distribution services as the
principal underwriter for Diamond Hill Funds. It is expected that DHCM will begin to finance certain commissions paid as well as perform certain distribution-related activities. This change is not expected to have a material impact on the
Companys financial statements.



18



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



Broker-dealer activity, which is revenue from security transactions and
market-making activity net of broker-dealer expenses which are comprised principally of clearing costs and regulatory fees, decreased to a net expense of $1,225 for the three months ended June 30, 2004 from a net expense of $6,633 for the three
months ended June 30, 2003. DHS is a registered full-service broker-dealer and transacts security trades through its clearing broker under a correspondent agreement. For the three months ended June 30, 2004 and 2003, broker-dealer activity expenses
were $5,356 and $10,335, respectively. This decrease is largely due to the reduction in overhead and commission expense from reduced activity. DHS earns commissions and service fees related to business transacted through its clearing broker.
Broker-dealer activity generated revenue of $4,131 for the three months ended June 30, 2004 and $3,702 for the three months ended June 30, 2003. In conjunction with the Companys shift in emphasis from its traditional investment related
activities through DHS, to the investment advisory services of DHCM, broker dealer activities through DHS have declined. During the quarter ended June 30, 2004, the Company transitioned substantially all DHS services to third party broker-dealers
and its advisory business to DHCM. This transition is expected to be complete by September 30, 2004 and to have no material impact on the Companys financial statements.



The Companys net operating loss decreased to $240,926 for the three months ended June 30, 2004 from $422,649 for the
three months ended June 30, 2003, a 43% improvement.



Investment return, net of interest expense, decreased to a gain of $7,120 for the three months ended June 30, 2004 from a gain of $240,839 for the three months ended June 30, 2003. This decrease in investment gain results primarily from a
relatively flat overall market during the period. Management is unable to predict how future fluctuations in market values will impact the performance of the Companys investment portfolios.



Six months ended June 30, 2004 compared to Six Months ended June 30,
2003



Investment management revenues for the six months
ended June 30, 2004 increased to $985,445 compared to $467,659 for the six months ended June 30, 2003, a 111% increase. This increase results primarily from the increase in assets under management from which the Company derives its revenues.



The Company increased its investment management fees from all
three of its investment products  mutual funds, managed accounts and a private investment partnership, Diamond Hill Investment Partners, L.P. (DHIP). Fees from mutual funds for the six months ended June 30, 2004 and 2003 were
$404,585 and $189,561, respectively, a 113% increase. Fees from managed accounts posted the largest dollar increase over the six months ended June 30, 2004, with a dollar increase of $260,078, or a 103% increase. Investment management fees collected
from the DHIP improved by 172%, over the six months ended June 30, 2003. These fees grew from $24,807 to $67,491. Assets under management increased to $326,171,863 as of June 30, 2004, a 30% increase since December 31, 2003. However, there can be no
assurance that the Company will be able to achieve the critical threshold of assets under management at DHCM to support future operations.



Operating expenses for the six months ended June 30, 2004 increased to $1,262,849 compared to $1,108,553 for the six months ended June 30, 2003, an
increase of 14%. Substantially all of this increase was due to an increase in salaries, benefits and payroll taxes which grew by 21% to $925,915 in 2004 versus $768,299 in 2003. Other operating expenses were largely unchanged year over year.



Mutual fund administration, which is administrative services
fees collected in connection with the Companys mutual fund products net of all mutual fund administrative expenses paid by the Company, decreased from a net expense of $160,660 for the six months ended June 30, 2004 to $76,907 for the six
months ended June 30, 2003, a 52% improvement. Administrative fees collected and expenses paid increased for the six months ended June 30, 2004 versus the six months ended June 30, 2003. This increase in fees is primarily due to the increase in
assets under management in the Companys mutual fund products. The increase in expenses is primarily due to the increase in asset-based expenses. DHCM has an administrative, fund accounting and transfer agency services agreement with the
Diamond Hill Funds, where DHCM performs certain services for each series of the trust. These services include



