UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM N-CSR
----------
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
INVESTMENT COMPANY ACT FILE NUMBER 811-9114
THE NEEDHAM FUNDS, INC.
(Exact name of registrant as specified in charter)
----------
445 Park Avenue
New York, New York 10022
(Address of principal executive offices) (Zip Code)
The Corporation Trust Company
300 E. Lombard Street
Baltimore, Maryland 21202
(Name and Address of agent for service)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(212) 371-8300
DATE OF FISCAL YEAR END: December 31, 2003
DATE OF REPORTING PERIOD: January 1, 2003 to June 30, 2003
ITEM 1. REPORTS TO STOCKHOLDERS.
Semiannual
Report
NEEDHAM FUNDS
Seeking to build wealth for long-term investors.
Six Months Ended June 30, 2003
(Unaudited)
Needham Growth Fund
Needham Aggressive Growth Fund
Needham Small Cap Growth Fund
[NEEDHAM FUNDS GRAPHIC]
www.needhamfunds.com
[Needham Funds LOGO]
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
WWW.NEEDHAMFUNDS.COM
Semiannual Report
For the Six Months Ended June 30, 2003
(Unaudited)
CONTENTS
<Table>
LETTER FROM THE ADVISER
NEEDHAM GROWTH FUND 1
NEEDHAM AGGRESSIVE GROWTH FUND 7
NEEDHAM SMALL CAP GROWTH FUND 11
SCHEDULE OF INVESTMENTS
NEEDHAM GROWTH FUND 14
NEEDHAM AGGRESSIVE GROWTH FUND 21
NEEDHAM SMALL CAP GROWTH FUND 25
SCHEDULE OF SECURITIES SOLD SHORT
NEEDHAM GROWTH FUND 19
NEEDHAM AGGRESSIVE GROWTH FUND 24
NEEDHAM SMALL CAP GROWTH FUND 27
STATEMENTS OF ASSETS AND LIABILITIES 28
STATEMENTS OF OPERATIONS 29
STATEMENTS OF CHANGES IN NET ASSETS 30
FINANCIAL HIGHLIGHTS
NEEDHAM GROWTH FUND 31
NEEDHAM AGGRESSIVE GROWTH FUND 32
NEEDHAM SMALL CAP GROWTH FUND 33
NOTES TO FINANCIAL STATEMENTS 34
</Table>
[BAR CHART]
<Table>
<Caption>
1ST QUARTER 2003* 2ND QUARTER 2003*
----------------- -----------------
Dow Jones (1)|Industrial|Average -3.64 13.12
Russell (2)|2000 Index -4.48 23.43
S&P (3)|500 Index -3.15 15.39
NASDAQ (4)|Composite|Index 0.58 21.11
Morgan Stanley (5)|High Tech|Index 0.06 27.66
S&P (6)|Healthcare|Index 0.85 9.63
Bloomberg (7)|Broadcast &|Cable Stock Index -7.26 12.65
S&P (8)|Retail Index 2.09 20.27
Philadelphia (9)|Oil Service|Index -2.52 8.66
</Table>
*Source of data: Bloomberg
1. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chips
that are generally the leaders in their industry.
2. The Russell 2000 Index is a broad unmanaged index comprised of the smallest
2000 companies in the Russell 3000.
3. The S&P 500 Index is a broad unmanaged measure of the U.S. stock market.
4. The NASDAQ Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market & SmallCap stocks.
5. The Morgan Stanley High Tech Index is an equal dollar-weighted index of 35
stocks from 9 technology subsectors.
6. The S&P Health Care Index is a capitalization-weighted index of all stocks in
the S&P 500 that are in the business of health care related products or
services.
7. The Bloomberg Broadcasting & Cable Stock Index is a price-weighted index that
measures the performance of the U.S. broadcasting and cable industries.
8. The S&P Retail Index is a capitalization-weighted index of all stocks in the
S&P 500 that are in the retail industry.
9. The Philadelphia Oil Service Index is a price-weighted index of leading oil
service companies.
Needham Growth Fund SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
Dear Shareholders,
This is the first quarterly report by the new team of Vince Gallagher and Jim
Kloppenburg, who replaced Peter Trapp as joint portfolio managers for the
Needham Growth Fund ("NGF" or the "Fund") on April 22, 2003. Vince has been
running the Needham Small Cap Growth Fund since its inception on May 22, 2002
and Jim has been running the Needham Aggressive Growth Fund since its inception
on September 4, 2001. We plan to continue the Fund's successful "Growth at a
Reasonable Price" ("GARP") approach. We are pleased to report on page 2 our
performance results for the Fund, NASDAQ symbol NEEGX, for the six months ended
June 30, 2003 ("6 months"), the year ended June 30, 2003 ("1 Year"), the
three-year period ended June 30, 2003 ("3 Years"), the five-year period ended
June 30, 2003 ("5 Years") and from January 1, 1996 to June 30, 2003 ("since
inception"). The Fund was up 23.61% for the 2Q03, is up 5.69% for the year, and
is up 20.01% since inception compounded annually.
<Table>
<Caption>
- --------------------
Performance
One year ended
June 30, 2003
NEEDHAM GROWTH FUND 20.38
S&P 500 (1) INDEX 11.76
S&P 400 MIDCAP (2) INDEX 12.41
RUSSELL 2000 (3) INDEX 17.90
</Table>
<Table>
<Caption>
- ------------------------------
Performance since Inception(4)
through
June 30, 2003
Cumulative
NEEDHAM GROWTH FUND 292.58
S&P 500 (1) INDEX 77.95
S&P 400 MIDCAP (2) INDEX 141.68
RUSSELL 2000 (3) INDEX 57.90
</Table>
<Table>
<Caption>
- ------------------------------
Performance since Inception(4)
through
June 30, 2003
Annualized
NEEDHAM GROWTH FUND 20.01
S&P 500 (1) INDEX 7.98
S&P 400 MIDCAP (2) INDEX 12.47
RUSSELL 2000 (3) INDEX 6.27
</Table>
- ----------------------------
1. S&P 500 Index is a broad unmanaged measure of the U.S. stock market.
2. S&P 400 Midcap Index is a broad unmanaged measure of the U.S. stock market.
3. Russell 2000 Index is a broad unmanaged index comprised of the smallest 2000
companies in the Russell 3000.
4. The inception date of the Fund was 1/1/96.
NGF seeks to create long-term, tax-efficient capital appreciation for its
investors. To this end, NGF targets companies with products or services that are
selling or marketing into high-growth markets. These companies normally have
earnings growth of at least 15-20%, product and market dominance, and the
ability to consolidate their market positions. They may also have a competitive
advantage by acquiring and retaining more customers or driving costs down and
profits up. NGF also looks for seasoned and motivated managements with records
of building shareholder value. Companies with these characteristics sometimes
find themselves in a temporary earnings downturn or shortfall or may be in a
product transition. This often causes aggressive growth or dynamic growth
investors to sell. At this point, NGF may deem the stock to be reasonably priced
and purchase it for long-term capital appreciation. Hence, the discipline called
"Growth At a Reasonable Price," or GARP.
1
Needham Growth Fund
- --------------------------------------------------------------------------------
After April 22, we decided that the number of positions in the Fund had become
unmanageable and we embarked on a strategy to reduce the overall number of
holdings in the Fund from 155 to 125 at June 30. In addition, within the
holdings, we have reduced the concentration on energy/industrial/ metals names
from 30.5% in mid-April down to 14.8% at June 30 and may bring that lower to
create better diversification in the Fund. These actions were a continuation of
programs that had begun earlier in the year. Overall, at June 30, we had a
reasonable short position (13.03%), an attractive cash position (24.7%), and a
seasoned portfolio of long stock investments that performed very well during the
second quarter.
As shown below, we outperformed all four of the benchmark indices in the second
quarter of 2003, as technology and telecom led the market higher; we believe it
was more a bounce from severely depressed levels than strength in the economy or
a turn-up in business where there is still significant overcapacity, especially
in technology. As discussed above, we spent most of the second quarter trimming
back the number of holdings, taking some gains and losses in the process and
creating what we hope will be a better balanced portfolio going into the second
half of the year. We added one or two new names, and we hope to add more as the
year progresses. On the short side, we reduced many of our positions in late
April and early May, going from over 20% down to about 13.03%. This action
benefited the Fund substantially as the market continued the April rally into
May and then June.
The equity markets staged an impressive rally in the second quarter of 2003,
ending the quarter up 15.4% as measured by the S&P 500 Index and rising 23.9%
from the March 11 intraday low to the recent high on June 17. Investor sentiment
surveys have also shown a corresponding rise in investor optimism off the March
lows, as an increasing number of market participants believe the three-year bear
market to be over.
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------
COMPARATIVE PERFORMANCE STATISTICS
BENCHMARKS 6 MONTHS 1 YEAR 3 YEARS(6) 5 YEARS(6) SINCE INCEPTION(6)
-------------------------------- ------ ------- -------- ------- ------
Needham Growth Fund(1) 20.38% 5.69% (5.94%)(7) 15.07%(8) 20.01%(9)(10)
Nasdaq Composite Index(2) 21.82% 11.44% (25.51%) (2.70%) 6.30%
S&P 500 Index(3) 11.76% 0.25% (11.17%) (1.80%) 7.98%
S&P 400 Midcap Index(4) 12.41% (0.72%) 1.13% 6.93% 12.47%
Russell 2000 Index(5) 17.90% (1.63%) (3.20%) 1.02% 6.27%
---------------------------------------------------------------------------------------------------------------
</Table>
1. Investment results calculated after reinvestment of dividends.
2. The NASDAQ Composite Index is a broad-based capitalization-weighted index of
all NASDAQ national market & smallcap stocks.
3. The S&P 500 Index is a broad unmanaged measure of the U.S. stock market.
4. The S&P 400 Midcap Index is a broad unmanaged measure of the U.S. stock
market.
5. The Russell 2000 Index is a broad unmanaged index comprised of the smallest
2000 companies in the Russell 3000.
6. Compound annual growth rate. Assumes all dividends are reinvested in shares
of the Fund.
7. Total return for the three years was (16.78)%, assuming all dividends were
reinvested in shares of the Fund.
8. Total return for the five years was 101.72%, assuming all dividends were
reinvested in shares of the Fund.
9. Total return since inception was 292.58%, assuming all dividends were
reinvested in shares of the Fund.
10. The inception date of the Fund was 1/1/96.
Note: The average annual returns shown above are historical and reflect changes
in share price, reinvested dividends and are net of expenses. The table
above does not reflect the deduction of taxes that a shareholder would
have paid on Fund distributions or on the redemption of Fund shares.
Investment results and the principal value of an investment will vary.
Past performance noted above does not guarantee future results. When
shares are redeemed, they may be worth more or less than their original
cost. Since inception, the Fund's Adviser has absorbed certain expenses of
the Fund, without which returns would have been lower.
2
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
From the current list of top ten holdings, two are new and eight are repeat
performers. Exiting the list are two energy names: Halliburton Co. and
Patterson-UTI Energy. This was part of our strategy, touched on above. New to
the list are Computer Associates and Ceradyne, Inc. Computer Associates has long
been a name followed by the Fund; when the stock was beaten down in 2002, we
built up a meaningful position that has appreciated nicely during 2003. Ceradyne
is a new technology name and the only small cap name in our top ten holdings.
The company, based in Southern California, is a leader in sophisticated
ceramics.
Our primary focus remains in the technology space, a core competency at Needham
& Company, representing 46.1% of our long exposure and 40.01% of our net
exposure, down from our 48.15% net exposure at the end of 1Q03. Our net exposure
in energy/industrial/metals has decreased from 30.5% to 14.8%, as we moved to
reduce our exposure to the group. We increased our cash and fixed income
investments from 5.24% to 24.72%. We prefer to be less than fully invested in
this current market.
[BAR CHART]
<Table>
<Caption>
NEEDHAM GROWTH FUND NET ASSETS
------------------------------
6/30/96 $ 9625
12/31/96 14379
6/30/97 25396
12/31/97 21769
6/30/98 18579
12/31/98 17946
6/30/99 27656
12/31/99 42144
6/30/00 67923
12/31/00 76070
6/30/01 277695
12/31/01 348387
6/30/02 374292
12/31/02 264575
6/30/03 296052
</Table>
<Table>
<Caption>
NEEDHAM GROWTH FUND SHAREHOLDER ACCOUNTS
----------------------------------------
6/30/96 298
12/31/96 495
6/30/97 770
12/31/97 751
6/30/98 612
12/31/98 546
6/30/99 516
12/31/99 535
6/30/00 683
12/31/00 985
6/30/01 2587
12/31/01 3508
6/30/02 5678
12/31/02 5200
6/30/03 4810
</Table>
While this rally has certainly been impressive, it is not unique. In fact, there
have been seven double-digit rallies of the S&P 500 Index since the market
peaked in early 2000, with five of those (including the present rally) having
gains of greater than 20%. The first six of those rallies eventually failed. It
has yet to be seen whether the second quarter 2003 rally will prove to be the
start of a more sustainable market recovery or just another rally within a bear
market.
