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 811-04719 --------- The Westwood Funds --------------------------------------------------------- (Exact name of registrant as specified in charter) One Corporate Center Rye, New York 10580-1422 --------------------------------------------------------- (Address of principal executive offices) (Zip code) Bruce N. Alpert Gabelli Funds, LLC One Corporate Center Rye, New York 10580-1422 --------------------------------------------------------- (Name and address of agent for service) registrant's telephone number, including area code: 1-800-422-3554 -------------- Date of fiscal year end: September 30 ------------ Date of reporting period: September 30, 2006 ------------------ Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Report to Shareholders is attached herewith. THE WESTWOOD FUNDS ================== (UNAUDITED) EQUITY FUND SMALLCAP EQUITY FUND BALANCED FUND INCOME FUND INTERMEDIATE BOND FUND MIGHTY MITES(SM) FUND CLASS AAA SHARES CLASS A SHARES --------------------------------------------------- ------------------------------------------------------ Average Annual Returns -- September 30, 2006 (a)(e) Average Annual Returns -- September 30, 2006 (a)(b)(e) Since Since 1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception ------------------------------------- ----------------------------------------- Equity .............13.39% 9.43% 10.14% 12.01% 8.59% 8.23% 9.40% 11.57% Balanced ........... 9.77 7.79 8.73 10.48 5.13 6.67 8.02 9.88 Intermediate Bond .. 2.72 3.58 5.52 5.76 (1.53) 2.65 5.04 5.44 SmallCap Equity ....10.81 7.14 N/A 7.41 6.24 6.17 N/A 6.90 Income ............. 3.40 15.87 N/A 10.48 (1.75) 14.46 N/A 9.73 Mighty Mites(SM) ... 8.96 13.08 N/A 13.43 4.34 11.95 N/A 12.72 CLASS B SHARES CLASS C SHARES --------------------------------------------------- ------------------------------------------------------ Average Annual Returns -- September 30, 2006 (a)(c)(e) Average Annual Returns -- September 30, 2006 (a)(d)(e) Since Since 1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception ------------------------------------- ----------------------------------------- Equity ............. 7.60% 8.34% 9.60% 11.67% 11.56% 8.64% 9.59% 11.67% Balanced ........... 3.98 6.66 8.20 10.00 7.97 6.99 8.25 10.04 Intermediate Bond ..(3.05) 2.45 5.07 5.46 (1.34) 2.44 4.94 5.38 SmallCap Equity .... 5.06 6.07 N/A 6.97 9.12 6.20 N/A 6.91 Income .............(2.26) 14.98 N/A 10.13 1.75 15.35 N/A 10.20 Mighty Mites(SM) ... 3.13 11.99 N/A 12.89 7.10 12.22 N/A 12.90 (a) TOTAL RETURNS AND AVERAGE ANNUAL RETURNS REFLECT CHANGES IN SHARE PRICE AND REINVESTMENT OF DISTRIBUTIONS AND ARE NET OF EXPENSES. RETURNS REPRESENT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND THE PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE. WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR THE INTERMEDIATE BOND, SMALLCAP EQUITY, INCOME, AND MIGHTY MITES(SM) (THROUGH 09/30/05 FOR THE MIGHTY MITES(SM) FUND) FUNDS, THE ADVISER REIMBURSED EXPENSES TO LIMIT THE EXPENSE RATIO. HAD SUCH LIMITATIONS NOT BEEN IN PLACE, RETURNS WOULD HAVE BEEN LOWER. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA PRESENTED. VISIT WWW.GABELLI.COM FOR PERFORMANCE INFORMATION AS OF THE MOST RECENT MONTH END. INVESTORS SHOULD CAREFULLY CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE FUND BEFORE INVESTING. THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT THIS AND OTHER MATTERS AND SHOULD BE READ CAREFULLY BEFORE INVESTING. (b) INCLUDES THE EFFECT OF THE MAXIMUM 4.0% SALES CHARGE AT THE BEGINNING OF THE PERIOD. (c) PERFORMANCE RESULTS INCLUDE THE DEFERRED SALES CHARGES FOR THE CLASS B SHARES UPON REDEMPTION AT THE END OF THE ONE YEAR, FIVE YEAR, TEN YEAR, AND SINCE INCEPTION PERIODS OF 5%, 2%, 0%, AND 0%, RESPECTIVELY, OF THE FUND'S NAV AT THE TIME OF PURCHASE OR SALE WHICHEVER IS LOWER. (d) PERFORMANCE RESULTS INCLUDE THE DEFERRED SALES CHARGE FOR THE CLASS C SHARES UPON REDEMPTION AT THE END OF THE ONE YEAR PERIOD OF 1% OF THE FUND'S NAV AT THE TIME OF PURCHASE OR SALE WHICHEVER IS LOWER. (e) THE PERFORMANCE OF THE CLASS AAA SHARES IS USED TO CALCULATE PERFORMANCE FOR THE PERIODS PRIOR TO THE ISSUANCE OF CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES. THE PERFORMANCE FOR THE CLASS B SHARES AND CLASS C SHARES WOULD HAVE BEEN LOWER DUE TO THE ADDITIONAL EXPENSES ASSOCIATED WITH THESE CLASSES OF SHARES. THE INCEPTION DATES FOR THE CLASS AAA SHARES AND THE INITIAL ISSUANCE DATES FOR THE CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES AFTER WHICH SHARES REMAINED CONTINUOUSLY OUTSTANDING ARE LISTED BELOW. Class AAA Shares Class A Shares Class B Shares Class C Shares ---------------- -------------- -------------- -------------- Equity ......................... 01/02/87 01/28/94 03/27/01 02/13/01 Balanced ....................... 10/01/91 04/06/93 03/27/01 09/25/01 Intermediate Bond .............. 10/01/91 07/26/01 03/27/01 10/22/01 SmallCap Equity ................ 04/15/97 11/26/01 03/27/01 11/26/01 Income ......................... 09/30/97 05/09/01 11/26/01 11/26/01 Mighty Mites(SM) ............... 05/11/98 11/26/01 06/06/01 08/03/01 PERFORMANCE DISCUSSION EQUITY FUND For the twelve months ended September 30, 2006, the Westwood Equity Fund's Class AAA Shares posted a return of 13.39% and the Standard & Poor's ("S&P") 500 Index returned 10.78%. During the fiscal year, stock selection was largely responsible for strong outperformance of the S&P 500 Index by the Fund, led by Consumer Discretionary, Financial Services, and Technology stocks. Top performing consumer stocks included Federated Dept. Stores Inc. and Starwood Hotels & Resorts Worldwide Inc. Among the top 10 contributing stocks were Financial Services holdings JPMorgan Chase & Co., Bank of America Corp., Bear Stearns Cos., Lehman Brothers Holdings Inc., and Morgan Stanley. In the Technology sector, Motorola Inc. was the top contributor to Fund performance. Phelps Dodge Corp., a Materials & Processing holding engaged in the production of copper and molybdenum, contributed more to total return than any other stock for the fiscal year - a period that included marked price increases for many commodities in addition to copper, including silver, nickel, zinc, gold, and titanium. Contributing the least to Fund performance was the Energy sector, attributable largely to an overweight position in a sector that underperformed the index as a whole. Toward the end of the twelve months, multiple factors combined to produce a "perfect storm" that drove oil prices and energy stocks lower: (1) the economy showed signs of slowing, (2) Israel and Hezbollah adhered to a negotiated cease fire, and (3) there were no serious hurricanes. Specific energy holdings that were hit included ConocoPhillips and Apache Corp. The Fund still holds energy companies that we believe are attractively valued and positioned to both increase production and replace depleted reserves. - ----------------------------------------------------------------------------------------------------------------- Average Annual Returns Through September 30, 2006* (Unaudited) -------------------------------------------------------------- Since Inception 6 Months 1 Year 3 Year 5 Year 10 Year 15 Year (1/2/87) - ---------------------------------------------------------------------------------------------------------------- EQUITY FUND CLASS AAA ............. 4.95% 13.39% 17.14% 9.43% 10.14% 12.34% 12.01% S&P 500 Index ..................... 4.14 10.78 12.29 6.97 8.59 10.75 11.58 Lipper Large Cap Value Average .... 5.36 11.99 14.08 8.01 8.51 10.76 10.92 <FN> * RETURNS REPRESENT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS. TOTAL RETURNS AND AVERAGE ANNUAL RETURNS REFLECT CHANGES IN SHARE PRICE AND REINVESTMENT OF DISTRIBUTIONS AND ARE NET OF EXPENSES. INVESTMENT RETURNS AND THE PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE. WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA PRESENTED. VISIT WWW.GABELLI.COM FOR PERFORMANCE INFORMATION AS OF THE MOST RECENT MONTH END. INVESTORS SHOULD CAREFULLY CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE FUND BEFORE INVESTING. THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT THIS AND OTHER MATTERS AND SHOULD BE READ CAREFULLY BEFORE INVESTING. PERFORMANCE RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. SEE PAGE 1 FOR FURTHER DETAILS ABOUT ADDITIONAL CLASSES OF SHARES. THE S&P 500 INDEX IS AN UNMANAGED INDICATOR OF STOCK MARKET PERFORMANCE, WHILE THE LIPPER AVERAGE REFLECTS THE AVERAGE PERFORMANCE OF MUTUAL FUNDS CLASSIFIED IN THIS PARTICULAR CATEGORY. DIVIDENDS ARE CONSIDERED REINVESTED. </FN> - ----------------------------------------------------------------------------------------------------------------- 2 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE EQUITY FUND CLASS AAA AND THE S&P 500 INDEX (Unaudited) [GRAPHIC OMITTED] PLOT POINTS FOLLOW: Equity Fund (Class AAA) S&P 500 Index 1/2/87 $10,000 $10,000 9/87 13,148 13,585 9/88 11,779 11,902 9/89 15,323 15,823 9/90 13,700 14,361 9/91 16,386 18,826 9/92 17,068 20,905 9/93 20,509 23,616 9/94 22,384 24,485 9/95 28,170 31,760 9/96 35,742 38,213 9/97 49,899 53,663 9/98 49,185 58,536 9/99 58,909 74,803 9/00 70,273 84,729 9/01 59,809 62,183 9/02 50,754 49,454 9/03 58,413 61,506 9/04 68,974 70,030 9/05 82,796 78,609 9/06 93,883 87,083 - -------------------------------------------------------------------------------- Average Annual Total Return* - -------------------------------------------------------------------------------- 1 Year 5 Year 10 Year Life of Fund - -------------------------------------------------------------------------------- Class AAA 13.39% 9.43% 10.14% 12.01% - -------------------------------------------------------------------------------- * PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. The performance tables and graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. BALANCED FUND For the twelve months ended September 30, 2006, the Westwood Balanced Fund's Class AAA Shares posted a return of 9.77% while the balanced benchmark which is comprised of 60% S&P 500 Stock Index and 40% Lehman Brothers Government/Corporate Bond Index returned 7.80%. - ----------------------------------------------------------------------------------------------------------------- Average Annual Returns Through September 30, 2006* (Unaudited) -------------------------------------------------------------- Since Inception 6 Months 1 Year 3 Year 5 Year 10 Year (10/1/91) - ----------------------------------------------------------------------------------------------------------------- BALANCED FUND CLASS AAA ................. 4.08% 9.77% 11.29% 7.79% 8.73% 10.48% 60% S&P 500 and 40% Lehman Brothers Government/Corporate Bond Indices ..... 3.99 7.80 8.61 6.17 7.74 9.19 S&P 500 Index ........................... 4.14 10.78 12.29 6.97 8.59 10.75 Lehman Brothers Government/ Corporate Bond Index .................. 3.77 3.33 3.08 4.96 6.47 6.86 Lipper Mixed-Asset Target Allocation Moderate Fund .............. 2.67 7.33 8.81 6.61 6.48 8.38 <FN> * RETURNS REPRESENT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS. TOTAL RETURNS AND AVERAGE ANNUAL RETURNS REFLECT CHANGES IN SHARE PRICE AND REINVESTMENT OF DISTRIBUTIONS AND ARE NET OF EXPENSES. INVESTMENT RETURNS AND THE PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE. WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE FUND IS SUBJECT TO THE RISK THAT ITS ALLOCATION BETWEEN EQUITY AND DEBT SECURITIES MAY UNDERPERFORM OTHER ALLOCATIONS. INVESTING IN DEBT SECURITIES INVOLVES INTEREST RATE AND CREDIT RISKS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA PRESENTED. VISIT WWW.GABELLI.COM FOR PERFORMANCE INFORMATION AS OF THE MOST RECENT MONTH END. INVESTORS SHOULD CAREFULLY CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE FUND BEFORE INVESTING. THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT THIS AND OTHER MATTERS AND SHOULD BE READ CAREFULLY BEFORE INVESTING. PERFORMANCE RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. SEE PAGE 1 FOR FURTHER DETAILS ABOUT ADDITIONAL CLASSES OF SHARES. THE S&P 500 INDEX IS AN UNMANAGED INDICATOR OF STOCK MARKET PERFORMANCE AND THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX IS A MARKET VALUE WEIGHTED INDEX THAT TRACKS THE TOTAL RETURN PERFORMANCE OF FIXED RATE, PUBLICLY PLACED, DOLLAR DENOMINATED OBLIGATIONS. THE LIPPER AVERAGE REFLECTS THE AVERAGE PERFORMANCE OF MUTUAL FUNDS CLASSIFIED IN THIS PARTICULAR CATEGORY. DIVIDENDS ARE CONSIDERED REINVESTED. </FN> - ----------------------------------------------------------------------------------------------------------------- 3 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE BALANCED FUND CLASS AAA, THE S&P 500 INDEX, THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX, AND A COMPOSITE OF 60% OF THE S&P 500 INDEX AND 40% OF THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX (Unaudited) [GRAPHIC OMITTED] PLOT POINTS FOLLOW: 60% S&P 500 and 40% Lehman Brothers Lehman Brothers Balanced Fund Government/Corporate Government/Corporate (Class AAA) Bond Indices S&P 500 Index Bond Index 10/1/91 $10,000 $10,000 $10,000 $10,000 9/92 10,797 11,192 11,104 11,323 9/93 12,622 12,575 12,544 12,618 9/94 13,291 12,644 13,006 12,096 9/95 16,212 15,624 16,870 13,832 9/96 19,297 17,810 20,298 14,454 9/97 24,762 22,814 28,504 15,842 9/98 25,460 25,229 31,092 17,876 9/99 28,658 29,272 39,733 17,586 9/00 32,495 32,392 45,006 18,772 9/01 30,620 28,926 33,030 21,244 9/02 29,062 26,439 26,268 23,200 9/03 32,325 30,994 32,670 24,711 9/04 35,956 33,984 37,198 25,534 9/05 40,591 36,833 41,755 26,192 9/06 44,556 39,705 46,256 27,064 - -------------------------------------------------------------------------------- Average Annual Total Return* - -------------------------------------------------------------------------------- 1 Year 5 Year 10 Year Life of Fund - -------------------------------------------------------------------------------- Class AAA 9.77% 7.79% 8.73% 10.48% - -------------------------------------------------------------------------------- * PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. The performance tables and graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The Balanced Fund is designed to provide an investor exposure to equity like returns with reduced overall risk though simultaneous investments in short to intermediate term investment grade fixed income securities. Aside from the more moderate fixed income risk profile, strategies for and the contributors to the performance of the Equity and Intermediate Bond Funds, which are discussed elsewhere in this letter, also apply to their respective components of the Balanced Fund. INTERMEDIATE BOND FUND For the twelve months ended September 30, 2006, the Westwood Intermediate Bond Fund's Class AAA Shares posted, net of all fees and expenses, a return of 2.80% and the Lehman Brothers Government/Corporate Bond Index (LBG/C) returned 3.33% for the same period. Across the maturity spectrum, Treasury yields ended the fiscal year below 5%. However, unlike the start of the fiscal year, the yield curve was flatter, higher, and slightly inverted. Short maturity yields had followed Federal Funds higher from 3.5% to 4.9%; yields for maturities of 5 years and greater ended at 4.76% or below, on average 0.30% higher than at the beginning of the fiscal year. In terms of credit quality, returns of AAA- and AA-rated bonds exceed those of A- and Baa-rated credits. The Fund was positioned to benefit from rising short-term rates with a significant investment in shorter term notes that rolled over into higher coupon notes at maturity. In terms of sectors, just as Financial Services stocks were top performers in large cap stocks, Financial Institutions and U.S. Agency sectors outperformed other sectors in the LBG/C. The top contributing sector to fund performance was U.S. Agency Obligations, attributable to an overweight position and to stronger security selection. Also additive to fund performance were: (1) an overweight position in Financial Institutions notes, (2) management of the Industrial sector, with both an overweight position and stronger security selection than LBG/C, in combination with (3) the decision to invest in Mortgage Backed Securities, which outperformed all LBG/C sectors. The greatest detractor to performance was the U.S. Treasury sector. 4 Top contributing securities included a financial note (Goldman Sachs Group, 6.65%, due 05-15-09), a U.S. Agency note (Freddie Mac, 3.5%, due 09-15-07), and Industrial notes (Hewlett-Packard, 3.62%, due 03-15-08 and IBM Corp., 4.875%, due 10-01-06). - ----------------------------------------------------------------------------------------------------------------- Average Annual Returns Through September 30, 2006* (Unaudited) -------------------------------------------------------------- Since Inception 6 Months 1 Year 3 Year 5 Year 10 Year (10/1/91) - ----------------------------------------------------------------------------------------------------------------- INTERMEDIATE BOND FUND CLASS AAA .......... 2.99% 2.72% 2.12% 3.58% 5.52% 5.76% Lehman Brothers Government/ Corporate Bond Index ..................... 3.77 3.33 3.08 4.96 6.47 6.86 Lipper International Investment Grade Debt Fund Average ................. 3.30 3.15 2.99 4.24 5.66 6.45 <FN> * RETURNS REPRESENT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS. TOTAL RETURNS AND AVERAGE ANNUAL RETURNS REFLECT CHANGES IN SHARE PRICE AND REINVESTMENT OF DISTRIBUTIONS AND ARE NET OF EXPENSES. INVESTMENT RETURNS AND THE PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE. WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ADVISER REIMBURSED EXPENSES TO LIMIT THE EXPENSE RATIO. HAD SUCH LIMITATION NOT BEEN IN PLACE, RETURNS WOULD HAVE BEEN LOWER. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA PRESENTED. VISIT WWW.GABELLI.COM FOR PERFORMANCE INFORMATION AS OF THE MOST RECENT MONTH END. THE FUND IS SUBJECT TO INTEREST RATE AND CREDIT RISKS. INVESTORS SHOULD CAREFULLY CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE FUND BEFORE INVESTING. THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT THIS AND OTHER MATTERS AND SHOULD BE READ CAREFULLY BEFORE INVESTING. PERFORMANCE RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. SEE PAGE 1 FOR FURTHER DETAILS ABOUT ADDITIONAL CLASSES OF SHARES. THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX IS A MARKET VALUE WEIGHTED INDEX THAT TRACKS THE PERFORMANCE OF FIXED RATE, PUBLICLY PLACED, DOLLAR DENOMINATED OBLIGATIONS, WHILE THE LIPPER INTERNATIONAL AVERAGE REFLECTS THE AVERAGE PERFORMANCE OF MUTUAL FUNDS CLASSIFIED IN THIS PARTICULAR CATEGORY. DIVIDENDS ARE CONSIDERED REINVESTED. </FN> - ----------------------------------------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERMEDIATE BOND FUND CLASS AAA AND THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX (Unaudited) [GRAPHIC OMITTED] PLOT POINTS FOLLOW: Lehman Brothers Intermediate Bond Fund Government/Corporate (Class AAA) Bond Index 10/1/91 $10,000 $10,000 9/92 11,186 11,323 9/93 12,331 12,618 9/94 11,658 12,096 9/95 12,956 13,832 9/96 13,539 14,454 9/97 15,077 15,842 9/98 16,612 17,876 9/99 16,218 17,586 9/00 17,256 18,772 9/01 19,442 21,244 9/02 21,172 23,200 9/03 21,772 24,711 9/04 22,194 25,534 9/05 22,571 26,192 9/06 23,185 27,064 - -------------------------------------------------------------------------------- Average Annual Total Return* - -------------------------------------------------------------------------------- 1 Year 5 Year 10 Year Life of Fund - -------------------------------------------------------------------------------- Class AAA 2.72% 3.58% 5.52% 5.76% - -------------------------------------------------------------------------------- * PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. The performance tables and graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 5 SMALLCAP EQUITY FUND For the twelve months ended September 30, 2006, the Westwood SmallCap Equity Fund's Class AAA Shares produced a return of 10.81% versus the 9.92% return of the Russell 2000 Index. Titanium Metals Corp. and Oregon Steel, both in the Materials & Processing sector, were leading contributors to total return. Hotel related stocks Marcus Corp. and Orient Hotels Express in the Consumer Discretionary sector also materially contributed. Joining these four stocks in the top ten were Transportation holdings Horizon Lines Inc. and FreightCar America Inc., Producer Durables holding Thomas & Betts Corp., Real Estate Investment Trusts positions in Longview Fibre Co. and Post Properties Inc., and Technology stock Benchmark Electronics Inc. Symmetry Medical Inc., a Health Care holding, was the leading detractor, followed by BKF Capital Group Inc. in Financial Services, and Technical Olympic USA Inc. in Producer Durables. Related to the discussion in the Equity Fund, the SmallCap Fund's Energy sector detracted from performance, with an overweight position and lagging stock selection. Benefiting the fund was a significant underweight position in Health Care, the second lowest performer in the index. - ----------------------------------------------------------------------------------------------------------------- Average Annual Returns Through September 30, 2006* (Unaudited) -------------------------------------------------------------- Since Inception 6 Months 1 Year 3 Year 5 Year (4/15/97) - ----------------------------------------------------------------------------------------------------------------- SMALLCAP EQUITY FUND CLASS AAA ............... (3.99)% 10.81% 15.21% 7.14% 7.41% Russell 2000 Index ........................... (4.61) 9.92 15.48 13.78 9.70 Lipper Small Cap Core Average ................ (5.19) 7.55 15.46 13.51 9.62 <FN> * RETURNS REPRESENT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS. TOTAL RETURNS AND AVERAGE ANNUAL RETURNS REFLECT CHANGES IN SHARE PRICE AND REINVESTMENT OF DISTRIBUTIONS AND ARE NET OF EXPENSES. INVESTMENT RETURNS AND THE PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE. WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ADVISER REIMBURSED EXPENSES TO LIMIT THE EXPENSE RATIO. HAD SUCH LIMITATION NOT BEEN IN PLACE, RETURNS WOULD HAVE BEEN LOWER. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA PRESENTED. VISIT WWW.GABELLI.COM FOR PERFORMANCE INFORMATION AS OF THE MOST RECENT MONTH END. INVESTORS SHOULD CAREFULLY CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE FUND BEFORE INVESTING. THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT THIS AND OTHER MATTERS AND SHOULD BE READ CAREFULLY BEFORE INVESTING. PERFORMANCE RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. SEE PAGE 1 FOR FURTHER DETAILS ABOUT ADDITIONAL CLASSES OF SHARES. THE RUSSELL 2000 INDEX IS AN UNMANAGED INDICATOR OF STOCK MARKET PERFORMANCE, WHILE THE LIPPER AVERAGE REFLECTS THE AVERAGE PERFORMANCE OF MUTUAL FUNDS CLASSIFIED IN THIS PARTICULAR CATEGORY. INVESTING IN SMALL CAPITALIZATION SECURITIES INVOLVES SPECIAL RISKS BECAUSE THESE SECURITIES MAY TRADE LESS FREQUENTLY AND EXPERIENCE MORE ABRUPT PRICE MOVEMENTS THAN LARGE CAPITALIZATION SECURITIES. DIVIDENDS ARE CONSIDERED REINVESTED. </FN> - ----------------------------------------------------------------------------------------------------------------- 6 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE SMALLCAP EQUITY FUND CLASS AAA, THE RUSSELL 2000 INDEX, AND THE RUSSELL 2000 GROWTH INDEX (Unaudited) [GRAPHIC OMITTED] PLOT POINTS FOLLOW: SmallCap Equity Fund (Class AAA) Russell 2000 Index 4/15/97 $10,000 $10,000 9/30/97 14,480 13,410 9/30/98 11,923 10,859 9/30/99 18,950 12,930 9/30/00 24,512 15,955 9/30/01 13,930 12,571 9/30/02 11,777 11,402 9/30/03 12,861 15,563 9/30/04 14,276 18,484 9/30/05 17,751 21,825 9/30/06 19,670 23,990 - -------------------------------------------------------------------------------- Average Annual Total Return* - -------------------------------------------------------------------------------- 1 Year 5 Year 10 Year Life of Fund - -------------------------------------------------------------------------------- Class AAA 10.81% 15.21% 7.14% 7.41% - -------------------------------------------------------------------------------- * PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. The performance tables and graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. INCOME FUND For the twelve months ending September 30, 2006, the Westwood Income (formerly Realty) Fund's Class AAA Shares produced a return of 3.40%, net of all fees and expenses, versus the 10.44% return of a stock/bond blend comprised of a 25% blend of each of the 10 Year Treasury Note Index, the 3 Month Treasury Bill Index, the S&P 500 Index, and the NAREIT Composite REIT Index. The Westwood Income Fund was transitioning from a realty focus to a broader income focus during the first half of the fiscal year. For the year as a whole, the top contributing asset classes in the Fund were common stocks, government notes, preferred stocks, and convertible preferred securities. Common stocks in the fund outperformed the S&P 500 Index by a margin similar to that of the Equity Fund, led by Reddy Ice Holdings in the food industry. Preferred Stock top contributors to total return were issued by MetLife, Wells Fargo, and CBS Corp. Convertible preferred securities in the Fund far exceeded the performance of the comparable Lehman Brothers Index, led by Financial Services, Utilities, and Consumer Staples. Early in 2006, our ongoing assessment of U.S. capital markets pointed toward attractive risk adjusted return opportunities in very short bonds relative to stocks. At that time, Westwood added short term government notes to the Income Fund, a decision that markedly contributed to fiscal year total return. On a negative note, the REIT category was the greatest detractor to Fund total return. 7 - ----------------------------------------------------------------------------------------------------------------- Average Annual Returns Through September 30, 2006* (Unaudited) -------------------------------------------------------------- Since Inception 6 Months 1 Year 3 Year 5 Year (9/30/97) - ----------------------------------------------------------------------------------------------------------------- INCOME FUND CLASS AAA ........................ 2.58% 3.40% 16.52% 15.87% 10.48% Blended Index** .............................. 4.49 10.44 10.79 8.89 6.90 10 Year Treasury Note Index .................. 3.80 1.18 2.09 4.13 5.49 3 Month Treasury Bill Index .................. 2.50 4.50 2.73 2.30 3.63 S&P 500 Index ................................ 4.14 10.78 12.29 6.97 5.53 NAREIT Composite REIT Index .................. 7.53 25.29 26.04 22.17 12.93 Lipper Equity Income Fund Average ............ 5.31 11.74 14.18 8.30 6.59 <FN> * RETURNS REPRESENT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS. TOTAL RETURNS AND AVERAGE ANNUAL RETURNS REFLECT CHANGES IN SHARE PRICE AND REINVESTMENT OF DISTRIBUTIONS AND ARE NET OF EXPENSES. INVESTMENT RETURNS AND THE PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE. WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ADVISER REIMBURSED EXPENSES TO LIMIT THE EXPENSE RATIO. HAD SUCH LIMITATION NOT BEEN IN PLACE, RETURNS WOULD HAVE BEEN LOWER. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA PRESENTED. VISIT WWW.GABELLI.COM FOR PERFORMANCE INFORMATION AS OF THE MOST RECENT MONTH END. INVESTORS SHOULD CAREFULLY CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE FUND BEFORE INVESTING. THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT THIS AND OTHER MATTERS AND SHOULD BE READ CAREFULLY BEFORE INVESTING. PERFORMANCE RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. SEE PAGE 1 FOR FURTHER DETAILS ABOUT ADDITIONAL CLASSES OF SHARES. THE NAREIT INDEX IS AN UNMANAGED INDICATOR OF REITS MARKET PERFORMANCE, WHILE THE LIPPER AVERAGE REFLECTS THE AVERAGE PERFORMANCE OF MUTUAL FUNDS CLASSIFIED IN THIS PARTICULAR CATEGORY. INVESTING IN REAL ESTATE RELATED SECURITIES INVOLVES SPECIAL RISKS ASSOCIATED WITH GENERAL OR LOCAL ECONOMIC CONDITIONS, OVERBUILDING AND CHANGES IN ZONING, OR THAT THE REAL ESTATE MARKET WILL UNDERPERFORM THE STOCK MARKET GENERALLY. DIVIDENDS ARE CONSIDERED REINVESTED. **PLEASE NOTE THAT THE BLENDED INDEX CONSISTS OF A 25% BLEND OF EACH OF THE 10 YEAR TREASURY NOTE INDEX, THE 3 MONTH TREASURY BILL INDEX, THE S&P 500 INDEX, AND THE NAREIT COMPOSITE REIT INDEX. </FN> - ----------------------------------------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INCOME FUND CLASS AAA, THE S&P 500 INDEX, AND THE NATIONAL ASSOCIATION OF REITS COMPOSITE REIT INDEX (Unaudited) [GRAPHIC OMITTED] PLOT POINTS FOLLOW: 10 Year 3 Month NAREIT Lipper Equity Income Fund Blended Treasury Treasury S&P 500 Composite Income (Class AAA) Index Note Index Bill Index Index REIT Index Fund Average 9/30/97 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 9/30/98 8,950 10,252 11,860 10,536 10,908 8,646 10,332 9/30/99 8,442 10,998 11,046 11,034 13,939 8,088 11,654 9/30/00 10,541 11,356 11,616 11,672 15,789 9,754 12,779 9/30/01 11,741 12,443 13,213 12,308 11,588 10,980 12,030 9/30/02 12,622 12,777 14,896 12,553 9,216 11,918 10,044 9/30/03 15,503 12,717 15,205 12,719 11,461 14,924 12,068 9/30/04 18,986 14,888 15,682 12,859 13,050 18,739 14,142 9/30/05 23,718 16,697 15,992 13,196 14,649 23,851 16,114 9/30/06 24,524 17,620 16,180 13,790 16,228 29,882 18,015 - -------------------------------------------------------------------------------- Average Annual Total Return* - -------------------------------------------------------------------------------- 1 Year 3 Year 5 Year Life of Fund - -------------------------------------------------------------------------------- Class AAA 3.40% 16.52% 15.87% 10.48% - -------------------------------------------------------------------------------- * PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. The performance tables and graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. MIGHTY MITES(SM) FUND The Westwood Mighty Mites(SM) Fund's Class AAA Shares' total return for the twelve months ending September 30, 2006 was 8.96% versus the Russell 2000 Index, the Russell Microcap(TM) Index, and the Lipper Small Cap Value Average returns of 9.92%, 7.02%, and 8.14%, respectively. 8 The biggest contributors to performance were from a variety of industries, including financial services, alternative energy, nutrition and a special situation: o Epoch Holding Corp., a rapidly growing investment management company with assets under management increasing 132% in fiscal 2006. o Parish National Corp., a Louisiana-based bank that operates in upscale, rapidly growing geographical areas. o MGP Ingredients Inc., which develops and produces natural grain-based products including distillery products, a play on ethanol. o Schiff Nutrition International Inc., a vitamin and supplement company benefiting from the country's focus on health and wellness. o Net Perceptions, Inc., a company with no operations but substantial cash and net operating losses that agreed to acquire Concord Steel. The disappointments we encountered ranged from Media companies to Manufactured Housing and Information Technology: o Crown Media Holdings, owner of the Hallmark Channel, took itself off the block after not receiving satisfactory bids for the company. o PRIMEDIA Inc., a Media company that owns magazines and consumer guides, which lowered earnings guidance and announced management restructuring. o Beasley Broadcasting, a radio broadcaster with 2006 revenue deceleration greater than the broader industry. o Cavalier Homes Inc., a Manufactured Housing company that is cycling through non-recurring hurricane-related business with FEMA. o AMICAS Inc., a radiology image management company whose 2006 revenue growth was disappointing due to recent legislation regarding reimbursements to its customers. The cost of compliance with Sarbanes-Oxley (SOX) has weighed heavily on the smallest public companies, greatly increasing general and administrative expenses, and eating into management time. The good news is that, for many companies, the large upfront hit to expenses has been borne and the ongoing cost of SOX will be somewhat smaller. Another burden to profit margins has been the soaring costs of energy and health care. Although health care costs continue to rise, energy prices have begun to moderate, translating into lower overhead for corporations. The consumer is also benefiting, with the U.S. average retail price for regular gasoline around 25% lower than a year ago and lower utility bills at home. The economy continues along at a healthy pace. The Federal Reserve has not raised interest rates since June, and we have seen increases in the productivity of U.S. corporations, which will continue to help profit margins going forward. We believe these points provide a favorable environment for stocks. As always, we continue to seek out micro cap companies that will prosper in a good or poor economic environment. We do so by finding under-followed companies with excellent growth prospects, but with valuations that provide us with a margin of safety should progress moderate. 9 - ----------------------------------------------------------------------------------------------------------------- Average Annual Returns Through September 30, 2006* (Unaudited) -------------------------------------------------------------- Since Inception 6 Months 1 Year 3 Year 5 Year (5/11/98) - ----------------------------------------------------------------------------------------------------------------- MIGHTY MITES(SM) FUND CLASS AAA ............. 0.44% 8.96% 14.22% 13.08% 13.43% Russell 2000 Index .......................... (4.61) 9.92 15.48 13.78 6.39 Russell Microcap(TM) Index .................. (0.67) 7.02 12.87 15.90 --** Lipper Small Cap Value Average .............. (3.20) 8.14 16.59 15.46 9.07 <FN> * RETURNS REPRESENT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS. TOTAL RETURNS AND AVERAGE ANNUAL RETURNS REFLECT CHANGES IN SHARE PRICE AND REINVESTMENT OF DISTRIBUTIONS AND ARE NET OF EXPENSES. INVESTMENT RETURNS AND THE PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE. WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ADVISER REIMBURSED EXPENSES THROUGH 09/30/05 TO LIMIT THE EXPENSE RATIO. HAD SUCH LIMITATION NOT BEEN IN PLACE, RETURNS WOULD HAVE BEEN LOWER. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA PRESENTED. VISIT WWW.GABELLI.COM FOR PERFORMANCE INFORMATION AS OF THE MOST RECENT MONTH END. INVESTORS SHOULD CAREFULLY CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE FUND BEFORE INVESTING. THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT THIS AND OTHER MATTERS AND SHOULD BE READ CAREFULLY BEFORE INVESTING. PERFORMANCE RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. SEE PAGE 1 FOR FURTHER DETAILS ABOUT ADDITIONAL CLASSES OF SHARES. THE RUSSELL 2000 INDEX IS AN UNMANAGED INDICATOR OF STOCK MARKET PERFORMANCE. THE RUSSELL MICROCAP(TM) INDEX MEASURES THE PERFORMANCE OF THE MICROCAP SEGMENT, REPRESENTING LESS THAN 3% OF THE U.S. EQUITY MARKET. THE LIPPER AVERAGE REFLECTS THE AVERAGE PERFORMANCE OF MUTUAL FUNDS CLASSIFIED IN THIS PARTICULAR CATEGORY. INVESTING IN SMALL CAPITALIZATION SECURITIES INVOLVES SPECIAL RISKS BECAUSE THESE SECURITIES MAY TRADE LESS FREQUENTLY AND EXPERIENCE MORE ABRUPT PRICE MOVEMENTS THAN LARGE CAPITALIZATION SECURITIES. DIVIDENDS ARE CONSIDERED REINVESTED. ** INCEPTION DATE FOR THE RUSSELL MICROCAP(TM) INDEX IS JULY 1, 2000. </FN> - ----------------------------------------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE MIGHTY MITES(SM) FUND CLASS AAA AND THE RUSSELL 2000 INDEX (Unaudited) [GRAPHIC OMITTED] PLOT POINTS FOLLOW: Mighty Mites(SM) Fund Russell 2000 Russell Microcap (Class AAA) Index Index 5/11/98 $10,000 $10,000 $10,000 9/30/98 9,700 7,660 9/30/99 13,018 9,121 9/30/00 16,010 11,254 15,750 9/30/01 15,567 8,867 13,359 9/30/02 16,128 8,042 12,594 9/30/03 19,314 10,978 19,443 9/30/04 21,915 13,039 22,185 9/30/05 26,391 15,395 26,067 9/30/06 28,755 16,922 28,035 - -------------------------------------------------------------------------------- Average Annual Total Return* - -------------------------------------------------------------------------------- 1 Year 3 Year 5 Year Life of Fund - -------------------------------------------------------------------------------- Class AAA 8.96% 14.22% 13.08% 13.43% - -------------------------------------------------------------------------------- * PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. The performance tables and graph do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. **The Russell Microcap(TM) Index inception date is July 1, 2000 and the value of the Index prior to July 1, 2000 is that of the Mighty Mites(SM) Fund (Class AAA). - -------------------------------------------------------------------------------- We have separated the portfolio managers' commentary from the financial statements and investment portfolio due to corporate governance regulations stipulated by the Sarbanes-Oxley Act of 2002. We have done this to ensure that the content of the portfolio managers' commentary is unrestricted. The financial statements and investment portfolio are mailed separately from the commentary. Both the commentary and the financial statements, including the portfolio of investments, will be available on our website at www.gabelli.com/funds. - -------------------------------------------------------------------------------- 10 THE WESTWOOD FUNDS DISCLOSURE OF FUND EXPENSES (UNAUDITED) For the Six Month Period from April 1, 2006 through September 30, 2006 EXPENSE TABLE ================================================================================ We believe it is important for you to understand the impact of fees and expenses regarding your investment. All mutual funds have operating expenses. As a shareholder of a fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund's gross income, directly reduce the investment return of a fund. When a fund's expenses are expressed as a percentage of its average net assets, this figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your Fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period. The Expense Table below illustrates your Fund's costs in two ways: ACTUAL FUND RETURN: This section provides information about actual account values and actual expenses. You may use this section to help you to estimate the actual expenses that you paid over the period after any fee waivers and expense reimbursements. The "Ending Account Value" shown is derived from the Fund's ACTUAL return during the past six months, and the "Expenses Paid During Period" shows the dollar amount that would have been paid by an investor who started with $1,000 in the Fund. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your Fund under the heading "Expenses Paid During Period" to estimate the expenses you paid during this period. HYPOTHETICAL 5% RETURN: This section provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio. It assumes a hypothetical annualized return of 5% before expenses during the period shown. In this case - because the hypothetical return used is NOT the Fund's actual return - the results do not apply to your investment and you cannot use the hypothetical account value and expense to estimate the actual ending account balance or expenses you paid for the period. This example is useful in making comparisons of the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as sales charges (loads), redemption fees, or exchange fees, if any, which are described in the Prospectus. If these costs were applied to your account, your costs would be higher. Therefore, the 5% hypothetical return is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. The "Annualized Expense Ratio" represents the actual expenses for the last six months and may be different from the expense ratio in the Financial Highlights which is for the year ended September 30, 2006. Beginning Ending Annualized Expenses Account Value Account Value Expense Paid During 04/01/06 09/30/06 Ratio Period* - -------------------------------------------------------------------------------- WESTWOOD EQUITY FUND - -------------------------------------------------------------------------------- Actual Fund Return Class AAA $1,000.00 $1,049.50 1.49% $ 7.66 Class A $1,000.00 $1,048.00 1.74% $ 8.93 Class B $1,000.00 $1,045.00 2.24% $11.48 Class C $1,000.00 $1,045.90 2.24% $11.49 Hypothetical 5% Return Class AAA $1,000.00 $1,017.60 1.49% $ 7.54 Class A $1,000.00 $1,016.34 1.74% $ 8.80 Class B $1,000.00 $1,013.84 2.24% $11.31 Class C $1,000.00 $1,013.84 2.24% $11.31 11 THE WESTWOOD FUNDS DISCLOSURE OF FUND EXPENSES (CONTINUED) (UNAUDITED) For the Six Month Period from April 1, 2006 through September 30, 2006 EXPENSE TABLE ================================================================================ Beginning Ending Annualized Expenses Account Value Account Value Expense Paid During 04/01/06 09/30/06 Ratio Period* - -------------------------------------------------------------------------------- WESTWOOD BALANCED FUND - -------------------------------------------------------------------------------- Actual Fund Return Class AAA $1,000.00 $1,040.80 1.27% $ 6.50 Class A $1,000.00 $1,040.30 1.52% $ 7.77 Class B $1,000.00 $1,036.80 2.02% $10.31 Class C $1,000.00 $1,037.60 2.02% $10.32 Hypothetical 5% Return Class AAA $1,000.00 $1,018.70 1.27% $ 6.43 Class A $1,000.00 $1,017.45 1.52% $ 7.69 Class B $1,000.00 $1,014.94 2.02% $10.20 Class C $1,000.00 $1,014.94 2.02% $10.20 - -------------------------------------------------------------------------------- WESTWOOD INTERMEDIATE BOND FUND - -------------------------------------------------------------------------------- Actual Fund Return Class AAA $1,000.00 $1,030.80 1.00% $ 5.09 Class A $1,000.00 $1,031.10 1.10% $ 5.60 Class B $1,000.00 $1,027.80 1.75% $ 8.90 Class C $1,000.00 $1,007.90 1.75% $ 8.81 Hypothetical 5% Return Class AAA $1,000.00 $1,020.05 1.00% $ 5.06 Class A $1,000.00 $1,019.55 1.10% $ 5.57 Class B $1,000.00 $1,016.29 1.75% $ 8.85 Class C $1,000.00 $1,016.29 1.75% $ 8.85 - -------------------------------------------------------------------------------- WESTWOOD SMALLCAP EQUITY FUND - -------------------------------------------------------------------------------- Actual Fund Return Class AAA $1,000.00 $ 960.10 1.50% $ 7.37 Class A $1,000.00 $ 959.90 1.75% $ 8.60 Class B $1,000.00 $ 957.00 2.25% $11.04 Class C $1,000.00 $ 956.80 2.25% $11.04 Hypothetical 5% Return Class AAA $1,000.00 $1,017.55 1.50% $ 7.59 Class A $1,000.00 $1,016.29 1.75% $ 8.85 Class B $1,000.00 $1,013.79 2.25% $11.36 Class C $1,000.00 $1,013.79 2.25% $11.36 Beginning Ending Annualized Expenses Account Value Account Value Expense Paid During 04/01/06 09/30/06 Ratio Period* - -------------------------------------------------------------------------------- WESTWOOD INCOME FUND - -------------------------------------------------------------------------------- Actual Fund Return Class AAA $1,000.00 $1,025.80 1.50% $ 7.62 Class A $1,000.00 $1,016.20 1.75% $ 8.85 Class B $1,000.00 $1,022.60 2.25% $11.41 Class C $1,000.00 $1,022.30 2.25% $11.41 Hypothetical 5% Return Class AAA $1,000.00 $1,017.55 1.50% $ 7.59 Class A $1,000.00 $1,016.29 1.75% $ 8.85 Class B $1,000.00 $1,013.79 2.25% $11.36 Class C $1,000.00 $1,013.79 2.25% $11.36 - -------------------------------------------------------------------------------- WESTWOOD MIGHTY MITES(SM) FUND - -------------------------------------------------------------------------------- Actual Fund Return Class AAA $1,000.00 $1,004.40 1.56% $ 7.84 Class A $1,000.00 $1,003.80 1.77% $ 8.89 Class B $1,000.00 $1,000.60 2.31% $11.59 Class C $1,000.00 $1,000.70 2.31% $11.59 Hypothetical 5% Return Class AAA $1,000.00 $1,017.25 1.56% $ 7.89 Class A $1,000.00 $1,016.19 1.77% $ 8.95 Class B $1,000.00 $1,013.49 2.31% $11.66 Class C $1,000.00 $1,013.49 2.31% $11.66 * Expenses are equal to the Fund's annualized expense ratio for the last six months multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365. 