United States Securities and Exchange CommissionUNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2007.

OR

For the transition period fromto.

Commission file number 1-31234

WESTWOOD HOLDINGS GROUP, INC.

(Exact name of registrant as specified in its charter)

200 CRESCENT COURT, SUITE 1200

DALLAS, TEXAS

75201

(Address of Principal Executive Office)principal executive office)

(Zip Code)

TELEPHONE NUMBER (214) 756-6900

(Registrant’s telephone number, including area code)

---

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  Yes    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate theThe number of shares outstanding of each of the issuer’s classes of common stock, par value $0.01 per share, outstanding as of the latest practicable date.

Common Stock, $0.01 Par Value — 6,631,431 shares as of OctoberApril 24, 2006.2007:    6,639,203.

WESTWOOD HOLDINGS GROUP, INC.

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED FINANCIAL STATEMENTS

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of September 30, 2006March 31, 2007 and December 31, 20052006

(in thousands, except par value and share amounts)

(unaudited)

See notes to consolidated financial statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

See notes to consolidated financial statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the NineThree Months Ended September 30, 2006March 31, 2007

(in thousands)

(unaudited)

See notes to consolidated financial statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See notes to consolidated financial statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. DESCRIPTION OF THE BUSINESS:

Westwood Holdings Group, Inc. (“Westwood”,Westwood,” the “Company”, “we”“Company,” “we,” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001, as a subsidiary of SWS Group, Inc. (“SWS”). On June 28, 2002, SWS completed the spin-off of Westwood by effecting a dividend distribution of all of the Westwood common stock held by SWS to all of its stockholders on a pro rata basis.

Westwood manages investment assets and provides services for its clients through two subsidiaries, Westwood Management Corp. (“Westwood Management”) and Westwood Trust (“Westwood Trust”). Westwood Management provides investment advisory services to corporate pension funds, public retirement plans, endowments, foundations, the WHG Funds,and a family of institutional no-load mutual funds, otherwhich we call the WHG Funds, and investment subadvisory services to mutual funds and clients of Westwood Trust. Westwood Trust provides to institutions and high net worth individuals trust and custodial services and participation in common trust funds that it sponsors. Revenue is largely dependent on the total value and composition of assets under management (“AUM”). Accordingly, fluctuations in financial markets and in the composition of AUM impact revenue and results of operations.

Westwood Management is a registered investment advisor under the Investment Advisers Act of 1940. Westwood Trust is chartered and regulated by the Texas Department of Banking.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying consolidated financial statements have been prepared without an audit and reflect all adjustments that, in the opinion of management, are necessary to present fairly the Company’sour financial position as of September 30, 2006,March 31, 2007, and results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements are presented using the accrual basis of accounting and have been prepared in accordance with the instructions for the presentation of interim financial information as prescribed by the Securities and Exchange Commission (SEC)(“SEC”) and, therefore, as permitted by SEC rules, do not purport to contain all necessary financialcertain information and footnote disclosures required by accounting principles generally accepted in the United States of America that might otherwise be necessary in the circumstances, andAmerica. The accompanying consolidated financial statements should be read in conjunction with the Company’sour consolidated financial statements, and notes thereto, included in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2005.2006. Refer to the accounting policies described in the notes to the Company’sour annual financial statements, which were consistently followed in preparing this interim financial information. Operating results for the ninethree months ended September 30, 2006March 31, 2007 are not necessarily indicative of the results for the year ending December 31, 20062007 or any future period.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Investment advisory and trust fees are recognized as services are provided. These fees are determined in accordance with contracts between the Company’sour subsidiaries and their clients and are generally based on a percentage of AUM. Most advisory and trust fees are payable in advance or in arrears on a calendar quarterly basis. Advance payments are deferred and recognized over the periods services are performed. Since most of our advance paying clients’ billing periods coincide with the calendar quarter to which payment relates, the revenue related to those

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

advance paying clients’ billing periods coincide with the calendar quarter to which payment relates, the revenue related to those clients is fully recognized within the quarter; consequently, there is not a significant amount of deferred revenue contained in these financial statements. Deferred revenue is shown on the balance sheet under the heading of “Other current liabilities”. Other revenues generally consist of interest and investment income and consulting fees.income. These revenues are recognized as earned or as the services are performed.

Cash and Cash Equivalents

Cash and cash equivalents consist of short-term, highly liquid investments with maturities of three months or less.

Investments

Money market securities are classified as available for sale securities and have no significant fluctuating values. All other marketable securities are classified as trading securities. All securities are carried at quoted market value on the accompanying balance sheet. Net unrealized holding gains or losses on investments classified as trading securities are reflected as a component of other revenues. The Company measuresWe measure realized gains and losses on investments using the specific identification method.

