##### Table of Contents



U.S. Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 Commission file number 000-24498
 DIAMOND HILL INVESTMENT GROUP, INC
  Ohio
    
    65-0190407(State of incorporation)
    
    (I.R.S. Employer Identification No.)
  (Address, including Zip Code, of principal executive offices)
  (Registrants telephone number, including area code)
 þ o
  o o þ
 o þ




---



##### 



PAGEPart I: FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operation
    

16-21Item 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and Procedures
    
    21Part II: OTHER INFORMATION
    
    21-22Item 1. Legal Proceedings
    
    21Item 2. Unregistered Sales of Equity Securities and use of Proceeds
    
    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
    
    23EX-31.1EX-31.2EX-32.1
  2




---



##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1: Financial Statements
 Diamond Hill Investment Group, Inc.  Consolidated Balance Sheets (unaudited)
 3/31/2006
    
    
    12/31/2005ASSETSCash and cash equivalents
    
    
    2,578,899
    
    
    
    2,532,334Investment portfolio (note 3)
    
    
    8,352,064
    
    
    
    5,855,370Accounts receivable
    
    
    2,547,040
    
    
    
    1,897,701Prepaid expenses
    
    
    658,753
    
    
    
    580,109Fixed assets, net of depreciation and other assets
    
    
    111,903
    
    
    
    111,863Deferred taxes (note 6)
    
    
    1,153,291
    
    
    
    1,770,132Total assets
    
    
    15,401,950
    
    
    
    12,747,509LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable and accrued expenses
    
    
    588,122
    
    
    
    336,497Accrued incentive compensation
    
    
    2,372,703
    
    
    
    1,550,000Total Liabilities
    
    
    2,960,825
    
    
    
    1,886,497Shareholders Equity (note 4)Common
stock, no par value
7,000,000 shares authorized; 1,827,972 issued
1,767,193 outstanding at March 31, 2006
1,755,899 outstanding at December 31, 2005
    
    
    13,440,932
    
    
    
    13,199,444Preferred
stock, undesignated, 1,000,000 shares
authorized and unissued
    
    
    
    
    
    
    Treasury
stock, at cost
60,779 shares at March 31, 2006
72,073 shares at December 31, 2005
    
    
    (347,750
    )
    
    
    (412,370
    )Deferred compensation
    
    
    (270,988
    )
    
    
    (292,381
    )Accumulated deficit
    
    
    (381,069
    )
    
    
    (1,633,681
    )Total shareholders equity
    
    
    12,441,126
    
    
    
    10,861,012Total liabilities and shareholders equity
    
    
    15,401,950
    
    
    
    12,747,509
  3




---



##### Table of Contents



Diamond Hill Investment Group, Inc.  Consolidated Statements of Income (unaudited)
 Three Months Ended March 31,2006
    
    
    2005INVESTMENT MANAGEMENT REVENUE:Mutual funds
    
    
    2,216,941
    
    
    
    522,717Managed accounts
    
    
    1,298,420
    
    
    
    429,592Private investment partnership
    
    
    1,388,492
    
    
    
    236,681Total investment management revenue
    
    
    4,903,854
    
    
    
    1,188,990OPERATING EXPENSES:Compensation and related costs
    
    
    3,372,511
    
    
    
    639,415Legal and audit
    
    
    57,279
    
    
    
    38,283General and administrative
    
    
    190,656
    
    
    
    132,616Sales and marketing
    
    
    57,444
    
    
    
    38,201Total operating expenses
    
    
    3,677,890
    
    
    
    848,515NET OPERATING INCOME
    
    
    1,225,964
    
    
    
    340,475Mutual fund administration, net (note 8)
    
    
    268,291
    
    
    
    (74,133
    )Investment return
    
    
    425,118
    
    
    
    130,291INCOME BEFORE TAXES
    
    
    1,919,373
    
    
    
    396,633Income tax provision
    
    
    (666,761
    )
    
    
    NET INCOME
    
    
    1,252,612
    
    
    
    396,633Earnings per shareBasic
    
    $
    0.71
    
    
    $
    0.24Diluted
    
    $
    0.58
    
    
    $
    0.20Weighted average shares outstandingBasic
    
    
    1,762,818
    
    
    