19



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



mutual fund administration, accounting, transfer agency and other related
functions. For performing these administrative services, each series of the trust compensates DHCM a fee at an annual rate of 0.45% times each series average daily net assets. DHCM collected $250,762 and $101,941 for mutual fund administration
revenue for the six months ended June 30, 2004 and 2003, respectively. In fulfilling its role under this agreement, DHCM has engaged several third-party providers and the cost for their services is paid by DHCM. Mutual fund administration expense
for the six months ended June 30, 2004 and 2003 were $327,669 and $262,601, respectively. As assets under management grow in the mutual fund products, the Company expects fees collected to increase, while the Company expects expenses paid to
increase but not as quickly as fees are collected; therefore, causing the net mutual fund administration expense to decrease.



Mutual fund distribution, which includes distribution fees collected in connection with sales of the Diamond Hill Funds net of all mutual fund
distribution expenses paid by the Company, increased to a net expense of $67,302 for the six months ended June 30, 2004 from $55,639 for the six months ended June 30, 2003. Mutual fund distribution fees and expenses both increased during the six
months ended June 30, 2004 versus the six months ended June 30, 2003. For performing these distribution functions, DHS collects front-end and back-end sales loads, ranging from 0.25% to 5.75% or underwriting fees of 0.25% to 0.50% on fund
investments. DHS also collects 12b-1 fees at an annual rate ranging from 0.25% to 1.00% times each series average daily net assets. Mutual fund distribution revenue for the six months ended June 30, 2004 and 2003 was $121,617 and $62,307,
respectively. This increase in fees is primarily due to the increase in sales of the Diamond Hill Funds. DHS also pays for the production of marketing materials used in the distribution of the Diamond Hill Funds. Mutual fund distribution expense for
the six months ended June 30, 2004 and 2003 was $188,919 and $117,946, respectively. This increase is the result of increased sales of the mutual fund shares in 2004 versus 2003, in which DHS finances the commissions paid. Effective April 30, 2004,
DHS discontinued providing mutual fund distribution services as the principal underwriter for Diamond Hill Funds. It is expected that DHCM will begin to finance certain commissions paid as well as perform certain distribution-related activities.
This change is not expected to have a material impact on the Companys financial statements.



Broker-dealer activity, is revenue from security transactions and market-making activity net of broker-dealer expenses which are comprised principally of clearing costs and regulatory fees,
decreased to a net expense of $714 for the six months ended June 30, 2004 from a net expense of $13,270 for the six months ended June 30, 2003. DHS is a registered full-service broker-dealer and transacts security trades through its clearing broker
under a correspondent agreement. For the six months ended June 30, 2004 and 2003, broker-dealer activity expenses were $5,356 and $10,335, respectively. This decrease is largely due to the reduction in overhead and commission expense from reduced
activity. DHS earns commissions and service fees related to business transacted through its clearing broker. Broker-dealer activity generated revenue of $10,561 for the six months ended June 30, 2004 and $19,335 for the six months ended June 30,
2003. In conjunction with the Companys shift in emphasis from its traditional investment related activities through DHS, to the investment advisory services of DHCM, broker dealer activities through DHS have declined. During the quarter ended
June 30, 2004, the Company transitioned substantially all DHS services to third party broker-dealers and its advisory business to DHCM. This transition is expected to be complete by September 30, 2004 and to have no material impact on the
Companys financial statements.



The Companys net
operating loss decreased to $422,327 for the six months ended June 30, 2004 from $870,463 for the six months ended June 30, 2003, a 51% improvement.



Investment return, net of interest expense, decreased to a gain of $108,299 for the six months ended June 30, 2004 from a gain of $185,281 for the six
months ended June 30, 2003. This decrease in investment gain results primarily from a lower returns in the fixed income market relative to 2003. Management is unable to predict how future fluctuations in market values will impact the performance of
the Companys investment portfolios.