Goodwill

During the third quarter of 2006, the Companywe completed itsour annual impairment assessment as required by SFAS 142.the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No.142. No impairment loss was required. The Company performs itsWe perform our annual impairment assessment as of July 1.

Reclassifications

Reclassifications of prior period amounts in the statement of cash flows have been made to conform to the current period presentation of net purchases of investments-trading securities.

Federal Income Taxes

The Company filesWe file a Federal income tax return as a consolidated group for the CompanyWestwood and its subsidiaries.

Deferred income tax assets and liabilities are determined based on the differences between the financial statement and income tax bases of assets and liabilities as measured at enacted income tax rates. Deferred income tax expense is generally the result of changes in the deferred tax assets and liabilities.liabilities and relates primarily to stock-based compensation expense.

Fair Value of Financial Instruments

The estimated fair values of the Company’sour financial instruments have been determined by the Companyus using available information. The fair value amounts discussed in Note 3 are not necessarily indicative of either the amounts the Companywe would realize upon disposition of these instruments or the Company’sour intent or ability to dispose of these assets. The estimated fair value of cash and cash equivalents, as well as accounts receivable and payable, approximates their carrying value due to their short-term maturities. The carrying amount of investments designated as “trading” securities, primarily U.S. Government and Government agency obligations as well as mutual funds and common trust fund shares, equals their fair value, which is equal to prices quoted in active markets and, with respect to funds, the net asset value of the shares held as reported by the fund. The carrying amount of investments designated as “available for sale” securities, primarily money market accounts, equals their fair value, which is equal to the net asset value of the shares held as reported by the fund. The market values of the Company’sour money market holdings generally do not fluctuate.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Earnings per Share

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the periods ended September 30,March 31, 2007 and 2006, and 2005, respectively. Diluted earnings per share for these periods is computed based on the weighted average number of shares outstanding plus the effect of the dilutive impact of stock options and shares of restricted stock granted to employees and non-employee directors. Diluted earnings per common share is computed using the treasury stock method.

The following table sets forth the computation of basic and diluted shares (in thousands, except share amounts):

Stock Based Compensation

The Company accountsWe account for stock based compensation in accordance with FASB Statement of Financial Accounting Standards No. 123 Revised (“SFAS No. 123R”). Under SFAS No. 123R, stock based compensation expense reflects the fair value of stock based awards measured at grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. We have elected to use the modified prospective transition method as permitted by SFAS No. 123R and therefore have not restated our financial results for prior periods. Under this transition method, we will apply the provisions of SFAS No. 123R to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, we will recognize compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of January 1, 2006, as the remaining service is rendered. The compensation cost we record for these awards will beis based on their grant-date fair value as required by SFAS No. 123R. SFAS No. 123R also requires us to report the benefits of tax deductions in excess of recognized compensation expense as a financing cash flow, rather than as an operating cash flow. The Company has

We have issued restricted stock and stock options in accordance with itsour Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan. We valuevalued stock options issued based upon the Black-Scholes option-pricing model and recognize this value as an expense over the periods in which the options vest. Implementation of the Black-Scholes option-pricing model requires us to make certain assumptions, including expected volatility, risk-free interest rate, expected dividend yield and expected life of the options. We utilized assumptions that we believed to be most appropriate at the time of the valuation. Had we used different assumptions in the pricing model, the expense recognized for stock options may have been different than the expense recognized in our financial statements. We must also apply judgment in developing an expectation of awards of restricted stock and stock options that may be forfeited. If actual experience differs significantly from these estimates, stock based compensation expense and the Company’sour results of operations could be materially affected.

3. INVESTMENTS:

Investment balances are presented in the table below (in thousands). All of these investments are carried at market value. The money market funds are accounted for as available for sale securities. The other investments are accounted for as trading securities.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

3. INVESTMENTS:

Investments held as trading securities and investments held as available for sale securities are as follows (in thousands):

All of these investments are carried at market value. The money market funds are available for sale securities. The other investments are trading securities.

4. EQUITY:

On July 27, 2006,February 22, 2007, we purchased 5,497 shares of our common stock from employees of Westwood to satisfy tax obligations related to vested restricted shares. The shares were purchased at $23.88, the Company declared a special cash dividendclosing price of $0.85 per shareour common stock on that date, and are shown as well as a quarterly cash dividendtreasury shares in the equity section of $0.15 per common share payable on October 2, 2006 to stockholders of record on September 15, 2006.our balance sheet at cost.

On July 27, 2006, under the Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan, the Company granted an aggregate of 228,600 shares of restricted stock to certain employees and non-employee directors of the Company. These shares are subject to vesting conditions as described in “Note 5. Stock Based Compensation”.

On May 25, 2006, under the Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan, the Company granted an aggregate of 400,000 shares of performance-based restricted stock to its Chief Investment Officer and Chief Executive Officer, which are subject to vesting conditions as described in “Note 5. Stock Based Compensation”.