    1,622,281Diluted
    
    
    2,172,183
    
    
    
    1,963,658
  4




---



##### Table of Contents



Diamond Hill Investment Group, Inc.  Consolidated Statements of Cash Flow (unaudited)
 Three Months Ended March 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net Income
    
    
    1,252,612
    
    
    
    396,633Adjustments to reconcile net income to net cash used in
operating activities:Depreciation on property and equipment
    
    
    10,161
    
    
    
    9,276Amortization of deferred compensation
    
    
    21,394
    
    
    
    7,050(Increase) decrease in accounts receivable
    
    
    (649,339
    )
    
    
    696,187(Increase) decrease in deferred taxes
    
    
    666,761
    
    
    
    Stock option expense
    
    
    15,411
    
    
    
    (Increase) decrease in unrealized gains
    
    
    (378,792
    )
    
    
    (130,291
    )Increase (decrease) in accrued liabilities
    
    
    1,074,328
    
    
    
    (142,181
    )Other changes in assets and liabilities
    
    
    (78,644
    )
    
    
    (57,305
    )Net cash provided by operating activities
    
    
    1,933,892
    
    
    
    779,369CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (10,200
    )
    
    
    Investment portfolio activity
    
    
    (2,117,903
    )
    
    
    (1,086,114
    )Net cash used in investing activities
    
    
    (2,128,103
    )
    
    
    (1,086,114
    )CASH FLOWS FROM FINANCING ACTIVITIES:Sale of treasury stock
    
    
    240,776
    
    
    
    294,793NET INCREASE IN CASH
    
    
    46,565
    
    
    
    (11,952
    )CASH, BEGINNING OF PERIOD
    
    
    2,532,334
    
    
    
    102,566CASH, END OF PERIOD
    
    
    2,578,899
    
    
    
    90,614Cash paid during the period for:Interest
    
    
    
    
    
    
    Income taxes
    
    
    
    
    
    
    
  5




---



##### Table of Contents



ORGANIZATION AND NATURE OF BUSINESS
     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Reclassifications
  Principles of Consolidation
  Accounts Receivable
  Regulatory Requirements
  6




---



##### Table of Contents



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 Valuation of Investment Portfolio
  Limited Partnership Interests
  Property and Equipment
  Incentive Compensation
  Earnings Per Share
   Numerator
    
    Denominator
    
    AmountBasic Earnings
    
    $
    1,252,612
    
    
    
    1,762,818
    
    
    $
    0.71Diluted Earnings
    
    $
    1,252,612
    
    
    
    2,172,183
    
    
    $
    0.58
  Numerator
    
    Denominator
    
    AmountBasic Earnings
    
    $
    396,633
    
    
    
    1,622,281
    
    
    $
    0.24Diluted Earnings
    
    $
    396,633
    
    
    
    1,963,658
    
    
    $
    0.20
 Fair Value of Financial Instruments
  7




---



##### Table of Contents



INVESTMENT PORTFOLIO
   UnrealizedMarket
    
    
    Cost
    
    
    Gains (Losses)Diamond Hill Small Cap Fund
    
    $
    64,797
    
    
    $
    50,632
    
    
    $
    14,165Diamond Hill Small-Mid Cap Fund
    
    
    317,700
    
    
    
    300,000
    
    
    
    17,700Diamond Hill Large Cap Fund
    
    
    263,468
    
    
    
    250,477
    
    
    
    12,991Diamond Hill Select Fund
    
    
    309,300
    
    
    
    300,000
    
    
    
    9,300Diamond Hill Long-Short Fund
    
    
    265,606
    
    
    
    250,657
    
    
    
    14,949Diamond Hill Strategic Income Fund
    
    
    1,552,969
    
    
    
    1,494,705
    
    
    
    58,264DHIP Private Investment Partnership
    
    
    5,578,224
    
    
    
    4,339,966
    
    
    
    1,238,258Total
    
    
    8,352,064
    
    
    
    6,986,437
    
    
    