3
Needham Growth Fund
- --------------------------------------------------------------------------------
There have been some key improvements that have warranted a more positive
revaluation in stocks: the quick end of the Hussein regime in Iraq, the progress
on the tax front and, perhaps most important, more accommodating financial
markets that are allowing the strengthening of corporate balance sheets. On the
other hand, the magnitude of the stock moves, particularly in the high-beta
names, has once again anticipated a big recovery in the economy that we have yet
to see materialize.
<Table>
<Caption>
- ---------------------------------------------------
TOP TEN HOLDINGS*
SECURITY
- --------------------- % OF TOTAL INVESTMENTS+
------
1) Talisman Energy,
Inc. TLM 5.16%
2) Seagate
Technology
Holdings STX 5.13%
3) Comcast Corp.
Class A CMCSA 2.83%
4) Scientific-
Atlanta, Inc. SFA 2.68%
5) Harris Corp. HRS 2.25%
6) Motorola, Inc. MOT 2.21%
7) Computer
Associates Intl.,
Inc. CA 2.09%
8) Thermo Electron
Corp. TMO 2.05%
9) National
Semiconductor
Corp. NSM 2.03%
10) Ceradyne, Inc. CRDN 1.95%
TOP TEN HOLDINGS =
28.38% OF PORTFOLIO
* Current portfolio
holdings may not be
indicative of future
portfolio holdings.
+ Percentage of total
investments
includes all
stocks, fixed
income securities
and options plus
cash minus all
short positions.
- ---------------------------------------------------
</Table>
The Federal Reserve has been working overtime to pump liquidity into the system
and to keep deflation at bay, and there has been a big short squeeze. We think
that both influences are running out of steam and that the likelihood of a
pullback in stocks has increased, particularly in the high-octane sectors of the
market that have fueled this rally.
As noted above, most of our efforts in the second quarter were made to reduce
the number of holdings to a more manageable level; to reduce our inherited short
position of 20% down to a more reasonable 11-13% level; to raise cash throughout
this 2Q03 rally so that we exited the quarter with almost 25% cash in the Fund;
and to preserve our flexibility so that we can take advantage of any pullback in
this market. We accomplished all of the above during the quarter and are now
prepared to take advantage of whatever the market has to offer.
4
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
The Fund continues, for the patient investor, to outperform the long-term
comparable indices, thanks to our GARP discipline, our focus on small to mid-cap
companies, the special situation investments, and our ability to hedge,
including short sales. The Fund also continues to focus on preservation of
capital and long-term capital appreciation. While we have a superior investment
record of nearly seven years, we continue to advise shareholders and potential
investors not to be rattled by short-term disappointments and to temper their
expectations and focus on realistic investment goals and returns.
For those of you who have invested, whether recently or over the life of the
Fund, we thank you for your confidence and support. We try to earn that
confidence every quarter. We believe the patient three-to-five-year investor
will be better rewarded. The Fund continues to be rated five stars by
Morningstar(TM) for five years and overall.(1)
- -------------
(1) For each fund with at least a three-year history, Morningstar(TM) calculates
a Morningstar(TM) Rating based on a Morningstar(TM) Risk-Adjusted Return
measure that accounts for variation in a fund's monthly performance
(including the effects of sales charges, loads, and redemption fees),
placing more emphasis on downward variations and rewarding consistent
performance. The top 10% of funds in each category receive 5 stars, the next
22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive
2 stars and the bottom 10% receive 1 star. (Each share class is counted as a
fraction of one fund within this scale and rated separately, which may cause
slight variations in the distribution percentages.) The Overall
Morningstar(TM) Rating for a fund is derived from a weighted-average of the
performance figures associated with its three-, five- and ten-year (if
applicable) Morningstar(TM) Rating metrics. The Needham Growth Fund was
rated against the following numbers of U.S.-domiciled Small-Cap Growth funds
over the following time periods: 457 funds in the last three years and 330
funds in the last five years. With respect to these Small-Cap Growth funds,
the Needham Growth Fund received a Morningstar(TM) Rating of 4-stars,
5-stars and 5-stars for the three-year period, five-year period and overall,
respectively. Past performance is no guarantee of future results.
<Table>
<Caption>
--------------------------------------------------------------------------------------------------
SECTOR WEIGHTINGS
SECTOR LONG(3) (SHORT)(3) TOTAL(3)(4)
------------------------------------------------------------ ------ -------- -------
Healthcare/Medical Devices/Pharmaceuticals 11.07% (1.62)% 9.45%
Media/Leisure/Cable/Entertainment 8.08% -- 8.08%
Energy/Industrial/Metals 17.37% (2.57)% 14.80%
Consumer/Business Services/Financial 2.89% (2.71)% 0.18%
Technology & Telecommunications 46.14% (6.13)% 40.01%
Miscellaneous & Options 2.76% -- 2.76%
Cash & Fixed Income Investments 24.72% -- 24.72%
100.00%
(3) Percentage of total investments includes all stocks, fixed income securities and options plus
cash minus all short positions.
(4) Total represents the difference between the long exposure and the short exposure, which
produces the net exposure.
--------------------------------------------------------------------------------------------------
</Table>
5
Needham Growth Fund
- --------------------------------------------------------------------------------
Please be advised that the Needham Funds third annual shareholder conference
will be held at The University Club, One West 54th St., New York, NY, on
Thursday, October 23 between 7:00 am and 2:00 pm. We have invited top management
from six of our portfolio holdings to present. Please e-mail
kwiegman@needhamco.com to reserve your place. Seating is limited and it is on a
first come, first served basis, so please let us hear from you soon.
If you have any questions, thoughts or concerns, or would like to obtain a
prospectus (which should be read carefully prior to investing in the Fund),
please contact us at 1-800-625-7071, visit our Web site at www.needhamfunds.com
or visit the Morningstar(TM) Web site at www.morningstar.com (enter NEEGX in the
ticker field).
Wishing you all a prosperous 2003, we remain
Sincerely,
<Table>
<Caption>
(-s- Vincent E. (-s- James K.
Gallagher) Kloppenburg)
Vincent E. Gallagher James K. Kloppenburg
Portfolio Manager Portfolio Manager
</Table>
<Table>
<Caption>
------------------------------------------
GOOD IDEAS THAT WORKED(1)
------------------------------------------
Seagate Technology Holdings
------------------------------------------
Scientific Atlanta, Inc.
------------------------------------------
Ceradyne, Inc.
------------------------------------------
Lucent Technologies (convert. pref.)
------------------------------------------
Talisman Energy, Inc.
------------------------------------------
</Table>
<Table>
<Caption>
------------------------------------------
GOOD IDEAS AT THE TIME(2)
------------------------------------------
Biotech Holders Trust (short)
------------------------------------------
Southwall Technologies, Inc.
------------------------------------------
AT&T Corp.
------------------------------------------
Mercury Computer Systems, Inc.
------------------------------------------
Raytheon Co.
------------------------------------------
</Table>
(1) Realized and Unrealized Gains From 01/01/03 to 06/30/03
(2) Realized and Unrealized Losses From 01/01/03 to 06/30/03
For the six months ended June 30, 2003, these are the holdings that
made the largest dollar difference in the portfolio. While some
minor holdings experienced greater percentage changes in price, the
change in their dollar value did not on an individual basis, have a
meaningful effect on the Fund's net assets. Past performance of
these holdings is historical and does not guarantee future results.
6
Needham Aggressive Growth Fund SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
Dear Shareholders,
We are pleased to report below the performance results for the Needham
Aggressive Growth Fund ("NAGF" or the "Fund"), NASDAQ symbol NEAGX, for the six
months ended June 30, 2003 ("6 months"), for the year ended June 30, 2003 ("1
Year") and from September 4, 2001 to June 30, 2003 ("since inception"). The Fund
was up 14.69% for the quarter ended June 30, 2003, is up 3.58% for the trailing
12 months and is up 2.12% since inception compounded annually.
NAGF seeks to create long-term, tax-efficient capital appreciation for its
investors. To this end, NAGF targets the equities of companies with strong,
above-average prospective growth rates. The Fund invests, in general, in markets
and industries with strong growth rates, focusing on the market leaders in these
areas. These market leaders, especially as they break away from their
competitors, tend to garner a disproportionate share of the positive financial
returns. Also important is the long-term sustainability of the companies'
leadership positions. Thus, the Fund looks for companies with strong management
teams, superior balance sheets, above-average margins that can generate excess
cash, and strong R&D and brand spending in industries with high barriers to
entry.
The equity markets staged an impressive rally in the second quarter of 2003,
ending the quarter up 15.4% as measured by the S&P 500 Index and rising 23.9%
from the March 11 intraday low to the recent high on June 17. Investor sentiment
surveys have also shown a corresponding rise in investor optimism off the March
lows, as an increasing number of market participants believe the three-year bear
market to be over.
The highest beta stocks have been the biggest beneficiaries of this equity
updraft, with the beaten-down technology sector leading the way. This has had a
favorable impact on NAGF, as the electronic food chain remains the sector of
greatest exposure to the Fund at 28.2% net exposure as of June 30, 2003, though
our significant investments in less economically sensitive sectors such as
healthcare and business services has moderated those benefits to some extent
during the quarter. The rally has been particularly favorable for smaller cap
names, as evidenced by the NASDAQ Composite handily outperforming both the DJIA
and the S&P 500 indices in the quarter. The recent market run has clearly been
all beta, all the time.
Heavily shorted names were also among the best performers in the quarter and
contributed to the Fund's underperformance relative to the NASDAQ during the
second quarter. Fortunately, our short
<Table>
<Caption>
--------------------------------------------------------------------------------------------------------
COMPARATIVE PERFORMANCE STATISTICS
SINCE
BENCHMARKS 6 MONTHS 1 YEAR INCEPTION(5)
--------------------------------------------------------- -------- -------- --------
Needham Aggressive Growth Fund(1) 11.66% 3.58% 2.12%(6)(7)
Nasdaq Composite Index(2) 21.82% 11.44% (1.64)%
S&P 500 Index(3) 11.76% 0.25% (4.17)%
Russell 2000 Index(4) 17.90% (1.63)% 1.94%
--------------------------------------------------------------------------------------------------------
</Table>
1. Investment results calculated after reinvestment of dividends.
2. The Nasdaq Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market & SmallCap stocks.
3. The S&P 500 Index is a broad unmanaged measure of the U.S. stock market.
4. The Russell 2000 Index is a broad unmanaged index comprised of the smallest
2000 companies in the Russell 3000.
5. Compound annual growth rate. Assumes all dividends are reinvested in shares
of the Fund.
6. Total return since inception was 3.89%, assuming all dividends were
reinvested in shares of the Fund.
7. The inception date of the Fund was 9/4/01.
Note: The average annual returns shown in the above table and accompanying
footnotes are historical, reflect changes in share price and are net of
expenses. The table above does not reflect the deduction of taxes that a
shareholder would have paid on Fund distributions or on the redemption of
Fund shares. Investment results and the principal value of an investment
will vary. Past performance noted above does not guarantee future results.
When shares are redeemed, they may be worth more or less than their
original cost. Since inception, the Fund's Adviser has absorbed certain
expenses of the Fund, without which returns would have been lower.
7
Needham Aggressive Growth Fund
- --------------------------------------------------------------------------------
exposure was only 4.4% of total investments upon entering the quarter, so the
negative drag was not significant. We highlighted in our last letter the buildup
in indiscriminate shorting that we were observing, and the resulting short
squeeze was an important contributor to the market's ascent in the second
quarter and a key reason why we had reduced the Fund's short exposure to a low
level. At current prices, we are finding better risk/rewards on the short side
and have begun to increase our shorts. That said, some of the thinner trading
names are still hard to borrow. They are overextended as stocks in our opinion,
but we are having trouble taking advantage of that opportunity.
One of our active strategies over the past six months has been to reduce the
number of core names in the portfolio. NAGF's top ten holdings now represent
32.6% of total investments as of June 30, up from 27.6% at the end of March. We
used the strong equity tape to eliminate a number of smaller positions and
redeployed those proceeds into some of the Fund's core holdings, thus increasing
our average exposure per holding. We think the market's significant volatility
is enabling us to enhance the Fund's long-term value. We have used the dips to
add to positions that we believe hold excellent long-term appreciation
potential, franchises that should thrive in multiple economic environments.