On April 27, 2006, the CompanyFebruary 7, 2007, we declared a quarterly cash dividend of $0.09 per share on common stock payable on July 3, 2006 to stockholders of record on June 15, 2006.

On February 7, 2006, the Company declared a quarterly cash dividend of $0.09$0.20 per share on common stock payable on April 3, 20062, 2007 to stockholders of record on March 15, 2006.

The Company eliminated its unamortized stock compensation balance against additional paid in capital as required by SFAS 123R.2007.

5. STOCK BASED COMPENSATION

The Company recorded certain adjustmentsWe have issued stock options and restricted shares to comply with SFAS 123R. Since the Company accounted for forfeitures of equity based awards as they occurred instead of estimating the effect of forfeitures when applying the original Statement of Financial Accounting Standards No. 123, on January 1, 2006 the Company recorded a cumulative

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

effect of a change in accounting principle totaling $39,000, net of tax, in order to reverse compensation expense recorded for unvested securities as of December 31, 2005 that was in excess of what the Company estimates will vest. The amount of stock based compensation expense recorded in continuing operations in the first nine months of 2006 using estimated forfeitures was approximately $56,000 less than it would have been had the Company not estimated forfeitures.

our employees and non-employee directors. The Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”) reserves shares of Westwood common stock for issuance to eligible employees and directors of Westwood or its subsidiaries in the form of restricted stock and stock options. The total number of shares that may be issued under the Plan (including the predecessor plans to the Plan) may not exceed 1,948,100 shares. In the event of a change in control of the Company,Westwood, the Plan contains provisions providing for the acceleration of the vesting of restricted stock and stock options. At September 30, 2006March 31, 2007, approximately 580,000583,000 shares remain available for issuance under the Plan.

The Company recognizedfollowing table presents the total stock-based compensation cost related to stock based compensation of approximately $3,274,000expense we recorded and $1,644,000 for the nine months ended September 30, 2006 and 2005, respectively. The total income tax benefit recognized for stock basedstock-based compensation arrangements was $883,000 and $470,000 for the nine months ended September 30, 2006 and 2005, respectively.arrangements:

Restricted Stock

Under the Plan, the Company’s Compensation Committee of the Board of Directors hasWe have granted restricted stock to employees and non-employee directors, which are subject to a service condition, and performance-based restricted stock to theour Chief Executive Officer and Chief Investment Officer. The employees’Officer, which are subject to a service condition and performance goals. Until the shares vest, they are restricted from sale, transfer or assignment in accordance with the terms of the agreements under which they were issued. We calculate compensation cost for restricted stock grants by using the fair market value of our common stock at the date of grant, the number of shares issued and an estimate of shares that will not vest due to forfeitures. This compensation cost is amortized on a straight-line basis over the applicable vesting period. As of March 31, 2007, there was approximately $12.5 million of unrecognized compensation cost, which we expect to recognize over a weighted-average period of 2.5 years. In order to satisfy tax liabilities that employees will owe on their shares that vest, we may withhold a sufficient number of vested shares from employees on or about the date vesting occurs. For 2007, we estimate that the number of shares that could be withheld for this purpose could total approximately 55,000 shares. Our two types of restricted stock grants are discussed below.

Employee and non-employee director restricted share grants

Restricted stock granted to employees vest over four years and the non-employee directors’ shares vest over one yearyear. The following table details the status and changes in our restricted stock grants that are subject only to a service condition for the three months ended March 31, 2007:

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Certain employees that retired from Westwood in the first three months of 2007 had a portion of their non-vested restricted shares vest ahead of the vesting schedule. The total fair value of shares vested during the three months ended March 31, 2007 and 2006 was $36,000 and zero, respectively.

CEO and CIO performance-based restricted share grants

We granted shares will vest annually over the next four years for shares granted to theour Chief Executive Officer and over the next six years for shares granted to the Chief Investment Officer that vest over four years and six years, respectively, provided annual performance goals established by the compensation committee,Compensation Committee of Westwood’s board of directors are met. For the first vesting year, 2006, the officer will become vested in the applicable percentage of his or her restricted shares if Westwood’s adjusted pre-tax income for 2006 is at least 10% greater than Westwood’s adjusted pre-tax income for the 2005 year. In each subsequent year during the applicable vesting period, the compensation committeeCompensation Committee will establish a specific goal for that year’s vesting of the restricted shares, which will be based in all cases upon Westwood’s adjusted pre-tax income.income, as defined. In February 2007, the Compensation Committee established the goal for 2007 as an increase of at least 7% in adjusted pre-tax income over the adjusted pre-tax income for the year 2006. If in any year during the vesting period the performance goal is not met, the compensation committeeCompensation Committee may establish a goal for a subsequent vesting period, which if achieved or exceeded may result in full or partial vesting of the shares that did not otherwise become vested in a prior year. InHowever, in no event however, will the maximum number of shares, which may become vested over the vesting period, exceed 100,000 shares in the case of our Chief Executive Officer and 300,000 shares in the case of our Chief Investment Officer. If a portion of the performance-based restricted shares do not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to the shares that do not vest would be reversed. Until restricted shares vest they are restricted from sale, transfer or assignment in accordance with the terms of the agreements under which they were issued. The Company calculates compensation cost for restricted stock grants by using the fair market value of its common stock at the date of grant, the number of shares issued and an estimate of shares that will not vest due to forfeitures. This compensation cost is amortized over the applicable vesting period. The following table details the status and changes in its restricted stock for the nine months ended September 30, 2006:

TheBecause the performance goal was met in 2006, the shares subject to vesting were vested in substance, but required certification by the Compensation Committee, at which time a share price was determined for tax purposes. On February 22, 2007, the 2006 shares, which were expensed in 2006, were certified as vested and the total fair value of the shares vested during the nine months ended September 30, 2006 and 2005 was $2.5 million and $1.3 million, respectively. As of September 30, 2006, there was approximately $14.7 million of unrecognized compensation cost related to non-vested restricted shares. This cost is expecteddetermined to be recognized over$1,791,000, utilizing a weighted average periodshare price of 2.7 years.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

$23.88, the closing price of our common stock as of the day of certification.

Stock Options

Options granted under the Plan have a maximum ten-year term and vestvested over a period of four years. All of our stock options are vested and exercisable. All of our outstanding and exercisable options were fully expensed in 2006. The following table sets forth the summary of option activity under our stock option program for the ninethree months ended September 30, 2006:March 31, 2007:

The total intrinsic value of options exercised during the ninethree months ended September 30,March 31, 2007 and 2006 was $95,000 and 2005 was $140,600 and $89,800,$34,000, respectively. Options exercised represent newly issued shares. As of September 30, 2006, there was approximately $3,000 of unrecognized compensation cost related to non-vested stock options, which we expect to recognize completely in 2006.

6. SEGMENT REPORTING:

The Company operatesWe operate two segments: the Westwood Management segment and the Westwood Trust segment. Such segments are managed separately based on types of products and services offered and their related client bases. The Company evaluatesWe evaluate the performance of itsour segments based primarily on income before income taxes.

Westwood Management

TheWestwood Management segment provides investment advisory services to corporate pension funds, public retirement plans, endowments, foundations and the WHG Funds, a family of institutional, no-load mutual funds, otherand investment subadvisory services to mutual funds and clients of Westwood Trust.

Westwood Trust

TheWestwood Trust segment provides to institutions and high net worth individuals trust and custodial services and participation in common trust funds that Trust sponsors.it sponsors to institutions and high net worth individuals.

All segment accounting policies are the same as those described in the summary of significant accounting policies. Intersegment balances that eliminate in consolidation have been applied to the appropriate segment.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSForward-Looking Statements

All statements other than statements of historical fact containedStatements in this report that are not purely historical facts, including statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” concerningabout our expected future financial position, and liquidity, results of operations prospects for future growth,or cash flows, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “could,” “goal,” “target,” “designed,” “on track,” “comfortable with,” “optimistic” and other matters are forward-looking statements. Although we believe that the expectations reflected in suchsimilar expressions, constitute forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors thatwithin the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results and the timing of some events could cause our results to differ materially from the results discussedthose projected in or contemplated by suchthe forward-looking statements includedue to a number of factors, including, without limitation, the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20052006 filed with the SecuritiesSEC, and Exchange Commission. Such risks include, without limitation, risks related to poor investment performance of the assets managed by us; risks related to our inability to capitalize on the costs we have recently incurred and are continuing to incur to develop some new asset classes and otherwise broaden Westwood’s capabilities; risks related to some members of our management being critical to our success and our inability to attract and retain key employees, which could compromise our future success; risks related to some of our executive officers having substantial influence over our investment policies; risks related to the negative performance of the securities markets; risks related to our business being dependent on investment advisory, subadvisory and trust agreements that are subject to termination or non-renewal and the related risk of losing any of our clients on very short notice; risks related to having a small number of clients account for a substantial portion of our business; risks related to any event that negatively affects the asset management industry; risk related to the substantial cost and time required to introduce new asset classes in our industry; risks related to our inability to successfully and timely expand our asset classes; risks related to our business being subject to pervasive regulation with attendant costs of compliance and serious consequences for violations; risks related to potential misuse of assets and information in the possession of our investment professionals and employees; risks related to acquisitions, which may be part of our long-term business strategy and involve inherent risks that could compromise the success of the combined business and dilute the holdings of our stockholders; risks related to various factors hindering those set forth below:

You should not unduly rely on these forward-looking statements, which speak only as of us.the date of this report. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