    1,365,627
  UnrealizedMarket
    
    
    Cost
    
    
    Gains (Losses)Diamond Hill Small Cap Fund
    
    $
    60,817
    
    
    $
    50,632
    
    
    $
    10,185Diamond Hill Small-Mid Cap Fund
    
    
    300,000
    
    
    
    300,000
    
    
    
    Diamond Hill Large Cap Fund
    
    
    58,918
    
    
    
    50,477
    
    
    
    8,441Diamond Hill Select Fund
    
    
    300,000
    
    
    
    300,000
    
    
    
    Diamond Hill Long-Short Fund
    
    
    60,405
    
    
    
    50,657
    
    
    
    9,748Diamond Hill Strategic Income Fund
    
    
    1,024,171
    
    
    
    977,295
    
    
    
    46,876DHIP Private Investment Partnership
    
    
    4,051,059
    
    
    
    3,139,474
    
    
    
    911,585Total
    
    
    5,855,370
    
    
    
    4,868,535
    
    
    
    986,835
  2006
    
    2005Total assets
    
    $
    221,987,561
    
    
    $
    87,116,252Total liabilities
    
    
    88,902,603
    
    
    
    39,598,197Net assets
    
    
    133,084,958
    
    
    
    47,518,055Net income
    
    
    8,965,392
    
    
    
    2,597,125DHCMs portion of net assets
    
    
    5,578,224
    
    
    
    1,386,047DHCMs portion of net income
    
    
    1,527,164
    
    
    
    727,766
  2006
    
    2005Management Fee
    
    $
    188,000
    
    
    $
    50,568Incentive Fee
    
    
    1,200,492
    
    
    
    186,113
  8




---



##### Table of Contents



CAPITAL STOCK
 Common Shares
  Treasury Stock
  Authorization of Preferred Stock
  STOCK-BASED COMPENSATION
 Equity Incentive Plans
 2005 Employee and Director Equity Incentive Plan
  1993 Non-qualified and Incentive Stock Option Plan
  Equity Compensation Grants
  9




---



##### Table of Contents



STOCK-BASED COMPENSATION (continued)
 401k Plan
  Other Stock-Based Compensation Information
   Three Months Ended March 31,2006
    
    
    2005Net income, as reported
    
    
    1,252,612
    
    
    
    396,633Add: Stock-based employee
compensation expense
included in reported
net income, net of
related tax effects
    
    
    7,467
    
    
    
    Deduct: Total stock-based
employee
compensation expense
determined under
fair value based
methods for all
awards net of
related tax effects
    
    
    (7,467
    )
    
    
    (14,709
    )Pro forma net income
    
    
    1,252,612
    
    
    
    381,924Earnings per share:Basic  as reported
    
    $
    0.71
    
    
    $
    0.24Basic  pro forma
    
    $
    0.71
    
    
    $
    0.24Diluted  as reported
    
    $
    0.58
    
    
    $
    0.20Diluted  pro forma
    
    $
    0.58
    
    
    $
    0.19
  10




---



##### Table of Contents



STOCK-BASED COMPENSATION (continued)
  Options
    
    
    WarrantsExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding December 31, 2004
    
    
    260,202
    
    
    $
    10.581
    
    
    
    280,400
    
    
    $
    12.897Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    9,000
    
    
    
    10.625
    
    
    
    10,000
    
    
    
    14.375Expired unexercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding March 31, 2005
    
    
    251,202
    
    
    
    10.580
    
    
    
    270,400
    
    
    
    12.385Exercisable March 31, 2005
    
    
    143,202
    
    
    $
    14.847
    
    
    
    270,400
    
    
    $
    12.385Outstanding December 31, 2005
    
    
    303,002
    
    
    $
    14.481
    
    
    
    259,400
    
    
    $
    12.778Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    5,000
    
    
    
    14.375
    
    
    
    2,000
    
    
    
    11.250Expired unexercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding March 31, 2006
    
    
    298,002
    
    
    
    14.483
    
    
    
    257,400
    
    
    
    12.789Exercisable March 31, 2006
    
    
    226,002
    
    
    $
    17.595
    
    
    
    257,400
    
    
    $
    12.789
 11




---



##### Table of Contents



STOCK-BASED COMPENSATION (continued)
  Options Outstanding
    
    
    Options ExercisableWeightedAverageRemaining
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Contractual
    