12 SUMMARY OF PORTFOLIO HOLDINGS (UNAUDITED) The following tables present portfolio holdings as a percent of total net assets as of September 30, 2006: - -------------------------------------------------------------------------------- WESTWOOD EQUITY FUND - -------------------------------------------------------------------------------- Financial Services ............................. 12.3% Energy: Oil .................................... 9.7% Banking ........................................ 7.7% Retail ......................................... 7.1% Telecommunications ............................. 6.4% Brokerage ...................................... 5.5% Diversified Industrial ......................... 5.1% Utilities ...................................... 5.0% Consumer Products .............................. 4.4% Business Services .............................. 4.0% Transportation ................................. 3.8% Computer Software and Services ................. 3.3% Aviation: Parts and Services ................... 2.7% Health Care .................................... 2.6% Food and Beverage .............................. 2.6% Metals and Mining .............................. 2.6% Communications Equipment ....................... 2.6% Hotels and Gaming .............................. 2.6% Energy: Natural Gas ............................ 2.5% Energy: Integrated ............................. 2.4% Aerospace ...................................... 1.4% Specialty Chemicals ............................ 1.3% Computer Hardware .............................. 1.3% Other Assets and Liabilities (Net) ............. 1.1% ------ 100.0% ====== - -------------------------------------------------------------------------------- WESTWOOD BALANCED FUND - -------------------------------------------------------------------------------- U.S. Government Agency Obligations ............. 18.3% U.S. Government Obligations .................... 14.9% Financial Services ............................. 6.9% Energy: Oil .................................... 6.6% Banking ........................................ 5.9% Retail ......................................... 4.8% Telecommunications ............................. 4.6% Brokerage ...................................... 4.0% Diversified Industrial ......................... 3.7% Utilities ...................................... 2.7% Consumer Products .............................. 2.5% Transportation ................................. 2.2% Business Services .............................. 2.2% Metals and Mining .............................. 2.1% Food and Beverage .............................. 2.1% Computer Hardware .............................. 2.0% Computer Software and Services ................. 1.8% Communications Equipment ....................... 1.5% Health Care .................................... 1.5% Aviation: Parts and Services ................... 1.4% Hotels and Gaming .............................. 1.3% Energy: Integrated ............................. 1.3% Energy: Natural Gas ............................ 1.3% Real Estate .................................... 1.1% Aerospace ...................................... 0.7% Specialty Chemicals ............................ 0.7% Machinery ...................................... 0.6% Asset Backed Securities ........................ 0.5% Other Assets and Liabilities (Net) ............. 0.8% ------ 100.0% ====== - -------------------------------------------------------------------------------- WESTWOOD INTERMEDIATE BOND FUND - -------------------------------------------------------------------------------- Corporate Bonds ................................ 41.4% U.S. Government Agency Obligations ............. 34.4% U.S. Government Obligations .................... 19.7% Asset Backed Securities ........................ 2.2% Warrants ....................................... 0.0% Other Assets and Liabilities (Net) ............. 2.3% ------ 100.0% ====== - -------------------------------------------------------------------------------- WESTWOOD SMALLCAP EQUITY FUND - -------------------------------------------------------------------------------- Real Estate .................................... 12.2% Energy and Utilities ........................... 10.7% Financial Services ............................. 8.8% Retail ......................................... 8.1% Equipment and Supplies ......................... 8.1% Transportation ................................. 7.2% Computer Software and Services ................. 6.2% Building and Construction ...................... 5.2% Aerospace ...................................... 5.2% Diversified Industrial ......................... 4.3% Hotels and Gaming .............................. 4.2% Metals and Mining .............................. 4.1% Business Services .............................. 3.9% Consumer Products .............................. 2.4% Health Care .................................... 2.3% Electronics .................................... 2.2% Telecommunications ............................. 1.9% Food and Beverage .............................. 1.9% Other Assets and Liabilities (Net) ............. 1.1% ------ 100.0% ====== 13 SUMMARY OF PORTFOLIO HOLDINGS (CONTINUED) (UNAUDITED) - -------------------------------------------------------------------------------- WESTWOOD INCOME FUND - -------------------------------------------------------------------------------- U.S. Government Obligations .................... 21.8% Financial Services ............................. 21.1% U.S. Government Agency Obligations ............. 14.0% Transportation ................................. 8.1% Real Estate Investment Trusts .................. 5.7% Brokerage ...................................... 5.5% Metals and Mining .............................. 3.5% Energy and Utilities: Natural Gas .............. 3.4% Broadcasting ................................... 2.8% Banking ........................................ 2.7% Energy and Utilities: Integrated ............... 2.7% Energy and Utilities ........................... 2.5% Energy and Utilities: Electric ................. 1.3% Food and Beverage .............................. 1.3% Other Assets and Liabilities (Net) ............. 3.6% ------ 100.0% ====== - -------------------------------------------------------------------------------- WESTWOOD MIGHTY MITES(SM) FUND - -------------------------------------------------------------------------------- Financial Services ............................. 18.5% Health Care .................................... 10.0% Diversified Industrial ......................... 6.8% Equipment and Supplies ......................... 6.8% Manufactured Housing and Recreational Vehicles . 5.0% Automotive: Parts and Accessories .............. 4.2% Consumer Products .............................. 4.1% Broadcasting ................................... 4.0% Real Estate .................................... 4.0% Telecommunications ............................. 3.7% Computer Software and Services ................. 3.6% Business Services .............................. 3.5% Electronics .................................... 2.8% Energy and Utilities: Integrated ............... 2.7% Energy and Utilities: Services ................. 2.4% Entertainment .................................. 2.3% Food and Beverage .............................. 2.2% Energy and Utilities: Natural Gas .............. 2.1% Energy and Utilities: Water .................... 1.9% Specialty Chemicals ............................ 1.8% Aviation: Parts and Services ................... 1.5% Retail ......................................... 0.9% U.S. Government Obligations .................... 0.9% Mutual Funds ................................... 0.8% Restaurants .................................... 0.7% Energy and Utilities: Electric ................. 0.7% Building and Construction ...................... 0.5% Agriculture .................................... 0.4% Publishing ..................................... 0.4% Communications Equipment ....................... 0.3% Hotels and Gaming .............................. 0.3% Wireless Communications ........................ 0.2% Paper and Forest Products ...................... 0.1% Transportation ................................. 0.1% Cable .......................................... 0.1% Environmental Control .......................... 0.0% Consumer Services .............................. 0.0% Metals and Mining .............................. 0.0% Other Assets and Liabilities (Net) .............(0.3)% ------ 100.0% ====== THE FUNDS FILE A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") FOR THE FIRST AND THIRD QUARTERS OF EACH FISCAL YEAR ON FORM N-Q, THE LAST OF WHICH WAS FILED FOR THE QUARTER ENDED JUNE 30, 2006. SHAREHOLDERS MAY OBTAIN THIS INFORMATION AT WWW.GABELLI.COM OR BY CALLING THE FUNDS AT 800-GABELLI (800-422-3554). THE FUNDS' FORM N-Q IS AVAILABLE ON THE SEC'S WEBSITE AT WWW.SEC.GOV AND MAY ALSO BE REVIEWED AND COPIED AT THE COMMISSION'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING 1-800-SEC-0330. PROXY VOTING Each Fund files Form N-PX with its complete proxy voting record for the 12 months ended June 30th, no later than August 31st of each year. A description of the Funds' proxy voting policies, procedures, and how the Funds voted proxies relating to portfolio securities are available without charge, upon request, by (i) calling 800-GABELLI (800-422-3554); (ii) writing to The Gabelli Funds at One Corporate Center, Rye, NY 10580-1422; or (iii) visiting the SEC's website at www.sec.gov. 14 WESTWOOD EQUITY FUND SCHEDULE OF INVESTMENTS -- SEPTEMBER 30, 2006 ================================================================================ MARKET SHARES COST VALUE ------ ---- ----- COMMON STOCKS -- 98.9% AEROSPACE -- 1.4% 28,100 Lockheed Martin Corp. ................$ 1,450,820 $ 2,418,286 ------------ ------------ AVIATION: PARTS AND SERVICES -- 2.7% 73,200 United Technologies Corp. ............ 3,741,317 4,637,220 ------------ ------------ BANKING -- 7.7% 81,600 Bank of America Corp. ................ 2,421,184 4,371,312 89,333 Citigroup Inc. ....................... 3,651,887 4,437,170 93,984 JPMorgan Chase & Co. ................. 3,340,447 4,413,489 ------------ ------------ 9,413,518 13,221,971 ------------ ------------ BROKERAGE -- 5.5% 31,600 Lehman Brothers Holdings Inc. ........ 2,021,063 2,333,976 64,400 Morgan Stanley ....................... 3,934,997 4,695,404 17,500 The Bear Stearns Companies Inc. ...... 1,354,112 2,451,750 ------------ ------------ 7,310,172 9,481,130 ------------ ------------ BUSINESS SERVICES -- 4.0% 93,600 Automatic Data Processing Inc. ....... 4,359,731 4,431,024 22,400 FedEx Corp. .......................... 2,341,949 2,434,432 ------------ ------------ 6,701,680 6,865,456 ------------ ------------ COMMUNICATIONS EQUIPMENT -- 2.6% 177,600 Motorola Inc. ........................ 3,657,556 4,440,000 ------------ ------------ COMPUTER HARDWARE -- 1.3% 27,100 International Business Machines Corp. ..................... 2,265,834 2,220,574 ------------ ------------ COMPUTER SOFTWARE AND SERVICES -- 3.3% 81,400 Microsoft Corp. ...................... 2,220,304 2,224,662 197,300 Oracle Corp.+ ........................ 2,856,989 3,500,102 ------------ ------------ 5,077,293 5,724,764 ------------ ------------ CONSUMER PRODUCTS -- 4.4% 42,900 Altria Group Inc. .................... 3,118,912 3,283,995 70,200 Colgate-Palmolive Co. ................ 3,601,291 4,359,420 ------------ ------------ 6,720,203 7,643,415 ------------ ------------ DIVERSIFIED INDUSTRIAL -- 5.1% 126,000 General Electric Co. ................. 3,637,192 4,447,800 43,300 ITT Corp. ............................ 1,884,138 2,219,991 25,400 Textron Inc. ......................... 1,975,116 2,222,500 ------------ ------------ 7,496,446 8,890,291 ------------ ------------ ENERGY: INTEGRATED -- 2.4% 71,300 ConocoPhillips ....................... 3,354,364 4,244,489 ------------ ------------ ENERGY: NATURAL GAS -- 2.5% 69,106 Apache Corp. ......................... 4,149,858 4,367,499 ------------ ------------ ENERGY: OIL -- 9.7% 29,300 Baker Hughes Inc. .................... 1,791,889 1,998,260 65,500 Exxon Mobil Corp. .................... 2,740,507 4,395,050 57,600 Marathon Oil Corp. ................... 4,629,678 4,429,440 81,235 Murphy Oil Corp. ..................... 4,103,611 3,862,724 42,810 Occidental Petroleum Corp. ........... 1,680,000 2,059,589 ------------ ------------ 14,945,685 16,745,063 ------------ ------------ MARKET SHARES COST VALUE ------ ---- ----- FINANCIAL SERVICES -- 12.3% 77,900 American Express Co. .................$ 2,680,491 $ 4,368,632 8,600 BlackRock Inc. ....................... 1,134,015 1,281,400 44,100 Franklin Resources Inc. .............. 3,963,072 4,663,575 48,600 Hartford Financial Services Group Inc. ................ 4,262,321 4,216,050 31,500 Prudential Financial Inc. ............ 2,435,090 2,401,875 70,000 The Allstate Corp. ................... 3,975,136 4,391,100 ------------ ------------ 18,450,125 21,322,632 ------------ ------------ FOOD AND BEVERAGE -- 2.6% 78,700 General Mills Inc. ................... 3,796,772 4,454,420 ------------ ------------ HEALTH CARE -- 2.6% 157,100 Pfizer Inc. .......................... 3,916,512 4,455,356 ------------ ------------ HOTELS AND GAMING -- 2.6% 77,400 Starwood Hotels & Resorts Worldwide Inc. ..................... 3,584,651 4,426,506 ------------ ------------ METALS AND MINING -- 2.6% 52,500 Phelps Dodge Corp. ................... 3,878,123 4,446,750 ------------ ------------ RETAIL -- 7.1% 100,300 CVS Corp. ............................ 3,304,233 3,221,636 102,000 Federated Department Stores Inc. ........................ 3,144,423 4,407,420 29,175 Sears Holdings Corp.+ ................ 4,034,677 4,612,276 ------------ ------------ 10,483,333 12,241,332 ------------ ------------ SPECIALTY CHEMICALS -- 1.3% 33,400 PPG Industries Inc. .................. 2,101,618 2,240,472 ------------ ------------ TELECOMMUNICATIONS -- 6.4% 79,470 ALLTEL Corp. ......................... 4,031,047 4,410,585 52,700 Harris Corp. ......................... 1,595,947 2,344,623 117,604 Verizon Communications Inc. .......... 4,415,698 4,366,637 ------------ ------------ 10,042,692 11,121,845 ------------ ------------ TRANSPORTATION -- 3.8% 60,300 Burlington Northern Santa Fe Corp. ..................... 3,110,455 4,428,432 33,875 Overseas Shipholding Group Inc. ...... 1,871,412 2,092,459 ------------ ------------ 4,981,867 6,520,891 ------------ ------------ UTILITIES -- 5.0% 71,300 Exelon Corp. ......................... 3,904,785 4,316,502 102,300 PG&E Corp. ........................... 4,065,799 4,260,795 ------------ ------------ 7,970,584 8,577,297 ------------ ------------ TOTAL COMMON STOCKS .................. 145,491,023 170,707,659 ------------ ------------ TOTAL INVESTMENTS -- 98.9% ...........$145,491,023 170,707,659 ============ OTHER ASSETS AND LIABILITIES (NET) -- 1.1% ..................................... 1,824,356 ------------ NET ASSETS -- 100.0% ................................$172,532,015 ============ - -------------- + Non-income producing security. See accompanying notes to financial statements. 15 WESTWOOD BALANCED FUND SCHEDULE OF INVESTMENTS -- SEPTEMBER 30, 2006 ================================================================================ MARKET SHARES COST VALUE ------ ---- ----- COMMON STOCKS -- 55.9% AEROSPACE -- 0.7% 12,995 Lockheed Martin Corp. ................$ 757,621 $ 1,118,350 ------------ ------------ AVIATION: PARTS AND SERVICES -- 1.4% 33,700 United Technologies Corp. ............ 1,755,214 2,134,895 ------------ ------------ BANKING -- 4.3% 42,800 Bank of America Corp. ................ 1,500,260 2,292,796 41,833 Citigroup Inc. ....................... 1,556,017 2,077,845 44,996 JPMorgan Chase & Co. ................. 1,745,035 2,113,012 ------------ ------------ 4,801,312 6,483,653 ------------ ------------ BROKERAGE -- 3.0% 16,600 Lehman Brothers Holdings Inc. ........ 1,062,299 1,226,076 29,400 Morgan Stanley ....................... 1,777,033 2,143,554 7,900 The Bear Stearns Companies Inc. ...... 749,263 1,106,790 ------------ ------------ 3,588,595 4,476,420 ------------ ------------ BUSINESS SERVICES -- 2.2% 45,400 Automatic Data Processing Inc. ....... 2,118,494 2,149,236 10,300 FedEx Corp. .......................... 1,075,702 1,119,404 ------------ ------------ 3,194,196 3,268,640 ------------ ------------ COMMUNICATIONS EQUIPMENT -- 1.5% 88,800 Motorola Inc. ........................ 1,793,628 2,220,000 ------------ ------------ COMPUTER HARDWARE -- 0.7% 13,500 International Business Machines Corp. ..................... 1,155,846 1,106,190 ------------ ------------ COMPUTER SOFTWARE AND SERVICES -- 1.8% 42,800 Microsoft Corp. ...................... 1,122,775 1,169,724 90,380 Oracle Corp.+ ........................ 1,302,388 1,603,341 ------------ ------------ 2,425,163 2,773,065 ------------ ------------ CONSUMER PRODUCTS -- 2.5% 21,000 Altria Group Inc. .................... 1,495,104 1,607,550 36,100 Colgate-Palmolive Co. ................ 1,893,212 2,241,810 ------------ ------------ 3,388,316 3,849,360 ------------ ------------ DIVERSIFIED INDUSTRIAL -- 2.9% 62,600 General Electric Co. ................. 1,827,096 2,209,780 22,190 ITT Corp. ............................ 1,052,871 1,137,681 11,200 Textron Inc. ......................... 871,993 980,000 ------------ ------------ 3,751,960 4,327,461 ------------ ------------ ENERGY: INTEGRATED -- 1.3% 32,900 ConocoPhillips ....................... 1,769,344 1,958,537 ------------ ------------ ENERGY: NATURAL GAS -- 1.3% 30,955 Apache Corp. ......................... 1,984,251 1,956,356 ------------ ------------ ENERGY: OIL -- 5.3% 13,240 Baker Hughes Inc. .................... 771,872 902,968 36,500 Exxon Mobil Corp. .................... 1,528,025 2,449,150 26,615 Marathon Oil Corp. ................... 2,179,456 2,046,694 36,686 Murphy Oil Corp. ..................... 1,810,598 1,744,419 19,800 Occidental Petroleum Corp. ........... 757,500 952,578 ------------ ------------ 7,047,451 8,095,809 ------------ ------------ MARKET SHARES COST VALUE ------ ---- ----- FINANCIAL SERVICES -- 6.9% 38,800 American Express Co. .................$ 1,454,585 $ 2,175,904 4,000 BlackRock Inc. ....................... 527,492 596,000 20,100 Franklin Resources Inc. .............. 1,855,364 2,125,575 24,100 Hartford Financial Services Group Inc. ......................... 2,121,880 2,090,675 14,500 Prudential Financial Inc. ............ 1,116,766 1,105,625 36,600 The Allstate Corp. ................... 2,076,459 2,295,918 ------------ ------------ 9,152,546 10,389,697 ------------ ------------ FOOD AND BEVERAGE -- 1.5% 39,100 General Mills Inc. ................... 1,909,519 2,213,060 ------------ ------------ HEALTH CARE -- 1.5% 77,100 Pfizer Inc. .......................... 1,923,536 2,186,556 ------------ ------------ HOTELS AND GAMING -- 1.3% 35,320 Starwood Hotels & Resorts Worldwide Inc. ..................... 1,741,521 2,019,951 ------------ ------------ MACHINERY -- 0.6% 14,700 Caterpillar Inc. ..................... 1,017,503 967,260 ------------ ------------ METALS AND MINING -- 2.1% 11,300 IPSCO Inc. ........................... 1,097,631 979,371 26,400 Phelps Dodge Corp. ................... 1,982,721 2,236,080 ------------ ------------ 3,080,352 3,215,451 ------------ ------------ RETAIL -- 3.9% 51,500 CVS Corp. ............................ 1,702,869 1,654,180 50,270 Federated Department Stores Inc. ..... 1,615,247 2,172,167 13,341 Sears Holdings Corp.+ ................ 1,848,021 2,109,079 ------------ ------------ 5,166,137 5,935,426 ------------ ------------ SPECIALTY CHEMICALS -- 0.7% 16,400 PPG Industries Inc. .................. 1,022,435 1,100,112 ------------ ------------ TELECOMMUNICATIONS -- 3.6% 38,800 ALLTEL Corp. ......................... 1,993,603 2,153,400 24,300 Harris Corp. ......................... 776,817 1,081,107 60,418 Verizon Communications Inc. .......... 2,210,479 2,243,320 ------------ ------------ 4,980,899 5,477,827 ------------ ------------ TRANSPORTATION -- 2.2% 32,400 Burlington Northern Santa Fe Corp. ... 1,765,244 2,379,456 15,600 Overseas Shipholding Group Inc. ...... 835,996 963,612 ------------ ------------ 2,601,240 3,343,068 ------------ ------------ UTILITIES -- 2.7% 34,400 Exelon Corp. ......................... 1,890,456 2,082,576 49,700 PG&E Corp. ........................... 1,979,277 2,070,005 ------------ ------------ 3,869,733 4,152,581 ------------ ------------ TOTAL COMMON STOCKS .................. 73,878,318 84,769,725 ------------ ------------ PRINCIPAL AMOUNT ------ ASSET BACKED SECURITIES -- 0.5% $ 825,000 GS Mortgage Securities Corp. II, 97-GL Cl. A2D, 6.940%, 07/13/30 ................... 831,543 830,189 ------------ ------------ See accompanying notes to financial statements. 16 WESTWOOD BALANCED FUND SCHEDULE OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 2006 ================================================================================ PRINCIPAL MARKET AMOUNT COST VALUE ------ ---- ----- CORPORATE BONDS -- 9.6% BANKING -- 1.6% $1,250,000 Bank of America Corp., 5.375%, 06/15/14 ...................$ 1,298,836 $ 1,257,341 1,125,000 Citigroup Inc., 6.500%, 01/18/11 ................... 1,218,455 1,182,320 ------------ ------------ 2,517,291 2,439,661 ------------ ------------ BROKERAGE -- 1.0% 1,450,000 Goldman Sachs Group Inc., 6.650%, 05/15/09 ................... 1,456,748 1,504,333 ------------ ------------ COMPUTER HARDWARE -- 1.3% 750,000 Hewlett-Packard Co., 3.625%, 03/15/08 ................... 749,286 732,745 1,250,000 International Business Machines Corp., 4.875%, 10/01/06 ................... 