Overview

Westwood Holdings Group, Inc. (“Westwood”) managesWe manage investment assets and providesprovide services for itsour clients through itsour two subsidiaries, Westwood Management Corp. (“Management”) and Westwood Trust (“Trust”).Trust. Westwood Management provides investment advisory services to corporate pension funds, public retirement plans, endowments, foundations the WHG Funds,and a family of institutional no-load mutual funds, which we call the WHG Funds, and investment subadvisory services to other mutual funds and clients of Westwood Trust. Westwood Trust provides to institutions and high net worth individuals trust and custodial services and participation in common trust funds that it sponsors.sponsors to institutions and high net worth individuals. Our revenues are generally derived from fees based on a percentage of assets under management. We have been providing investment advisory services since 1983 and, according to recognized industry sources, including Morningstar, Inc., when measured over multi-year periods ten years and longer, our principal asset classes have consistently ranked above the median in performance within their peer groups.

Revenues

We derive our revenues from investment advisory fees, trust fees, and other revenues. Our advisory fees are generated by Westwood Management, which manages its clients’ accounts under investment advisory and

subadvisory agreements. Advisory fees are calculated based on a percentage of assets under management, and are paid in accordance with the terms of the agreements. Westwood Management’s advisory fees are paid quarterly in advance based on the assets under management on the last day of the preceding quarter, quarterly in arrears based on the assets under management on the last day of the quarter just ended, or are based on a daily or monthly analysis of assets under management for the stated period. Westwood Management recognizes revenues as services are rendered. Since most of our advance paying clients’ billing periods coincide with the calendar quarter to which payment relates, the revenue related to those clients is fully recognized within the quarter; consequently, there is not a significant amount of deferred revenue contained in our financial statements.

Our trust fees are generated by Westwood Trust pursuant to trust or custodial agreements. Trust fees are separately negotiated with each client and are generally based on a percentage of assets under management, which in turn is influenced by the complexity of the operations of the trust and the services provided. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. Most trust fees are paid quarterly in advance and are recognized as services are rendered. Since the majority of Westwood Trusts’ advance paying clients’ billing periods coincide with the calendar quarter to which payment relates, the revenue related to those clients is fully recognized within the quarter; consequently, there is not a significant amount of deferred revenue contained in our financial statements.

Our other revenues generally consist of interest income,and investment income and consulting fees.income. We invest most of our cash in money market funds, although we doalso invest smaller amounts in bonds and equity instruments.

Assets Under Management

Assets under management increased $1.1 billion,$771 million, or 24.7%14.4%, to $5.7$6.1 billion at September 30, 2006,March 31, 2007, compared with $4.6$5.4 billion at September 30, 2005.March 31, 2006. Average assets under management for the thirdfirst quarter of 2007 were $6.0 billion compared to $5.1 billion for the first quarter of 2006, were $5.5 billion compared to $4.4 billion for the third quarter of 2005, an increase of 25.6%17.2%. The increase in period ending assets under management was principally attributable to asset inflows from new clients and market appreciation of assets under management and asset inflows from new clients, partially offset by the withdrawal of assets by certain clients. The following table sets forth Westwood Management’s and Westwood Trust’s assets under management as of September 30, 2006March 31, 2007 and September 30, 2005:March 31, 2006:

Westwood Management. In the preceding table, “Separate Accounts” represent corporate pension and profit sharing plans, public employee retirement accounts, Taft Hartley plans, endowments, foundations and individuals. “Subadvisory” represents relationships where Westwood Management provides investment management services for funds offered by other financial institutions. “WHG Funds” represent the family of institutional mutual funds for which Westwood Management serves as advisor. “Westwood Funds” represent the family of mutual funds for which Westwood Management serves as subadvisor. “Managed Accounts” represent relationships with brokerage firms and other registered investment advisors who offer Westwood Management’s products to their customers.

Westwood Trust. In the preceding table, “Commingled Funds” represent funds that have been established to facilitate investment of fiduciary funds of multiple clients by combining assets into a single trust for taxable and tax-exempt entities. “Private Accounts” represent discretionary accounts where Westwood Trust acts as trustee or agent and has full investment discretion. “Agency/Custody Accounts” represent non-discretionary accounts in which Westwood Trust provides agent or custodial services, but does not act in an advisory capacity. For certain assets in this category Westwood Trust provides limited custody services for a minimal or zero fee currently, but views these assets as potentially converting to fee-generating managed assets in the future. As an example, some assets in this category consist of low-basis stock that is being held in custody for clients currently, but will likelymay transfer to fee-generating managed assets during an intergenerational transfer of wealth at some point in the future.

Results of Operations

The following table (dollars in thousands) and discussion of our results of operations for the three and nine months ended September 30, 2006March 31, 2007 is based upon data derived from the consolidated statements of income contained in our consolidated financial statements and should be read in conjunction with these statements, which are included elsewhere in this quarterly report.