    
    Average
    
    
    Options
    
    
    AverageExercise Prices
    
    Outstanding
    
    
    Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$73.75
    
    
    16,202
    
    
    2.12 years
    
    $
    73.75
    
    
    
    16,202
    
    
    $
    73.75$7.95
    
    
    10,000
    
    
    4.36 years
    
    $
    7.95
    
    
    
    10,000
    
    
    $
    7.95$8.438
    
    
    10,000
    
    
    4.72 years
    
    $
    8.438
    
    
    
    10,000
    
    
    $
    8.438$28.10
    
    
    71,800
    
    
    4.73 years
    
    $
    28.10
    
    
    
    71,800
    
    
    $
    28.10$8.45
    
    
    10,000
    
    
    5.01 years
    
    $
    8.45
    
    
    
    8,000
    
    
    $
    8.45$5.25
    
    
    60,000
    
    
    5.30 years
    
    $
    5.25
    
    
    
    50,000
    
    
    $
    5.25$4.50
    
    
    120,000
    
    
    7.19 years
    
    $
    4.50
    
    
    
    60,000
    
    
    $
    4.50Total
    
    
    298,002
    
    
    5.69 years
    
    $
    14.483
    
    
    
    226,002
    
    
    $
    17.595
 Warrants Outstanding
    
    
    Warrants ExercisableWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Contractual
    
    Average
    
    
    Number
    
    
    AverageExercise Prices
    
    Outstanding
    
    
    Life
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$10.625
    
    
    13,000
    
    
    0.93 years
    
    $
    10.625
    
    
    
    13,000
    
    
    $
    10.625$73.75
    
    
    14,000
    
    
    2.12 years
    
    $
    73.75
    
    
    
    14,000
    
    
    $
    73.75$22.50
    
    
    16,400
    
    
    3.00 years
    
    $
    22.50
    
    
    
    16,400
    
    
    $
    22.50$11.25
    
    
    12,000
    
    
    3.92 years
    
    $
    11.25
    
    
    
    12,000
    
    
    $
    11.25$8.75
    
    
    2,000
    
    
    4.12 years
    
    $
    8.75
    
    
    
    2,000
    
    
    $
    8.75$8.00
    
    
    200,000
    
    
    4.12 years
    
    $
    8.00
    
    
    
    200,000
    
    
    $
    8.00Total
    
    
    257,400
    
    
    3.77 years
    
    $
    12.778
    
    
    
    257,400
    
    
    $
    12.778
 INCOME TAXES
  12




---



##### Table of Contents



OPERATING LEASES
  2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013$25,500
    
    $
    82,100
    
    
    $
    156,900
    
    
    $
    171,700
    
    
    $
    177,100
    
    
    $
    182,500
    
    
    $
    188,000
    
    
    $
    195,000
    
    
    $
    82,600(Current Lease)
    
    
    
    
    
    
    
    
    
    
    
    
    
    (New Lease)
  MUTUAL FUND ADMINISTRATION
  13




---



##### Table of Contents



ITEM 2: Managements Discussion and Analysis of Financial Condition and Results of Operation
 Forward-looking Statements
  General
   Assets Under Management
  3/31/2006
    
    
    12/31/2005
    
    
    3/31/2005Mutual Funds
    
    $
    1,337
    
    
    
    907
    
    
    
    321Separately Managed Accounts
    
    $
    711
    
    
    
    513
    
    
    
    310Private Investment Partnership
    
    $
    133
    
    
    
    111
    
    
    
    48Total Assets Under Management
    
    $
    2,181
    
    
    
    1,531
    
    
    
    679
 Three months ended March 31, 2006 compared to three months ended March 31, 2005
  14




---



##### Table of Contents



Liquidity and Capital Resources
   15




---



##### Table of Contents



Impact of Inflation and Other Factors
  
 ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
    
 ITEM 4: Controls and Procedures
 
 16




---



##### Table of Contents



PART II: OTHER INFORMATION
 
 ITEM 1: Legal Proceedings 
 ITEM 1A: Risk Factors
  The Companys assets under management, which impact revenue, are subject to significant
fluctuations.
  The Companys success depends on our key personnel and our financial performance could be
negatively affected by the loss of their services.
  The Company is subject to substantial competition in all aspects of its business.
  