Our largest position at present is Seagate Technology, the worldwide leader in
hard disk drives, a market segment we have had extensive experience with
throughout Needham's history. We were able to take a large position when the
company returned to the public markets in December 2002 after a leveraged
buyout. Although the stock initially went through a post-IPO swoon, having come
public in a pessimistic technology tape and not being well understood, the stock
has since traded strongly, as the company has consistently delivered healthy
upside to earnings. Even at the current prices, the stock trades at a discount
to other dominant technology companies. For example, Seagate trades at only
one-third the price to sales ratio of EMC, even though they both serve the same
enterprise storage market. In fact, we would make the case that Seagate's
opportunities are ultimately larger, as the company is just now entering the
notebook market, which is the fastest-growing component of the PC marketplace,
and as hard disk drives penetrate deeper into the consumer electronics space in
key applications such as personal video recorders. In a business requiring both
scale and technology prowess, we think only Hitachi Data Systems has the
potential to stay competitive with Seagate over time.
While this rally has certainly been impressive, it is not unique. In fact, there
have been seven double-
[BAR CHART]
<Table>
<Caption>
NEEDHAM AGGRESSIVE GROWTH FUND NET ASSETS
-----------------------------------------
9/30/01 $ 7634
10/31/01 9105
11/30/01 10714
12/31/01 13178
6/30/02 17210
12/31/02 14273
6/30/03 14512
</Table>
<Table>
<Caption>
NEEDHAM AGGRESSIVE GROWTH FUND
SHAREHOLDER ACCOUNTS
------------------------------
9/30/01 86
10/31/01 113
11/30/01 146
12/31/01 163
6/30/02 256
12/31/02 236
6/30/03 228
</Table>
8
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
digit rallies of the S&P 500 Index since the market peaked in early 2000, with
five of those (including the present rally) with gains of greater than 20%. The
first six of those rallies eventually failed. It has yet to be seen whether the
second quarter 2003 rally will prove to be the start of a more sustainable
market recovery or just another bear market head fake.
Our position is that it has been a little bit of both. There have been some key
improvements that have warranted a more positive revaluation in stocks: the
quick end of the Hussein regime in Iraq, the progress on the tax front and,
perhaps most important, more accommodating financial markets that are allowing
the strengthening of corporate balance sheets. On the other hand, the magnitude
of the stock moves, particularly in the high-beta names, has once again
anticipated a big recovery in the economy that we have yet to see materialize.
We think it is unlikely that growth will return fast enough to support the
current valuations and that many stocks have moved too far too fast.
The Federal Reserve has been working overtime to pump liquidity into the system
and to keep deflation at bay. We believe this has been a big factor in the
equity market's quick ascent, as has been the big short squeeze we noted above.
We think that both influences are running out of steam and that the likelihood
of a pullback in stocks has increased, particularly in the high-octane sectors
of the market that have fueled this rally.
Although we have consistently put cash to work over the past nine months, we
still have a healthy cash position at about 22% of total investments. This
should provide the Fund some protection if stocks retrace a portion of their
recent gains and keep us in a position to add to key holdings on a market
pullback. Given our growth -- albeit slow growth -- outlook, it wouldn't
surprise us to see both our long and short positions increase over the balance
of the year at the expense of the cash.
<Table>
<Caption>
- -----------------------------------------------------
TOP TEN HOLDINGS*
SECURITY
- --------------------- % OF TOTAL INVESTMENTS+
------
Seagate Technology
Holdings STX 5.09%
Pfizer, Inc. PFE 3.69%
Pacific Sunwear of
California PSUN 3.47%
Affiliated Computer
Services ACS 3.29%
Comcast Corp. Special
Class A CMCSK 3.12%
Kronos, Inc KRON 2.93%
Synaptics, Inc. SYNA 2.91%
Universal Health
Svcs, Inc CL B UHS 2.85%
Community Health
Systems, Inc. CYH 2.78%
Choicepoint, Inc CPS 2.49%
TOP TEN HOLDINGS =
32.62% OF TOTAL
INVESTMENTS
* Current portfolio holdings may not be indicative
of future portfolio holdings.
+ Percentage of total investments includes all
stocks, fixed income securities and options plus
cash minus all short positions.
- -----------------------------------------------------
</Table>
We think that in this more sober investing environment, investment gains will
once again be more closely aligned with real and sustainable earnings growth, an
environment that we believe favors our patient, bottoms-up style.
As always, we appreciate your continued support and encourage your comments and
feedback.
9
Needham Aggressive Growth Fund
- --------------------------------------------------------------------------------
Please be advised that the Needham Funds third annual shareholder conference
will be held at The University Club, One West 57th St., New York, NY, on
Thursday, October 23 between 7:00 am and 2:00 pm. We have invited top management
from six of our portfolio holdings to present. Please e-mail
kwiegman@needhamco.com to reserve your place. Seating is limited and it is on a
first come, first served basis so please let us hear from you soon.
If you have any questions, thoughts or concerns, or would like to obtain a
prospectus (which should be read carefully before investing in the Fund), please
contact us at 1-800-625-7071 or visit our website, www.needhamfunds.com.
Yours sincerely,
(-s- James K. Kloppenburg)
James K. Kloppenburg
Portfolio Manager
<Table>
<Caption>
---------------------------------------------------------------------------------------------------
SECTOR WEIGHTINGS
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
------------------------------------------------------------ ------- ------- -------
Healthcare/Medical Devices/Pharmaceuticals 16.92% -- 16.92%
Media/Leisure/Cable/Entertainment 7.33% -- 7.33%
Energy/Industrial 8.42% (0.58)% 7.84%
Consumer/Business Services/Financial 19.27% (1.11)% 18.16%
Technology & Telecommunications 33.57% (5.38)% 28.19%
Miscellaneous & Options -- -- --
Cash & Fixed Income Investments 21.56% -- 21.56%
100.00%
(1) Percentage of total investments includes all stocks, fixed income securities and options plus
cash minus all short positions.
(2) Total represents the difference between the long exposure and the short exposure, which
produces the net exposure.
---------------------------------------------------------------------------------------------------
</Table>
10
Needham Small Cap Growth Fund SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
Dear Shareholders,
We are pleased to report below the performance results for the Needham Small Cap
Growth Fund ("NSCGF" or the "Fund"), NASDAQ symbol NESGX, for the six months
ended June 30, 2003 ("6 months"), for the year ended June 30, 2003 ("1 Year")
and from May 22, 2002 to June 30, 2003 ("since inception"). The Fund was up
34.72% for the quarter, is up 40.24% for the year and up 26.75% compounded
annually since its inception on May 22, 2002.
The Fund seeks long-term, tax-efficient capital appreciation by investing
primarily in equity securities of smaller growth companies which the Fund
believes are trading at a discount to their underlying value yet have the
potential for superior long-term growth. Under normal conditions, the Fund
invests at least 80% of its total assets in equity securities of domestic
issuers that have market capitalizations of $2 billion or less and that are
listed on a nationally recognized securities exchange or traded on the Nasdaq
system. Central to the Fund's investment strategy is a sound valuation
discipline that seeks to acquire growth companies at reasonable prices. The Fund
seeks tax efficiency by holding securities for a period of 12 months or more to
obtain long-term capital gain treatment and by offsetting capital gains on the
sale of securities with capital losses.
We are very pleased with the Fund's performance in the second quarter. We took
advantage of the updraft to reduce the number of positions in the Fund down to
44 longs and 8 shorts. We also managed to diversify the holdings. We reduced our
exposure in technology and telecommunications from 60.8% at March 31 to 37.4% at
June 30. We plan to keep technology at about that level. We increased our
healthcare-related holdings from 8.73% to 16.09%. We would like to get that
sector closer to 20% over the coming months. We also dramatically increased our
cash position from 6.27% at the end of March to 23.43% at June 30.
<Table>
<Caption>
-----------------------------------------------------------------
COMPARATIVE PERFORMANCE STATISTICS
SINCE
BENCHMARKS 6 MONTHS 1 YEAR INCEPTION(4)
--------------------- ------ ------ ------
Needham Small Cap
Growth Fund 25.24% 40.24% 26.75%(5)(6)
Nasdaq Composite
Index 21.82% 11.44% (2.15)%
S&P 600 Index 12.93% (3.58)% (8.67)%
Russell 2000 17.90% (1.63)% (6.98)%
-----------------------------------------------------------------
</Table>
1. The S&P 600 Index is a broad unmanaged measure of the U.S. stock market.
2. The Nasdaq Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market & SmallCap stocks.
3. The Russell 2000 Index is a broad unmanaged index comprised of the smallest
2000 companies in the Russell 3000.
4. Compound annual growth rate. Assumes all dividends are reinvested in the
Fund.
5. Total return since inception was 30.00%, assuming all dividends were
reinvested in shares of the Fund.
6. The inception date of the Fund was 5/22/02.
Note: The average annual returns shown in the above table and accompanying
footnotes are historical, reflect changes in share price and are net of
expenses. The table above does not reflect the deduction of taxes that a
shareholder would have paid on Fund distributions or on the redemption of
Fund shares. Investment results and the principal value of an investment
will vary. Past performance noted above does not guarantee future results.
When shares are redeemed, they may be worth more or less than their
original cost. Since inception, the Fund's Adviser has absorbed certain
expenses of the Fund, without which returns would have been lower.
All this happened while growing the Fund's NAV 34.72% in the quarter. We would
be very pleased if we could duplicate that performance going forward and that is
our goal. Markets have been and will continue to be volatile. We cannot control
the markets. What we can control is our efforts to uncover outstanding companies
to add to the portfolio. We plan to add such companies at reasonable prices and
then let them compound over the next three-to-five years for the benefit of our
investors.
This market has had a substantial move in the second quarter, and the question
is not "are the technology stocks ahead of themselves" because
11
Needham Small Cap Growth Fund
- --------------------------------------------------------------------------------
assuredly they are. The real question is: "Given that fact, will the market take
them back down in the third or fourth quarter, similar to July and then October
2002?" My gut feeling is that we could see a 5-10% correction at any time, but I
do not see a wholesale sell-off. There simply are not enough attractive
alternatives out there. The bond market is at its lowest yields in over 40
years; real estate has done well but that market is somewhat frothy, and money
market funds . . . enough said. There are not many great alternatives out there,
and cash continues to flow into the markets looking for an acceptable return.
Given all of the above, we believe that this market could go sideways or even up
over the next six months.
Nonetheless, we do not predict markets and since we recognize the price
appreciation that has gone on in the second quarter, we will hedge our bets and
become more market neutral going forward. Part of this strategy started in June
when we increased our cash position from 6% to 23%. We have also started to add
to our short positions to protect the portfolio in the event of a sell-off. As
such, our gains may be tempered on the upside but our downside should also be
moderated.
Again, we want to extend a very appreciative thank you to our investors for
showing confidence in a new fund in a second challenging year. We will be
working hard to reward your confidence during the rest of 2003 and beyond by
seeking out attractive long-term growth companies that we can purchase at
reasonable prices. We are pleased to note that in early July net assets exceeded
$7.0 million and the Fund continues to grow. We also wanted to respond to a
number of our contemporaries who are moving their portfolios more toward fixed
income and tax-exempt bonds and are somewhat reluctant to invest in "small
caps." We are always pleased to set up accounts for children and grandchildren
under a Uniform Gift for Minors Account ("UGMA"), or their IRAs, if they have
one. We believe that "small caps" will be an attractive sector of the market,
particularly over the long haul.
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
TOP TEN HOLDINGS*
SECURITY
- ------------------------------------------------------------ % OF TOTAL INVESTMENTS+
------
1) Pemstar, Inc. PMTR 4.91%
2) Ceradyne, Inc. CRDN 4.70%
3) Remec, Inc. REMC 4.66%
4) Hovnanian Enterprises, Inc. HOV 3.45%
5) MKS Instruments, Inc. MKSI 3.02%
6) PEC Solutions PECS 2.69%
7) Standard Microsystems Corp. SMSC 2.54%
8) Mobility Electronics, Inc. MOBE 2.37%
9) Datalink Corp. DTLK 2.34%
10) Sitel Corp. SWW 2.33%
TOP TEN HOLDINGS = 33.01% OF TOTAL INVESTMENTS
* Current portfolio holdings may not be indicative of future portfolio holdings.
+ Percentage of total investments includes all stocks, fixed income securities and options
plus cash minus all short positions.
- --------------------------------------------------------------------------------------------
</Table>
Please be advised that the Needham Funds third annual shareholder conference
will be held at The University Club, One West 57th St., New York, NY, on
Thursday, October 23 between 7:00 am and 2:00 pm. We have invited top management
from six of our portfolio holdings to present. Please e-mail
kwiegman@needhamco.com to reserve your place. Seating is limited and it is on a
first come, first served basis so please let us hear from you soon.
12
Needham Small Cap Growth Fund SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
If you have any questions, thoughts or concerns, or would like to obtain a
prospectus (which should be read carefully before investing in the Fund), please
contact us at 1-800-625-7071 or visit our website www.needhamfunds.com.