Three months ended September 30, 2006March 31, 2007 compared to three months ended September 30, 2005March 31, 2006

Total Revenues. Our total revenues increased by 24.1%12.9% to $6.9$7.4 million for the three months ended September 30, 2006March 31, 2007 compared with $5.6$6.5 million for the three months ended September 30, 2005.March 31, 2006. Advisory fees increased by 26.7%9.7% to $4.4$4.6 million for the three months ended September 30, 2006March 31, 2007 compared with $3.5$4.2 million for the three months ended September 30, 2005,March 31, 2006, primarily as a result of increased average assets under management by Westwood Management due to market appreciation of assets and inflows from new clients and market appreciation of assets.clients. These increases were partially offset by the

withdrawal of assets by certain clients. Trust fees increased by 17.7%25.2% to $2.1$2.4 million for the three months ended September 30, 2006March 31, 2007 compared with $1.8$1.9 million for the three months ended September 30, 2005,March 31, 2006, primarily as a result of increased average assets under management by Westwood Trust due to inflows from new and existing clients and market appreciation of assets, offset in part by the withdrawal of assets by certain clients. Other revenues, which generally consist of interest and investment income, and consulting fees, increaseddecreased by 32.7%9.2% to $418,000$394,000 for the three months ended September 30, 2006March 31, 2007 compared with $315,000$434,000 for the three months ended September 30, 2005.March 31, 2006. Other revenues increaseddecreased primarily as a result of increaseda decrease of $83,000 in consulting revenue from Gabelli Advisers due to the termination of our consulting fee arrangement. We were notified in the fourth quarter 2006 that our consulting payment arrangement was to be replaced by a dividend payment from Gabelli Advisers. We accrued $47,000 in the first quarter of 2007 related to the expected dividend for 2007. Also contributing to the decrease in other revenues were decreases in realized gains from the Company’s investments, increased interest and dividends from the Company’s investments and an increase in consulting revenue. A decrease in mark to market value recordedvalues on the Company’s investments partiallyour investments. Increased dividend income offset these increases.decreases to some extent.

Employee Compensation and Benefits. Employee compensation and benefits costs generally consist of salaries, incentive compensation, equity based compensation expense and benefits. Employee compensation and benefits increased by 33.1%16.2% to $4.1$3.7 million for the three months ended September 30, 2006March 31, 2007 compared with $3.0$3.2 million for the three months ended September 30, 2005. The largest component of thisMarch 31, 2006. This increase was due primarily to an increase of approximately $730,000$259,000 in restricted stock expense due to additional restricted stock grants in July 2006, and grants of performance-based restricted stockincreased incentive compensation expense due to our Chief Executive Officer and Chief Investment Officer in May 2006. In the second quarter of 2006, we concluded that it is probable that we will meet the performance goal required in order for the applicable percentage of these performance-based shares to vest for 2006. As a result, we recognized expense of approximately $470,000 in each of the second and third quarters of 2006 related to the expected vesting of these shares. We expect to recognize a similar amount in the fourth quarter of 2006 related to these performance-based restricted stock grants. Other components of the increase in employee compensationhigher pretax income, increased salary and benefits costs were increased salary expense due to salary increases for certain employees and increased headcount, increased payroll taxes related to increased salaries and incentive compensation expense and increased 401(k) match expense and increased payroll tax expense. A decrease in compensation expense related to stock options partially offset these increases. We had 48 full-time employees as of September 30, 2006March 31, 2007 compared to 47 full-time employees as of September 30, 2005.March 31, 2006.

Sales and Marketing. Sales and marketing costs generally consist of costs associated with our marketing efforts, including travel and entertainment, direct and consultant marketing and advertising costs. Sales and marketing costs increaseddecreased by 34.5%4.0% to $148,000$121,000 for the three months ended September 30, 2006March 31, 2007 compared with $110,000$126,000 for the three months ended September 30, 2005.March 31, 2006. The increasedecrease is primarily the result of increased entertainmentdecreased consultant marketing costs and a decrease in referral fees. Increases in advertising costs and travel expenses.and entertainment expenses partially offset these decreases.

WHG Mutual Funds. WHG Mutual Funds expenses generally consist of costs associated with our marketing, distributingdistribution and administration efforts related to the WHG Mutual Funds. WHG Mutual Funds expenses were $80,000decreased 51.4% to $35,000 for the three months ended September 30, 2006March 31, 2007 compared with zero$72,000 for the three months ended September 30, 2005 as the first of the fundsMarch 31, 2006. The decrease was not launched until the fourth quarter of 2005. Currently, the largest component of these costs isdue primarily to decreased distribution and administration expenses and lower fund expense reimbursements reflecting our partial subsidy of mutual fund expenses as we have capped the expense ratios for the fundsdue to growth in order to competitively position themassets in the defined contribution marketplace.these funds.