1,250,000 1,250,000 ------------ ------------ 1,999,286 1,982,745 ------------ ------------ DIVERSIFIED INDUSTRIAL -- 0.8% 1,200,000 General Electric Co., 5.000%, 02/01/13 ................... 1,212,053 1,188,031 ------------ ------------ ENERGY: OIL -- 1.3% 1,000,000 Anadarko Petroleum Corp., 5.790%, 09/15/09 (a) ............... 1,001,920 1,002,029 1,005,000 Occidental Petroleum Corp., MTN, 4.250%, 03/15/10 ................... 1,006,965 977,999 ------------ ------------ 2,008,885 1,980,028 ------------ ------------ FOOD AND BEVERAGE -- 0.6% 950,000 Anheuser-Busch Cos. Inc., 4.375%, 01/15/13 ................... 937,230 908,694 ------------ ------------ REAL ESTATE -- 1.1% 1,600,000 Archstone-Smith Trust, 7.200%, 03/01/13 ................... 1,560,746 1,721,280 ------------ ------------ RETAIL -- 0.9% 1,250,000 Wal-Mart Stores Inc., 6.875%, 08/10/09 ................... 1,292,175 1,309,880 ------------ ------------ TELECOMMUNICATIONS -- 1.0% 1,460,000 Verizon Communications Inc., MBIA, Deb., 6.460%, 04/15/08 ................... 1,463,680 1,490,791 ------------ ------------ TOTAL CORPORATE BONDS ................ 14,448,094 14,525,443 ------------ ------------ U.S. GOVERNMENT AGENCY OBLIGATIONS -- 18.3% FEDERAL HOME LOAN BANK -- 2.0% 1,500,000 3.375%, 02/23/07 .................... 1,497,966 1,488,953 1,500,000 5.375%, 05/18/16 .................... 1,509,580 1,546,213 ------------ ------------ 3,007,546 3,035,166 ------------ ------------ PRINCIPAL MARKET AMOUNT COST VALUE ------ ---- ----- FEDERAL HOME LOAN MORTGAGE CORP. -- 7.0% $2,000,000 Zero Coupon, 01/18/07 ...............$ 1,969,850 $ 1,969,790 1,800,000 Zero Coupon, 04/20/07 ............... 1,750,000 1,749,949 2,000,000 3.500%, 09/15/07 .................... 2,006,532 1,971,130 1,400,000 3.625%, 09/15/08 .................... 1,361,440 1,365,682 2,000,000 5.000%, 07/15/14 .................... 2,049,025 2,007,156 1,500,000 5.250%, 04/18/16 .................... 1,476,781 1,533,681 ------------ ------------ 10,613,628 10,597,388 ------------ ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 9.3% 1,250,000 Zero Coupon, 10/25/06 ............... 1,246,071 1,246,071 1,000,000 2.625%, 11/15/06 .................... 999,846 999,846 2,000,000 4.250%, 07/15/07 .................... 1,993,836 1,985,564 2,000,000 3.250%, 11/15/07 .................... 1,950,721 1,960,598 1,500,000 4.625%, 01/15/08 .................... 1,495,579 1,492,376 1,000,000 4.250%, 05/15/09 .................... 979,060 984,637 1,500,000 5.375%, 11/15/11 .................... 1,510,883 1,533,864 2,500,000 4.375%, 03/15/13 .................... 2,480,004 2,424,102 1,500,000 5.000%, 04/15/15 .................... 1,570,086 1,508,772 ------------ ------------ 14,226,086 14,135,830 ------------ ------------ TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS ................. 27,847,260 27,768,384 ------------ ------------ U.S. GOVERNMENT OBLIGATIONS -- 14.9% U.S. INFLATION INDEX NOTES -- 1.0% 1,500,000 0.875%, 04/15/10 .................... 1,612,467 1,527,229 ------------ ------------ U.S. TREASURY BILLS -- 0.6% 1,000,000 U.S. Treasury Bill, 4.980%++, 12/14/06 .................. 990,175 990,461 ------------ ------------ U.S. TREASURY NOTES -- 13.3% 1,700,000 3.500%, 11/15/06 .................... 1,701,287 1,701,287 2,000,000 3.375%, 02/28/07 .................... 1,990,893 1,987,266 1,800,000 3.625%, 04/30/07 .................... 1,792,031 1,786,360 1,500,000 3.125%, 05/15/07 .................... 1,481,986 1,483,361 2,000,000 3.375%, 02/15/08 .................... 1,973,671 1,962,892 1,500,000 4.875%, 04/30/08 .................... 1,497,688 1,502,637 1,250,000 3.375%, 12/15/08 .................... 1,240,135 1,217,286 1,250,000 4.875%, 02/15/12 .................... 1,247,558 1,267,823 2,250,000 4.750%, 05/15/14 .................... 2,247,907 2,269,777 1,500,000 4.000%, 02/15/15 .................... 1,466,891 1,436,310 2,000,000 4.250%, 08/15/15 .................... 1,994,638 1,946,172 1,500,000 5.125%, 05/15/16 .................... 1,510,454 1,556,485 ------------ ------------ 20,145,139 20,117,656 ------------ ------------ TOTAL U.S. GOVERNMENT OBLIGATIONS .... 22,747,781 22,635,346 ------------ ------------ TOTAL INVESTMENTS -- 99.2% ...........$139,752,996 150,529,087 ============ OTHER ASSETS AND LIABILITIES (NET) -- 0.8% .......... 1,181,423 ------------ NET ASSETS -- 100.0% ................................$151,710,510 ============ - -------------- (a) Floating rate security. The rate disclosed is that in effect at September 30, 2006. + Non-income producing security. ++ Represents annualized yield at date of purchase. MBIA Municipal Bond Insurance Association MTN Medium Term Note See accompanying notes to financial statements. 17 WESTWOOD INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS -- SEPTEMBER 30, 2006 ================================================================================ PRINCIPAL MARKET AMOUNT COST VALUE ------ ---- ----- ASSET BACKED SECURITIES -- 2.2% $225,000 GS Mortgage Securities Corp. II, 97-GL Cl. A2D, 6.940%, 07/13/30 ....................$ 231,269 $ 226,415 ------------ ------------ CORPORATE BONDS -- 41.4% COMPUTER HARDWARE -- 5.5% 325,000 Hewlett-Packard Co., 3.625%, 03/15/08 .................... 325,418 317,523 250,000 International Business Machines Corp., 4.875%, 10/01/06 .................... 250,000 250,000 ------------ ------------ 575,418 567,523 ------------ ------------ DIVERSIFIED INDUSTRIAL -- 2.4% 250,000 General Electric Co., 5.000%, 02/01/13 .................... 252,511 247,507 ------------ ------------ ENERGY AND UTILITIES: OIL -- 6.2% 200,000 Anadarko Petroleum Corp., 5.790%, 09/15/09 (c) ................ 200,384 200,406 225,000 Chevron Corp., 3.375%, 02/15/08 .................... 225,502 219,623 225,000 Occidental Petroleum Corp., MTN, 4.250%, 03/15/10 ............... 225,000 218,955 ------------ ------------ 650,886 638,984 ------------ ------------ FINANCIAL SERVICES -- 20.1% 200,000 American Express Credit Corp., MTN, 5.490%, 06/16/11 (c) ........... 200,000 200,403 300,000 Bank of America Corp., 5.375%, 06/15/14 .................... 311,721 301,762 225,000 Citigroup Inc., 6.500%, 01/18/11 .................... 243,398 236,464 300,000 Goldman Sachs Group Inc., 6.650%, 05/15/09 .................... 306,541 311,241 260,000 International Bank for Reconstruction & Development, 8.625%, 10/15/16 .................... 317,805 334,105 275,000 Merrill Lynch & Co. Inc. MTN Series C, 5.000%, 01/15/15 .................... 275,240 267,085 200,000 SLM Corp., 5.450%, 04/25/11 .......... 199,798 201,429 225,000 The Bear Stearns Co. Inc., 2.875%, 07/02/08 .................... 219,994 216,476 ------------ ------------ 2,074,497 2,068,965 ------------ ------------ FOOD AND BEVERAGE -- 2.3% 250,000 Anheuser-Busch Cos. Inc., 4.375%, 01/15/13 .................... 246,647 239,130 ------------ ------------ PRINCIPAL MARKET AMOUNT COST VALUE ------ ---- ----- REAL ESTATE -- 1.6% $150,000 Archstone-Smith Trust, 7.200%, 03/01/13 ....................$ 146,617 $ 161,370 ------------ ------------ RETAIL -- 2.0% 200,000 Wal-Mart Stores Inc., 6.875%, 08/10/09 .................... 206,748 209,581 ------------ ------------ TELECOMMUNICATIONS -- 1.3% 125,000 Verizon Communications Inc., MBIA, Deb., 6.460%, 04/15/08 ........ 125,671 127,636 ------------ ------------ TOTAL CORPORATE BONDS ................ 4,278,995 4,260,696 ------------ ------------ U.S. GOVERNMENT AGENCY OBLIGATIONS -- 34.4% FEDERAL HOME LOAN BANK -- 5.4% 300,000 4.625%, 11/21/08 .................... 299,465 297,933 250,000 5.375%, 05/18/16 .................... 251,597 257,702 ------------ ------------ 551,062 555,635 ------------ ------------ FEDERAL HOME LOAN MORTGAGE CORP. -- 13.7% 175,000 Zero Coupon, 01/18/07 ............... 172,362 172,357 250,000 3.750%, 04/15/07 .................... 249,668 248,006 300,000 3.500%, 09/15/07 .................... 298,581 295,669 250,000 3.625%, 09/15/08 .................... 245,124 243,872 200,000 4.250%, 07/15/09 .................... 197,736 196,513 250,000 5.250%, 04/18/16 .................... 246,130 255,614 ------------ ------------ 1,409,601 1,412,031 ------------ ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 9.5% 200,000 3.250%, 11/15/07 .................... 195,072 196,060 175,000 5.375%, 11/15/11 .................... 175,716 178,951 300,000 4.375%, 03/15/13 .................... 298,269 290,892 162,205 5.500%, 09/01/20 .................... 162,033 162,388 149,693 5.500%, 01/01/35 .................... 152,236 147,808 ------------ ------------ 983,326 976,099 ------------ ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 5.8% 10,443 GNMA, Pool #580871, 6.500%, 12/15/31 .................... 10,471 10,733 97,850 GNMA, Pool #562288, 6.000%, 12/15/33 .................... 99,874 99,193 167,841 GNMA, Pool #604946 5.500%, 01/15/34 .................... 170,445 166,911 140,603 GNMA, Pool #604970, 5.500%, 01/15/34 .................... 142,362 139,824 186,769 GNMA, Pool #003747, 5.000%, 08/20/35 .................... 185,051 180,740 ------------ ------------ 608,203 597,401 ------------ ------------ TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS .................. 3,552,192 3,541,166 ------------ ------------ See accompanying notes to financial statements. 18 WESTWOOD INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 2006 ================================================================================ PRINCIPAL MARKET AMOUNT COST VALUE ------ ---- ----- U.S. GOVERNMENT OBLIGATIONS -- 19.7% U.S. INFLATION INDEX NOTES -- 2.7% $275,000 0.875%, 04/15/10 ....................$ 295,708 $ 279,992 ------------ ------------ U.S. TREASURY BONDS -- 9.4% 250,000 7.125%, 02/15/23 .................... 308,319 314,102 300,000 6.125%, 11/15/27 .................... 308,755 350,977 275,000 5.500%, 08/15/28 .................... 301,127 299,750 ------------ ------------ 918,201 964,829 ------------ ------------ U.S. TREASURY NOTES -- 7.6% 275,000 4.750%, 05/15/14 .................... 281,620 277,417 300,000 4.250%, 08/15/15 .................... 298,488 291,926 200,000 5.125%, 05/15/16 .................... 201,394 207,531 ------------ ------------ 781,502 776,874 ------------ ------------ TOTAL U.S. GOVERNMENT OBLIGATIONS ......................... 1,995,411 2,021,695 ------------ ------------ MARKET SHARES COST VALUE ------ ---- ----- WARRANTS -- 0.0% ENERGY AND UTILITIES -- 0.0% 8 Forman Petroleum Corp., Series A, expire 01/14/07+ (a) (b) ............$ 0 $ 0 25 Forman Petroleum Corp., Series B, expire 01/14/07+ (a) (b) ............ 0 0 25 Forman Petroleum Corp., Series C, expire 01/14/07+ (a) (b) ............ 0 0 25 Forman Petroleum Corp., Series D, expire 01/14/07+ (a) (b) ............ 0 0 ------------ ------------ 0 0 ------------ ------------ TOTAL WARRANTS ....................... 0 0 ------------ ------------ TOTAL INVESTMENTS -- 97.7% ...........$ 10,057,867 10,049,972 ============ OTHER ASSETS AND LIABILITIES (NET) -- 2.3% .......................... 241,343 ------------ NET ASSETS -- 100.0% ................................$ 10,291,315 ============ - -------------- (a) Security fair valued under procedures established by the Board of Trustees. The procedures may include reviewing available financial information about the company and reviewing valuation of comparable securities and other factors on a regular basis. At September 30, 2006, the market value of fair valued securities amounted to $0 or 0.00% of total net assets. (b) Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At September 30, 2006, the market value of Rule 144A securities amounted to $0 or 0.00% of total net assets. (c) Floating rate security. The rate disclosed is that in effect at September 30, 2006. + Non-income producing security. MBIA Municipal Bond Insurance Association MTN Medium Term Note See accompanying notes to financial statements. 19 WESTWOOD SMALLCAP EQUITY FUND SCHEDULE OF INVESTMENTS -- SEPTEMBER 30, 2006 ================================================================================ MARKET SHARES COST VALUE ------ ---- ----- COMMON STOCKS -- 98.9% AEROSPACE -- 5.2% 2,400 DRS Technologies Inc. ................$ 98,634 $ 104,808 5,500 Moog Inc., Cl. A+ .................... 139,466 190,630 4,900 Teledyne Technologies Inc.+ .......... 164,098 194,040 ------------ ------------ 402,198 489,478 ------------ ------------ BUILDING AND CONSTRUCTION -- 5.2% 6,500 Layne Christensen Co.+ ............... 161,324 185,705 1,800 NCI Building Systems Inc.+ ........... 97,414 104,706 3,400 Washington Group International Inc. .. 151,889 200,124 ------------ ------------ 410,627 490,535 ------------ ------------ BUSINESS SERVICES -- 3.9% 5,800 Macquarie Infrastructure Co. Trust ... 163,776 180,844 4,700 URS Corp.+ ........................... 155,023 182,783 ------------ ------------ 318,799 363,627 ------------ ------------ COMPUTER SOFTWARE AND SERVICES -- 6.2% 5,300 Hyperion Solutions Corp.+ ............ 169,731 182,744 6,000 ManTech International Corp., Cl. A+ .............................. 167,704 198,060 6,200 SI International Inc.+ ............... 171,750 198,276 ------------ ------------ 509,185 579,080 ------------ ------------ CONSUMER PRODUCTS -- 2.4% 11,000 Knoll Inc. ........................... 184,030 222,200 ------------ ------------ DIVERSIFIED INDUSTRIAL -- 4.3% 3,600 Kennametal Inc. ...................... 155,718 203,940 4,100 Oregon Steel Mills Inc.+ ............. 146,582 200,367 ------------ ------------ 302,300 404,307 ------------ ------------ ELECTRONICS -- 2.2% 7,550 Benchmark Electronics Inc.+ .......... 171,810 202,944 ------------ ------------ ENERGY AND UTILITIES -- 10.7% 6,500 Atmos Energy Corp. ................... 176,871 185,575 7,800 Cleco Corp. .......................... 171,655 196,872 5,800 Foundation Coal Holdings Inc. ........ 166,946 187,746 6,400 Oil States International Inc.+ ....... 207,794 176,000 3,800 Unit Corp.+ .......................... 164,770 174,686 2,000 Whiting Petroleum Corp.+ ............. 85,421 80,200 ------------ ------------ 973,457 1,001,079 ------------ ------------ EQUIPMENT AND SUPPLIES -- 8.1% 7,100 Greenbrier Companies Inc. ............ 204,691 205,971 3,000 Hydril Co.+ .......................... 215,176 168,180 4,300 IDEX Corp. ........................... 179,923 185,115 2,600 Middleby Corp.+ ...................... 182,538 200,356 ------------ ------------ 782,328 759,622 ------------ ------------ FINANCIAL SERVICES -- 8.8% 6,500 Boston Private Financial Holdings Inc. ....................... 163,368 181,220 3,100 Calamos Asset Management Inc., Cl. A ......................... 73,538 90,892 5,000 Cathay General Bancorp ............... 170,415 180,500 4,400 Placer Sierra Bancshares ............. 120,566 97,724 MARKET SHARES COST VALUE ------ ---- ----- 2,500 Provident Bankshares Corp. ...........$ 84,944 $ 92,625 5,600 Stifel Financial Corp.+ .............. 214,720 177,744 ------------ ------------ 827,551 820,705 ------------ ------------ FOOD AND BEVERAGE -- 1.9% 5,600 J & J Snack Foods Corp. .............. 122,259 174,160 ------------ ------------ HEALTH CARE -- 2.3% 19,700 Five Star Quality Care Inc.+ ......... 205,793 211,972 ------------ ------------ HOTELS AND GAMING -- 4.2% 8,700 Marcus Corp. ......................... 171,649 199,839 5,300 Orient-Express Hotels Ltd., Cl. A ............................... 139,841 198,114 ------------ ------------ 311,490 397,953 ------------ ------------ METALS AND MINING -- 4.1% 5,100 Cleveland-Cliffs Inc. ................ 188,691 194,361 4,400 RTI International Metals Inc.+ ....... 191,774 191,752 ------------ ------------ 380,465 386,113 ------------ ------------ REAL ESTATE -- 12.2% 6,300 Getty Realty Corp. ................... 167,465 184,464 4,600 LaSalle Hotel Properties ............. 131,606 199,364 4,700 Lexington Corporate Properties Trust .................... 104,386 99,546 4,477 Longview Fibre Co. ................... 103,518 90,972 4,700 Maguire Properties Inc. .............. 159,204 191,478 4,000 Post Properties Inc. ................. 145,945 190,080 6,200 Sunstone Hotel Investors Inc. ........ 153,647 184,264 ------------ ------------ 965,771 1,140,168 ------------ ------------ RETAIL -- 8.1% 11,200 CKE Restaurants Inc. ................. 176,545 187,264 3,400 The Children's Place Retail Stores Inc.+ ................. 189,863 217,702 5,000 The Men's Wearhouse Inc. ............. 182,876 186,050 8,800 The Warnaco Group Inc.+ .............. 186,791 170,192 ------------ ------------ 736,075 761,208 ------------ ------------ TELECOMMUNICATIONS -- 1.9% 14,576 General Communication Inc., Cl. A+ ............................ 152,047 180,597 ------------ ------------ TRANSPORTATION -- 7.2% 8,800 Arlington Tankers Ltd. ............... 200,520 198,528 3,500 Freightcar America Inc. .............. 145,407 185,500 4,300 Genco Shipping & Trading Ltd. ........ 94,806 97,438 11,500 Horizon Lines Inc. Cl. A ............. 129,203 192,050 ------------ ------------ 569,936 673,516 ------------ ------------ TOTAL COMMON STOCKS .................. 8,326,121 9,259,264 ------------ ------------ TOTAL INVESTMENTS -- 98.9% ...........$ 8,326,121 9,259,264 ============ OTHER ASSETS AND LIABILITIES (NET) -- 1.1% .......................... 105,020 ------------ NET ASSETS -- 100.0% ................................$ 9,364,284 ============ -------------- + Non-income producing security. See accompanying notes to financial statements. 20 WESTWOOD INCOME FUND SCHEDULE OF INVESTMENTS -- SEPTEMBER 30, 2006 ================================================================================ MARKET SHARES COST VALUE ------ ---- ----- COMMON STOCKS -- 27.4% BANKING -- 2.7% 6,200 Bank of America Corp. ................$ 292,592 $ 332,134 ------------ ------------ ENERGY AND UTILITIES: ELECTRIC -- 1.3% 3,500 FPL Group Inc. ....................... 141,522 157,500 ------------ ------------ ENERGY AND UTILITIES: NATURAL GAS -- 3.4% 9,700 Enterprise Products Partners LP ...... 250,551 259,475 2,800 ONEOK Partners LP .................... 130,806 157,500 ------------ ------------ 381,357 416,975 ------------ ------------ FINANCIAL SERVICES -- 1.4% 2,400 AllianceBernstein Holding LP ......... 130,503 165,576 ------------ ------------ FOOD AND BEVERAGE -- 1.3% 6,395 Reddy Ice Holdings Inc. .............. 135,133 154,759 ------------ ------------ METALS AND MINING -- 3.5% 6,500 Compass Minerals International Inc. .. 161,698 184,015 10,300 Penn Virginia Resource Partners LP ... 274,208 247,509 ------------ ------------ 435,906 431,524 ------------ ------------ REAL ESTATE INVESTMENT TRUSTS -- 5.7% 5,100 Getty Realty Corp. ................... 140,303 149,328 10,000 Healthcare Realty Trust Inc. ......... 365,242 384,100 4,082 Rayonier Inc. ........................ 155,576 154,299 ------------ ------------ 661,121 687,727 ------------ ------------ TRANSPORTATION -- 8.1% 14,400 Arlington Tankers Ltd. ............... 315,583 324,864 23,800 Double Hull Tankers Inc. ............. 317,055 327,250 11,000 Teekay LNG Partners LP ............... 322,189 334,950 ------------ ------------ 954,827 987,064 ------------ ------------ TOTAL COMMON STOCKS .................. 3,132,961 3,333,259 ------------ ------------ PREFERRED STOCKS -- 21.7% BROADCASTING -- 2.8% 13,400 CBS Corp., 7.250% Pfd. ............... 340,175 336,340 ------------ ------------ BROKERAGE -- 2.7% 12,900 Lehman Brothers Holdings Inc., 6.080% Pfd., Ser. G (a) ............. 324,199 330,756 ------------ ------------ FINANCIAL SERVICES -- 16.2% 13,000 Bank One Capital VI, 7.200% Pfd. ..... 331,188 330,200 13,000 Barclays Bank plc, 6.625% Pfd., Ser. 2 ................. 325,000 336,830 6,000 Fannie Mae, 7.085% Pfd., Ser. O (a) .......................... 332,225 319,125 13,700 General Electric Capital Corp., 5.875% Pfd. .................. 338,037 334,417 12,600 Metlife Inc., 6.390% Pfd., Ser. A (a) .......................... 324,858 325,710 MARKET SHARES COST VALUE ------ ---- ----- 13,000 Wells Fargo Capital Trust IV, 7.000% Pfd. .........................$ 334,740 $ 327,600 ------------ ------------ 1,986,048 1,973,882 ------------ ------------ TOTAL PREFERRED STOCKS ............... 2,650,422 2,640,978 ------------ ------------ CONVERTIBLE PREFERRED STOCKS -- 6.9% BROKERAGE -- 2.8% 12,400 Lehman Brothers Holdings Inc., 6.250% Cv. Pfd., Ser. GIS ........... 322,936 338,520 ------------ ------------ ENERGY AND UTILITIES: INTEGRATED -- 2.7% 6,100 Entergy Corp., 7.625% Cv. Pfd. ....... 307,200 331,962 ------------ ------------ FINANCIAL SERVICES -- 1.4% 600 Alleghany Corp., 5.750% Cv. Pfd. ..... 159,265 171,375 ------------ ------------ TOTAL CONVERTIBLE PREFERRED STOCKS .................... 789,401 841,857 ------------ ------------ PRINCIPAL AMOUNT ------- CORPORATE BONDS -- 4.6% ENERGY AND UTILITIES -- 2.5% $300,000 Anadarko Petroleum Corp., 5.790%, 09/15/09 (a) ................ 300,570 300,609 ------------ ------------ FINANCIAL SERVICES -- 2.1% 250,000 American Express Credit Corp., MTN, 5.490%, 06/16/11 (a) ................ 250,000 250,503 ------------ ------------ TOTAL CORPORATE BONDS ................ 550,570 551,112 ------------ ------------ U.S. GOVERNMENT AGENCY OBLIGATIONS -- 14.0% FEDERAL HOME LOAN BANK -- 3.1% 375,000 4.625%, 01/18/08 .................... 372,552 373,065 ------------ ------------ FEDERAL HOME LOAN MORTGAGE CORP. -- 4.4% 250,000 Zero Coupon, 01/18/07 ............... 246,232 246,224 300,000 3.500%, 09/15/07 .................... 296,215 295,669 ------------ ------------ 542,447 541,893 ------------ ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 6.5% 450,000 4.250%, 07/15/07 .................... 447,934 446,752 350,000 3.250%, 11/15/07 .................... 342,396 343,105 ------------ ------------ 790,330 789,857 ------------ ------------ TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS .................. 1,705,329 1,704,815 ------------ ------------ U.S. GOVERNMENT OBLIGATIONS -- 21.8% U.S. TREASURY BILLS -- 2.4% 300,000 U.S. Treasury Bills, 4.980%++, 12/14/06 ....................... 297,053 297,138 ------------ ------------ See accompanying notes to financial statements. 