##### Table of Contents



U.S. Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-QSB
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 o
    
    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
  Ohio
    
    65-0190407(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 375 North Front Street, Suite 300, Columbus, Ohio
    
    43215(Address of principal executive offices)
    
    (Zip Code)
 (614) 255-3333
   o þ
   1




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PAGEPart I: FINANCIAL INFORMATION
    
    3-21Item 1. Financial Statements:
    
    3-15Consolidated Statements of Financial Condition as of June 30, 2005 (unaudited)
    
    4Consolidated Statements of Operations for the Six Months and Three Months Ended June 30, 2005
and 2004 (unaudited)
    
    5Consolidated Statements of Cash Flow for the Six Months Ended June 30, 2005 and 2004 (unaudited)
    
    6Notes to the Consolidated Financial Statements
    
    7-15Item 2. Managements Discussion and Analysis or Plan of Operation
    
    16-21Item 3. Controls and Procedures
    
    21Part II: OTHER INFORMATION
    
    21-22Item 1. Legal Proceedings
    
    21Item 2. Changes in Securities
    
    21Item 3. Defaults Upon Senior Securities
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    22Item 5. Other Information
    
    22Item 6. Exhibits
    
    22Signatures
    
    23Certifications for Quarterly Report on Form 10-QSB
    
    24-25EX-10.6EX-31.1EX-31.2EX-32.1
  2




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PART I
 FINANCIAL INFORMATION
 
 ITEM 1: Financial Statements
   3




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##### Table of Contents



UNAUDITED
 ASSETSCash
    
    $
    268,631Investment portfolio (note 3):Mutual fund shares and private limited partnership interests
    
    
    3,545,777Accounts receivable:Investment management revenue
    
    
    828,209Property and equipment, net of accumulated depreciation of $174,634
    
    
    98,608Prepaid expenses
    
    
    349,428Refundable deposits
    
    
    20,570Total assets
    
    $
    5,111,223LIABILITIESUnearned fee income
    
    
    4,869Accrued expenses
    
    
    255,059Total liabilities
    
    
    259,928SHAREHOLDERS EQUITYCommon stock: (note 5)No par value, 7,000,000 shares authorized,
1,827,972 shares issued and 1,653,745 shares outstanding
    
    
    10,555,929Treasury stock, at cost (174,227 shares)
    
    
    (996,853Deferred compensation
    
    
    (335,169Accumulated deficit
    
    
    (4,372,612
    )Total shareholders equity
    
    
    4,851,295Total liabilities and shareholders equity
    
    $
    5,111,223
  4




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##### Table of Contents



UNAUDITED
 6 MONTHS ENDED
    
    3 MONTHS ENDEDJUNE 2005
    
    JUNE 2004
    
    JUNE 2005
    
    JUNE 2004INVESTMENT MANAGEMENT REVENUE:Mutual funds
    
    $
    1,197,461
    
    
    $
    404,585
    
    
    $
    674,744
    
    
    $
    214,747Managed accounts
    
    
    933,718
    
    
    
    513,369
    
    
    
    504,126
    
    
    
    269,317Private investment partnership
    
    
    465,198
    
    
    
    67,491
    
    
    
    203,842
    
    
    
    35,322Total investment management revenue
    
    
    2,596,377
    
    
    
    985,445
    
    
    
    1,382,712
    
    
    
    519,386OPERATING EXPENSES:Salaries, benefits and payroll taxes
    
    
    1,300,444
    
    
    
    925,915
    
    
    
    661,029
    
    
    
    502,449Incentive compensation (note 7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Legal and audit
    
    
    61,311
    
    
    
    58,535
    
    
    
    23,027
    
    
    
    25,637General and administrative
    
    
    261,970
    
    
    
    187,592
    
    
    
    129,354
    
    
    
    92,470Sales and marketing
    
    
    109,865
    
    
    
    90,807
    
    
    
    71,664
    
    
    
    50,191Total operating expenses
    
    
    1,733,590
    
    
    
    1,262,849
    
    
    
    885,074
    
    
    
    670,747NET OPERATING INCOME (LOSS)
    
    
    862,787
    
    
    
    (277,404
    )
    
    
    497,638
    
    
    
    (151,361
    )Mutual fund administration, net (Note 8)
    
    
    (117,702
    )
    
    
    (144,923
    )
    
    
    (43,570
    )
    
    
    (89,565
    )Investment return
    
    
    166,751
    
    
    
    108,299
    
    
    
    61,134
    
    
    
    7,120INCOME (LOSS) BEFORE TAXES
    
    
    911,836
    
    
    