Sincerely,
(-s- Vincent E. Gallagher)
Vincent E. Gallagher
Portfolio Manager
<Table>
<Caption>
------------------------------------------------------------
SECTOR WEIGHTINGS
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
--------------------- ------- ------ -------
Healthcare/ Medical
Devices/
Pharmaceuticals 16.09% -- 16.09%
Media/ Leisure/
Cable/
Entertainment -- -- --
Energy/ Industrial/
Metals 13.40% (0.79)% 12.61%
Consumer/Business
Services/ Financial 10.49% -- 10.49%
Technology &
Telecommunications 40.65% (3.27)% 37.38%
Miscellaneous &
Options -- -- --
Cash & Fixed Income
Investments 23.43% -- 23.43%
100.00%
(1) Percentage of total investments includes all stocks,
fixed income securities and options plus cash minus all
short positions.
(2) Total represents the difference between the long
exposure and the short exposure, which produces the net
exposure.
------------------------------------------------------------
</Table>
Funds holding smaller capitalized companies are subject to greater price
fluctuation than those of larger companies.
<Table>
<Caption>
------------------------------------------
GOOD IDEAS THAT WORKED(1)
------------------------------------------
Ceradyne, Inc.
------------------------------------------
Pemstar, Inc.
------------------------------------------
Remec, Inc.
------------------------------------------
Seagate Technology Holdings
------------------------------------------
PEC Solutions, Inc.
------------------------------------------
</Table>
<Table>
<Caption>
------------------------------------------
GOOD IDEAS AT THE TIME(2)
------------------------------------------
Southwall Technologies, Inc.
------------------------------------------
Parthusceva, Inc.
------------------------------------------
AXT, Inc.
------------------------------------------
Tessco Technologies, Inc.
------------------------------------------
Photronics, Inc.
------------------------------------------
</Table>
(1) Realized and Unrealized Gains From 01/01/03 to 06/30/03
(2) Realized and Unrealized Losses From 01/01/03 to 06/30/03
For the six months ended June 30, 2003, these are the holdings that
made the largest dollar difference in the portfolio. While some
minor holdings experienced greater percentage changes in price, the
change in their dollar value did not on an individual basis, have a
meaningful effect on the Fund's net assets. Past performance of
these holdings is historical and does not guarantee future results.
13
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Schedule of Investments (Unaudited)
June 30, 2003
<Table>
<Caption>
Shares Value
- -----------------------------------------------------------------------------------------------
COMMON STOCK - (77.0%)
- -----------------------------------------------------------------------------------------------
BIOTECH & PHARMACEUTICALS - (0.8%)
CV Therapeutics, Inc.* 75,000 $ 2,224,500
- -----------------------------------------------------------------------------------------------
BUSINESS SERVICES - (0.5%)
Affiliated Computer Services, Inc. Class A* 35,000 1,600,550
- -----------------------------------------------------------------------------------------------
CABLE TV & EQUIPMENT - (6.2%)
Comcast Corp Class A*+ 250,000 7,545,000
Comcast Corp. Special Class A* 60,000 1,729,800
Scientific-Atlanta, Inc. 300,000 7,152,000
Shaw Communications, Inc.+ 150,000 2,017,500
- -----------------------------------------------------------------------------------------------
18,444,300
- -----------------------------------------------------------------------------------------------
COMPUTER HARDWARE - (0.9%)
Planar Systems, Inc.* 135,200 2,644,512
- -----------------------------------------------------------------------------------------------
CONTRACT MANUFACTURING & MATERIALS - (2.4%)
Manufacturers Services Ltd.* 325,000 1,576,250
Merix Corp.*+ 180,000 1,371,600
Parlex Corp.*+ 100,000 769,100
Pemstar, Inc.* 500,000 2,095,000
Solectron Corp.*+ 350,000 1,309,000
- -----------------------------------------------------------------------------------------------
7,120,950
- -----------------------------------------------------------------------------------------------
EDA/CAD - CAM/INTELLECTUAL PROPERTY - (1.4%)
Autodesk, Inc.+ 110,000 1,777,600
MIPS Technologies Inc. Class B* 285,000 703,950
Verisity Ltd.* 137,800 1,645,332
- -----------------------------------------------------------------------------------------------
4,126,882
- -----------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS & DISTRIBUTION - (0.7%)
Vishay Intertechnology, Inc.* 150,000 1,980,000
- -----------------------------------------------------------------------------------------------
ELECTRONICS & STORAGE - (5.8%)
Bell Microproducts, Inc.* 200,000 854,000
Datalink Corporation* 28,400 132,628
Datalink Corporation (PP)* 400,000 1,868,000
Komag Inc.* 50,000 591,500
Seagate Technology Holdings+ 775,000 13,678,750
- -----------------------------------------------------------------------------------------------
17,124,878
- -----------------------------------------------------------------------------------------------
ELECTRONICS, ELECTRICAL EQUIPMENT, &
INSTRUMENTATION - (1.1%)
Cognex Corp.*+ 100,000 2,235,000
Lecroy Corp.* 50,000 483,000
Robotic Vision Systems Inc. (PP)* 1,102,739 408,013
- -----------------------------------------------------------------------------------------------
3,126,013
- -----------------------------------------------------------------------------------------------
EXPLORATION, PRODUCTION, REFINING & STORAGE - (6.0%)
Chesapeake Energy Corp. 400,000 4,040,000
Talisman Energy, Inc.+ 300,000 13,755,000
- -----------------------------------------------------------------------------------------------
17,795,000
- -----------------------------------------------------------------------------------------------
FOUNDRIES - (0.4%)
AU Optronics Corp.*+ 150,000 1,038,000
- -----------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
14
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
- -----------------------------------------------------------------------------------------------
HEALTH CARE SERVICES - (2.0%)
D & K Healthcare Resources+ 200,000 $ 3,228,000
Laboratory Corp. of America* 25,000 753,750
Pediatric Services of America, Inc.* 150,000 1,005,000
U.S. Oncology, Inc.* 135,000 997,650
- -----------------------------------------------------------------------------------------------
5,984,400
- -----------------------------------------------------------------------------------------------
INDUSTRIAL CHEMICALS, RESINS, & LAMINATES - (1.7%)
AXT, Inc.*+ 367,202 429,626
Park Electrochemical Corp.+ 185,000 3,690,750
Southwall Technologies, Inc.* 725,500 899,620
- -----------------------------------------------------------------------------------------------
5,019,996
- -----------------------------------------------------------------------------------------------
LEISURE PRODUCTS - (1.0%)
Vail Resorts, Inc.*+ 230,000 3,098,100
- -----------------------------------------------------------------------------------------------
MANUFACTURING & INDUSTRIAL EQUIPMENT - (2.5%)
Ceradyne, Inc. (PP)* 277,301 5,193,848
Sypris Solutions+ 225,000 2,324,250
- -----------------------------------------------------------------------------------------------
7,518,098
- -----------------------------------------------------------------------------------------------
MEDICAL DEVICES & SUPPLIES - (7.1%)
Analogic Corp. 100,000 4,876,000
ConMED Corp.*+ 250,000 4,565,000
Thermo Electron Corp.*+ 260,000 5,465,200
Universal Health Services, Inc. Class B* 40,000 1,584,800
Viasys Healthcare, Inc.*+ 135,000 2,794,500
Waters Corp.* 70,000 2,039,100
- -----------------------------------------------------------------------------------------------
21,324,600
- -----------------------------------------------------------------------------------------------
METALS & MINING - (1.2%)
Gold Fields, Ltd. 210,000 2,557,800
Iamgold Corp. 200,000 988,000
- -----------------------------------------------------------------------------------------------
3,545,800
- -----------------------------------------------------------------------------------------------
NETWORKING & COMMUNICATIONS EQUIPMENT - (0.2%)
Visual Networks, Inc.* 400,000 548,000
- -----------------------------------------------------------------------------------------------
OIL/GAS EQUIPMENT & SERVICES - (4.2%)
GlobalSantaFe Corp.+ 195,000 4,551,300
Offshore Logistics, Inc.*+ 140,000 3,045,000
Patterson-UTI Energy, Inc.*+ 150,000 4,860,000
- -----------------------------------------------------------------------------------------------
12,456,300
- -----------------------------------------------------------------------------------------------
OPTICAL COMPONENTS - (2.2%)
Agere Systems, Inc. - Class B* 500,000 1,150,000
Newport Corp.*+ 200,000 2,960,000
Orbotech Ltd.*+ 150,000 2,494,500
- -----------------------------------------------------------------------------------------------
6,604,500
- -----------------------------------------------------------------------------------------------
POWER SEMICONDUCTORS - (0.4%)
Mercury Computer Systems, Inc.*+ 63,500 1,153,160
- -----------------------------------------------------------------------------------------------
SEMICONDUCTOR CAPITAL EQUIPMENT - (5.5%)
ADE Corp.*+ 150,400 1,290,432
Brooks Automation Inc.*+ 213,400 2,419,956
FSI International, Inc.* 331,000 1,290,900
FSI International, Inc. (PP)* 150,000 585,000
</Table>
See accompanying notes to financial statements.
15
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Schedule of Investments (Unaudited) (Continued)
June 30, 2003
<Table>
<Caption>
Shares Value
- -----------------------------------------------------------------------------------------------
Helix Technology Corp.+ 175,341 $ 2,319,761
MKS Instruments, Inc.* 159,100 2,874,937
Nova Measuring Instruments, Ltd.* 82,500 285,450
Photronics, Inc.*+ 225,000 3,926,250
Three-Five Systems, Inc.*+ 125,000 862,500
Trikon Technologies, Inc.*+ 122,500 443,450
- -----------------------------------------------------------------------------------------------
16,298,636
- -----------------------------------------------------------------------------------------------
SEMICONDUCTOR MANUFACTURERS & COMMUNICATION DEVICES - (5.3%)
Actel Corp.*+ 95,000 1,947,500
Atmel Corp.* 810,000 2,049,300
LSI Logic Corp.*+ 290,000 2,053,200
National Semiconductor Corp.*+ 275,000 5,423,000
Standard Microsystems Corp.*+ 150,000 2,275,500
Xicor, Inc.* 292,500 1,833,975
- -----------------------------------------------------------------------------------------------
15,582,475
- -----------------------------------------------------------------------------------------------
SOFTWARE - (7.2%)
Aspen Technology, Inc.* 300,000 1,440,000
Computer Associates International, Inc. 250,000 5,570,001
Kronos, Inc.*+ 100,000 5,081,000
Phoenix Technologies, Ltd.* 300,000 1,695,000
Rainbow Technologies* 175,000 1,471,750
SPSS, Inc.*+ 197,500 3,306,150
Sybase, Inc.*+ 210,000 2,921,100
- -----------------------------------------------------------------------------------------------
21,485,001
- -----------------------------------------------------------------------------------------------
SPECIALTY RETAILING & MANUFACTURING - (2.1%)
Brookstone, Inc.* 102,500 2,075,625
Charming Shoppes, Inc.*+ 450,000 2,236,500
G-III Apparel Group, Inc.* 74,500 558,005
West Marine* 70,000 1,225,700
- -----------------------------------------------------------------------------------------------
6,095,830
- -----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS SERVICE & EQUIPMENT - (2.3%)
ADC Telecommunications, Inc.* 360,000 838,080
Harris Corp.+ 200,000 6,010,000
- -----------------------------------------------------------------------------------------------
6,848,080
- -----------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS & EQUIPMENT - (5.9%)
Anaren Microwave, Inc.*+ 250,000 2,342,500
AT&T Wireless Services, Inc.*+ 225,000 1,847,250
EMS Technologies, Inc.* 76,900 1,020,463
EMS Technologies, Inc. (PP)* 100,000 1,327,000
Motorola, Inc.+ 625,000 5,893,750
Remec, Inc.*+ 300,000 2,088,000
Viasat, Inc.*+ 200,000 2,868,000
- -----------------------------------------------------------------------------------------------
17,386,963
- -----------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost $226,925,814) 228,175,524
- -----------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
16
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
- -----------------------------------------------------------------------------------------------
INVESTMENT TRUSTS - (2.4%)
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANIES - (2.4%)
Central Fund Of Canada 590,000 $ 2,531,100
Central Fund of Canada (PP) 250,000 1,072,500
H & Q Healthcare Investors Fund 104,127 1,828,470
H & Q Life Sciences Investors Fund 104,178 1,559,545
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENT TRUSTS (Cost $7,082,736) 6,991,615
- -----------------------------------------------------------------------------------------------
PREFERRED STOCK - (2.0%)
- -----------------------------------------------------------------------------------------------
CABLE TV & EQUIPMENT - (0.0%)
Adelphia Communications Corp. - Convertible Preferred Stock,
7.50%, 11/15/04, Series E* 182,000 18,200
- -----------------------------------------------------------------------------------------------
NETWORKING & COMMUNICATIONS EQUIPMENT - (2.0%)
Lucent Convertible - Preferred Stock, 8.00%, 08/01/31 60,000 6,015,000
- -----------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (Cost $8,218,018) 6,033,200
- -----------------------------------------------------------------------------------------------
Par
- -----------------------------------------------------------------------------------------------
CONVERTIBLE BOND - (0.9%)
- -----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS SERVICE & EQUIPMENT - (0.9%)
Nortel Telecommunications, 4.25%, 09/01/08 3,000,000 2,527,500
- -----------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BOND (Cost $2,530,736) 2,527,500
- -----------------------------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - (19.3%)
PNC Bank Money Market 32,283,564 32,283,564
Provident Institutional Fund - Tempcash Portfolio 12,545,306 12,545,306
The RBB Sansom Street Money Market Portfolio 12,545,306 12,545,306
- -----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost $57,374,176) 57,374,176
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS - (101.6%) (Cost $302,131,480) 301,102,015
- -----------------------------------------------------------------------------------------------
Number of
Contracts
- -----------------------------------------------------------------------------------------------
NAME/EXPIRATION DATE/STRIKE PRICE
- -----------------------------------------------------------------------------------------------
INVESTMENTS IN OPTIONS - (0.1%)
- -----------------------------------------------------------------------------------------------
CALL OPTIONS PURCHASED - (0.1%)
- -----------------------------------------------------------------------------------------------
CABLE TV & EQUIPMENT - (0.0%)
America Online, Jan 04, $20.00* 1,000 45,000
- -----------------------------------------------------------------------------------------------
ELECTRONICS & STORAGE - (0.0%)
EMC Corp., Jan 04, $12.50* 1,000 75,000
- -----------------------------------------------------------------------------------------------
EXPLORATION, PRODUCTION, REFINING & STORAGE - (0.0%)
El Paso, Jan 04, $25.00* 1,600 8,000
- -----------------------------------------------------------------------------------------------
NETWORKING & COMMUNICATIONS EQUIPMENT - (0.1%)
Tellabs, Inc., Jan 04, $7.50* 1,000 80,000
- -----------------------------------------------------------------------------------------------
SEMICONDUCTOR MANUFACTURERS & COMMUNICATION DEVICES - (0.0%)
Advanced Micro Devices, Jan 04, $15.00* 1,000 10,000
- -----------------------------------------------------------------------------------------------
TOTAL CALL OPTIONS PURCHASED (Cost $1,976,852) 218,000
- -----------------------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED (Cost $1,976,852) 218,000
- -----------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
17
NEEDHAM GROWTH FUND
Schedule of Investments (Unaudited) (Continued)
June 30, 2003
Needham Funds
- --------------------------------------------------------------------------------
<Table>
Shares Value
- -----------------------------------------------------------------------------------------------
WARRANTS - (0.1%)
- -----------------------------------------------------------------------------------------------
ELECTRONICS & STORAGE - (0.1%)
Datalink, May 07, $4.50* 68,000 $ 151,834
- -----------------------------------------------------------------------------------------------
ELECTRONICS, ELECTRICAL EQUIPMENT, &
INSTRUMENTATION - (0.0%)
Robotic Vision Systems, Inc., May 05, $1.50* 275,684 7,652
- -----------------------------------------------------------------------------------------------
TOTAL WARRANTS PURCHASED (Cost $162,175) 159,486
- -----------------------------------------------------------------------------------------------
TOTAL OPTIONS AND WARRANTS PURCHASED (Cost $2,139,027) 377,486
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS AND OPTIONS PURCHASED - (101.8%) 301,479,501
- -----------------------------------------------------------------------------------------------
Total Securities Sold Short and Options Written - (-11.7%) (34,774,795)
- -----------------------------------------------------------------------------------------------
Assets, Less Other Liabilities - (9.9%) 29,347,093
- -----------------------------------------------------------------------------------------------
NET ASSETS - (100.0%) $296,051,799
- -----------------------------------------------------------------------------------------------
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
PPPrivate placement
See accompanying notes to financial statements.