21 WESTWOOD INCOME FUND SCHEDULE OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 2006 ================================================================================ PRINCIPAL MARKET AMOUNT COST VALUE ------ ---- ----- U.S. GOVERNMENT OBLIGATIONS (CONTINUED) U.S. TREASURY NOTES -- 19.4% $325,000 3.500%, 11/15/06 ....................$ 324,616 $ 324,616 250,000 3.375%, 02/28/07 .................... 248,249 248,408 275,000 3.750%, 03/31/07 .................... 273,282 273,357 425,000 3.125%, 05/15/07 .................... 421,651 420,286 400,000 3.625%, 06/30/07 .................... 395,839 396,063 375,000 3.375%, 02/15/08 .................... 366,491 368,042 325,000 4.875%, 04/30/08 .................... 324,499 325,571 ------------ ------------ 2,354,627 2,356,343 ------------ ------------ TOTAL U.S. GOVERNMENT OBLIGATIONS ......................... 2,651,680 2,653,481 ------------ ------------ TOTAL INVESTMENTS -- 96.4% ...........$ 11,480,363 11,725,502 ============ OTHER ASSETS AND LIABILITIES (NET) -- 3.6% .......................... 443,435 ------------ NET ASSETS -- 100.0% ................................$ 12,168,937 ============ - -------------- (a) Floating rate security. The rate disclosed is that in effect at September 30, 2006. ++ Represents annualized yield at date of purchase. MTN Medium Term Note See accompanying notes to financial statements. 22 WESTWOOD MIGHTY MITES(SM) FUND SCHEDULE OF INVESTMENTS -- SEPTEMBER 30, 2006 ================================================================================ MARKET SHARES COST VALUE ------ ---- ----- COMMON STOCKS -- 98.0% AGRICULTURE -- 0.4% 200 J.G. Boswell Co. .....................$ 124,000 $ 144,000 ------------ ------------ AUTOMOTIVE: PARTS AND ACCESSORIES -- 3.1% 50,000 Earl Scheib Inc.+ .................... 243,865 180,000 21,700 Midas Inc.+ .......................... 291,865 448,756 30,000 Proliance International Inc.+ ........ 140,544 137,100 1,000 Puradyn Filter Technologies Inc.+ .... 1,645 1,000 34,000 Standard Motor Products Inc. ......... 377,590 407,660 ------------ ------------ 1,055,509 1,174,516 ------------ ------------ AVIATION: PARTS AND SERVICES -- 1.5% 9,000 CPI Aerostructures Inc.+ ............. 96,813 42,300 800 Curtiss-Wright Corp. ................. 8,610 24,280 6,200 Kaman Corp. .......................... 92,246 111,662 155,000 The Fairchild Corp., Cl. A+ .......... 747,748 403,000 ------------ ------------ 945,417 581,242 ------------ ------------ BROADCASTING -- 4.0% 53,000 Acme Communications Inc.+ ............ 321,038 278,780 25,500 Beasley Broadcast Group Inc., Cl. A .. 246,757 179,265 62,000 Crown Media Holdings Inc., Cl. A+ .... 474,841 278,380 10,000 Fisher Communications Inc.+ .......... 413,617 415,500 5,000 Granite Broadcasting Corp.+ .......... 2,000 650 23,000 Gray Television Inc. ................. 212,749 147,430 15,000 ION Media Networks Inc.+ ............. 41,060 12,150 9,000 Salem Communications Corp., Cl. A .... 154,890 101,790 41,000 Young Broadcasting Inc., Cl. A+ ...... 291,937 94,300 ------------ ------------ 2,158,889 1,508,245 ------------ ------------ BUILDING AND CONSTRUCTION -- 0.5% 4,000 Huttig Building Products Inc.+ ....... 13,358 22,120 6,000 The Monarch Cement Co. ............... 140,135 175,800 ------------ ------------ 153,493 197,920 ------------ ------------ BUSINESS SERVICES -- 3.5% 153,000 AMICAS Inc.+ ......................... 725,126 455,940 28,000 ANC Rental Corp.+ .................... 840 3 74,000 Edgewater Technology Inc.+ ........... 293,188 421,800 41,000 Nashua Corp.+ ........................ 267,736 286,590 804 National Stock Yards Co. ............. 80,700 135,876 10,000 PubliCARD Inc.+ ...................... 14,436 150 500 StarTek Inc. ......................... 8,375 6,235 ------------ ------------ 1,390,401 1,306,594 ------------ ------------ CABLE -- 0.1% 90,000 Adelphia Communications Corp., Cl. A+ 15,750 3,150 2,500 Outdoor Channel Holdings Inc.+ ....... 24,825 27,225 ------------ ------------ 40,575 30,375 ------------ ------------ MARKET SHARES COST VALUE ------ ---- ----- COMMUNICATIONS EQUIPMENT -- 0.3% 1,000 Andrew Corp.+ ........................$ 3,413 $ 9,230 10,000 Communications Systems Inc. .......... 84,990 93,400 ------------ ------------ 88,403 102,630 ------------ ------------ COMPUTER SOFTWARE AND SERVICES -- 3.6% 23,881 Gemplus International SA+ ............ 10,945 40,578 5,600 Lab-Volt Systems Inc.+ ............... 31,800 63,056 25,000 Mobius Management Systems Inc.+ ...... 190,228 168,500 460,500 Net Perceptions Inc.+ ................ 188,818 828,900 834 Prosoft Learning Corp.+ .............. 11,216 25 850,000 StorageNetworks Inc. Escrow+ (a) ..... 0 25,500 6,000 Tyler Technologies Inc.+ ............. 24,120 77,580 11,000 Vitria Technology Inc.+ .............. 66,989 29,590 20,000 Xanser Corp.+ ........................ 83,498 117,000 ------------ ------------ 607,614 1,350,729 ------------ ------------ CONSUMER PRODUCTS -- 4.1% 68,000 Adams Golf Inc.+ ..................... 115,878 95,200 6,000 American Locker Group Inc.+ .......... 74,117 26,700 2,000 Ducati Motor Holding SpA, ADR ........ 31,192 18,380 5,000 Levcor International Inc.+ ........... 15,701 2,775 4,500 Marine Products Corp. ................ 4,609 43,740 1,000 Marzotto SpA ......................... 787 4,625 300 National Presto Industries Inc. ...... 8,618 16,581 180,000 Schiff Nutrition International Inc.+ . 328,887 1,252,800 41,530 Syratech Corp.+ ...................... 10,383 2,077 2,000 Valentino Fashion Group SpA .......... 11,538 68,627 ------------ ------------ 601,710 1,531,505 ------------ ------------ CONSUMER SERVICES -- 0.0% 1,000 Collectors Universe Inc. ............. 3,530 13,950 ------------ ------------ DIVERSIFIED INDUSTRIAL -- 6.8% 7,700 Ampco-Pittsburgh Corp. ............... 154,000 238,161 80,000 Harbor Global Co. Ltd.+ .............. 433,730 882,000 26,500 Haulotte Group ....................... 142,049 685,846 62,000 Katy Industries Inc.+ ................ 296,348 174,840 2,000 Lindsay Manufacturing Co. ............ 39,765 57,500 400 Oregon Steel Mills Inc.+ ............. 3,421 19,548 11,750 RWC Inc.+ ............................ 281,315 32,313 35,000 Tech/Ops Sevcon Inc. ................. 205,347 242,200 500 The Lamson & Sessions Co.+ ........... 2,475 11,910 24,000 WHX Corp.+ ........................... 309,477 216,000 ------------ ------------ 1,867,927 2,560,318 ------------ ------------ ELECTRONICS -- 2.8% 7,000 California Micro Devices Corp.+ ...... 42,015 35,700 20,000 CTS Corp. ............................ 167,434 275,600 11,500 George Risk Industries Inc. .......... 52,760 82,513 112,500 IntriCon Corp.+ ...................... 355,318 547,312 5,000 Methode Electronics Inc. ............. 46,440 47,550 20,000 SIRIT Inc.+ .......................... 11,714 3,489 4,000 Zoran Corp.+ ......................... 25,729 64,320 ------------ ------------ 701,410 1,056,484 ------------ ------------ See accompanying notes to financial statements. 23 WESTWOOD MIGHTY MITES(SM) FUND SCHEDULE OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 2006 ================================================================================ MARKET SHARES COST VALUE ------ ---- ----- COMMON STOCKS (CONTINUED) ENERGY AND UTILITIES: ELECTRIC -- 0.6% 800 British Energy Group plc+ ............$ 4,271 $ 8,695 1,000 Green Mountain Power Corp. ........... 21,571 33,370 7,000 Unitil Corp. ......................... 172,599 170,100 ------------ ------------ 198,441 212,165 ------------ ------------ ENERGY AND UTILITIES: INTEGRATED -- 2.7% 25,000 Aquila Inc.+ ......................... 71,600 108,250 34,950 Florida Public Utilities Co. ......... 318,064 482,310 7,500 MGE Energy Inc. ...................... 237,363 242,850 800 Pardee Resources Co. Inc. ............ 72,100 144,400 95,200 Progress Energy Inc., CVO+ ........... 10,472 31,416 ------------ ------------ 709,599 1,009,226 ------------ ------------ ENERGY AND UTILITIES: NATURAL GAS -- 2.1% 500 Cascade Natural Gas Corp. ............ 10,612 13,045 4,000 Chesapeake Utilities Corp. ........... 100,296 120,200 15,000 Corning Natural Gas Corp.+ ........... 226,160 240,750 1,000 Evergreen Energy Inc.+ ............... 7,920 10,510 31,200 PetroCorp Escrow Shares+ (a) ......... 0 1,872 15,500 RGC Resources Inc. ................... 332,976 401,450 2,100 U.S. Energy Corp.+ ................... 14,476 8,463 ------------ ------------ 692,440 796,290 ------------ ------------ ENERGY AND UTILITIES: SERVICES -- 2.4% 14,000 Acergy SA, ADR+ ...................... 45,204 238,980 950 Covanta Holding Corp.+ ............... 3,996 20,454 36,000 RPC Inc. ............................. 221,650 659,520 ------------ ------------ 270,850 918,954 ------------ ------------ ENERGY AND UTILITIES: WATER -- 1.9% 4,500 Artesian Resources Corp., Cl. A ...... 48,062 84,645 1,500 BIW Ltd. ............................. 27,266 24,075 2,500 California Water Service Group ....... 55,552 92,325 4,000 Consolidated Water Co. Ltd. .......... 55,124 98,280 6,000 Middlesex Water Co. .................. 102,162 115,380 10,000 SJW Corp. ............................ 118,389 299,100 ------------ ------------ 406,555 713,805 ------------ ------------ ENTERTAINMENT -- 2.3% 12,500 Canterbury Park Holding Corp. ........ 129,392 158,375 1,802 Chestnut Hill Ventures+ (a)(c) ....... 67,956 38,701 34,000 Dover Motorsports Inc. ............... 170,332 184,280 21,000 Jetix Europe NV+ ..................... 122,472 454,027 1,000 LodgeNet Entertainment Corp.+ ........ 11,000 18,880 2,000 Triple Crown Media Inc.+ ............. 12,000 14,560 ------------ ------------ 513,152 868,823 ------------ ------------ ENVIRONMENTAL CONTROL -- 0.0% 10,000 BioteQ Environmental Technologies Inc.+ .................. 16,559 15,925 ------------ ------------ MARKET SHARES COST VALUE ------ ---- ----- EQUIPMENT AND SUPPLIES -- 6.8% 145,000 Baldwin Technology Co. Inc., Cl. A+ ............................$ 308,665 $ 839,550 15,000 Capstone Turbine Corp.+ .............. 27,450 21,150 23,000 Cherokee International Corp.+ ........ 108,327 80,500 16,000 Core Molding Technologies Inc.+ ...... 47,844 110,400 22,000 Fedders Corp.+ ....................... 110,026 27,500 1,000 Genoil Inc.+ ......................... 225 760 4,000 Gerber Scientific Inc.+ .............. 13,873 59,920 9,000 Gildemeister AG ...................... 66,269 90,957 4,000 GrafTech International Ltd.+ ......... 24,000 23,360 21,000 L.S. Starrett Co., Cl. A ............. 339,640 300,300 20,000 Maezawa Kyuso Industries Co. Ltd. .... 108,117 313,228 7,500 Mine Safety Appliances Co. ........... 227,906 267,300 13,900 SL Industries Inc.+ .................. 88,117 266,880 1,000 SRS Labs Inc.+ ....................... 5,500 6,200 3,800 The Eastern Co. ...................... 58,424 106,400 800 Watts Water Technologies Inc., Cl. A ............................... 12,236 25,408 ------------ ------------ 1,546,619 2,539,813 ------------ ------------ FINANCIAL SERVICES -- 18.5% 1,000 Bancshares of Florida Inc.+ .......... 14,313 21,080 15,500 Berkshire Bancorp Inc. ............... 199,016 248,000 11,000 Crazy Woman Creek Bancorp Inc. ....... 143,391 188,100 436,500 Epoch Holding Corp.+ ................. 683,126 2,880,900 6,000 Fidelity Southern Corp. .............. 53,378 109,590 30,000 Flushing Financial Corp. ............. 449,987 525,000 31,000 Fulton Financial Corp. ............... 193,062 501,890 10 Guaranty Corp., Cl. A+ ............... 137,500 158,000 70,000 Ladenburg Thalmann Financial Services Inc.+ ...................... 50,558 73,500 500 Magyar Bancorp Inc.+ ................. 5,275 6,585 3,150 Northrim BanCorp Inc. ................ 60,970 83,160 6,400 Parish National Corp.+ ............... 238,648 603,200 9,167 Patriot National Bancorp Inc. ........ 141,747 220,741 2,500 PennFed Financial Services Inc. ...... 42,628 41,925 11,500 Seacoast Banking Corp. of Florida .... 222,420 347,300 116 Sunwest Bank+ ........................ 322,721 388,600 13,000 SWS Group Inc. ....................... 239,027 323,570 14,000 Synergy Financial Group Inc. ......... 142,492 225,400 500 TIB Financial Corp. .................. 7,780 15,965 ------------ ------------ 3,348,039 6,962,506 ------------ ------------ See accompanying notes to financial statements. 24 WESTWOOD MIGHTY MITES(SM) FUND SCHEDULE OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 2006 ================================================================================ MARKET SHARES COST VALUE ------ ---- ----- COMMON STOCKS (CONTINUED) FOOD AND BEVERAGE -- 2.0% 4,500 Boston Beer Co. Inc., Cl. A+ .........$ 82,979 $ 147,825 4,000 Genesee Corp., Cl. A+ ................ 13,980 9,420 30,100 Genesee Corp., Cl. B+ ................ 55,564 62,458 2,000 J & J Snack Foods Corp. .............. 28,830 62,200 22,000 Lifeway Foods Inc.+ .................. 78,614 150,480 14,000 MGP Ingredients Inc. ................. 67,550 297,780 400 Scheid Vineyards Inc., Cl. A+ ........ 11,311 14,400 1,000 The Inventure Group Inc.+ ............ 2,660 2,380 100 Willamette Valley Vineyards Inc.+ .... 400 571 ------------ ------------ 341,888 747,514 ------------ ------------ HEALTH CARE -- 10.0% 25,000 AFP Imaging Corp.+ ................... 54,566 42,000 13,000 Arkopharma ........................... 187,359 190,398 55,000 BioLase Technology Inc.+ ............. 651,024 343,750 2,800 Biosite Inc.+ ........................ 84,132 129,444 11,500 Boiron SA ............................ 190,555 260,300 1,000 Bruker BioSciences Corp.+ ............ 5,980 7,010 36,000 Cholestech Corp.+ .................... 277,469 432,000 96,000 Del Global Technologies Corp.+ ....... 205,665 168,000 3,000 DexCom Inc.+ ......................... 55,852 33,390 1,000 Escalon Medical Corp.+ ............... 4,920 4,080 15,279 Exactech Inc.+ ....................... 235,526 208,711 1,000 ICU Medical Inc.+ .................... 30,050 45,480 21,000 Lifecore Biomedical Inc.+ ............ 161,125 296,100 14,000 Neogen Corp.+ ........................ 160,903 303,240 2,500 NMT Medical Inc.+ .................... 7,858 38,625 1,000 Orthofix International NV+ ........... 27,010 45,470 27,000 Quidel Corp.+ ........................ 118,831 381,240 37,000 Regeneration Technologies Inc.+ ...... 331,756 259,740 500 Sirona Dental Systems Inc. ........... 9,750 16,465 76,500 Sonic Innovations Inc.+ .............. 383,462 313,650 2,000 Tutogen Medical Inc.+ ................ 10,180 8,940 12,000 United-Guardian Inc. ................. 112,483 111,000 3,200 Young Innovations Inc. ............... 86,579 115,072 ------------ ------------ 3,393,035 3,754,105 ------------ ------------ HOTELS AND GAMING -- 0.3% 1,000 Cloverleaf Kennel Club, Cl. A+ ....... 3,250 2,675 6,000 Dover Downs Gaming & Entertainment Inc. .................. 37,310 72,900 29 Fair Grounds Corp.+ (a) .............. 177,460 319 2,000 Florida Gaming Corp.+ ................ 6,950 25,500 ------------ ------------ 224,970 101,394 ------------ ------------ MANUFACTURED HOUSING AND RECREATIONAL VEHICLES -- 5.0% 80,000 Cavalier Homes Inc.+ ................. 443,541 255,200 9,000 Cavco Industries Inc.+ ............... 167,143 283,590 10,000 Nobility Homes Inc. .................. 157,337 268,100 16,000 Palm Harbor Homes Inc.+ .............. 325,687 239,360 6,000 Skyline Corp. ........................ 203,272 229,260 73,000 Southern Energy Homes Inc.+ .......... 281,579 614,660 ------------ ------------ 1,578,559 1,890,170 ------------ ------------ MARKET SHARES COST VALUE ------ ---- ----- METALS AND MINING -- 0.0% 615,000 Royal Oak Mines Inc.+ ................$ 2,314 $ 615 ------------ ------------ MUTUAL FUNDS -- 0.8% 24,000 MVC Capital Inc. ..................... 217,842 311,040 ------------ ------------ PAPER AND FOREST PRODUCTS -- 0.1% 300 Keweenaw Land Association Ltd. ....... 46,200 50,700 ------------ ------------ PUBLISHING -- 0.4% 90,000 PRIMEDIA Inc.+ ....................... 146,833 136,800 ------------ ------------ REAL ESTATE -- 4.0% 5,000 Capital Properties Inc., Cl. A ....... 73,300 119,950 350 Case Pomeroy & Co. Inc., Cl. A ....... 570,325 625,625 50 Case Pomeroy & Co. Inc., Cl. B ....... 58,825 89,375 2,500 CKX Lands Inc. ....................... 19,766 29,225 15,500 Griffin Land & Nurseries Inc.+ ....... 311,580 469,185 3,000 Gyrodyne Co. of America Inc.+ ........ 53,308 139,950 400 Holobeam Inc.+ ....................... 15,500 17,900 2,508 Royalty LLC (a) ...................... 0 0 ------------ ------------ 1,102,604 1,491,210 ------------ ------------ RESTAURANTS -- 0.7% 18,000 Nathan's Famous Inc.+ ................ 126,077 243,000 ------------ ------------ RETAIL -- 0.9% 2,200 Bowlin Travel Centers Inc.+ .......... 3,750 3,740 24,000 CoolBrands International Inc.+ ....... 56,139 14,171 1,000 Cost-U-Less Inc.+ .................... 7,022 8,660 10,000 Movado Group Inc. .................... 145,136 254,200 8,000 Sport Supply Group Inc.+ ............. 10,250 68,600 ------------ ------------ 222,297 349,371 ------------ ------------ SPECIALTY CHEMICALS -- 1.8% 267,226 General Chemical Group Inc.+ ......... 59,859 1,603 30,000 Hawkins Inc. ......................... 380,688 426,600 1,000 KMG Chemicals Inc. ................... 3,270 8,380 55,000 Omnova Solutions Inc.+ ............... 302,076 229,900 ------------ ------------ 745,893 666,483 ------------ ------------ TELECOMMUNICATIONS -- 3.7% 1,000 Ambient Corp.+ ....................... 280 145 1,000 Applied Signal Technology Inc. ....... 16,330 14,840 24,000 D&E Communications Inc. .............. 265,251 302,640 13,000 HickoryTech Corp. .................... 154,118 91,000 80 Horizon Telecom Inc., Cl. A .......... 9,250 6,200 339 Horizon Telecom Inc., Cl. B .......... 39,073 19,493 1,200 Lexcom Inc., Cl. B ................... 68,955 44,130 20,000 New Ulm Telecom Inc. ................. 198,219 307,500 2,305 NTL Inc. ............................. 31,540 58,616 10,000 PNV Inc.+ ............................ 3 15 300 Preformed Line Products Co. .......... 13,941 10,722 6,000 Shenandoah Telecommunications Co. .... 94,686 260,820 20,000 Stratos International Inc.+ .......... 81,837 138,400 33,000 Sycamore Networks Inc.+ .............. 107,085 124,740 ------------ ------------ 1,080,568 1,379,261 ------------ ------------ See accompanying notes to financial statements. 25 WESTWOOD MIGHTY MITES(SM) FUND SCHEDULE OF INVESTMENTS (CONTINUED) -- SEPTEMBER 30, 2006 ================================================================================ MARKET SHARES COST VALUE ------ ---- ----- COMMON STOCKS (CONTINUED) TRANSPORTATION -- 0.1% 2,500 Providence and Worcester Railroad Co. ........................$ 36,934 $ 50,250 ------------ ------------ WIRELESS COMMUNICATIONS -- 0.2% 9,000 Rural Cellular Corp., Cl. A+ ......... 7,830 86,670 ------------ ------------ TOTAL COMMON STOCKS .................. 26,714,976 36,854,598 ------------ ------------ PREFERRED STOCKS -- 1.1% AUTOMOTIVE: PARTS AND ACCESSORIES -- 1.1% 16,000 Jungheinrich AG Pfd. ................. 129,990 430,327 ------------ ------------ CONVERTIBLE PREFERRED STOCKS -- 0.2% FOOD AND BEVERAGE -- 0.2% 3,500 Seneca Foods Corp., Cv. Pfd. Ser. 2003+ ................. 53,375 94,570 ------------ ------------ WARRANTS -- 0.1% BUSINESS SERVICES -- 0.0% 1,666 Avalon Digital Marketing Systems Inc., expire 11/11/11+ (a)(c) ............. 0 0 37,500 Interep National Radio Sales Inc., expire 05/06/07+ (a)(b)(c) .......... 0 0 ------------ ------------ 0 0 ------------ ------------ DIVERSIFIED INDUSTRIAL -- 0.0% 3,780 WHX Corp., expire 02/28/08+ .......... 11,721 4,347 ------------ ------------ ENERGY AND UTILITIES: ELECTRIC -- 0.1% 1,680 British Energy Group plc, expire 01/17/10+ .................... 5,488 15,075 ------------ ------------ TOTAL WARRANTS ....................... 17,209 19,422 ------------ ------------ PRINCIPAL MARKET AMOUNT COST VALUE ------ ---- ----- U.S. GOVERNMENT OBLIGATIONS -- 0.9% $326,000 U.S. Treasury Bills, 4.727% to 4.843%++, 10/26/06 to 12/28/06 ................$ 324,115 $ 324,106 ------------ ------------ TOTAL INVESTMENTS -- 100.3% ..........$ 27,239,665 37,723,023 ============ OTHER ASSETS AND LIABILITIES (NET) -- (0.3)% ........................ (113,625) ------------ NET ASSETS -- 100.0% ................................$ 37,609,398 ============ -------------- (a) Security fair valued under procedures established by the Board of Trustees. The procedures may include reviewing available financial information about the company and reviewing valuation of comparable securities and other factors on a regular basis. At September 30, 2006, the market value of fair valued securities amounted to $66,392 or 0.18% of total net assets. (b) Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At September 30, 2006, the market value of Rule 144A securities amounted to $0 or 0.00% of total net assets. (c) At September 30, 2006, the Fund held investments in restricted securities amounting to $38,701 or 0.10% of total net assets, which were valued under methods approved by the Board, as follows: 09/30/06 CARRYING ACQUISITION ACQUISITION ACQUISITION VALUE SHARES ISSUER DATE COST PER UNIT ------- ------ ------ ------ -------- 1,666 Avalon Digital Marketing Systems Inc. Warrants expire 11/11/11 ..... 04/03/00 -- -- 1,802 Chestnut Hill Ventures ........ 09/20/00 $67,956 $21.4767 37,500 Interep National Radio Sales Inc. Warrants expire 05/06/07 ..... 05/03/02 -- -- + Non-income producing security. ++ Represents annualized yield at date of purchase. ADR American Depository Receipt CVO Contingent Value Obligation See accompanying notes to financial statements. 26 THE WESTWOOD FUNDS STATEMENTS OF ASSETS AND LIABILITIES SEPTEMBER 30, 2006 ================================================================================ EQUITY BALANCED INTERMEDIATE SMALLCAP INCOME MIGHTY FUND FUND BOND FUND EQUITY FUND FUND MITES(SM) FUND ------------ ------------ ------------ ------------ ------------ -------------- ASSETS: Investments, at value (cost $145,491,023, $139,752,996, $10,057,867, $8,326,121, $11,480,363, and $27,239,665, respectively) ........................... $170,707,659 $150,529,087 $ 10,049,972 $ 9,259,264 $ 11,725,502 $ 37,723,023 Cash ...................................... 