    (314,028
    )
    
    
    515,202
    
    
    
    (233,806
    )Income tax provision (Note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    911,836
    
    
    $
    (314,028
    )
    
    $
    515,202
    
    
    $
    (233,806
    )Basic Earnings (Loss) Per Share
    
    $
    0.56
    
    
    $
    (0.21
    )
    
    $
    0.31
    
    
    $
    (0.15
    )Diluted Earnings (Loss) Per Share
    
    $
    0.47
    
    
    $
    (0.21
    )
    
    $
    0.26
    
    
    $
    (0.15
    )
  5




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UNAUDITED
 2005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    911,836
    
    
    $
    (314,028
    )Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    18,724
    
    
    
    19,841Amortization of deferred compensation
    
    
    18,881
    
    
    
    3,146Unrealized (gain) loss
    
    
    (120,920
    )
    
    
    (60,596
    )(Increase) decrease in certain assets:Investment portfolio
    
    
    (1,298,728
    )
    
    
    334,482
    )Accounts receivable:Investment management fees
    
    
    (362,709
    )
    
    
    (106,929
    )Sale of securities
    
    
    900,000
    
    
    
    (96
    )Refundable income taxes
    
    
    
    
    
    
    (31,950
    )Deposits and other
    
    
    (109,590
    )
    
    
    (129,017
    )Increase (decrease) in certain liabilities-Unearned fee income
    
    
    4,869
    
    
    
    Accounts payable to broker-dealers and other
    
    
    
    
    
    
    (1,589)
    )Accrued expenses and other
    
    
    (146,161
    )
    
    
    11,206Net cash provided by (used in) operating activities
    
    
    (183,798
    )
    
    
    (275,338
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (4,375
    )
    
    
    (13,598
    )Net cash used in investing activities
    
    
    (4,375
    )
    
    
    (13,598
    )CASH FLOWS FROM FINANCING ACTIVITIES:Exercise of stock options
    
    
    
    
    
    
    Note Payable  line of credit
    
    
    
    
    
    
    48,700Sale of treasury stock
    
    
    354,238
    
    
    
    201,152Net cash provided by financing activities
    
    
    354,238
    
    
    
    249,852NET INCREASE (DECREASE) IN CASH
    
    
    166,065
    
    
    
    (39,084
    )CASH, BEGINNING OF PERIOD
    
    
    102,566
    
    
    
    50,985CASH, END OF PERIOD
    
    $
    268,631
    
    
    $
    11,901SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    596Income taxes
    
    
    
    
    
    
    
  6




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ORGANIZATION AND NATURE OF BUSINESS
   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Reclassifications
  Principles of Consolidation
  Cash
  Accounts Receivable
  Valuation of Investment Portfolio
  7




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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Limited Partnership Interests
  Property and Equipment
  Revenues
  Earnings Per Share
   Numerator
    
    Denominator
    
    AmountBasic Earnings
    
    $
    911,836
    
    
    
    1,632,216
    
    
    $
    0.56Diluted Earnings
    
    $
    911,836
    
    
    
    1,950,530
    
    
    $
    0.47
  Numerator
    
    Denominator
    
    AmountBasic Earnings
    
    $
    (314,028
    )
    
    
    1,529,588
    
    
    $
    (0.21
    )Diluted Earnings
    
    $
    (314,028
    )
    
    
    1,529,588
    
    
    $
    (0.21
    )
 8




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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Earnings Per Share
  Numerator
    
    Denominator
    
    AmountBasic Earnings
    
    $
    515,202
    
    
    
    1,642,042
    
    
    $
    0.31Diluted Earnings
    
    $
    515,202
    
    
    
    1,951,967
    
    
    $
    0.26
  Numerator
    
    Denominator
    
    AmountBasic Earnings
    
    $
    (233,806
    )
    
    
    1,533,715
    
    
    $
    (0.15
    )Diluted Earnings
    
    $
    (233,806
    )
    
    
    1,533,715
    
    
    $
    (0.15
    )
  Fair Value of Financial Instruments
  INVESTMENT PORTFOLIO
  UnrealizedMarket
    
    Cost
    
    Gains (Losses)Diamond Hill Strategic Income Fund
    
    $
    1,026,400
    
    
    $
    946,295
    
    
    $
    80,105Diamond Hill Short Term Fixed Income Fund
    
    
    862,210
    
    
    
    866,767
    
    
    
    (4,557
    )Diamond Hill Small Cap Fund
    
    
    54,967
    
    
    
    50,000
    
    
    