Information Technology. Information technology expenses are generally costs associated with proprietary investment research tools, maintenance and support, computing hardware, software licenses, telecommunications and other related costs. Information technology costs increased by 13.1%0.4% to $225,000$233,000 for the three months ended September 30, 2006March 31, 2007 compared with $199,000$232,000 for the three months ended September 30, 2005.March 31, 2006. The increase is primarily due to the costs related to a new performance measurement serviceincreased expenses for Trust clients, increased software maintenance costsresearch tools and increased expense for system maintenance.equipment rental fees. Decreases in equipment related expensedepreciation and website related expenses partially offset the increases.

Professional Services. Professional services expenses generally consist of costs associated with subadvisory fees, audit, legal and other professional services. Professional services expenses decreasedincreased by 1.0%13.3% to $312,000$400,000 for the three months ended September 30, 2006March 31, 2007 compared with $315,000$353,000 for the three months ended September 30, 2005.March 31, 2006. The decreaseincrease is primarily due to a reduction in audit expense due to reduced external audit and Sarbanes-Oxley costs resulting from our change in external auditors for the fiscal year 2006 and decreased legal expense. These decreases were partially offset by higher advisory fees paid to external subadvisors due to increased assets under management in international equity and growth common trust funds sponsored by Westwood Trust.Trust and increased audit expense related to 2006 audits. These increases were partially offset by decreased legal expense.

General and Administrative. General and administrative expenses generally consist of costs associated with the lease of our office space, investor relations, licenses and fees, depreciation, insurance, office supplies and other miscellaneous expenses. General and administrative expenses increased by 13.4%4.5% to $508,000$516,000 for the three months ended September 30, 2006March 31, 2007 compared with $448,000$494,000 for the three months ended September 30, 2005. The increase is primarily due to an increase in the fees paid to the Company’s independent directors, increased charitable contributions, increased state and local taxes, an increase in employee training costs and an increase in occupancy costs. These increases were partially offset by decreases in office supply expense and other expenses.

Provision for Income Tax Expense. Provision for income tax expense increased by 3.9% to $643,000 for the three months ended September 30, 2006 compared with $619,000 for the three months ended September 30, 2005. The effective tax rate was 41.1% for the three months ended September 30, 2006 compared to 43.2% for the three months ended September 30, 2005.

Nine months ended September 30, 2006 compared to nine months ended September 30, 2005

Total Revenues. Our total revenues increased by 26.2% to $20.0 million for the nine months ended September 30, 2006 compared with $15.9 million for the nine months ended September 30, 2005. Advisory fees increased by 29.2% to $12.9 million for the nine months ended September 30, 2006 compared with $10.0 million for the nine months ended September 30, 2005, primarily as a result of increased average assets under management by Westwood Management due to inflows from new clients and market appreciation of assets. These increases were offset somewhat by the withdrawal of assets by certain clients. Trust fees increased by 17.1% to $6.0 million for the nine months ended September 30, 2006 compared with $5.1 million for the nine months ended September 30, 2005, primarily as a result of increased average assets under management by Westwood Trust due to inflows from new and existing clients and market appreciation of assets, offset in part by the withdrawal of assets by certain clients. Other revenues increased by 46.1% to $1.1 million for the nine months ended September 30, 2006 compared with $779,000 for the nine months ended September 30, 2005. Other revenues increased primarily as a result of increased interest and dividends from the Company’s investments, increased realized gains from the Company’s investments and an increase in consulting revenue. A decrease in mark to market value recorded on the Company’s investments partially offset these increases.

Employee Compensation and Benefits. Employee compensation and benefits increased by 31.8% to $11.0 million for the nine months ended September 30, 2006 compared with $8.3 million for the nine months ended September 30, 2005. This increase resulted primarily from an increase of approximately $1.7 million in restricted stock expense due to additional restricted stock grants in July 2006, May 2006 and July 2005, increased salary expense due to increased headcount and salary increases for certain employees, increased incentive compensation expense, increased payroll taxes related to the increases in salary and incentive compensation expense, increased employee health insurance expense and increased 401(k) and profit sharing contributions. A decrease in compensation expense related to stock options partially offset these increases. We had 48 full-time employees as of September 30, 2006 compared to 47 full-time employees as of September 30, 2005.

Sales and Marketing. Sales and marketing costs increased by 27.9% to $431,000 for the nine months ended September 30, 2006 compared with $337,000 for the nine months ended September 30, 2005. The increase is primarily the result of increased direct marketing expenses, increased travel expense and increased entertainment costs.

WHG Mutual Funds. WHG Mutual Funds expense of $167,000 was primarily related to expense reimbursements to the funds reflecting our partial subsidy of mutual fund expenses as we have capped the expense ratios for the funds in order to competitively position them in the defined contribution marketplace. There was no expense in the prior year period as the first funds were not launched until the fourth quarter of 2005.

