##### 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 September 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 375 North Front Street, Suite 300, Columbus, Ohio 43215
 (614) 255-3333
  o þ
 o þ




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PAGEPart I: FINANCIAL INFORMATION
    
    3-21Item 1.
    
    Financial Statements:
    
    3-15Consolidated Statements of Financial Condition as of September 30, 2005 (unaudited)
    
    4Consolidated Statements of Operations for the Nine Months and Three Months Ended September 30, 2005 and 2004 (unaudited)
    
    5Consolidated Statements of Cash Flow for the Nine Months Ended September 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
    
    24-25Exhibit 31.1Exhibit 31.2Exhibit 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
    
    $
    1,984,590Investment portfolio (note 3):Mutual fund shares and private limited partnership interests
    
    
    4,322,913Accounts receivable:Investment management revenue
    
    
    1,356,254Property and equipment, net of accumulated depreciation of $182,913
    
    
    104,640Prepaid expenses
    
    
    420,015Refundable deposits
    
    
    10,570Total assets
    
    $
    8,198,982LIABILITIESUnearned fee income
    
    
    8,365Accrued expenses
    
    
    2,829,682Total liabilities
    
    
    2,838,047SHAREHOLDERS EQUITYCommon stock: (note 4)
No par value, 7,000,000 shares authorized,
1,827,972 shares issued and 1,681,603 shares outstanding
    
    
    10,812,124Treasury stock, at cost (146,369 shares)
    
    
    (837,461
    )Deferred compensation
    
    
    (313,775
    )Accumulated deficit
    
    
    (4,299,953
    )Total shareholders equity
    
    
    5,360,935Total liabilities and shareholders equity
    
    $
    8,198,982
  4




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##### Table of Contents



UNAUDITED
 9 MONTHS ENDED
    
    
    3 MONTHS ENDEDSEP 2005
    
    
    SEP 2004
    
    
    SEP 2005
    
    
    SEP 2004INVESTMENT MANAGEMENT
REVENUE:Mutual funds
    
    $
    2,120,078
    
    
    $
    657,525
    
    
    $
    922,618
    
    
    $
    252,940Managed accounts
    
    
    1,721,687
    
    
    
    810,389
    
    
    
    787,969
    
    
    
    297,020Private investment partnership
    
    
    2,034,912
    
    
    
    179,205
    
    
    
    1,586,728
    
    
    
    111,714Total investment management revenue
    
    
    5,876,677
    
    
    
    1,647,119
    
    
    
    3,297,315
    
    
    
    661,674OPERATING EXPENSES:Salaries, benefits and payroll taxes
    
    
    1,949,369
    
    
    
    1,480,906
    
    
    
    648,925
    
    
    
    554,991Incentive compensation (note 6)
    
    
    2,500,000
    
    
    
    
    
    
    
    2,500,000
    
    
    
    Legal and audit
    
    
    77,170
    
    
    
    67,255
    
    
    
    15,859
    
    
    
    8,720General and administrative
    
    
    424,947
    
    
    
    303,222
    
    
    
    162,977
    
    
    
    115,630Sales and marketing
    
    
    192,456
    
    
    
    133,587
    
    
    
    82,591
    
    
    
    42,780Total operating expenses
    
    
    5,143,942
    
    
    
    1,984,970
    
    
    
    3,410,352
    
    
    
    722,121NET OPERATING INCOME (LOSS)
    
    
    732,735
    
    
    
    (377,851
    )
    
    
    (113,037
    )
    
    
    (60,447
    )Mutual fund administration, net (Note 7)
    
    
    (126,709
    )
    
    
    (139,530
    )
    
    
    (9,007
    )
    
    
    5,393Investment return
    
    
    378,469
    
    
    
    316,016
    
    
    
    211,718
    
    
    
    207,717INCOME (LOSS) BEFORE TAXES
    
    
    984,495
    
    
    
    (161,365
    )
    
    
    89,674
    
    
    
    152,663Income tax provision (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    984,495
    
    
    $
    (161,365
    )
    
    $
    89,674
    
    
    $
    152,663Basic Earnings (Loss) Per Share
    
    $
    0.60
    
    
    $
    (0.10
    )
    
    $
    0.05
    
    
    $
    0.10Diluted Earnings (Loss) Per Share
    
    $
    0.50
    
    
    $
    (0.10
    )
    