    4,967Diamond Hill Focus Long-Short Fund
    
    
    53,261
    
    
    
    50,000
    
    
    
    3,261Diamond Hill Large Cap Fund
    
    
    52,868
    
    
    
    50,000
    
    
    
    2,868DHIP Partnership Investment Partnership
    
    
    1,496,071
    
    
    
    962,260
    
    
    
    533,811Total
    
    
    3,545,777
    
    
    
    2,925,322
    
    
    
    620,455
  Net UnrealizedMarket
    
    Cost
    
    Gains (Losses)Mutual fund shares and investment
partnership interests
    
    $
    2,448,454
    
    
    $
    1,960,891
    
    
    $
    87,563Not readily marketable equity securities
    
    
    9,993
    
    
    
    190,010
    
    
    
    (180,017
    )Total
    
    
    2,458,447
    
    
    
    2,150,901
    
    
    
    307,546
 9




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INVESTMENT PORTFOLIO
   2005
    
    2004Total assets
    
    $
    135,294,268
    
    
    $
    29,662,715Total liabilities
    
    
    55,217,298
    
    
    
    13,351,788Net assets
    
    
    80,076,970
    
    
    
    16,310,927Net income
    
    
    3,780,082
    
    
    
    988,200DHCMs portion of net assets
    
    
    1,496,071
    
    
    
    1,490,082DHCMs portion of net income
    
    
    417,768
    
    
    
    126,632
  SIX MONTHS ENDED
    
    THREE MONTHS ENDEDJUNE 2005
    
    JUNE 2004
    
    JUNE 2005
    
    JUNE 2004Management fee
    
    $
    161,220
    
    
    $
    44,503
    
    
    $
    110,651
    
    
    $
    23,974Incentive fee
    
    
    303,978
    
    
    
    22,988
    
    
    
    93,192
    
    
    
    11,347
 LINE OF CREDIT
  CAPITAL STOCK
 Common Stock
  10




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CAPITAL STOCK (Continued)
 Treasury Stock
  Authorization of Preferred Stock
  OPERATING LEASES
  Year Ended
    
    Amount2005
    
    
    76,5002006
    
    
    63,750
 EMPLOYEE INCENTIVE PLANS
 Comprehensive Compensation Program
  11




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EMPLOYEE INCENTIVE PLANS (Continued)
 Equity Compensation Grants
  Equity Incentive Plan
  Stock Option Plan
   12




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EMPLOYEE INCENTIVE PLANS (Continued)
 Stock Option Plan
  Three Months Ended
    
    Six Months EndedJune 30
    
    June 302005
    
    2004
    
    2005
    
    2004Net income, as reported
    
    
    515,202
    
    
    
    (233,806
    )
    
    
    911,836
    
    
    
    (314,028
    )Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related tax effects
    
    
    (12,885
    )
    
    
    (32,339
    )
    
    
    (27,594
    )
    
    
    (72,360
    )Pro forma net income
    
    
    502,317
    
    
    
    (266,145
    )
    
    
    884,242
    
    
    
    (386,388
    )Earnings per share:Basic  as reported
    
    
    0.31
    
    
    
    (0.15
    )
    
    
    0.56
    
    
    
    (0.21
    )Basic  pro forma
    
    
    0.31
    
    
    
    (0.17
    )
    
    
    0.54
    
    
    
    (0.25
    )Diluted  as reported
    
    
    0.26
    
    
    
    (0.15
    )
    
    
    0.47
    
    
    
    (0.21
    )Diluted  pro forma
    
    
    0.26
    
    
    
    (0.17
    )
    
    
    0.45
    
    
    
    (0.25
    )
  13




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EMPLOYEE INCENTIVE PLANS (Continued)
 Stock Option Plan
  Options
    
    WarrantsExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding December 31, 2003
    
    
    260,202
    
    
    $
    10.581
    
    
    
    280,400
    
    
    $
    12.897Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired unexercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding June 30, 2004
    
    
    260,202
    
    
    
    10.581
    
    
    
    280,400
    
    
    
    12.897Exercisable June 30, 2004
    
    
    138,202
    
    
    $
    15.459
    
    
    
    280,400
    
    
    $
    12.897Outstanding December 31, 2004
    
    
    260,202
    
    
    $
    10.581
    
    
    
    280,400
    
    
    $
    12.897Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    9,000
    
    
    
    10.625
    
    
    
    10,000
    
    
    
    14.375Expired unexercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding June 30, 2005
    
    
    251,202
    
    
    
    10.580
    
    
    
    270,400
    
    
    