20



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



Liquidity and Capital Resources



Almost 100% of the Companys investment portfolio is readily
marketable. Investments in securities traded on national securities markets and securities not traded on national securities markets, but with readily ascertainable market values, are valued at market value. Other securities, for which market
quotations are not readily available, due to infrequency of transactions, are valued at fair value as determined in good faith by management of the Company. While management employs objective criteria to ascertain these values, there is no
independent benchmark by which the values assigned by management can be judged. Accordingly, the value of these securities may be overstated.



Subsequent to June 30, 2004, the Company sold 60,000 shares of the Companys Common Stock through a private placement at a price of $7.00, thereby
increasing liquidity and capital resources by $420,000.



DHS,
under a correspondent agreement with its clearing broker, has agreed to indemnify the clearing broker from damages or losses resulting from customers transactions. The Company is, therefore, exposed to off-balance sheet risk of loss in the
event that customers are unable to fulfill contractual obligations. The Company manages this risk by requiring customers to have sufficient cash in their account before a buy order is executed and to have the subject securities in their account
before a sell order is executed. The Company has not incurred any losses from customers being unable to fulfill contractual obligations.



As of June 30, 2004, the Company had working capital of approximately $2.6 million compared to $2.8 million at December 31, 2003 and compared to $2.7
million at June 30, 2003. The decrease is due to operating activities, which includes the net loss during the six and three months ended June 30, 2003. Working capital includes cash, securities owned and accounts and notes receivable, net of all
liabilities. The Company has no long-term debt.



The
Companys net cash balance decreased by $39,084 during the six months ended June 30, 2004. Net cash used by operating activities was $275,338. The primary use of cash flow was the net loss of $314,028. Investing activities during the six months
ended June 30, 2004 used $13,598. Financing activities provided $249,852 of cash during the six months ended June 30, 2004, primarily from the sale of treasury stock.



The Companys net cash balance decreased by $656,741 during the six months ended June 30, 2003. Net cash used by
operating activities was $660,651. The primary use of cash flow was the net loss of $685,182. No cash was used for investing activities during the six months ended June 30, 2003. Financing activities provided $3,910 of cash during the six months
ended June 30, 2003, entirely from the exercise of options of Company common stock by a former employee.



Investment management fees primarily fund the operations of the Company. Management believes that the Companys existing resources (which include proceeds from the recent private placement),
including available cash and cash provided by operating activities, will be sufficient to satisfy its working capital requirements in the foreseeable future. However, no assurance can be given that additional funds will not be required. To the
extent that returns on investments are less than anticipated, or expenses are greater than anticipated, the Company may be required to reduce its activities, liquidate the investment portfolio or seek additional financing. Further, this additional
financing may not be available on acceptable terms, if at all. No significant capital expenditures are expected in the foreseeable future.



Impact of Inflation and Other Factors



The Companys operations have not been significantly affected by inflation. The Companys investment portfolios of equity and fixed income
securities are carried at current market values. Therefore, the Companys profitability is affected by general economic and market conditions, the volume of securities trading and fluctuations in interest rates. The Companys business is
also subject to government regulation and changes in legal, accounting, tax and other compliance requirements. Changes in these regulations may have a significant effect on the Companys operations.



21



---

##### Table of Contents

ITEM 3: Controls and Procedures



Management, including the Chief Executive Officer and the Chief Financial Officer have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on the evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a
timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their
evaluation.



PART II: OTHER INFORMATION



ITEM 1: Legal Proceedings  None



ITEM 2: Changes in Securities  None



ITEM 3: Defaults Upon Senior Securities  None



ITEM 4: Submission of Matters to a Vote of Security Holders



The annual meeting of the shareholders of the Company was held on May 13, 2004 at the Companys office. A majority of the Companys voting shares were present at the meeting, either by person or by proxy.