1,120,930 260,541 170,431 119,219 454,648 1,065 Receivable for investments sold ........... 17,501,158 -- -- 76,397 -- 10,107 Receivable for Fund shares sold ........... 117,810 398,917 3,038 1,088 2,568 300 Dividends and interest receivable ......... 273,334 808,249 112,987 12,276 64,089 35,323 Prepaid expense ........................... 1,559 1,349 318 309 357 581 ------------ ------------ ------------ ------------ ------------ ------------ TOTAL ASSETS .............................. 189,722,450 151,998,143 10,336,746 9,468,553 12,247,164 37,770,399 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES: Dividends payable ......................... -- -- 6,489 -- -- -- Payable for Fund shares redeemed .......... 16,839,417 32,578 90 63,126 33,840 75,645 Payable for investment advisory fees ...... 152,688 92,447 16,417 23,397 22,601 30,387 Payable for distribution fees ............. 38,956 32,622 2,322 2,166 2,596 8,058 Payable for shareholder communications expenses ................. 26,959 20,233 1,959 2,341 3,540 9,808 Payable for shareholder services fees ..... 46,785 38,731 4,398 2,898 4,151 10,301 Payable for audit fees .................... 64,716 53,242 9,116 8,783 9,680 17,513 Other accrued expenses .................... 20,914 17,780 4,640 1,558 1,819 9,289 ------------ ------------ ------------ ------------ ------------ ------------ TOTAL LIABILITIES ......................... 17,190,435 287,633 45,431 104,269 78,227 161,001 ------------ ------------ ------------ ------------ ------------ ------------ NET ASSETS ................................ $172,532,015 $151,710,510 $ 10,291,315 $ 9,364,284 $ 12,168,937 $ 37,609,398 ============ ============ ============ ============ ============ ============ NET ASSETS CONSIST OF: Shares of beneficial interest, each class at $0.001 par value .......... $ 13,793 $ 11,827 $ 952 $ 749 $ 1,010 $ 2,351 Additional paid-in capital ................ 120,065,593 122,094,743 10,328,216 16,593,956 9,729,457 22,410,153 Accumulated (distributions in excess of) net investment income .................... 594,350 2,000 (465) 112,195 11,745 98,410 Accumulated net realized gain (loss) on investments and foreign currency transactions ................... 26,641,643 18,825,849 (29,493) (8,275,759) 2,181,586 4,614,945 Net unrealized appreciation/(depreciation) on investments .......................... 25,216,636 10,776,091 (7,895) 933,143 245,139 10,483,358 Net unrealized appreciation on foreign currency translations ................... -- -- -- -- -- 181 ------------ ------------ ------------ ------------ ------------ ------------ NET ASSETS ................................ $172,532,015 $151,710,510 $ 10,291,315 $ 9,364,284 $ 12,168,937 $ 37,609,398 ============ ============ ============ ============ ============ ============ SHARES OF BENEFICIAL INTEREST: CLASS AAA: Net assets ................................ $169,404,160 $145,027,730 $ 9,917,008 $ 8,716,679 $ 12,053,929 $ 36,843,058 ============ ============ ============ ============ ============ ============ Shares of beneficial interest outstanding; unlimited number of shares authorized .... 13,541,450 11,308,744 917,044 696,584 1,000,779 2,301,634 ========== ========== ======= ======= ========= ========= NET ASSET VALUE, offering and redemption price per share .............. $12.51 $12.82 $10.81 $12.51 $12.04 $16.01 ====== ====== ====== ====== ====== ====== CLASS A: Net assets ................................ $2,779,601 $5,596,276 $91,620 $403,054 $96,665 $3,603 ========== ========== ======= ======== ======= ====== Shares of beneficial interest outstanding; unlimited number of shares authorized ....................... 223,210 434,850 8,473 32,377 7,832 226 ======= ======= ===== ====== ===== === NET ASSET VALUE and redemption price per share ......................... $12.45 $12.87 $10.81 $12.45 $12.34 $15.94 ====== ====== ====== ====== ====== ======= Maximum offering price per share (NAV / .96, based on maximum sales charge of 4.00% of the offering price) ... $12.97 $13.41 $11.26 $12.97 $12.85 $16.60 ====== ====== ====== ====== ====== ====== CLASS B: Net assets ................................ $31,852 $140,613 $282,588 $6,055 $2,124 $451,816 ======= ======== ======== ====== ====== ======== Shares of beneficial interest outstanding; unlimited number of shares authorized ... 2,588 10,856 26,141 503.2 169.1 29,286 ===== ====== ====== ===== ===== ====== NET ASSET VALUE and offering price per share (a) ..................... $12.31 $12.95 $10.81 $12.03 $12.56 $15.43 ====== ====== ====== ====== ====== ====== CLASS C: Net assets ................................ $316,402 $945,891 $99 $238,496 $16,219 $310,921 ======== ======== === ======== ======= ======== Shares of beneficial interest outstanding; unlimited number of shares authorized .................... 25,707 72,940 9.6 19,919 1,250 20,250 ====== ====== === ====== ===== ====== NET ASSET VALUE and offering price per share (a) ..................... $12.31 $12.97 $10.31 $11.97 $12.98 $15.35 ====== ====== ====== ====== ====== ====== - -------------------- (a) Redemption price varies based on the length of time held. See accompanying notes to financial statements. 27 THE WESTWOOD FUNDS STATEMENTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2006 ================================================================================ EQUITY BALANCED INTERMEDIATE SMALLCAP INCOME MIGHTY FUND FUND BOND FUND EQUITY FUND FUND MITES(SM) FUND ------------ ------------ ------------ ------------ ------------ -------------- INVESTMENT INCOME: Dividends (net of foreign taxes of $1,404, $630, $0, $0, $0, and $5,583, respectively) .............$ 3,701,132 $ 1,902,470 $ -- $ 260,545 $ 710,824 $ 541,718 Interest ................................ 47,919 2,672,545 499,298 2 97,379 15,856 Other income ............................ -- -- -- -- -- 22,799 ------------ ------------ ------------ ------------ ------------ ------------ TOTAL INVESTMENT INCOME ................. 3,749,051 4,575,015 499,298 260,547 808,203 580,373 ------------ ------------ ------------ ------------ ------------ ------------ EXPENSES: Investment advisory fees ................ 1,827,992 1,127,783 64,375 97,555 138,072 434,224 Distribution fees -- Class AAA .......... 449,292 359,671 25,546 23,263 34,215 106,582 Distribution fees -- Class A ............ 13,993 26,936 519 1,360 463 161 Distribution fees -- Class B ............ 306 1,385 3,609 88 21 4,406 Distribution fees -- Class C ............ 2,512 9,485 20 1,694 156 3,024 Legal and audit fees .................... 141,426 118,114 6,766 5,052 17,947 35,977 Custodian fees .......................... 69,702 75,641 8,701 20,057 21,873 26,054 Shareholder services fees ............... 172,855 128,004 13,672 13,118 14,881 23,610 Registration expenses ................... 40,258 41,427 31,040 29,186 36,492 23,592 Shareholder communications expenses ..... 28,142 39,480 3,501 2,620 6,869 12,069 Trustees' fees .......................... 10,354 8,570 613 539 833 2,590 Accounting fees (see Note 6) ............ 45,000 45,000 -- -- -- -- Interest expense ........................ -- -- -- -- -- 19,402 Miscellaneous expenses .................. 17,580 17,051 8,554 4,638 7,277 14,584 ------------ ------------ ------------ ------------ ------------ ------------ TOTAL EXPENSES .......................... 2,819,412 1,998,547 166,916 199,170 279,099 706,275 ------------ ------------ ------------ ------------ ------------ ------------ LESS: Expense reimbursements (see Note 3) .. -- -- (49,788) (30,478) (50,429) -- Custodian fee credits ................ (70,596) (74,909) (6,967) (20,340) (21,354) (37) ------------ ------------ ------------ ------------ ------------ ------------ TOTAL REIMBURSEMENTS AND CREDITS ..... (70,596) (74,909) (56,755) (50,818) (71,783) (37) ------------ ------------ ------------ ------------ ------------ ------------ TOTAL NET EXPENSES ...................... 2,748,816 1,923,638 110,161 148,352 207,316 706,238 ------------ ------------ ------------ ------------ ------------ ------------ NET INVESTMENT INCOME (LOSS) ............ 1,000,235 2,651,377 389,137 112,195 600,887 (125,865) ------------ ------------ ------------ ------------ ------------ ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, SECURITIES SOLD SHORT, AND FOREIGN CURRENCY: Net realized gain (loss) on investments ........................ 31,162,114 19,456,154 (12,289) 1,048,122 2,485,605 5,567,618 Net realized gain on securities sold short ............................ -- -- -- -- -- 4,405 Net realized loss on foreign currency transactions ................. -- -- -- -- -- (1,205) ------------ ------------ ------------ ------------ ------------ ------------ Net realized gain (loss) on investments, securities sold short, and foreign currency transactions ................. 31,162,114 19,456,154 (12,289) 1,048,122 2,485,605 5,570,818 ------------ ------------ ------------ ------------ ------------ ------------ Net change in unrealized appreciation/ (depreciation) on investments, securities sold short, and foreign currency translations ................. (8,918,553) (7,798,557) (90,810) (156,440) (2,698,672) (1,883,665) ------------ ------------ ------------ ------------ ------------ ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY .. 22,243,561 11,657,597 (103,099) 891,682 (213,067) 3,687,153 ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............$ 23,243,796 $ 14,308,974 $ 286,038 $ 1,003,877 $ 387,820 $ 3,561,288 ============ ============ ============ ============ ============ ============ See accompanying notes to financial statements. 28 THE WESTWOOD FUNDS STATEMENTS OF CHANGES IN NET ASSETS ================================================================================ EQUITY FUND BALANCED FUND ----------- ------------- FOR THE YEAR ENDED SEPTEMBER 30, FOR THE YEAR ENDED SEPTEMBER 30, -------------------------------- -------------------------------- 2006 2005 2006 2005 ------------- ------------- ------------- ------------- OPERATIONS: Net investment income ....................... $ 1,000,235 $ 1,224,537 $ 2,651,377 $ 2,443,138 Net realized gain on investments and foreign currency transactions .......... 31,162,114 25,102,359 19,456,154 13,147,368 Net change in unrealized appreciation/ (depreciation) on investments .............. (8,918,553) 6,163,758 (7,798,557) 2,236,304 ------------- ------------- ------------- ------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................. 23,243,796 32,490,654 14,308,974 17,826,810 ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income Class AAA ................................ (782,257) (1,760,755) (2,709,658) (2,246,908) Class A .................................. (14,014) (8,953) (67,539) (61,410) Class B .................................. (77) -- (454) (446) Class C .................................. (619) (502) (2,979) (3,121) ------------- ------------- ------------- ------------- (796,967) (1,770,210) (2,780,630) (2,311,885) ------------- ------------- ------------- ------------- Net realized gain on investments Class AAA ................................ -- -- (9,760,439) -- Class A .................................. -- -- (364,172) -- Class B .................................. -- -- (9,202) -- Class C .................................. -- -- (61,573) -- ------------- ------------- ------------- ------------- -- -- (10,195,386) -- ------------- ------------- ------------- ------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS ......... (796,967) (1,770,210) (12,976,016) (2,311,885) ------------- ------------- ------------- ------------- SHARES OF BENEFICIAL INTEREST TRANSACTIONS: Proceeds from shares issued Class AAA ................................ 33,121,467 26,510,381 27,845,576 27,058,840 Class A .................................. 1,707,348 302,826 795,329 687,831 Class B .................................. -- -- 3,171 -- Class C .................................. 268,288 2,979 103,367 218,960 ------------- ------------- ------------- ------------- 35,097,103 26,816,186 28,747,443 27,965,631 ------------- ------------- ------------- ------------- Proceeds from reinvestment of distributions Class AAA ................................ 726,922 1,608,725 11,833,526 2,092,576 Class A .................................. 9,432 8,446 388,820 51,281 Class B .................................. 41 -- 8,142 380 Class C .................................. 619 502 52,080 2,172 ------------- ------------- ------------- ------------- 737,014 1,617,673 12,282,568 2,146,409 ------------- ------------- ------------- ------------- Cost of shares redeemed Class AAA ................................ (64,882,159) (59,376,350) (40,477,393) (35,775,507) Class A .................................. (1,573,899) (1,815,288) (1,305,055) (984,117) Class B .................................. (1,442) (13,854) (11,401) (40,935) Class C .................................. (131,911) (31,680) (208,504) (188,945) ------------- ------------- ------------- ------------- (66,589,411) (61,237,172) (42,002,353) (36,989,504) ------------- ------------- ------------- ------------- NET DECREASE IN NET ASSETS FROM SHARES OF BENEFICIAL INTEREST TRANSACTIONS (30,755,294) (32,803,313) (972,342) (6,877,464) ------------- ------------- ------------- ------------- REDEMPTION FEES ............................. -- (1,224) -- 5,163 ------------- ------------- ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS ....... (8,308,465) (2,084,093) 360,616 8,642,624 NET ASSETS: Beginning of period ......................... 180,840,480 182,924,573 151,349,894 142,707,270 ------------- ------------- ------------- ------------- End of period ............................... $ 172,532,015 $ 180,840,480 $ 151,710,510 $ 151,349,894 ============= ============= ============= ============= Undistributed net investment income ......... $ 594,350 $ 391,082 $ 2,000 $ 131,253 ============= ============= ============= ============= See accompanying notes to financial statements. 29 THE WESTWOOD FUNDS STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) ================================================================================ INTERMEDIATE BOND FUND SMALLCAP EQUITY FUND ---------------------- -------------------- FOR THE YEAR ENDED SEPTEMBER 30, FOR THE YEAR ENDED SEPTEMBER 30, -------------------------------- -------------------------------- 2006 2005 2006 2005 ------------- ------------- ------------- ------------- OPERATIONS: Net investment income (loss) .............. $ 389,137 $ 325,235 $ 112,195 $ (10,082) Net realized gain (loss) on investments ... (12,289) 15,973 1,048,122 1,981,152 Net change in unrealized appreciation/ (depreciation) on investments ........... (90,810) (154,585) (156,440) 329,566 ------------ ------------ ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................ 286,038 186,623 1,003,877 2,300,636 ------------ ------------ ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS: Net investment income Class AAA .............................. (373,401) (313,036) -- -- Class A ................................ (5,320) (2,268) -- -- Class B ................................ (10,351) (9,927) -- -- Class C ................................ (65) (4) -- -- ------------ ------------ ------------ ------------ (389,137) (325,235) -- -- ------------ ------------ ------------ ------------ Net realized gain on investments Class AAA .............................. (14,113) (85,504) -- -- Class A ................................ (241) (644) -- -- Class B ................................ (665) (3,791) -- -- Class C ................................ --* (1) -- -- ------------ ------------ ------------ ------------ (15,019) (89,940) -- -- ------------ ------------ ------------ ------------ TOTAL DISTRIBUTIONS TO SHAREHOLDERS ....... (404,156) (415,175) -- -- ------------ ------------ ------------ ------------ SHARES OF BENEFICIAL INTEREST TRANSACTIONS: Proceeds from shares issued Class AAA .............................. 2,310,376 2,030,120 2,726,239 1,715,102 Class A ................................ 168,497 31,409 278,007 4,704 Class B ................................ 137,989 1,152 -- -- Class C ................................ 53,292 -- 225,481 -- ------------ ------------ ------------ ------------ 2,670,154 2,062,681 3,229,727 1,719,806 ------------ ------------ ------------ ------------ Proceeds from reinvestment of distributions Class AAA .............................. 329,870 363,093 -- -- Class A ................................ 5,414 2,841 -- -- Class B ................................ 5,372 6,110 -- -- Class C ................................ -- -- -- -- ------------ ------------ ------------ ------------ 340,656 372,044 -- -- ------------ ------------ ------------ ------------ Cost of shares redeemed Class AAA .............................. (2,883,978) (1,457,099) (3,680,038) (7,388,405) Class A ................................ (138,752) (50,245) (26,885) (39,558) Class B ................................ (235,964) (72,586) (5,461) (13,872) Class C ................................ (53,344) -- -- (10,985) ------------ ------------ ------------ ------------ (3,312,038) (1,579,930) (3,712,384) (7,452,820) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM SHARES OF BENEFICIAL INTEREST TRANSACTIONS (301,228) 854,795 (482,657) (5,733,014) ------------ ------------ ------------ ------------ REDEMPTION FEES ........................... -- (78) -- (155) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS ..... (419,346) 626,165 521,220 (3,432,533) NET ASSETS: Beginning of period ....................... 10,710,661 10,084,496 8,843,064 12,275,597 ------------ ------------ ------------ ------------ End of period ............................. $ 10,291,315 $ 10,710,661 $ 9,364,284 $ 8,843,064 ============ ============ ============ ============ Undistributed net investment income ....... $ -- $ -- $ 112,195 $ -- ============ ============ ============ ============ - --------------- *Amount represents less than $1.00. See accompanying notes to financial statements. 30 THE WESTWOOD FUNDS STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) ================================================================================ INCOME FUND MIGHTY MITES(SM) FUND ---------------------- --------------------- FOR THE YEAR ENDED SEPTEMBER 30, FOR THE YEAR ENDED SEPTEMBER 30, -------------------------------- -------------------------------- 2006 2005 2006 2005 ------------- ------------- ------------- ------------- OPERATIONS: Net investment income (loss) ................ $ 600,887 $ 321,247 $ (125,865) $ (71,577) Net realized gain on investments, securities sold short, and foreign currency transactions ............. 2,485,605 3,988,703 5,570,818 5,351,217 Net change in unrealized appreciation/ (depreciation) on investments, securities sold short, and foreign currency translations ..................... (2,698,672) (504,578) (1,883,665) 3,944,342 ------------ ------------ ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................. 387,820 3,805,372 3,561,288 9,223,982 ------------ ------------ ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS: Net investment income Class AAA ................................ (415,259) (312,053) -- -- Class A .................................. (2,324) (1,038) -- -- Class B .................................. (23) (10) -- -- Class C .................................. (162) (73) -- -- ------------ ------------ ------------ ------------ (417,768) (313,174) -- -- ------------ ------------ ------------ ------------ Net realized gains on investments Class AAA ................................ (4,124,003) (885,319) (5,443,979) (4,019,285) Class A .................................. (24,170) (2,234) (5,023) (3,339) Class B .................................. (544) (87) (53,095) (34,684) Class C .................................. (3,976) (407) (35,532) (26,813) ------------ ------------ ------------ ------------ (4,152,693) (888,047) (5,537,629) (4,084,121) ------------ ------------ ------------ ------------ TOTAL DISTRIBUTIONS TO SHAREHOLDERS ......... (4,570,461) (1,201,221) (5,537,629) (4,084,121) ------------ ------------ ------------ ------------ SHARES OF BENEFICIAL INTEREST TRANSACTIONS: Proceeds from shares issued Class AAA ................................ 4,386,990 4,500,719 2,461,715 1,101,902 Class A .................................. 288 80,304 1,008 1,152 Class B .................................. -- -- -- -- Class C .................................. -- 8,018 2,900 1,200 ------------ ------------ ------------ ------------ 4,387,278 4,589,041 2,465,623 1,104,254 ------------ ------------ ------------ ------------ Proceeds from reinvestment of distributions Class AAA ................................ 4,301,518 1,123,377 5,123,877 3,747,947 Class A .................................. 26,449 3,262 5,005 3,328 Class B .................................. 520 89 52,941 31,868 Class C .................................. 4,093 471 35,514 26,802 ------------ ------------ ------------ ------------ 4,332,580 1,127,199 5,217,337 3,809,945 ------------ ------------ ------------ ------------ Cost of shares redeemed Class AAA ................................ (8,661,378) (8,514,297) (15,297,041) (14,221,912) Class A .................................. -- (3,263) (39,730) (6,629) Class B .................................. -- -- (15,709) (38,328) Class C .................................. -- -- (43,008) (40,914) ------------ ------------ ------------ ------------ (8,661,378) (8,517,560) (15,395,488) (14,307,783) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS FROM SHARES OF BENEFICIAL INTEREST TRANSACTIONS 58,480 (2,801,320) (7,712,528) (9,393,584) ------------ ------------ ------------ ------------ REDEMPTION FEES ............................. -- 6,511 -- 22 ------------ ------------ ------------ ------------ NET DECREASE IN NET ASSETS .................. (4,124,161) (190,658) (9,688,869) (4,253,701) NET ASSETS: Beginning of period ......................... 