Information Technology. Information technology costs increased by 18.4% to $682,000 for the nine months ended September 30, 2006 compared with $576,000 for the nine months ended September 30, 2005.March 31, 2006. The increase is primarily due to increased softwareoccupancy costs, related to the upgrade of a critical application,increased custody expense, increased employee training costs related to a new performance measurement service for Trust clients and other application enhancements, software maintenance cost increases and increased system maintenance costs.

Professional Services. Professional services expenses increased by 14.5% to $1.0 million for the nine months ended September 30, 2006 compared with $908,000 for the nine months ended September 30, 2005. The increase is primarily the resultboard of higher advisory fees paid to external subadvisors due to increased assets under management in international equity and growth common trust funds sponsored by Westwood Trust and an increase in legal expense.director expenses. These increases were partially offset by a reductiondecrease in auditinvestor relations expense due to reduced external audit and Sarbanes-Oxley costs resulting from our change in external auditors for the fiscal year 2006.

General and Administrative. General and administrative expenses increased by 11.9% to $1.5 million for the nine months ended September 30, 2006 compared with $1.4 million for the nine months ended September 30, 2005. The increase is primarily due to an increase in the fees paid to the Company’s independent directors, an increase in charitable contributions, an increase in occupancy costs, an increase in employee training costs, current period costs related to ana prior year investor and analyst conference, a decrease in office supplies expense and an increasea decrease in state taxes.and local tax expense.

Provision for Income Tax Expense. Provision for income tax expense increased by 17.4%5.9% to $2.1 million$832,000 for the ninethree months ended September 30, 2006March 31, 2007 compared with $1.8 million$786,000 for the ninethree months ended September 30, 2005.March 31, 2006. The effective tax rate was 39.4% and 40.0%35.6% for the ninethree months ended September 30, 2006 and September 30, 2005, respectively.March 31, 2007 compared to 38.4% for the three months ended March 31, 2006. The decrease in the effective tax rate is primarily due to the decrease in state taxes owed resulting from a change in tax law by the State of Texas.

Cumulative Effect of a Change in Accounting Principle, Net of Tax. In December 2004, the FASB revised Statement of Financial Accounting StandardsSFAS No. 123 (“SFAS No. 123 (R)”123R”), requiring public companies to recognize the cost resulting from all share-based payment transactions in their financial statements. The Company hasWe have applied the fair value provisions of the original SFAS No. 123 for all options and restricted shares it haswe issued and accounted for forfeitures as they occurred. Under SFAS No. 123 (R)123R we are required to estimate the effect of forfeitures. As a result, on January 1, 2006 the Companywe recorded a cumulative effect of a change in accounting principle totaling $39,000, net of tax, in order to reverse compensation expense recorded for unvested securities as of December 31, 20052006 that iswas in excess of what the Company estimateswe estimate will vest.

Supplemental Financial Information

As supplemental information, we are providing non-GAAP performance measures that we refer to as cash earnings and cash expenses. We provide these measures in addition to, but not as a substitute for, net income and total expenses, which are reported on a GAAP basis. Management and our Boardboard of Directorsdirectors review cash earnings and cash expenses to evaluate the Company’sour ongoing performance, allocate resources and review dividend policy. We believe that these non-GAAP performance measures, while not substitutes for GAAP net income and total expenses, are useful for both management and investors to evaluate the Company’sour underlying operating and financial performance and itsour available resources. We do not advocate that investors consider these non-GAAP measures without considering financial information prepared in accordance with GAAP.

In calculating cash earnings, we add to net income the non-cash expense associated with equity-based compensation awards of restricted stock and stock options. In calculating cash earnings for the ninethree months ended September 30,March 31, 2006, we also eliminate the non-cash cumulative effect of change in accounting principle associated with our implementation of SFAS 123R. We define cash expenses as total expenses less non-cash equity-based compensation expense. Although depreciation on fixed assets is a non-cash expense, we do not add it back when calculating cash earnings or deduct it when calculating cash expenses because depreciation charges represent a decline in the value of the related assets that will ultimately require replacement.

Our cash earnings increased by 50.5%22.9% to $2.3$2.4 million for the three months ended September 30, 2006March 31, 2007 compared with $1.5$2.0 million for the three months ended September 30, 2005March 31, 2006 primarily due to a 24.1%16.3% increase in total revenues and a smaller 16.0% increase in cash expenses compared to the 2005 third quarter. For the nine months ended September 30, 2006, cash earnings increased by 50.8% to $6.4 million compared with $4.3 million for the nine months ended September 30, 2005, primarily due to a 26.2% increase in total revenues and a smaller 17.1% increase in total expenses compared to the prior year period.revenues.

The following table provides a reconciliation of net income to cash earnings and total expenses to cash expenses:expenses (in thousands):