At such meeting, the shareholders elected the following
individuals to serve on the Board of Directors for a one year term.



|                       |  |           |  |               
|---------------------- |  | --------- |  | --------------
|Name                   |  | Votes For |  | Votes Withheld
|R.H. Dillon            |  | 1,237,231 |  | 3,439         
|Dr. Roger D. Blackwell |  | 1,226,261 |  | 14,409        
|David P. Lauer         |  | 1,237,471 |  | 3,199         
|James G. Mathias       |  | 1,237,751 |  | 2,919         
|David R. Meuse         |  | 1,237,471 |  | 3,199         
|William G. Perkins     |  | 1,237,091 |  | 3,579         
|Diane D. Reynolds      |  | 1,237,431 |  | 3,239         



Also at the meeting,
the shareholders approved the terms and conditions of certain equity compensation grants.



|          |  |               |  |         |  |          
|--------- |  | ------------- |  | ------- |  | ---------
|Votes For |  | Votes Against |  | Abstain |  | Not Voted
|274,258   |  | 65,320        |  | 16,587  |  | 884,506  



ITEM 5: Other Information None



22



---

##### Table of Contents

ITEM 6: Exhibits and Reports on Form 8-K



(a) Index of Exhibits



|          |  |                                                                                                                                                                                                           
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*3.1      |  | Amended and Restated Articles of Incorporation of the Company.                                                                                                                                            
|          | 
|*3.2      |  | Code of Regulations of the Company.                                                                                                                                                                       
|          | 
|**10.1    |  | Diamond Hill Investment Group (fka Heartland) Incentive Compensation Plan.                                                                                                                                
|          | 
|***10.2   |  | 1993 Non-Qualified and Incentive Stock Option Plan.                                                                                                                                                       
|          | 
|****10.3  |  | Synovus Securities, Inc., Sub-Advisory Agreement with the Diamond Hill Capital Management, Inc. dated January 30, 2001.                                                                                   
|          | 
|**10.4    |  | Employment Agreement between the Company and Roderick H. Dillon, Jr. dated May 11, 2000.                                                                                                                  
|          | 
|**10.5    |  | Employment Agreement between the Company and James F. Laird dated October 24, 2001.                                                                                                                       
|          | 
|*****10.6 |  | Form of Subscription Agreement for common Shares of Diamond Hill Investment Group, Inc. executed by subscribers as part of the private placement referenced in Part II, Item 2 of this Form
10-QSB.       
|          | 
|31.1      |  | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15-d-14(a)                                                                                                                    
|          | 
|31.2      |  | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                     
|          | 
|32.1      |  | Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15(d)-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18
U.S.C. 1350).

---

|* | Filed with the Securities and Exchange Commission as an exhibit to the Companys Form 8-K filed on May 8, 2002 and incorporated herein by reference.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|** | Filed with the Securities and Exchange Commission as an exhibit to the Companys Form 10-KSB filed on March 28, 2003 and incorporated herein by reference.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|*** | Filed with the Securities and Exchange Commission as an exhibit to the Companys Proxy Statement filed on July 21, 1998 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|**** | Filed with the Securities and Exchange Commission as an exhibit to the Companys Form 10-KSB filed on March 1, 2001 and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|***** | Filed with the Securities and Exchange Commission as an exhibit to the companys Form 10-QSB filed on November 14, 2003 and incorporated herein by reference.
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K



A Form 8-K was filed on May 14, 2004 to report the
Companys earnings for the three months ended March 31, 2004.



23



---

##### Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES



SIGNATURES



In accordance with the
requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:



DIAMOND HILL INVESTMENT GROUP, INC.



|                                 |  |                         |  |                
|-------------------------------- |  | ----------------------- |  | ---------------
|Signature                        |  | Title                   |  | Date           
|/s/ R. H. DillonR. H. Dillon     |  | President and Director  |  | August 13, 2004
|                                 | 
|                                 |  |                        
|/s/ James F. LairdJames F. Laird |  | Chief Financial Officer |  | August 13, 2004
|                                 | 



24