16,293,098 16,483,756 47,298,267 51,551,968 ------------ ------------ ------------ ------------ End of period ............................... $ 12,168,937 $ 16,293,098 $ 37,609,398 $ 47,298,267 ============ ============ ============ ============ Undistributed net investment income ......... $ 11,745 $ 8,073 $ 98,410 $ 7,159 ============ ============ ============ ============ See accompanying notes to financial statements. 31 THE WESTWOOD FUNDS NOTES TO FINANCIAL STATEMENTS ================================================================================ 1. ORGANIZATION. The Westwood Funds, formerly the Gabelli Westwood Funds, (the "Trust") was organized as a Massachusetts business trust on June 12, 1986. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified open-end management investment company and currently consists of six active separate investment portfolios: Equity Fund, Balanced Fund, Intermediate Bond Fund, SmallCap Equity Fund, Income Fund, and Mighty Mites(SM) Fund (individually, a "Fund" and collectively, the "Funds"), each with four classes of shares outstanding. Each class of shares outstanding bears the same voting, dividend, liquidation, and other rights and conditions, except that the expenses incurred in the distribution and marketing of such shares are different for each class. Prior to July 18, 2005, the Westwood Income Fund's name was Westwood Realty Fund. The investment objectives of each Fund are as follows: o Equity Fund seeks to provide capital appreciation. The Fund's secondary goal is to produce current income. o Balanced Fund seeks to provide capital appreciation and current income resulting in a high total investment return consistent with prudent investment risk and a balanced investment approach. o Intermediate Bond Fund seeks to maximize total return, while maintaining a level of current income consistent with the maintenance of principal and liquidity. o SmallCap Equity Fund seeks to provide long-term capital appreciation by investing primarily in smaller capitalization equity securities. o Income Fund seeks to provide a high level of current income as well as long-term capital appreciation by investing primarily in income producing equity and fixed income securities. o Mighty Mites(SM) Fund seeks to provide long-term capital appreciation by investing primarily in micro-capitalization equity securities. 2. SIGNIFICANT ACCOUNTING POLICIES. The preparation of financial statements in accordance with United States ("U.S.") generally accepted accounting principles 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. The following is a summary of significant accounting policies followed by the Funds in the preparation of their financial statements. SECURITY VALUATION. Portfolio securities listed or traded on a nationally recognized securities exchange or traded in the U.S. over-the-counter market for which market quotations are readily available are valued at the last quoted sale price or a market's official closing price as of the close of business on the day the securities are being valued. If there were no sales that day, the security is valued at the average of the closing bid and asked prices or, if there were no asked prices quoted on that day, then the security is valued at the closing bid price on that day. If no bid or asked prices are quoted on such day, the security is valued at the most recently available price or, if the Board of Trustees (the "Board") so determines, by such other method as the Board shall determine in good faith to reflect its fair market value. Portfolio securities traded on more than one national securities exchange or market are valued according to the broadest and most representative market, as determined by Gabelli Advisers, Inc. (the "Adviser"). Portfolio securities primarily traded on a foreign market are generally valued at the preceding closing values of such securities on the relevant market, but may be fair valued pursuant to procedures established by the Board if market conditions change significantly after the close of the foreign market but prior to the close of business on the day the securities are being valued. Debt instruments with remaining maturities of 60 days or less that are not credit impaired are valued at amortized cost, unless the Board determines such amount does not reflect the securities' fair value, in which case these securities will be fair valued as determined by the Board. Debt instruments having a maturity greater than 60 days for which market quotations are readily available are valued at the average of the latest bid and asked prices. If there were no asked prices quoted on such day, the security is valued using the closing bid price. Futures contracts are valued at the closing settlement price of the exchange or board of trade on which the applicable contract is traded. 32 THE WESTWOOD FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ Securities and assets for which market quotations are not readily available are fair valued as determined by the Board. Fair valuation methodologies and procedures may include, but are not limited to: analysis and review of available financial and non-financial information about the company; comparisons to the valuation and changes in valuation of similar securities, including a comparison of foreign securities to the equivalent U.S. dollar value ADR securities at the close of the U.S. exchange; and evaluation of any other information that could be indicative of the value of the security. ACCOUNTING FOR REAL ESTATE INVESTMENT TRUSTS. The Balanced, SmallCap Equity, Income, and Mighty Mites(SM) Funds own shares of Real Estate Investment Trusts ("REITS") which report information on the source of their distributions annually. Distributions received from REITS during the year which represent a return of capital are recorded as a reduction to the cost of the individual REIT and distributions which represent a capital gain dividend are recorded as a realized long-term capital gain on investments. SECURITIES SOLD SHORT. The Mighty Mites(SM) Fund entered into short sale transactions. Short selling involves selling securities that may or may not be owned and, at times, borrowing the same securities for delivery to the purchaser, with an obligation to replace such borrowed securities at a later date. The proceeds received from short sales are recorded as liabilities and the Mighty Mites(SM) Fund records an unrealized gain or loss to the extent of the difference between the proceeds received and the value of an open short position on the day of determination. The Mighty Mites(SM) Fund records a realized gain or loss when the short position is closed out. By entering into a short sale, the Mighty Mites(SM) Fund bears the market risk of an unfavorable change in the price of the security sold short. Dividends on short sales are recorded as an expense by the Mighty Mites(SM) Fund on the ex-dividend date and interest expense is recorded on the accrual basis. The Mighty Mites(SM) Fund did not hold any short positions as of September 30, 2006. FOREIGN CURRENCY TRANSLATIONS. The books and records of the Funds are maintained in U.S. dollars. Foreign currencies, investments, and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities, income, and expenses are translated at the exchange rate prevailing on the respective dates of such transactions. Unrealized gains and losses that result from changes in foreign exchange rates and/or changes in market prices of securities have been included in unrealized appreciation/depreciation on investments and foreign currency translations. Net realized foreign currency gains and losses resulting from changes in exchange rates include foreign currency gains and losses between trade date and settlement date on investment securities transactions, foreign currency transactions, and the difference between the amounts of interest and dividends recorded on the books of the Funds and the amounts actually received. The portion of foreign currency gains and losses related to fluctuation in exchange rates between the initial trade date and subsequent sale trade date is included in realized gain/(loss) on investments. FOREIGN SECURITIES. The Funds may directly purchase securities of foreign issuers. Investing in securities of foreign issuers involves special risks not typically associated with investing in securities of U.S. issuers. The risks include possible revaluation of currencies, the ability to repatriate funds, less complete financial information about companies, and possible future adverse political and economic developments. Moreover, securities of many foreign issuers and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. issuers. FOREIGN TAXES. The Funds may be subject to foreign taxes on income, gains on investments, or currency repatriation, a portion of which may be recoverable. The Funds will accrue such taxes and recoveries as applicable, based upon their current interpretation of tax rules and regulations that exist in the markets in which they invest. RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest up to 10% (except for the SmallCap Equity Fund, Income Fund, and Mighty Mites(SM) Fund which may invest up to 15%) of its net assets in restricted securities issued under Section 4(2) of the Securities Act of 1933, as amended. Illiquid securities include securities the disposition of which is subject to substantial legal or contractual restrictions. The sale of illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale. Rule 144A securities freely saleable among qualified institutional investors under special rules adopted by the SEC may be treated as liquid if they satisfy liquidity 33 THE WESTWOOD FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ standards established by the Board. The continued liquidity of such securities is not as well assured as that of publicly traded securities, and accordingly the Board will monitor their liquidity. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are accounted for on the trade date with realized gain or loss on investments determined by using the identified cost method. Interest income (including amortization of premium and accretion of discount) is recorded on the accrual basis. Premiums and discounts on debt securities are amortized using the effective yield to maturity method. Dividend income is recorded on the ex-dividend date except for certain dividends which are recorded as soon as the Funds are informed of the dividend. DETERMINATION OF NET ASSET VALUE AND CALCULATION OF EXPENSES. Certain administrative expenses are common to, and allocated among, various affiliated funds. Such allocations are made on the basis of each Fund's average net assets or other criteria directly affecting the expenses as determined by the Adviser pursuant to procedures established by the Board. In calculating the net asset value ("NAV") per share of each class, investment income, realized and unrealized gains and losses, redemption fees, and expenses other than class specific expenses, are allocated daily to each class of shares based upon the proportion of net assets of each class at the beginning of each day. Distribution expenses are borne solely by the class incurring the expense. CUSTODIAN FEE CREDITS AND INTEREST EXPENSE. When cash balances are maintained in a Fund's custody account, the Fund receives credits which are used to offset custodian fees. The gross expenses paid under each custody arrangement are included in custodian fees in the Statement of Operations with the corresponding expense offset, if any, shown as "custodian fee credits". When cash balances are overdrawn, the Fund is charged an overdraft fee equal to 90% of the current Treasury Bill rate. This amount is shown as "interest expense" in the Statement of Operations. DISTRIBUTIONS TO SHAREHOLDERS. Distributions from net investment income are declared and paid annually for the Equity, SmallCap Equity, and Mighty Mites(SM) Funds, and quarterly for the Balanced and Income Funds. The Intermediate Bond Fund declares dividends daily and pays those dividends monthly. Distributions of net realized gain on investments are normally declared and paid at least annually by each Fund. Distributions to shareholders are recorded on the ex-dividend date. Distributions to shareholders are based on income and capital gains as determined in accordance with Federal income tax regulations, which may differ from income and capital gains as determined under U.S. generally accepted accounting principles. These differences are primarily due to differing treatments of income and gains on various investment securities and foreign currency transactions held by the Funds, timing differences, and differing characterizations of distributions made by the Funds. Distributions from net investment income include net realized gains on foreign currency transactions. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, adjustments are made to the appropriate capital accounts in the period when the differences arise. These reclassifications have no impact on the NAV of the Funds. For the fiscal year ended September 30, 2006, the following reclassifications were made to increase (decrease) such accounts with offsetting adjustments to additional paid-in capital. These reclassifications related primarily to distributions from Real Estate Investment Trusts and net operating losses. ACCUMULATED UNDISTRIBUTED ACCUMULATED NET REALIZED ADDITIONAL NET INVESTMENT INCOME (LOSS) GAIN (LOSS) ON INVESTMENTS PAID-IN CAPITAL ---------------------------- -------------------------- --------------- Equity Fund ............... -- -- -- Balanced Fund ............. -- -- -- Intermediate Bond Fund .... $ (37) $ 37 -- SmallCap Equity Fund ...... -- 5,516 $ (5,516) Income Fund ............... (179,447) (1,691) 181,138 Mighty Mites(SM) Fund ..... 217,116 (185,201) (31,915) 34 THE WESTWOOD FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ The tax character of distributions paid during the fiscal years ended September 30, 2006 and September 30, 2005 was as follows: EQUITY FUND BALANCED FUND INTERMEDIATE BOND FUND --------------------------- --------------------------- --------------------------- YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, --------------------------- --------------------------- --------------------------- 2006 2005 2006 2005 2006 2005 ----------- ----------- ----------- ----------- ----------- ----------- Ordinary income (inclusive of short-term capital gains) ... $ 796,967 $ 1,770,210 $ 3,260,752 $ 2,311,885 $ 397,787 $ 326,226 Net long-term capital gains ... -- -- 9,715,264 -- 6,369 88,949 ----------- ----------- ----------- ----------- ----------- ----------- Total distributions paid ...... $ 796,967 $ 1,770,210 $12,976,016 $ 2,311,885 $ 404,156 $ 415,175 =========== =========== =========== =========== =========== =========== SMALLCAP EQUITY FUND INCOME FUND MIGHTY MITES(SM) FUND --------------------------- --------------------------- --------------------------- YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, --------------------------- --------------------------- --------------------------- 2006 2005 2006 2005 2006 2005 ----------- ----------- ----------- ----------- ----------- ----------- Ordinary income (inclusive of short-term capital gains) .... -- -- $ 522,331 $ 313,174 -- $ 1,345,361 Net long-term capital gains .... -- -- 4,048,130 888,047 $ 5,537,629 2,738,760 ----------- ----------- ----------- ----------- ----------- ----------- Total distributions paid ....... -- -- $ 4,570,461 $ 1,201,221 $ 5,537,629 $ 4,084,121 =========== =========== =========== =========== =========== =========== PROVISION FOR INCOME TAXES. The Funds intend to continue to qualify as regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). It is the policy of the Funds to comply with the requirements of the Code applicable to regulated investment companies and to distribute substantially all of the Funds' net investment company taxable income and net capital gains. Therefore, no provision for Federal income taxes is required. At September 30, 2006, the difference between book and tax basis unrealized appreciation/(depreciation) is primarily attributable to the tax basis deferral of losses on wash sales. Additionally, the Income and Mighty Mites(SM) Funds have basis adjustments due to investments in publicly traded partnerships. As of September 30, 2006, the components of accumulated earnings/(losses) on a tax basis were as follows: INTERMEDIATE SMALLCAP MIGHTY EQUITY BALANCED BOND EQUITY INCOME MITES(SM) FUND FUND FUND FUND FUND FUND ------------ ------------ ------------ ------------ ------------ ------------ Undistributed ordinary income/(loss) ....................$ 1,776,974 $ 3,533,486 $ (465) $ 112,195 -- -- Undistributed long-term capital gain ..................... 25,948,745 15,349,366 -- -- $ 2,232,726 $ 4,844,829 Capital loss carryforward .......... -- -- (3,903) (8,264,432) -- -- Unrealized appreciation/ (depreciation) ................... 24,726,910 10,721,088 (25,099) 921,816 258,648 10,355,346 Post-October losses ................ -- -- (8,386) -- -- (3,281) Other temporary differences ........ -- -- -- -- (52,904) -- ------------ ------------ ------------ ------------ ------------ ------------ Total accumulated income/(loss) ....$ 52,452,629 $ 29,603,940 $ (37,853) $ (7,230,421) $ 2,438,470 $ 15,196,894 ============ ============ ============ ============ ============ ============ The following summarizes capital loss carryforwards and expiration dates for each Fund at September 30, 2006: INTERMEDIATE SMALLCAP MIGHTY EQUITY BALANCED BOND EQUITY INCOME MITES(SM) EXPIRING IN FISCAL YEAR FUND FUND FUND FUND FUND FUND - ----------------------- ------------ ------------ ------------ ------------ ------------ ------------ 2010 .......................... -- -- -- $3,418,946 -- -- 2011 .......................... -- -- -- 4,845,486 -- -- 2012 .......................... -- -- -- -- -- -- 2013 .......................... -- -- -- -- -- -- 2014 .......................... -- -- $3,903 -- -- -- 35 THE WESTWOOD FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ These capital loss carryforwards are available to reduce future required distributions of net capital gains to shareholders. During the fiscal year ended September 30, 2006, the Equity Fund and SmallCap Equity Fund utilized capital loss carryforwards of $4,052,930 and $1,057,530, respectively. Under the current tax law, capital losses related to securities realized after October 31 and prior to the Funds' fiscal year end may be treated as occurring on the first day of the following year. For the fiscal year ended September 30, 2006, the Intermediate Bond Fund and Mighty Mites(SM) Fund deferred capital losses of $8,386 and $3,281, respectively. The following summarizes the tax cost of investments and the related unrealized appreciation/depreciation at September 30, 2006: INTERMEDIATE SMALLCAP MIGHTY EQUITY BALANCED BOND EQUITY INCOME MITES(SM) FUND FUND FUND FUND FUND FUND ------------ ------------ ----------- ---------- ----------- ----------- Aggregate cost of investments .....$145,980,749 $139,807,999 $10,075,071 $8,337,448 $11,466,854 $27,367,858 ============ ============ =========== ========== =========== =========== Gross unrealized appreciation ..... 25,914,166 11,911,466 117,179 1,112,971 317,447 14,068,401 Gross unrealized depreciation ..... (1,187,256) (1,190,378) (142,278) (191,155) (58,799) (3,713,236) ------------ ------------ ----------- ---------- ----------- ----------- Net unrealized appreciation/ (depreciation) ..................$ 24,726,910 $ 10,721,088 $ (25,099) $ 921,816 $ 258,648 $10,355,165 ============ ============ =========== ========== =========== =========== NEW ACCOUNTING PRONOUNCEMENTS. In July 2006, the Financial Accounting Standards Board (the "FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" ("the Interpretation"). The Interpretation establishes for all entities, including pass-through entities such as the Funds, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. The Interpretation is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. Management has recently begun to evaluate the application of the Interpretation to the Funds, and is not in a position at this time to estimate the significance of its impact, if any, on the Funds' financial statements. In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 157, Fair Value Measurements, which clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. Adoption of SFAS 157 requires the use of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. At this time, management is in the process of reviewing the Standard against its current valuation policies to determine future applicability. 