18
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Schedule of Securities Sold Short (Unaudited)
June 30, 2003
<Table>
<Caption>
Shares Value
- -----------------------------------------------------------------------------------------------
SECURITIES SOLD SHORT - (-11.7%)
- -----------------------------------------------------------------------------------------------
BIOTECHNOLOGY & PHARMACEUTICALS - (-1.5%)
Biotech Holders Trust* 35,000 $ 4,313,750
- -----------------------------------------------------------------------------------------------
COMPUTER HARDWARE - (-0.8%)
Lexmark International Group, Inc. Cl-A* 35,000 2,476,950
- -----------------------------------------------------------------------------------------------
EDA/CAD - CAM/INTELLECTUAL PROPERTY - (-0.5%)
Ansys, Inc.* 50,000 1,555,000
- -----------------------------------------------------------------------------------------------
FINANCIAL SERVICES - (-1.6%)
Lehman Brothers Holdings, Inc.* 70,000 4,653,600
- -----------------------------------------------------------------------------------------------
MANUFACTURING & INDUSTRIAL EQUIPMENT - (-1.8%)
Harley-Davidson, Inc.* 30,000 1,195,800
Polaris Industries, Inc.* 25,000 1,535,000
Zebra Technologies Corp.* 35,000 2,631,650
- -----------------------------------------------------------------------------------------------
5,362,450
- -----------------------------------------------------------------------------------------------
NETWORKING & COMMUNICATIONS EQUIPMENT - (-0.4%)
Juniper Networks, Inc.* 100,000 1,237,000
- -----------------------------------------------------------------------------------------------
OIL/GAS EQUIPMENT & SERVICES - (-0.5%)
Oil Service Holders Trust* 25,000 1,503,750
- -----------------------------------------------------------------------------------------------
OPTICAL COMPONENTS - (-0.1%)
II-VI, Inc.* 20,000 461,600
- -----------------------------------------------------------------------------------------------
SEMICONDUCTOR CAPITAL EQUIPMENT - (-1.2%)
Cabot Microelectronics* 55,000 2,775,850
Rudolph Technologies Inc.* 50,000 798,000
- -----------------------------------------------------------------------------------------------
3,573,850
- -----------------------------------------------------------------------------------------------
SEMICONDUCTOR MANUFACTURERS & COMMUNICATION
DEVICES - (-0.6%)
Intel Corp.* 25,000 519,600
Silicon Laboratories, Inc.* 50,000 1,332,000
- -----------------------------------------------------------------------------------------------
1,851,600
- -----------------------------------------------------------------------------------------------
SOFTWARE - (-1.8%)
Electronic Arts, Inc.* 37,500 2,774,625
Mercury Interactive Corp.* 50,000 1,930,500
Serena Software, Inc.* 24,000 501,120
- -----------------------------------------------------------------------------------------------
5,206,245
- -----------------------------------------------------------------------------------------------
SPECIALTY RETAILING & MANUFACTURING - (-0.9%)
Kohl's Corp.* 50,000 2,569,000
- -----------------------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT (Proceeds $30,419,653) 34,764,795
- -----------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
19
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Schedule of Securities Sold Short (Unaudited) (Continued)
June 30, 2003
<Table>
Number of
Contracts Value
- ----------------------------------------------------------------------------------------------------------------
NAME/EXPIRATION DATE/STRIKE PRICE
- ----------------------------------------------------------------------------------------------------------------
WRITTEN OPTIONS - (0.0%)
- ----------------------------------------------------------------------------------------------------------------
PUT OPTIONS WRITTEN - (0.0%)
- ----------------------------------------------------------------------------------------------------------------
CABLE TV & EQUIPMENT - (0.0%)
America Online, Jan 04, $10.00* 500 $ 10,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL PUT OPTIONS WRITTEN (Premium Received $158,745) 10,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN (Premium Received $158,745) 10,000
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT AND OPTIONS WRITTEN - (-11.7%) (34,774,795)
- ----------------------------------------------------------------------------------------------------------------
Total Investments and Options Purchased - (101.8%) 301,479,501
- ----------------------------------------------------------------------------------------------------------------
Assets, Less Other Liabilities - (9.9%) 29,347,093
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS - (100.0%) $ 296,051,799
- ----------------------------------------------------------------------------------------------------------------
</Table>
* Non-income producing security.
See accompanying notes to financial statements.
20
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Schedule of Investments (Unaudited)
June 30, 2003
<Table>
<Caption>
Shares Value
- ----------------------------------------------------------------------------------------------
COMMON STOCK - (81.7%)
- ----------------------------------------------------------------------------------------------
AIRLINES - (1.5%)
Jetblue Airways Corp.* 5,000 $ 211,450
- ----------------------------------------------------------------------------------------------
BIOTECH & PHARMACEUTICALS - (9.7%)
CV Therapeutics, Inc.*+ 10,000 296,600
Express Scripts, Inc. Class A* 5,000 341,600
Idec Pharmaceutical Corp.* 8,000 272,000
Pfizer, Inc. 15,000 512,250
- ----------------------------------------------------------------------------------------------
1,422,450
- ----------------------------------------------------------------------------------------------
BROADCASTING - (4.0%)
Clear Channel Communications, Inc.* 7,000 296,730
Fox Entertainment Group, Inc. Class A* 10,000 287,800
- ----------------------------------------------------------------------------------------------
584,530
- ----------------------------------------------------------------------------------------------
BUSINESS SERVICES - (8.3%)
Affiliated Computer Services, Inc. Class A*+ 10,000 457,300
Choicepoint, Inc.* 10,000 345,200
First Data Corp. 3,000 124,320
Iron Mountain, Inc.* 7,500 278,175
- ----------------------------------------------------------------------------------------------
1,204,995
- ----------------------------------------------------------------------------------------------
CABLE TV & EQUIPMENT - (3.0%)
Comcast Corp. Special Class A*+ 15,000 432,450
- ----------------------------------------------------------------------------------------------
EDA/CAD - CAM/INTELLECTUAL PROPERTY - (0.2%)
Synplicity, Inc.* 5,037 26,344
- ----------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS & DISTRIBUTION - (2.3%)
Rogers Corp.* 10,000 333,000
- ----------------------------------------------------------------------------------------------
ELECTRONICS & STORAGE - (6.0%)
Datalink Corporation* 10,000 46,700
Datalink Corporation (PP)* 25,000 116,750
Seagate Technology Holdings+ 40,000 706,000
- ----------------------------------------------------------------------------------------------
869,450
- ----------------------------------------------------------------------------------------------
ELECTRONICS, ELECTRICAL EQUIPMENT, &
INSTRUMENTATION - (0.2%)
Robotic Vision Systems, Inc. (PP)* 82,705 30,601
- ----------------------------------------------------------------------------------------------
FINANCIAL SERVICES - (2.2%)
State Street Corp. 8,000 315,200
- ----------------------------------------------------------------------------------------------
HOSPITAL & PHYSICIAN MANAGEMENT - (2.7%)
Community Health Systems*+ 20,000 385,800
- ----------------------------------------------------------------------------------------------
INDUSTRIAL CHEMICALS, RESINS & LAMINATES - (1.4%)
Park Electrochemical Corp. 10,000 199,500
- ----------------------------------------------------------------------------------------------
MEDICAL DEVICES & SUPPLIES - (3.7%)
Medtronic, Inc. 3,000 143,910
Universal Health Services, Inc. Class B* 10,000 396,200
- ----------------------------------------------------------------------------------------------
540,110
- ----------------------------------------------------------------------------------------------
METALS & MINING - (1.7%)
Precision Castparts Corp. 8,000 248,800
- ----------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
21
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Schedule of Investments (Unaudited) (Continued)
December 31, 2002
<Table>
<Caption>
Shares Value
- ----------------------------------------------------------------------------------------------
OIL/GAS EQUIPMENT & SERVICES - (3.5%)
Itron, Inc.* 10,000 $ 215,600
Varco International, Inc.* 15,000 294,000
- ----------------------------------------------------------------------------------------------
509,600
- ----------------------------------------------------------------------------------------------
OPTICAL COMPONENTS - (2.0%)
Newport Corp.*+ 6,000 88,800
Orbotech Ltd.*+ 12,000 199,560
- ----------------------------------------------------------------------------------------------
288,360
- ----------------------------------------------------------------------------------------------
SEMICONDUCTOR CAPITAL EQUIPMENT - (3.2%)
Form Factor, Inc.* 500 8,850
FSI International (PP)* 5,000 19,500
FSI International, Inc.* 45,000 175,500
Helix Technology Corp. 20,000 264,600
- ----------------------------------------------------------------------------------------------
468,450
- ----------------------------------------------------------------------------------------------
SEMICONDUCTOR MANUFACTURERS & COMMUNICATION DEVICES - (6.0%)
Synaptics, Inc.* 30,000 403,800
Taiwan Semiconductor Manufacturing Co. Ltd. ADR* 20,000 201,600
Xicor, Inc.*+ 42,500 266,475
- ----------------------------------------------------------------------------------------------
871,875
- ----------------------------------------------------------------------------------------------
SOFTWARE - (7.6%)
Documentum, Inc.* 7,500 147,525
Kronos, Inc.*+ 8,000 406,480
NetIQ Corp.*+ 20,000 309,200
Netscreen Technologies, Inc.* 5,000 112,750
Plumtree Software, Inc.* 30,000 123,000
- ----------------------------------------------------------------------------------------------
1,098,955
- ----------------------------------------------------------------------------------------------
SPECIALITY RETAILING & MANUFACTURING - (8.0%)
Brookstone, Inc.* 5,000 101,250
Pacific Sunwear of California, Inc.* 20,000 481,800
Petco Animal Supplies, Inc.* 15,000 326,100
Tiffany & Co. 7,500 245,100
- ----------------------------------------------------------------------------------------------
1,154,250
- ----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS SERVICE & EQUIPMENT - (1.4%)
Harris Corp.+ 7,000 210,350
- ----------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS & EQUIPMENT - (3.1%)
EMS Technologies, Inc.*+ 20,000 265,400
Motorola, Inc. 20,000 188,600
- ----------------------------------------------------------------------------------------------
454,000
- ----------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost $10,770,115) 11,860,520
- ----------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
22
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - (20.6%)
PNC Bank Money Market 1,540,737 $ 1,540,737
Provident Institutional Fund - Tempcash Portfolio 725,891 725,891
The RBB Sansom Street Money Market Portfolio 725,891 725,891
- ----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost $2,992,519) 2,992,519
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS - (102.3%) (Cost $13,762,634) 14,853,039
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
NAME/EXPIRATION DATE/STRIKE PRICE
- ----------------------------------------------------------------------------------------------
WARRANTS - (0.1%)
- ----------------------------------------------------------------------------------------------
ELECTRONICS & STORAGE - (0.1%)
Datalink Corp, May 07, $4.50* 4,000 8,931
- ----------------------------------------------------------------------------------------------
ELECTRONICS, ELECTRICAL EQUIPMENT, &
INSTRUMENTATION - (0.0%)
Robotic Vision Systems, Inc., May 05, $1.50* 20,676 574
- ----------------------------------------------------------------------------------------------
TOTAL WARRANTS PURCHASED (Cost $11,591) 9,505
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS AND WARRANTS PURCHASED - (102.4%) 14,862,544
- ----------------------------------------------------------------------------------------------
Total Securities Sold Short - (-6.8%) (980,493)
- ----------------------------------------------------------------------------------------------
Assets, Less Other Liabilities - (4.4%) 629,990
- ----------------------------------------------------------------------------------------------
NET ASSETS - (100.0%) $14,512,041
- ----------------------------------------------------------------------------------------------
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
PPPrivate Placement
See accompanying notes to financial statements.