    $
    0.04
    
    
    $
    0.09
  5




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UNAUDITED
 2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    984,495
    
    
    $
    (161,365
    )Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    28,989
    
    
    
    28,742Write off of assets
    
    
    34
    
    
    
    762Amortization of deferred compensation
    
    
    40,275
    
    
    
    12,774(Increase) decrease in certain assets:Accounts receivable:Investment management fees
    
    
    (818,879
    )
    
    
    (210,744
    )Other
    
    
    
    
    
    
    229Refundable income taxes
    
    
    
    
    
    
    (27,000
    )Deposits and other
    
    
    (170,177
    )
    
    
    (45,801
    )Increase (decrease) in certain liabilities-Unearned fee income
    
    
    8,365
    
    
    
    Accounts payable to broker-dealers and other
    
    
    
    
    
    
    (1,465
    )Accrued expenses and other
    
    
    (2,424,888
    )
    
    
    9,589Net cash provided by (used in) operating activities
    
    
    2,497,990
    
    
    
    (394,279
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (20,708
    )
    
    
    (19,303
    )Unrealized (gain) loss
    
    
    (316,683
    )
    
    
    (317,237
    )(Increase) decrease in investment portfolio
    
    
    (1,880,101
    )
    
    
    282,318Sale of securities
    
    
    828,125
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (1,389,367
    )
    
    
    (54,222
    )CASH FLOWS FROM FINANCING ACTIVITIES:Exercise of stock options
    
    
    
    
    
    
    Sale of treasury stock
    
    
    773,401
    
    
    
    508,534Net cash provided by financing activities
    
    
    773,401
    
    
    
    508,534NET INCREASE (DECREASE) IN CASH
    
    
    1,882,024
    
    
    
    60,033CASH, BEGINNING OF PERIOD
    
    
    102,566
    
    
    
    50,985CASH, END OF PERIOD
    
    $
    1,984,590
    
    
    $
    111,018SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    1,221Income 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
    
    $
    984,495
    
    
    
    1,642,623
    
    
    $
    0.60Diluted Earnings
    
    $
    984,495
    
    
    
    1,965,743
    
    
    $
    0.50
  Numerator
    
    Denominator
    
    AmountBasic Earnings
    
    $
    (161,365
    )
    
    
    1,551,220
    
    
    $
    (0.10
    )Diluted Earnings
    
    $
    (161,365
    )
    
    
    1,551,220
    
    
    $
    (0.10
    )
 8




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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Earnings Per Share
  Numerator
    
    Denominator
    
    AmountBasic Earnings
    
    $
    89,674
    
    
    
    1,658,446
    
    
    $
    0.05Diluted Earnings
    
    $
    89,674
    
    
    
    1,999,620
    
    
    $
    0.04
  Numerator
    
    Denominator
    
    AmountBasic Earnings
    
    $
    152,663
    
    
    
    1,594,014
    
    
    $
    0.10Diluted Earnings
    
    $
    152,663
    
    
    
    1,658,440
    
    
    $
    0.09
  Fair Value of Financial Instruments
  INVESTMENT PORTFOLIO
  UnrealizedMarket
    
    
    Cost
    
    
    Gains (Losses)Diamond Hill Large Cap Fund
    
    $
    57,674
    
    
    $
    50,000
    
    
    $
    7,674Diamond Hill Focus Long-Short Fund
    
    
    58,442
    
    
    
    50,000
    
    
    
    8,442Diamond Hill Focus Small Cap Fund
    
    
    59,433
    
    
    
    50,000
    
    
    
    9,433Diamond Hill Strategic Income Fund
    
    
    1,028,444
    
    
    
    961,768
    
    
    
    66,676DHIP Private Investment Partnership
    
    
    3,118,920
    
    
    
    2,394,927
    
    
    
    723,993Total
    
    
    4,322,913
    
    
    
    3,506,695
    
    
    
    816,218
 9




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INVESTMENT PORTFOLIO
   2005
    
    2004Total assets
    
    $
    155,560,086
    
    
    $
    31,733,939Total liabilities
    
    
    59,440,368
    
    
    
    12,860,296Net assets
    
    
    96,119,718
    
    
    
    18,873,643Net income
    
    
    14,299,359
    
    
    
    2,859,649DHCMs portion of net assets
    
    
    3,118,920
    
    
    
    1,744,993DHCMs portion of net income
    
    
    2,040,618
    
    
    