    
    asset management firms,
    
    mutual fund companies,
    
    commercial banks and thrift institutions,
    
    insurance companies,
    
    hedge funds, and
    
    brokerage and investment banking firms.
  17




---



##### Table of Contents



A significant portion of our revenues are based on contracts with the Diamond Hill Funds that
are subject to termination without cause and on short notice.
  The Companys business is subject to substantial governmental regulation.
  
 ITEM 2: Unregistered Sales of Equity Securities and use of Proceeds
 
 ITEM 3: Defaults Upon Senior Securities 
 
 ITEM 4: Submission of Matters to a Vote of Security Holders
 
 ITEM 5: Other Information 
 18




---



##### Table of Contents



ITEM 6: Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation of the Company. (Incorporated by
reference from Form 8-K Current Report for the event on May 2, 2002 filed with the SEC
on May 7, 2002; File No. 000-24498.)3.2
    
    Code of Regulations of the Company. (Incorporated by reference from Form 8-K Current
Report for the event on May, 2002 filed with the SEC on May 7, 2002; File No.
000-24498.)10.1
    
    Representative Investment Management Agreement between Diamond Hill Capital
Management, Inc. and the Diamond Hill Funds. (Incorporated by reference from Form
N1-A filed with the SEC on December 30, 2005; File No. 811-08061.)10.2
    
    Third Amended and Restated Administrative, Fund Accounting, and Transfer Agency
Services Agreement between Diamond Hill Capital Management, Inc. and the Diamond Hill
Funds. (Incorporated by reference from Form N1-A filed with the SEC on December 30,
2005; File No. 811-08061.)10.3
    
    1993 Non-Qualified and Incentive Stock Option Plan. (Incorporated by reference from
Form DEF 14A filed with the SEC on July 21, 1998; File No. 000-24498.)10.4
    
    Synovus Securities, Inc., Sub-Advisory Agreement with the Diamond Hill Capital
Management, Inc. dated January 30, 2001. (Incorporated by reference from Form 10-KSB
for 2000 filed with the SEC on March 1, 2001; File No. 000-24498.)10.5
    
    Employment Agreement between the Company and Roderick H. Dillon, Jr. dated May 11,
2000. (Incorporated by reference from Form 10-KSB for 2002 filed with the SEC on
March 28, 2003; File No. 000-24498.)10.6
    
    Amendment dated March 10, 2006 to the Employment Agreement between the Company and
Roderick H. Dillon, Jr. dated May 11, 2000. (Incorporated by reference from Form 8-K
Current Report filed with the SEC on March 15, 2006; File No. 000-24498.)10.7
    
    Employment Agreement between the Company and James F. Laird dated October 24, 2001.
(Incorporated by reference from Form 10-KSB for 2002 filed with the SEC on March 28,
2003; File No. 000-24498.)10.8
    
    Form of Subscription Agreement for Common Shares of Diamond Hill Investment Group,
Inc. executed by subscribers as part of the private placement on July 21, 2004.
(Incorporated by reference from Form 10-QSB for the quarter ended September 30, 2004
filed with the SEC on November 15, 2004; File No. 000-24498.)10.9
    
    2005 Employee and Director Equity Incentive Plan. (Incorporated by reference from
Form DEF 14A filed with the SEC on April 5, 2005; File No. 000-24498.)14.1
    
    Code of Business Conduct and Ethics. (Incorporated by reference from Form DEF 14A
filed with the SEC on April 9, 2004; File No. 000-24498.)31.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).31.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).32.1
    
    Section 1350 Certifications.
 19




---



##### Table of Contents



SIGNATURES
   Signature
    
    Title
    
    Date/s/ R. H. Dillon
R. H. Dillon
    
    President, Chief Executive Officer,
  and a Director
    
    May 15, 2006/s/ James F. Laird
James F. Laird
    
    Chief Financial Officer, Treasurer,
  and Secretary
    
    May 15, 2006
 20