23
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Schedule of Securities Sold Short (Unaudited)
June 30, 2003
<Table>
<Caption>
Shares Value
- ------------------------------------------------------------------------------------------
SECURITIES SOLD SHORT - (-6.8%)
- ------------------------------------------------------------------------------------------
MANUFACTURING & INDUSTRIAL EQUIPMENT - (-0.5%)
Harley-Davidson, Inc. 2,000 $ 79,720
- ------------------------------------------------------------------------------------------
SEMICONDUCTOR CAPITAL EQUIPMENT - (-1.6%)
Cabot Microelectronics* 2,000 100,940
Rudolph Technologies, Inc.* 8,000 127,680
- ------------------------------------------------------------------------------------------
228,620
- ------------------------------------------------------------------------------------------
SOFTWARE - (-3.6%)
Avid Technology* 1,900 66,633
Eresearch Technology, Inc.* 15,000 332,400
Mercury Interactive Corp.* 2,000 77,220
Serena Software, Inc.* 2,000 41,760
- ------------------------------------------------------------------------------------------
518,013
- ------------------------------------------------------------------------------------------
SPECIALITY RETAILING & MANUFACTURING - (-1.1%)
Kohl's Corp.* 3,000 154,140
- ------------------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT (Proceeds $814,136) 980,493
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT - (-6.8%) (980,493)
- ------------------------------------------------------------------------------------------
Total Investments - (102.4%) 14,862,544
- ------------------------------------------------------------------------------------------
Assets, Less Other Liabilities - (4.4%) 629,990
- ------------------------------------------------------------------------------------------
NET ASSETS - (100.0%) $14,512,041
- ------------------------------------------------------------------------------------------
</Table>
* Non-income producing security.
See accompanying notes to financial statements.
24
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Schedule of Investments (Unaudited)
June 30, 2003
<Table>
<Caption>
Shares Value
- ----------------------------------------------------------------------------------------------
COMMON STOCK - (74.1%)
- ----------------------------------------------------------------------------------------------
BIOTECH & PHARMACEUTICALS - (3.7%)
Eon Labs Inc.* 3,000 $ 105,450
First Horizon Pharmaceutical* 35,000 138,250
- ----------------------------------------------------------------------------------------------
243,700
- ----------------------------------------------------------------------------------------------
BUSINESS SERVICES - (2.6%)
Information Holdings, Inc.* 1,500 27,375
Sitel Corp.* 90,000 139,500
- ----------------------------------------------------------------------------------------------
166,875
- ----------------------------------------------------------------------------------------------
CONTRACT MANUFACTURING & MATERIALS - (4.8%)
Parlex Corp.*+ 2,500 19,228
Pemstar, Inc.* 70,000 293,300
- ----------------------------------------------------------------------------------------------
312,528
- ----------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS & DISTRIBUTION - (0.0%)
BTU International, Inc.*+ 1,600 2,976
- ----------------------------------------------------------------------------------------------
ELECTRONICS & STORAGE - (5.4%)
Datalink Corporation* 30,000 140,100
Dataram Corp.* 40,000 122,080
Seagate Technology Holdings 5,000 88,250
- ----------------------------------------------------------------------------------------------
350,430
- ----------------------------------------------------------------------------------------------
ELECTRONICS, ELECTRICAL EQUIPMENT, &
INSTRUMENTATION - (1.4%)
Cognex Corp.* 4,000 89,400
- ----------------------------------------------------------------------------------------------
EXPLORATION, PRODUCTION, REFINING & STORAGE - (1.7%)
Chesapeake Energy Corp. 11,000 111,100
- ----------------------------------------------------------------------------------------------
FINANCIAL SERVICES - (1.6%)
Brantley Capital Corp.*+ 12,500 105,500
- ----------------------------------------------------------------------------------------------
GOVERNMENT IT - (2.5%)
PEC Solutions, Inc.* 10,000 161,000
- ----------------------------------------------------------------------------------------------
HOMEBUILDERS - (3.2%)
Hovanian Enterprises* 3,500 206,325
- ----------------------------------------------------------------------------------------------
HOSPITAL & PHYSICIAN MANAGEMENT - (1.4%)
Vitalworks Inc.* 22,500 88,875
- ----------------------------------------------------------------------------------------------
INDUSTRIAL CHEMICALS, RESINS & LAMINATES - (0.7%)
Southwall Technologies, Inc.* 35,000 43,400
- ----------------------------------------------------------------------------------------------
MANUFACTURING & INDUSTRIAL EQUIPMENT - (7.4%)
Ceradyne, Inc.* 15,000 280,950
Intevac, Inc.* 15,000 100,800
Sypris Solutions Inc. 10,000 103,300
- ----------------------------------------------------------------------------------------------
485,050
- ----------------------------------------------------------------------------------------------
MEDICAL DEVICES & SUPPLIES - (9.6%)
Cantel Medical Corp.* 10,000 134,200
ConMED Corp.*+ 7,500 136,950
Exactech Inc.* 7,500 108,000
Thermo Electron Corp.*+ 5,500 115,610
Zoll Medical Corp.* 4,000 134,240
- ----------------------------------------------------------------------------------------------
629,000
- ----------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
25
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Schedule of Investments (Unaudited) (Continued)
June 30, 2003
<Table>
<Caption>
Shares Value
- ----------------------------------------------------------------------------------------------
OPTICAL COMPONENTS - (2.0%)
Agere Systems Inc. - Class A* 25,000 $ 58,250
Agere Systems Inc. - Class B* 30,000 69,000
- ----------------------------------------------------------------------------------------------
127,250
- ----------------------------------------------------------------------------------------------
SEMICONDUCTOR CAPITAL EQUIPMENT - (7.4%)
3Com Corp.* 10,000 46,800
Brooks Automation Inc.* 10,500 119,070
FSI International, Inc.* 35,000 136,500
MKS Instruments, Inc.* 10,000 180,700
- ----------------------------------------------------------------------------------------------
483,070
- ----------------------------------------------------------------------------------------------
SEMICONDUCTOR MANUFACTURERS & COMMUNICATION DEVICES - (2.3%)
Standard Microsystems Corp.* 10,000 151,700
- ----------------------------------------------------------------------------------------------
SOFTWARE - (3.1%)
Mobius Management Systems, Inc.* 7,000 52,290
National Instruments Corp.* 2,500 94,450
Pervasive Software, Inc.* 10,000 53,500
- ----------------------------------------------------------------------------------------------
200,240
- ----------------------------------------------------------------------------------------------
SPECIALITY RETAILING & MANUFACTURING - (2.3%)
Barbeques Galore Limited 6,000 16,290
Rockford Corp.* 9,100 51,779
Sturm Ruger & Co., Inc. 8,000 80,000
- ----------------------------------------------------------------------------------------------
148,069
- ----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS SERVICE & EQUIPMENT - (3.8%)
ADC Telecommunications, Inc.* 15,000 34,920
LCC International Inc.* 25,000 68,500
Mobility Electronics, Inc.* 35,000 141,750
- ----------------------------------------------------------------------------------------------
245,170
- ----------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS & EQUIPMENT - (7.2%)
Anaren Microwave, Inc.* 8,960 83,955
Remec, Inc.*+ 40,000 278,400
Tessco Technologies, Inc.* 15,000 103,500
- ----------------------------------------------------------------------------------------------
465,855
- ----------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost $3,720,406) 4,817,513
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - (21.5%)
PNC Bank Money Market 763,064 763,064
Provident Institutional Fund - Tempcash Portfolio 318,499 318,499
The RBB Sansom Street Money Market Portfolio 318,499 318,499
- ----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,400,062) 1,400,062
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS - (95.6%) 6,217,575
- ----------------------------------------------------------------------------------------------
Total Securities Sold Short - (-3.7%) (242,625)
Assets, Less Other Liabilities - (8.1%) 528,334
- ----------------------------------------------------------------------------------------------
NET ASSETS - (100.0%) $6,503,284
- ----------------------------------------------------------------------------------------------
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
PP Private placement
See accompanying notes to financial statements.
26
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Schedule of Securities Sold Short (Unaudited)
June 30, 2003
<Table>
<Caption>
Shares Value
- -----------------------------------------------------------------------------------------
SECURITIES SOLD SHORT - (-3.7%)
- -----------------------------------------------------------------------------------------
EDA/CAD - CAM/INTELLECTUAL PROPERTY - (-0.5%)
Synopsys, Inc.* 500 $ 30,925
- -----------------------------------------------------------------------------------------
MANUFACTURING & INDUSTRIAL EQUIPMENT - (-0.7%)
Stratasys Inc.* 1,000 35,170
Transact Technologies Inc.* 1,000 12,130
- -----------------------------------------------------------------------------------------
47,300
- -----------------------------------------------------------------------------------------
NETWORKING & COMMUNICATIONS EQUIPMENT - (-0.4%)
Juniper Networks, Inc.* 2,000 24,740
- -----------------------------------------------------------------------------------------
SEMICONDUCTOR CAPITAL EQUIPMENT - (-1.1%)
Cabot Microelectronics* 1,000 50,470
Rudolph Technologies Inc.* 1,500 23,940
- -----------------------------------------------------------------------------------------
74,410
- -----------------------------------------------------------------------------------------
SEMICONDUCTOR MANUFACTURERS & COMMUNICATION
DEVICES - (-0.4%)
Silicon Laboratories, Inc.* 1,000 26,640
- -----------------------------------------------------------------------------------------
SOFTWARE - (-0.6%)
Mercury Interactive Corp.* 1,000 38,610
- -----------------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT (Proceeds $230,708) 242,625
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT - (-3.7%) (242,625)
- -----------------------------------------------------------------------------------------
Total Investments - (95.6%) 6,217,575
- -----------------------------------------------------------------------------------------
Assets, Less Other Liabilities - (8.1%) 528,334
- -----------------------------------------------------------------------------------------
NET ASSETS - (100.0%) $6,503,284
- -----------------------------------------------------------------------------------------
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated account
as collateral for securities sold short.
PPPrivate placement
See accompanying notes to financial statements.