    155,164
  NINE MONTHS ENDED
    
    THREE MONTHS ENDEDSEP 2005
    
    SEP 2004
    
    SEP 2005
    
    SEP 2004Management fee
    
    $
    298,266
    
    
    $
    72,638
    
    
    $
    137,047
    
    
    $
    28,135Incentive fee
    
    
    1,736,646
    
    
    
    106,567
    
    
    
    1,449,682
    
    
    
    83,579
 CAPITAL STOCK
 Common Stock
  Treasury Stock
  10




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CAPITAL STOCK (Continued)
 Authorization of Preferred Stock
  OPERATING LEASES
  Year Ended
    
    Amount2005
    
    
    38,2502006
    
    
    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
  Nine Months Ended
    
    Three Months EndedSeptember 30
    
    September 302005
    
    2004
    
    2005
    
    2004Net income, as reported
    
    
    984,495
    
    
    
    (161,365
    )
    
    
    89,674
    
    
    
    152,663Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related tax effects
    
    
    (35,634
    )
    
    
    (87,785
    )
    
    
    (8,040
    )
    
    
    (15,425
    )Pro forma net income
    
    
    948,861
    
    
    
    (249,150
    )
    
    
    81,634
    
    
    
    137,238Earnings per share:Basic  as reported
    
    
    0.60
    
    
    
    (0.10
    )
    
    
    0.05
    
    
    
    0.10Basic  pro forma
    
    
    0.58
    
    
    
    (0.13
    )
    
    
    0.05
    
    
    
    0.09Diluted  as reported
    
    
    0.50
    
    
    
    (0.10
    )
    
    
    0.04
    
    
    
    0.09Diluted  pro forma
    
    
    0.48
    
    
    
    (0.13
    )
    
    
    0.04
    
    
    
    0.08
  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 September 30, 2004
    
    
    260,202
    
    
    
    10.581
    
    
    
    280,400
    
    
    
    12.897Exercisable September 30, 2004
    
    
    138,202
    
    
    $
    15.459
    
    
    
    280,400
    
    
    $
    12.897Outstanding December 31, 2004
    
    
    260,202
    
    
    $
    10.581
    
    
    
    280,400
    
    
    $
    12.897Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    29,000
    
    
    
    13.211
    
    
    
    15,000
    
    
    
    14.375Expired unexercised
    
    
    5,000
    
    
    
    14.375
    
    
    
    6,000
    
    
    
    14.375Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding September 30, 2005
    
    
    226,202
    
    
    
    10.160
    
    
    
    259,400
    
    
    
    12.777Exercisable September 30, 2005
    
    
    152,202
    
    
    $
    16.429
    
    
    
    259,400
    
    
    $
    12.777
 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
    
    
    2.62
    
    
    
    2.62Number Outstanding
    
    
    
    
    
    
    14,000Number Exercisable
    
    
    
    
    
    
    14,000Exercise Price
    
    
    
    
    
    
    11.25Remaining life in years
    
    
    
    
    
    
    4.42Number Outstanding
    
    
    90,000
    
    
    
    16,400Number Exercisable
    
    
    76,000
    
    
    
    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
    
    
    5.60
    
    
    
    3.50Number 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
    
    
    7.68
    
    
    
    4.26
 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
  Assets Under Management
  9/30/2005
    
    
    12/31/2004
    
    
    9/30/2004Individually Managed Accounts
    
    $
    489,109,827
    
    
    $
    265,428,049
    
    
    $
    212,450,082Mutual Funds
    
    
    565,075,034
    
    
    
    237,625,466
    
    
    
    154,585,263Private Investment Partnership
    
    
    96,057,198
    
    
    
    20,739,964
    
    
    
    18,890,590Total Assets Under Management
    
    $
    1,150,242,060
    
    
    $
    523,793,479
    
    
    $
    385,925,936
 Three months ended September 30, 2005 compared to three months ended September 30, 2004
    17




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Nine months ended September 30, 2005 compared to nine months ended September 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
 
 ITEM 5: Other Information 
 20




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##### Table of Contents



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 Form
10-QSB filed on August 12, 2005.*******
    
    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

R. H. Dillon
    
    
    
    President and Director
    
    November 14, 2005/s/ James F. Laird

James F. Laird
    
    
    
    Chief Financial Officer
    
    November 14, 2005
 22