    12.385Exercisable June 30, 2005
    
    
    165,202
    
    
    $
    15.593
    
    
    
    270,400
    
    
    $
    12.385
 14




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EMPLOYEE INCENTIVE PLANS
 Stock Option Plan
  Options
    
    WarrantsNumber Outstanding
    
    
    16,202
    
    
    
    14,000Number Exercisable
    
    
    16,202
    
    
    
    14,000Exercise Price
    
    
    73.75
    
    
    
    73.75Remaining life in years
    
    
    2.87
    
    
    
    2.87Number Outstanding
    
    
    25,000
    
    
    
    11,000Number Exercisable
    
    
    25,000
    
    
    
    11,000Exercise Price
    
    
    14.375
    
    
    
    14.38Remaining life in years
    
    
    0.25
    
    
    
    0.25Number Outstanding
    
    
    
    
    
    
    14,000Number Exercisable
    
    
    
    
    
    
    14,000Exercise Price
    
    
    
    
    
    
    11.25Remaining life in years
    
    
    
    
    
    
    4.67Number Outstanding
    
    
    90,000
    
    
    
    16,400Number Exercisable
    
    
    64,000
    
    
    
    16,400Range of exercise prices
    
    
    5.25 - 8.45
    
    
    
    22.20 -22.50Weighted average exercise price
    
    
    6.26
    
    
    
    22.49Weighted average remaining life in years
    
    
    5.85
    
    
    
    3.75Number Outstanding
    
    
    120,000
    
    
    
    215,000Number Exercisable
    
    
    60,000
    
    
    
    215,000Range of exercise prices
    
    
    4.50
    
    
    
    8.00 - 10.625Weighted average exercise price
    
    
    4.50
    
    
    
    8.17Weighted average remaining life in years
    
    
    7.94
    
    
    
    4.52
 15




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MUTUAL FUND ADMINISTRATION
  INCOME TAXES
  REGULATORY REQUIREMENTS
  16




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ITEM 2: Managements Discussion and Analysis or Plan of Operation
 Forward-looking Statements
  General
   Assets Under Management
  6/30/2005
    
    12/31/2004
    
    6/30/2004Individually Managed Accounts
    
    $
    334,830,632
    
    
    $
    265,428,049
    
    
    $
    183,245,008Mutual Funds
    
    
    395,850,029
    
    
    
    237,625,466
    
    
    
    125,405,799Private Investment Partnership
    
    
    80,036,158
    
    
    
    20,739,964
    
    
    
    16,312,863Total Assets Under Management
    
    $
    810,716,819
    
    
    $
    523,793,479
    
    
    $
    321,963,670
 Three months ended June 30, 2005 compared to Three Months ended June 30, 2004
   17




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Six months ended June 30, 2005 compared to six months ended June 30, 2004
   18




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Liquidity and Capital Resources
   19




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Impact of Inflation and Other Factors
  
 ITEM 3: Controls and Procedures
  
 PART II: OTHER INFORMATION
 
 ITEM 1: Legal Proceedings 
 
 ITEM 2: Changes in Securities 
 
 ITEM 3: Defaults Upon Senior Securities 
 
 ITEM 4: Submission of Matters to a Vote of Security Holders
 20




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ITEM 5: Other Information 
 
 ITEM 6: Exhibits
 *3.1
    
    Amended and Restated Articles of Incorporation of the Company.*3.2
    
    Code of Regulations of the Company.***10.1
    
    1993 Non-Qualified and Incentive Stock Option Plan.****10.2
    
    Synovus Securities, Inc., Sub-Advisory Agreement with the Diamond Hill Capital
Management, Inc. dated January 30, 2001.**10.3
    
    Employment Agreement between the Company and Roderick H. Dillon, Jr. dated May 11, 2000.**10.4
    
    Employment Agreement between the Company and James F. Laird dated October 24, 2001.*****10.5
    
    Form of Subscription Agreement for common Shares of Diamond Hill Investment Group, Inc.
executed by subscribers as part of the private placement dated July 21, 2004.10.6
    
    2005 Employee and Director Equity Incentive Plan******14.1
    
    Code of Business Conduct and Ethics.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.******
    
    Filed with the Securities and Exchange Commission as an exhibit to the Companys Proxy
Statement filed on April 9, 2004 and incorporated herein by reference. 21




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SIGNATURES
   Signature
    
    Title
    
    Date/s/ R. H. Dillon
    
    President and Director
    
    August 12, 2005R. H. Dillon/s/James F. Laird
    
    Chief Financial Officer
    
    August 12, 2005James F. Laird
 22