27
Needham Funds
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities (Unaudited)
June 30, 2003
<Table>
<Caption>
NEEDHAM NEEDHAM
NEEDHAM AGGRESSIVE SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND
- ---------------------------------------------------------------------------------------------------
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments, at Value (Cost $302,131,480,
$13,762,634 and $5,120,468, respectively) $301,102,015 $14,853,039 $6,217,575
Option and Warrant Contracts Purchased, at
Value (Cost $2,139,027 and $11,591,
respectively) 377,486 9,505 --
Receivables:
Dividends and Interest 638,725 2,355 1,123
Investment Securities Sold 31,430,610 814,136 386,031
Fund Shares Sold 484,964 -- 137,857
Due from Adviser -- -- 52,180
Prepaid Expenses and Other Assets 24,628 7,393 10,883
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS 334,058,428 15,686,428 6,805,649
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Securities Sold Short, at Value (Proceeds
$30,419,653, $814,136 and $230,708,
respectively) 34,764,795 980,493 242,625
Option Contracts Written, at Value (Proceeds
$158,745) 10,000 -- --
Payables:
Investment Securities Purchased 809,572 136,200 --
Fund Shares Redeemed 1,246,354 -- 20,000
Due to Adviser 870,433 13,442 --
Accrued Expenses and Other Liabilities 305,475 44,252 39,740
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 38,006,629 1,174,387 302,365
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
NET ASSETS $296,051,799 $14,512,041 $6,503,284
- ---------------------------------------------------------------------------------------------------
Shares Outstanding $.001 Par Value
(Authorized 800,000,000, 100,000,000 and
100,000,000, respectively) 12,347,816 1,430,314 500,362
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE $23.98 $10.15 $13.00
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
COMPONENTS OF NET ASSETS
- ---------------------------------------------------------------------------------------------------
Paid-in Capital $361,728,946 $15,006,291 $5,519,137
Accumulated Net Realized Loss (58,689,744) (1,416,212) (101,043)
Net Unrealized Appreciation (Depreciation) of
Investment Securities (6,987,403) 921,962 1,085,190
- ---------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $296,051,799 $14,512,041 $6,503,284
- ---------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
28
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
Statements of Operations (Unaudited)
For the Six Months Ended June 30, 2003
<Table>
<Caption>
NEEDHAM NEEDHAM
NEEDHAM AGGRESSIVE SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND
- ---------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- ---------------------------------------------------------------------------------------------------
Interest $ 74,829 $ 10,524 $ 1,484
Dividends 770,629 12,001 5,585
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 845,458 22,525 7,069
- ---------------------------------------------------------------------------------------------------
EXPENSES
- ---------------------------------------------------------------------------------------------------
Investment Advisory Fees 1,696,256 85,960 28,621
Distribution Fees 339,523 17,184 5,743
Administration and Accounting Fees 126,570 42,498 38,249
Custodian Fees 37,014 11,827 11,233
Legal Fees 34,711 18,624 14,876
Shareholder's Reports 39,174 1,507 887
Directors Fees 12,894 646 208
Transfer Agent Fees 15,000 15,000 13,500
Audit Fees 22,810 16,859 14,876
Filing Fees 19,640 7,599 4,246
Insurance Expense 3,880 350 125
Other Expenses 93,567 9,641 5,498
- ---------------------------------------------------------------------------------------------------
TOTAL EXPENSES 2,441,039 227,695 138,062
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
LESS: FEES WAIVED AND/OR EXPENSES REIMBURSED -- (55,772) (80,801)
- ---------------------------------------------------------------------------------------------------
NET EXPENSES 2,441,039 171,923 57,261
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (1,595,581) (149,398) (50,192)
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT SECURITIES
- ---------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investment Securities (8,084,026) (1,101,710) 133,843
Net Realized Loss on Options (5,940,155) -- --
Change in Unrealized Appreciation of Investment
Securities and Option Contracts 66,510,607 2,757,646 1,044,300
- ---------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENT SECURITIES 52,486,426 1,655,936 1,178,143
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $50,890,845 $1,506,538 $ 1,127,951
- ---------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
29
Needham Funds
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<Table>
<Caption>
NEEDHAM AGGRESSIVE NEEDHAM SMALL CAP
NEEDHAM GROWTH FUND GROWTH FUND GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------
Six Months Six Months Six Months
Ended Ended Ended May 22,
June 30, Year Ended June 30, Year Ended June 30, 2002 to
2003 December 31, 2003 December 31, 2003 December 31,
(Unaudited) 2002 (Unaudited) 2002 (Unaudited) 2002**
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET
ASSETS
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Loss $ (1,595,581) $ (3,495,249) $ (149,398) $ (279,802) $ (50,192) $ (44,995)
Net Realized Gain (Loss) on
Investment Securities (8,084,026) (20,889,349) (1,101,710) (303,671) 133,843 (234,886)
Net Realized Gain (Loss) on
Option Contracts (5,940,155) (12,040,211) -- -- -- --
Change in Unrealized
Appreciation (Depreciation)
of Investment Securities and
Option Contracts 66,510,607 (96,059,471) 2,757,646 (2,713,257) 1,044,300 40,890
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 50,890,845 (132,484,280) 1,506,538 (3,296,730) 1,127,951 (238,991)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- -- -- -- --
Net Short-Term Gains -- -- -- (331,791) -- --
Net Long-Term Gains -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
-- -- -- (331,791) -- --
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1):
- ------------------------------------------------------------------------------------------------------------------------
Shares Issued 55,500,432 287,588,143 149,813 7,278,012 3,182,992 6,613,950
Shares Issued in Reinvestment
of Distributions -- -- -- 326,978 -- --
Shares Redeemed (74,914,297) (238,916,071) (1,417,412) (2,881,089) (2,376,454) (1,806,164)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions (19,413,865) 48,672,071 (1,267,599) 4,723,901 806,538 4,807,786
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS 31,476,980 (83,812,208) 238,939 1,095,380 1,934,489 4,568,795
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Beginning of Period 264,574,819 348,387,027 14,273,102 13,177,722 4,568,795 --
End of Period $296,051,799 $ 264,574,819 $14,512,041 $14,273,102 $ 6,503,284 $ 4,568,795
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
(1) SHARES ISSUED AND REDEEMED:
- ------------------------------------------------------------------------------------------------------------------------
Number of Shares Issued 2,633,569 11,422,140 15,869 671,800 285,552 654,732
Number of Shares Reinvested -- -- -- 36,482 -- --
Number of Shares Redeemed (3,565,832) (10,682,668) (154,891) (312,737) (225,337) (214,584)
- ------------------------------------------------------------------------------------------------------------------------
(932,263) 739,472 (139,022) 395,545 60,215 440,148
- ------------------------------------------------------------------------------------------------------------------------
</Table>
**The Needham Small Cap Growth Fund commenced operations on May 22, 2002.
See accompanying notes to financial statements.
30
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Financial Highlights
<Table>
<Caption>
Six Months Ended Year Ended Year Ended Year Ended Year Ended Year Ended
(For a Share Outstanding June 30, 2003 December 31, December 31, December 31, December 31, December 31,
Throughout each Period) (Unaudited) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of
Period $ 19.92 $ 27.78 $ 24.77 $ 26.47 $ 17.27 $ 14.42
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.17) (0.25) (0.29) (0.12) (0.03) (0.30)
Net Realized and Unrealized
Gains (Losses) on
Securities 4.23 (7.61) 3.30 2.57 12.55 3.16
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations 4.06 (7.86) 3.01 2.45 12.52 2.86
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- -- -- -- -- (0.01)
Net Realized Gains -- -- -- (4.15) (3.32) --
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- -- (4.15) (3.32) (0.01)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 23.98 $ 19.92 $ 27.78 $ 24.77 $ 26.47 $ 17.27
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 20.38%# (28.29)% 12.15% 7.40% 79.72% 19.85%
- --------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period
(thousands) $296,052 $264,575 $348,387 $76,070 $42,144 $17,946
- --------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average
Net Assets 1.80%* 1.75% 1.87% 2.19% 2.50% 2.50%
Ratio of Expenses to Average
Net Assets (excluding
waivers and reimbursement
of expenses) 1.80%* 1.75% 1.87% 2.19% 2.84% 3.44%
Ratio of Net Investment
Income (Loss) to Average
Net Assets (1.18)%* (1.01)% (1.04)% (1.07)% (1.63)% (1.72)%
Ratio of Net Investment
Income (Loss) to Average
Net Assets (excluding
waivers and reimbursement
of expenses) (1.18)%* (1.01)% (1.04)% (1.07)% (1.97)% (2.66)%
Portfolio Turnover Rate 53%* 78% 150% 187% 145% 586%
</Table>
* Annualized.
# Non-annualized.
See accompanying notes to financial statements.
31
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Financial Highlights
<Table>
<Caption>
Six Months Ended Year Ended September 4, to
For a Share Outstanding June 30, 2003 December 31, December 31,
Throughout each Period (Unaudited) 2002 2001**
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 9.09 $ 11.23 $ 10.00
- ----------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.10) (0.17) (0.03)
Net Realized and Unrealized Gains (Losses) on Securities 1.16 (1.76) 1.26
- ----------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.06 (1.93) 1.23
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------------------
Net Investment Income -- -- --
Net Realized Gains -- (0.21) --
- ----------------------------------------------------------------------------------------------------------------
Total Distributions -- (0.21) --
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.15 $ 9.09 $ 11.23
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
TOTAL RETURN 11.66%# (17.15)% 12.30%#
- ----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $14,512 $14,273 $13,178
- ----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.50%* 2.50% 2.50%*
Ratio of Expenses to Average Net Assets (excluding waivers
and reimbursement of expenses) 3.31%* 2.77% 4.05%*
Ratio of Net Investment Income (Loss) to Average Net Assets (2.17)%* (1.76)% (1.23)%*
Ratio of Net Investment Income (Loss) to Average Net Assets
(excluding waivers and reimbursement of expenses) (2.98)%* (2.03)% (2.78)%*
Portfolio Turnover Rate 75%* 58% 45%*
</Table>
* Annualized.
# Non-annualized.
**The Needham Aggressive Growth Fund commenced operations on September 4, 2001.
See accompanying notes to financial statements.
32
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Financial Highlights
<Table>
<Caption>
Six Months Ended May 22 to
For a Share Outstanding June 30, 2003 December 31,
Throughout each Period (Unaudited) 2002**
- ----------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.38 $10.00
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.09) (0.28)
Net Realized and Unrealized Gains (Losses) on Securities 2.71 0.66
- ----------------------------------------------------------------------------------------------------
Total from Investment Operations 2.62 0.38
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------
Net Investment Income -- --
Net Realized Gains -- --
- ----------------------------------------------------------------------------------------------------
Total Distributions -- --
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.00 $10.38
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN 25.24%# 3.80%#
- ----------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $6,503 $4,569
- ----------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.50%* 2.50%*
Ratio of Expenses to Average Net Assets
(excluding waivers and reimbursement of expenses) 6.03%* 6.06%*
Ratio of Net Investment Income (Loss) to Average Net Assets (2.19)%* (2.04)%*
Ratio of Net Investment Income (Loss) to Average Net Assets
(excluding waivers and reimbursement of expenses) (5.72)%* (5.60)%*
Portfolio Turnover Rate 126%* 107%*
</Table>
* Annualized.
# Non-annualized.
**The Needham Small Cap Growth Fund commenced operations on May 22, 2002.
See accompanying notes to financial statements.
33
Needham Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (Unaudited)
1. ORGANIZATION
Needham Growth Fund ("NGF"), Needham Aggressive Growth Fund ("NAGF"), and
Needham Small Cap Growth Fund ("NSCGF") or ("the Portfolios"), are portfolios of
The Needham Funds, Inc. (the "Fund"), which is registered under the Investment
Company Act of 1940 as a non-diversified, open-end management investment
company. The Needham Funds, Inc. was organized as a Maryland corporation on
October 12, 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation: Investments in securities (including options) listed or
traded on a nationally recognized securities exchange are valued at the last
quoted sales price on the date the valuations are made. Effective May 5, 2003,
securities regularly traded in the over-the-counter market are valued at the
NASDAQ Official Closing Price ("NOCP"). If no sales price or NOCP is available
for a listed or NASDAQ security, or if the security is not listed on NASDAQ,
such security is valued at a price equal to the mean of the latest bid and ask
prices. All other securities and assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Fund's
Board of Directors.
Other: Security transactions are accounted for on the date the securities are
purchased or sold. The cost (proceeds) of investments sold (bought to cover) are
determined on a specific identification basis for the purpose of determining
gains or losses on sales and buys to cover on short positions. Dividend income
and distributions to shareholders are recorded on the ex-dividend date. Interest
income is recorded on an accrual basis.
Use of Estimates: The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates and those differences could be material.
3. INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
The Fund has engaged Needham Investment Management L.L.C. (the "Adviser") to
manage its investments. The Fund pays the Adviser a fee at the annual rate of
1.25% of the average daily net asset value of each Portfolio.
The Adviser has voluntarily agreed to waive its fee for, and to reimburse
expenses of, the Fund in an amount that operates to limit annual operating
expenses for the six months ended June 30, 2003 to not more than 2.50% of
average daily net assets. For the six months ended June 30, 2003, the Adviser
waived advisory fees in the amount of $55,772 and $28,621 for NAGF and NSCGF,
respectively. The Adviser waived none of its fees for NGF during the six months
ended June 30, 2003. During the six months ended June 30, 2003, the Adviser also
reimbursed NSCGF for expenses in the amount of $52,180.
PFPC Inc. ("PFPC") acts as the Fund's Administrator. The Fund pays PFPC a fee at
the annual rate of 0.10% of the average daily net asset value of the Fund,
subject to certain minimums. PFPC also acts as the Fund's shareholder servicing
agent and transfer agent.
Certain officers and directors of the Fund are also officers and directors of
the Adviser.
4. FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and distribute substantially all of its taxable income and
capital gains to shareholders. Because income tax regulations differ from
accounting principles generally accepted in the United States of America, the
timing and character of income and capital gain distributions determined in
accordance with tax regulations can differ from income and capital gains
recognized for financial reporting purposes. Accordingly, the character of
distributions and the composition of net assets for tax purposes can differ from
those reflected in the financial statements.
34
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
Notes to Financial Statements (Unaudited) (Continued)
These book/tax differences may be temporary or permanent in nature. To the
extent these differences are permanent, they are charged or credited to paid-in
capital, accumulated net realized gain (loss) or accumulated net investment
income (loss), as appropriate, in the period the differences arise. These
reclassifications have no effect on net assets or net asset value per share.
The components of distributable earnings on a tax basis do not differ materially
from book basis distributable earnings, which are disclosed in the Statements of
Assets and Liabilities.
During the year ended December 31, 2002, NGF, NAGF and NSCGF each reclassified
the current year's accumulated net investment loss to paid-in capital, in the
amounts of $3,495,249, $279,802 and $44,995, respectively.
Capital losses after October 31 ("post-October losses") within the taxable year
are deemed to arise on the first business day of the Portfolios' next taxable
year. After October 31, 2002, NGF, NAGF and NSCGF incurred and will elect to
defer net capital losses in the approximate amounts of $3,864,000, $131,000, and
$181,000, respectively.
At June 30, 2003, gross unrealized appreciation and depreciation for federal
income tax purposes of investment securities was in the following approximate
amounts:
<Table>
<Caption>
Gross Gross
Unrealized Unrealized
Appreciation Depreciation Net
- ----------------------------------------------------------------
Needham Growth Fund $ 29,102,664 $(36,090,068) $(6,987,403)
Needham Aggressive
Growth Fund 1,376,648 (454,686) 921,962
Needham Small Cap
Growth Fund 1,161,542 (76,352) 1,085,190
- ----------------------------------------------------------------
</Table>
For federal income tax purposes, the Fund measures its capital loss
carryforwards annually at December 31, its fiscal year end. As of December 31,
2002, the Portfolios had capital loss carryforwards for federal income tax
purposes as follows:
<Table>
<Caption>
Expires on December 31,
- ---------------------------------------------------------------
2009 2010 Total
- ---------------------------------------------------------------
Needham Growth Fund $1,284,000 $39,319,000 $40,603,000
Needham Aggressive
Growth Fund -- 173,000 173,000
Needham Small Cap
Growth Fund -- 18,000 18,000
- ---------------------------------------------------------------
</Table>
No distributions were paid by the Fund during the six months ended June 30,
2003.
5. TEMPORARY BORROWINGS
The Fund has entered into an agreement with the Custodial Trust Company for
temporary borrowing purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Interest is
calculated daily based on the Federal Funds Rate plus one percent. The Fund may
borrow from banks up to 25% of its total assets and may pledge its assets in
connection with these borrowings, provided that no additional investments shall
be made while borrowings exceed 5% of total assets. During the six months ended
June 30, 2003, borrowings were as follows:
<Table>
<Caption>
Maximum
Weighted Weighted Amount
Average Average Number of Interest Borrowed
Interest Loan Days Expense During
Rate Balance Outstanding Incurred the Period
- ----------------------------------------------------------------------------------
Needham Growth Fund 2.26% $1,784,718 39 $4,303 $3,000,000
Needham Small Cap
Growth Fund
2.24% $ 214,706 17 228 400,000
- ----------------------------------------------------------------------------------
</Table>
NAGF did not have any borrowings during the six months ended June 30, 2003.
There were no outstanding borrowings by the Fund at June 30, 2003.
35
Needham Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (Unaudited) (Continued)
6. DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Under the plan, the Fund pays Needham & Company,
Inc. and any other distributor or financial institution with which the Fund has
an agreement, a fee at an annual rate of 0.25 of 1% of the Fund's daily average
net assets covered by each such agreement. For the six months ended June 30,
2003, NGF, NAGF and NSCGF incurred distribution fees in the amount of $339,523,
$17,184 and $5,743, respectively, a portion of which were paid to Needham &
Company, Inc.
7. INVESTMENT TRANSACTIONS
The following summarizes the aggregate amount of purchases and sales of
investment securities and securities sold short, excluding short-term
securities, during the six months ended June 30, 2003.
<Table>
Purchases Sales
- ---------------------------------------------------------
NEEDHAM GROWTH FUND
Long transactions $ 68,217,053 $143,458,332
Short sale transactions 214,125,741 200,888,596
- ---------------------------------------------------------
Total $282,342,794 $344,346,928
- ---------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH
FUND
Long transactions $ 4,082,854 $ 5,202,057
Short sale transactions 1,501,979 1,547,126
- ---------------------------------------------------------
Total $ 5,584,833 $ 6,749,183
- ---------------------------------------------------------
NEEDHAM SMALL CAP GROWTH
FUND
Long transactions $ 2,648,095 $ 3,236,790
Short sale transactions 748,477 762,757
- ---------------------------------------------------------
Total $ 3,396,572 $ 3,999,547
- ---------------------------------------------------------
</Table>
8. OPTION TRANSACTIONS
The Portfolios may write call and put options on securities they own or have the
right to acquire, and may purchase put and call options on individual securities
and indices written by others. Put and call options give the holder the right to
sell or purchase, respectively, a specified amount of a security at a specified
price on a certain date.
The Portfolios are subject to market risk associated with changes in the value
of the underlying financial instrument, as well as the risk of loss of
appreciation if a counterparty fails to perform. For exchange-traded contracts,
the exchange acts as the counterparty to specific transactions, and therefore,
bears the risk of delivery to and from counterparties of specific positions.
Put and call options purchased are accounted for in the same manner as portfolio
securities. The cost of securities acquired through the exercise of call options
is increased by the premium paid. The proceeds from securities sold through the
exercise of put options are decreased by the premiums paid. Options on stock
indices differ from options on securities in that the exercise of an option on a
stock index does not involve delivery of the actual underlying security and is
settled in cash only. Call and put options purchased at June 30, 2003 and their
related market values are included in the accompanying Schedules of Investments.
When a Portfolio writes an option, the premium received by the Portfolio is
recorded as a liability and is subsequently adjusted to the current market value
of the option written. Premiums received from writing options which have expired
are recorded by the Portfolio on the expiration date as realized gains from
option transactions. When a Portfolio enters into a closing purchase
transaction, the Portfolio realizes a gain or loss equal to the difference
between the cost of a closing purchase transaction and the premium received when
the option was written. If an option is exercised, the premium is added to the
proceeds from the sale of the underlying security in determining whether the
Portfolio has a realized gain or loss. In writing an option, the Portfolio bears
the market risk of an unfavorable change in the price of the security underlying
the written option.
A summary of options written by NGF for the six months ended June 30, 2003 is as
follows:
<Table>
<Caption>
Number of Premium
Options Written Contracts Received
- --------------------------------------------------------
Options outstanding at beginning
of period 4,087 $1,099,498
Options written -- --
Options repurchased (2,337) (685,019)
Options expired (1,000) (167,995)
Options exercised (250) (87,739)
- --------------------------------------------------------
Options outstanding at June 30,
2003 500 $ 158,745
- --------------------------------------------------------
</Table>
36
SEMIANNUAL REPORT 2003
- --------------------------------------------------------------------------------
Notes to Financial Statements (Unaudited) (Continued)
9. SHORT SALE TRANSACTIONS
During the six months ended June 30, 2003, the Portfolios sold securities short.
An equivalent amount of securities owned by the Portfolios are segregated as
collateral while the short sales are outstanding. At June 30, 2003, the market
value of securities separately segregated to cover short positions was
approximately $103,176,000, $2,856,000 and $385,000 for NGF, NAGF and NSCGF,
respectively. For financial statement purposes, an amount equal to the
settlement amount is included in the accompanying Statements of Assets and
Liabilities as an asset and an equivalent liability. The amount of the liability
is subsequently marked- to-market to reflect the current value of the short
position. Securities sold short at June 30, 2003 and their related market values
and proceeds are set forth in the accompanying Schedules of Securities Sold
Short.
10. FINANCIAL INSTRUMENTS
The Fund has always maintained a policy of valuing its securities positions and
derivative instruments at market values or estimated fair values and of
including any realized gains or losses in income.
In the normal course of its business, the Portfolios may trade various financial
instruments with off-balance sheet risk. These financial instruments include
securities sold short and exchange traded options. Generally, these financial
instruments represent future commitments to purchase or sell other financial
instruments at specific terms at specified future dates. Each of these financial
instruments contains varying degrees of off-balance sheet risk whereby changes
in the market values of the securities underlying the financial instruments may
be in excess of the amounts recognized in the financial statements.
Securities sold short represent obligations of the Portfolios to make future
delivery of specific securities and, correspondingly, create an obligation to
purchase the securities at market prices prevailing at the later delivery date
(or to deliver the securities if already owned by the Portfolios). As a result,
short sales create the risk that the Portfolios' ultimate obligation to satisfy
the delivery requirements may exceed the amount of the proceeds initially
received on the liability recorded in the financial statements.
37
[PHOTO OF VINCENT E. GALLAGHER] [PHOTO OF JAMES K. KLOPPENBURG]
VINCENT E. GALLAGHER JAMES K. KLOPPENBURG
Needham Growth Fund Needham Growth Fund
Needham Small Cap Growth Fund Needham Aggressive Growth Fund
Your Portfolio Managers At Needham
[NEEDHAM FUNDS GRAPHIC]
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
Investment Adviser:
Needham Investment Management L.L.C.
445 Park Avenue
New York, NY 10022-2606
President
John C. Michaelson
Executive Vice Presidents
and Portfolio Managers
Vincent E. Gallagher
Needham Growth Fund
Needham Small Cap Growth Fund
James K. Kloppenburg
Needham Growth Fund
Needham Aggressive Growth Fund
Directors
George A. Needham
John C. Michaelson
Roger W. Johnson
James P. Poitras
F. Randall Smith
Distributor:
Needham & Company, Inc.
445 Park Avenue
New York, NY 10022-2606
212-371-8300
Administrator, Shareholder Servicing
Agent and Transfer Agent:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
1-800-625-7071
Custodian:
PFPC Trust Company
8800 Tinicum Boulevard
3rd Floor Suite 200
Philadelphia, PA 19153
Counsel:
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103
Independent Accountants:
Ernst & Young LLP
5 Times Square
New York, NY 10036
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. (RESERVED)
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. (RESERVED)
ITEM 9. CONTROLS AND PROCEDURES.
(a) The certifying officers, whose certifications are included
herewith, have evaluated the registrant's disclosure controls and procedures
within 90 days of the filing date of this report. In their opinion, based on
their evaluation, the registrant's disclosure controls and procedures are
adequately designed, and are operating effectively to ensure, that material
information relating to the registrant is made known to them by others
particularly during the period in which this report is being prepared. Further,
in their opinion, the registrant's disclosure controls and procedures are
adequately designed, and are operating effectively to ensure, that information
required to be disclosed by the registrant in the reports it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) There were no significant changes in the registrant's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of our evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
ITEM 10. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a) Any code of ethics, or amendment thereto, that is the subject of
the disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit: Not applicable.
(b) Separate certifications for the principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2 under
the Investment Company Act of 1940, as amended (17 CFR 270.30a-2) are filed
herewith.
(c) Separate certifications for the principal executive officer and
principal financial officer of the registrant as required by Section 906 of the
Sarbanes-Oxley Act of 2002 are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
The Needham Funds, Inc.
By: /s/ John C. Michaelson
----------------------------------------
Name: John C. Michaelson
Title: President (Principal Executive
Officer)
Date: September 4, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ John C. Michaelson
-------------------------------
Name: John C. Michaelson
Title: President (Principal Executive
Officer)
Date: September 4, 2003
By: /s/ Glen W. Albanese
-------------------------------
Name: Glen W. Albanese
Title: Treasurer and Secretary
(Principal Financial and
Accounting Officer)
Date: September 4, 2003