36 THE WESTWOOD FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ 3. INVESTMENT ADVISORY AGREEMENTS AND OTHER TRANSACTIONS. The Funds have entered into an investment advisory agreement (the "Advisory Agreement") with the Adviser which provides that the Funds will pay the Adviser a fee, computed daily and paid monthly, at the annual rate of 1.00% for the Equity, SmallCap Equity, Income, and Mighty Mites(SM) Funds, 0.75% for the Balanced Fund, and 0.60% for the Intermediate Bond Fund, of the value of the Fund's average daily net assets. In accordance with the Advisory Agreement, the Adviser provides a continuous investment program for the Funds' portfolios, oversees the administration of all aspects of the Funds' business and affairs, and pays the compensation of all Officers and Trustees of the Funds who are affiliated persons of the Adviser. The Adviser contractually agreed to waive investment advisory fees and/or reimburse expenses to the Intermediate Bond, SmallCap Equity, and Income Funds in the event annual expenses of such Funds exceed certain prescribed limits. Such fee waiver/reimbursement arrangement will continue until at least September 30, 2007. The reimbursement agreement ended on September 30, 2005 for the Mighty Mites(SM) Fund. For the fiscal year ended September 30, 2006, the Adviser waived fees or reimbursed expenses in the amounts of $49,788, $30,478, and $50,429 for the Intermediate Bond, SmallCap Equity, and Income Funds, respectively. The Intermediate Bond, SmallCap Equity, Income, and Mighty Mites(SM) Funds are obliged to repay the Adviser for a period of two fiscal years following the fiscal year in which the Adviser reimbursed the Funds only to the extent that the operating expenses of the Funds fall below the applicable expense limitation for Class AAA of 1.00%, 1.50%, 1.50%, and 1.50%, respectively, and for Class A of 1.10%, 1.75%, 1.75%, and 1.75%, respectively, and for Class B and Class C of 1.75%, 2.25%, 2.25%, and 2.25%, respectively of average daily net assets, the annual limitation under the Advisory Agreement. As of September 30, 2006, the cumulative unreimbursed amounts which may be recovered by the Adviser within the next two fiscal years are $128,887, $111,774, $187,555, and $118,942 for the Intermediate Bond, SmallCap Equity, Income, and Mighty Mites(SM) Funds, respectively. The Funds, with the exception of the Mighty Mites(SM) Fund, have also entered into a sub-advisory agreement with Westwood Management Corp. (the "Sub-Adviser") whereby the Adviser pays the Sub-Adviser the greater of $150,000 per year on an aggregate basis for the Funds or a fee of 35% of net revenues to the Adviser from the Funds. For the fiscal year ended September 30, 2006, the Adviser informed the Funds that it paid collectively to the Sub-Adviser fees of $836,500 for the Equity, Balanced, Intermediate Bond, SmallCap Equity, and Income Funds. The Trust pays each Trustee that is not an affiliated person of the Adviser or its affiliates (as defined in the 1940 Act) an annual retainer of $3,000 plus $500 for each Board meeting attended and they are reimbursed for any out of pocket expenses incurred in attending meetings. All Board committee members receive $500 per meeting. Trustees who are directors or employees of the Adviser or an affiliated company receive no compensation or expense reimbursement from the Funds. 4. DISTRIBUTION PLAN. The Trust's Board has adopted a distribution plan (the "Plan") for each class of shares pursuant to Rule 12b-1 under the 1940 Act. Gabelli & Company, Inc. ("Gabelli & Company"), an affiliate of the Adviser, serves as distributor of the Funds. Under the Class AAA, Class A, Class B, and Class C Share Plans, payments are authorized to Gabelli & Company at annual rates of 0.25%, 0.50% (for the Intermediate Bond Fund's Class A Shares at an annual rate of 0.35%), 1.00%, and 1.00%, respectively, of the average daily net assets of those classes, the annual limitations under each Plan. Such payments are accrued daily and paid monthly. 37 THE WESTWOOD FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ 5. PORTFOLIO SECURITIES. Purchases and proceeds from the sales of securities for the fiscal year ended September 30, 2006, other than short-term securities, are as follows: PURCHASES SALES PURCHASES SALES (EXCLUDING U.S. (EXCLUDING U.S. OF U.S. OF U.S. GOVERNMENT GOVERNMENT GOVERNMENT GOVERNMENT SECURITIES) SECURITIES) SECURITIES SECURITIES ------------ ------------ ------------ ----------- Equity Fund ......................... $130,596,153 $155,009,955 -- -- Balanced Fund ....................... 72,856,572 91,968,796 $22,420,786 $12,705,711 Intermediate Bond Fund .............. 600,096 814,717 3,372,661 2,722,218 SmallCap Equity Fund ................ 7,502,320 7,546,618 -- -- Income Fund ......................... 14,116,572 22,027,413 3,800,472 -- Mighty Mites(SM) Fund ............... 1,687,372 13,933,895 -- -- 6. TRANSACTIONS WITH AFFILIATES. During the fiscal year ended September 30, 2006, the Mighty Mites(SM) Fund paid brokerage commissions of $17,567 to Gabelli & Company. Additionally, Gabelli & Company informed the Trust that it received $11,117 from investors representing commissions (sales charges and underwriting fees) on sales and redemptions of Fund shares. The cost of calculating each Fund's NAV per share is a Fund expense pursuant to the Advisory Agreement between each Fund and the Adviser. During the fiscal year ended September 30, 2006, the Equity and Balanced Funds each paid or accrued $45,000 to the Adviser in connection with the cost of computing the Fund's NAV. A reimbursement was not sought during the fiscal year ended September 30, 2006 for the Income, Intermediate Bond, SmallCap Equity, and Mighty Mites(SM) Funds. 7. SHARES OF BENEFICIAL INTEREST. The Funds currently offer four classes of shares -- Class AAA Shares, Class A Shares, Class B Shares, and Class C Shares. Class AAA Shares are offered only to investors who acquire them directly from Gabelli & Company, or through selected broker/dealers, or the transfer agent without a sales charge. Class A Shares are subject to a maximum front-end sales charge of 4.00%. Class B Shares are subject to a contingent deferred sales charge ("CDSC") upon redemption within six years of purchase and automatically convert to Class A Shares approximately eight years after the original purchase. The applicable CDSC is equal to a declining percentage of the lesser of the NAV per share at the date of original purchase or at the date of redemption, based on the length of time held. Class C Shares are subject to a 1.00% CDSC for one year after purchase. Class B Shares are available only through exchange of Class B Shares of other funds distributed by Gabelli & Company. The Board has approved Class I Shares which have not been offered publicly. From October 1, 2004 to April 1, 2005, the Funds imposed a redemption fee on Class AAA, Class A, Class B, and Class C Shares that were redeemed or exchanged on or before the sixtieth day after the date of a purchase. Effective April 1, 2005, the redemption fee was eliminated for all Funds except Mighty Mites(SM) Fund, whose redemption fee was retained at 2.00% applicable to redemptions or exchanges within 7 days or less after the date of a purchase. The redemption fee is deducted from the proceeds otherwise payable to the redeeming shareholders and is retained by the Mighty Mites(SM) Fund. The Mighty Mites(SM) Fund did not retain any redemption fees during the fiscal year ended September 30, 2006. The redemption fee does not apply to shares purchased through programs that the Adviser determined to have appropriate short-term trading policies in place. Additionally, certain recordkeepers for qualified and non-qualified retirement plans that could not collect the redemption fee at the participant level due to systems limitations have received an extension to implement such systems. 38 THE WESTWOOD FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ Transactions in shares of beneficial interest were as follows: ------------------------ ------------------------ ------------------------ YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, ------------------------ ------------------------ ------------------------ 2006 2005 2006 2005 2006 2005 ---------- ---------- ---------- ---------- ---------- ---------- EQUITY FUND BALANCED FUND INTERMEDIATE BOND FUND ------------------------ ------------------------ ------------------------ CLASS AAA Shares sold ..................... 2,831,089 2,614,599 2,232,486 2,242,945 215,535 183,882 Shares issued upon reinvestment of distributions . 64,387 163,156 977,328 171,183 30,698 32,898 Shares redeemed ................. (5,457,286) (5,914,467) (3,247,049) (2,955,568) (268,616) (131,846) ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in Class AAA shares ............ (2,561,810) (3,136,712) (37,235) (541,440) (22,383) 84,934 ========== ========== ========== ========== ========== ========== CLASS A Shares sold ..................... 153,176 29,818 63,619 57,114 15,561 2,852 Shares issued upon reinvestment of distributions . 838 856 32,181 4,182 505 257 Shares redeemed ................. (135,896) (184,155) (105,132) (80,170) (12,868) (4,564) ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in Class A shares .............. 18,118 (153,481) (9,332) (18,874) 3,198 (1,455) ========== ========== ========== ========== ========== ========== CLASS B Shares sold ..................... -- -- 258 -- 12,727 104 Shares issued upon reinvestment of distributions 4 -- 675 31 500 554 Shares redeemed ................. (123) (1,360) (911) (3,427) (21,971) (6,562) ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in Class B shares .............. (119) (1,360) 22 (3,396) (8,744) (5,904) ========== ========== ========== ========== ========== ========== CLASS C Shares sold ..................... 23,107 278 8,421 18,332 5,174 -- Shares issued upon reinvestment of distributions 55 51 4,312 174 -- -- Shares redeemed ................. (11,083) (3,114) (16,669) (15,539) (5,174) -- ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in Class C shares .............. 12,079 (2,785) (3,936) 2,967 -- -- ========== ========== ========== ========== ========== ========== SMALLCAP EQUITY FUND INCOME FUND MIGHTY MITES(SM) FUND ------------------------ ------------------------ ------------------------ CLASS AAA Shares sold ..................... 231,280 167,006 331,345 294,028 161,543 70,495 Shares issued upon reinvestment of distributions -- -- 371,438 74,389 350,949 247,063 Shares redeemed ................. (305,471) (728,768) (681,221) (555,553) (990,386) (909,141) ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in Class AAA shares ............ (74,191) (561,762) 21,562 (187,136) (477,894) (591,583) ========== ========== ========== ========== ========== ========== CLASS A Shares sold ..................... 22,889 427 22 5,237 64 74 Shares issued upon reinvestment of distributions . -- -- 2,237 212 344 219 Shares redeemed ................. (2,150) (4,228) -- (206) (2,646) (409) ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in Class A shares .............. 20,739 (3,801) 2,259 5,243 (2,238) (116) ========== ========== ========== ========== ========== ========== CLASS B Shares sold ..................... -- -- -- -- -- -- Shares issued upon reinvestment of distributions -- -- 43 6 3,739 2,143 Shares redeemed ................. (414) (1,353) -- -- (1,025) (2,562) ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in Class B shares .............. (414) (1,353) 43 6 2,714 (419) ========== ========== ========== ========== ========== ========== CLASS C Shares sold ..................... 19,909 -- -- 533 193 79 Shares issued upon reinvestment of distributions -- -- 333 30 2,521 1,809 Shares redeemed ................. -- (1,100) -- -- (2,620) (2,579) ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in Class C shares .............. 19,909 (1,100) 333 563 94 (691) ========== ========== ========== ========== ========== ========== 39 THE WESTWOOD FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ 8. INDEMNIFICATIONS. The Funds enter into contracts that contain a variety of indemnifications. The Funds' maximum exposure under these arrangements is unknown. However, the Funds have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote. 9. OTHER MATTERS. Affiliates of the Adviser, including Gabelli Funds, LLC, have received subpoenas from the Attorney General of the State of New York and the SEC requesting information on mutual fund trading practices involving certain funds managed by Gabelli Funds, LLC. GAMCO Investors, Inc. ("GAMCO"), the Adviser's parent company, is responding to these requests for documents and testimony. In June 2006, GAMCO began discussions with the SEC regarding a possible resolution of their inquiry. Since these discussions are ongoing, it cannot be determined at this time whether they will ultimately result in a settlement of this matter. On a separate matter, in September 2005, Gabelli Funds, LLC was informed by the staff of the SEC that the staff may recommend to the Commission that an administrative remedy and a monetary penalty be sought from Gabelli Funds, LLC in connection with the actions of two of seven closed-end funds managed by Gabelli Funds, LLC relating to Section 19(a) and Rule 19a-1 of the 1940 Act. These provisions require registered investment companies to provide written statements to shareholders when a dividend is made from a source other than net investment income. While the two closed-end funds sent annual statements and provided other materials containing this information, the funds did not send written statements to shareholders with each distribution in 2002 and 2003. Gabelli Funds, LLC informed the Adviser that all of the funds are now in compliance. The Adviser believes that these matters would have no effect on the Funds or any material adverse effect on the Adviser or its ability to manage the Funds. 40 THE WESTWOOD FUNDS FINANCIAL HIGHLIGHTS ================================================================================ Selected data for a share of beneficial interest outstanding throughout each period: OPERATING PERFORMANCE DISTRIBUTIONS TO SHAREHOLDERS ---------------------------------------- ----------------------------- NET REALIZED NET ASSET NET AND TOTAL VALUE, INVESTMENT UNREALIZED GAIN FROM NET PERIOD ENDED BEGINNING INCOME (LOSS) ON INVESTMENT INVESTMENT TOTAL SEPTEMBER 30 OF PERIOD (LOSS)(A) INVESTMENTS OPERATIONS INCOME DISTRIBUTIONS - ------------ --------- --------- ----------- ---------- ---------- ------------- EQUITY FUND CLASS AAA 2006 $11.08 $ 0.06 $ 1.42 $ 1.48 $(0.05) $(0.05) 2005 9.32 0.07 1.79 1.86 (0.10) (0.10) 2004 7.99 0.08 1.36 1.44 (0.11) (0.11) 2003 7.02 0.09 0.96 1.05 (0.08) (0.08) 2002 8.32 0.07 (1.32) (1.25) (0.05) (0.05) CLASS A 2006 $11.05 $ 0.03 $ 1.41 $ 1.44 $(0.04) $(0.04) 2005 9.28 0.06 1.75 1.81 (0.04) (0.04) 2004 7.97 0.05 1.35 1.40 (0.09) (0.09) 2003 6.99 0.07 0.97 1.04 (0.06) (0.06) 2002 8.29 0.05 (1.32) (1.27) (0.03) (0.03) CLASS B 2006 $10.96 $(0.02) $ 1.40 $ 1.38 $(0.03) $(0.03) 2005 9.21 (0.00)(b) 1.75 1.75 -- -- 2004 7.92 0.02 1.34 1.36 (0.07) (0.07) 2003 6.97 0.04 0.95 0.99 (0.04) (0.04) 2002 8.29 0.02 (1.32) (1.30) (0.02) (0.02) CLASS C 2006 $10.97 $(0.03) $ 1.40 $ 1.37 $(0.03) $(0.03) 2005 9.24 (0.01) 1.77 1.76 (0.03) (0.03) 2004 7.89 0.01 1.34 1.35 -- -- 2003 6.98 0.04 0.96 1.00 (0.09) (0.09) 2002 8.28 0.01 (1.31) (1.30) -- -- RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA --------------------------------------------------------------- OPERATING NET NET ASSETS, EXPENSES ASSET VALUE, END OF NET NET OF PORTFOLIO PERIOD ENDED REDEMPTION END OF TOTAL PERIOD INVESTMENT OPERATING CUSTODIAN TURNOVER SEPTEMBER 30 FEES(A) PERIOD RETURN+ (IN 000'S) INCOME (LOSS) EXPENSES FEE CREDITS RATE - ------------ ---------- ----------- ------- -------- ------------- -------- ----------- ---------- EQUITY FUND CLASS AAA 2006 -- $12.51 13.4% $169,404 0.55% 1.54% 1.50% 73% 2005 $(0.00)(b) 11.08 20.0 178,394 0.69 1.51 1.49 59 2004 0.00(b) 9.32 18.1 179,407 0.90 1.50 1.49 44 2003 -- 7.99 15.1 221,635 1.19 1.48 1.47 50 2002 -- 7.02 (15.1) 231,197 0.84 1.46 1.43 84 CLASS A 2006 -- $12.45 13.1% $ 2,780 0.27% 1.79% 1.75% 73% 2005 $(0.00)(b) 11.05 19.6 2,267 0.59 1.76 1.74 59 2004 0.00(b) 9.28 17.7 3,328 0.61 1.75 1.74 44 2003 -- 7.97 15.0 2,923 0.94 1.73 1.72 50 2002 -- 6.99 (15.4) 1,808 0.59 1.71 1.68 84 CLASS B 2006 -- $12.31 12.6% $ 32 (0.20)% 2.29% 2.25% 73% 2005 $(0.00)(b) 10.96 19.0 30 (0.01) 2.26 2.24 59 2004 0.00(b) 9.21 17.2 38 0.21 2.25 2.24 44 2003 -- 7.92 14.3 74 0.44 2.23 2.22 50 2002 -- 6.97 (15.7) 53 0.09 2.21 2.18 84 CLASS C 2006 -- $12.31 12.6% $ 316 (0.28)% 2.29% 2.25% 73% 2005 $(0.00)(b) 10.97 19.1 149 (0.06) 2.26 2.24 59 2004 0.00(b) 9.24 17.1 152 0.11 2.25 2.24 44 2003 -- 7.89 14.4 129 0.44 2.23 2.22 50 2002 -- 6.98 (15.7) 33 0.09 2.21 2.18 84 - -------------------------- + Total return represents aggregate total return of a hypothetical $1,000 investment at the beginning of the period and sold at the end of the period including reinvestment of distributions and does not reflect applicable sales charges. (a) Per share data is calculated using the average shares outstanding method. (b) Amount represents less than $0.005 per share. See accompanying notes to financial statements. 41 THE WESTWOOD FUNDS FINANCIAL HIGHLIGHTS ================================================================================ Selected data for a share of beneficial interest outstanding throughout each period: OPERATING PERFORMANCE DISTRIBUTIONS TO SHAREHOLDERS ---------------------------------------- ------------------------------------- NET REALIZED NET ASSET AND TOTAL NET VALUE, NET UNREALIZED GAIN FROM NET REALIZED PERIOD ENDED BEGINNING INVESTMENT (LOSS) ON INVESTMENT INVESTMENT GAIN ON TOTAL SEPTEMBER 30 OF PERIOD INCOME(A) INVESTMENTS OPERATIONS INCOME INVESTMENTS DISTRIBUTIONS - ------------ --------- --------- ----------- ---------- -------- ----------- ------------- BALANCED FUND CLASS AAA 2006 $12.74 $0.22 $ 0.95 $ 1.17 $(0.24) $(0.85) $(1.09) 2005 11.47 0.20 1.26 1.46 (0.19) -- (0.19) 2004 10.51 0.21 0.97 1.18 (0.22) -- (0.22) 2003 9.65 0.21 0.87 1.08 (0.22) -- (0.22) 2002 10.40 0.24 (0.75) (0.51) (0.24) (0.00)(b) (0.24) CLASS A 2006 $12.74 $0.19 $ 0.95 $ 1.14 $(0.16) $(0.85) $(1.01) 2005 11.44 0.17 1.26 1.43 (0.13) -- (0.13) 2004 10.48 0.18 0.97 1.15 (0.19) -- (0.19) 2003 9.62 0.19 0.86 1.05 (0.19) -- (0.19) 2002 10.37 0.21 (0.75) (0.54) (0.21) (0.00)(b) (0.21) CLASS B 2006 $12.76 $0.13 $ 0.95 $ 1.08 $(0.04) $(0.85) $(0.89) 2005 11.43 0.11 1.26 1.37 (0.04) -- (0.04) 2004 10.48 0.13 0.96 1.09 (0.14) -- (0.14) 2003 9.63 0.14 0.86 1.00 (0.15) -- (0.15) 2002 10.40 0.17 (0.77) (0.60) (0.17) (0.00)(b) (0.17) CLASS C 2006 $12.78 $0.13 $ 0.95 $ 1.08 $(0.04) $(0.85) $(0.89) 2005 11.45 0.11 1.26 1.37 (0.04) -- (0.04) 2004 10.49 0.13 0.97 1.10 (0.14) -- (0.14) 2003 9.62 0.14 0.87 1.01 (0.14) -- (0.14) 2002 10.40 0.19 (0.79) (0.60) (0.18) (0.00)(b) (0.18) RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA ------------------------------------------------------------ OPERATING NET NET ASSETS, EXPENSES ASSET VALUE, END OF NET NET OF PORTFOLIO PERIOD ENDED REDEMPTION END OF TOTAL PERIOD INVESTMENT OPERATING CUSTODIAN TURNOVER SEPTEMBER 30 FEES(A) PERIOD RETURN+ (IN 000'S) INCOME EXPENSES FEE CREDITS RATE - ------------ ------- ------ ------- -------- ------ -------- ----------- ------- BALANCED FUND CLASS AAA 2006 -- $12.82 9.8% $145,028 1.78% 1.32% 1.27% 68% 2005 $0.00(b) 12.74 12.8 144,572 1.67 1.25 1.22 56 2004 0.00(b) 11.47 11.3 136,400 1.92 1.23 1.22 41 2003 -- 10.51 11.2 152,409 2.10 1.23 1.20 56 2002 -- 9.65 (5.1) 150,915 2.25 1.22 1.17 78 CLASS A 2006 -- $12.87 9.5% $ 5,596 1.53% 1.57% 1.52% 68% 2005 $0.00(b) 12.74 12.6 5,658 1.42 1.50 1.47 56 2004 0.00(b) 11.44 11.0 5,298 1.66 1.48 1.47 41 2003 -- 10.48 11.0 5,070 1.85 1.48 1.45 56 2002 -- 9.62 (5.4) 5,761 2.00 1.47 1.42 78 CLASS B 2006 -- $12.95 9.0% $ 141 1.02% 2.07% 2.02% 68% 2005 $0.00(b) 12.76 12.0 138 0.93 2.00 1.97 56 2004 0.00(b) 11.43 10.4 163 1.18 1.98 1.97 41 2003 -- 10.48 10.4 184 1.35 1.98 1.95 56 2002 -- 9.63 (5.9) 113 1.50 1.97 1.92 78 CLASS C 2006 -- $12.97 9.0% $ 946 1.02% 2.07% 2.02% 68% 2005 $0.00(b) 12.78 12.0 982 0.92 2.00 1.97 56 2004 0.00(b) 11.45 10.5 846 1.19 1.98 1.97 41 2003 -- 10.49 10.5 456 1.35 1.98 1.95 56 2002 -- 9.62 (5.9) 284 1.50 1.97 1.92 78 - -------------------------- + Total return represents aggregate total return of a hypothetical $1,000 investment at the beginning of the period and sold at the end of the period including reinvestment of distributions and does not reflect applicable sales charges. (a) Per share data is calculated using the average shares outstanding method. (b) Amount represents less than $0.005 per share. See accompanying notes to financial statements. 42 THE WESTWOOD FUNDS FINANCIAL HIGHLIGHTS ================================================================================ Selected data for a share of beneficial interest outstanding throughout each period: OPERATING PERFORMANCE DISTRIBUTIONS TO SHAREHOLDERS ---------------------------------------- ------------------------------------ NET REALIZED NET ASSET AND TOTAL NET VALUE, NET UNREALIZED GAIN FROM NET REALIZED PERIOD ENDED BEGINNING INVESTMENT (LOSS) ON INVESTMENT INVESTMENT GAIN ON TOTAL SEPTEMBER 30 OF PERIOD INCOME(A) INVESTMENTS OPERATIONS INCOME INVESTMENTS DISTRIBUTIONS - ------------ --------- ---------- ----------- ---------- -------- ----------- ------------- INTERMEDIATE BOND FUND CLASS AAA 2006 $10.93 $0.39 $(0.11) $ 0.28 $(0.39) $(0.01) $(0.40) 2005 11.18 0.34 (0.16) 0.18 (0.34) (0.09) (0.43) 2004 11.31 0.33 (0.12) 0.21 (0.33) (0.01) (0.34) 2003 11.30 0.31 -- 0.31 (0.30) -- (0.30) 2002 10.82 0.45 0.48 0.93 (0.45) -- (0.45) CLASS A 2006 $10.93 $0.39 $(0.12) $ 0.27 $(0.38) $(0.01) $(0.39) 2005 11.18 0.33 (0.16) 0.17 (0.33) (0.09) (0.42) 2004 11.31 0.32 (0.12) 0.20 (0.32) (0.01) (0.33) 2003 11.30 0.30 0.01 0.31 (0.30) -- (0.30) 2002 10.82 0.44 0.48 0.92 (0.44) -- (0.44) CLASS B 2006 $10.93 $0.31 $(0.11) $ 0.20 $(0.31) $(0.01) $(0.32) 2005 11.18 0.26 (0.16) 0.10 (0.26) (0.09) (0.35) 2004 11.30 0.25 (0.11) 0.14 (0.25) (0.01) (0.26) 2003 11.29 0.23 -- 0.23 (0.22) -- (0.22) 2002 10.82 0.37 0.47 0.84 (0.37) -- (0.37) CLASS C 2006 $10.82 $0.32 $(0.36) $(0.04) $(0.46) $(0.01) $(0.47) 2005 11.17 0.27 (0.12) 0.15 (0.41) (0.09) (0.50) 2004 11.30 0.25 (0.09) 0.16 (0.28) (0.01) (0.29) 2003 11.29 0.22 0.01 0.23 (0.22) -- (0.22) 2002 (d) 10.84 0.35 0.45 0.80 (0.35) -- (0.35) RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA ------------------------------------------------------------------------- OPERATING EXPENSES OPERATING NET OF OPERATING NET NET EXPENSES WAIVERS/ EXPENSES ASSET ASSETS, NET OF REIMBURSE- BEFORE VALUE, END OF NET WAIVERS/ MENTS/ WAIVERS/ PORTFOLIO PERIOD ENDED REDEMPTION END OF TOTAL PERIOD INVESTMENT REIMBURSE- CUSTODIAN REIMBURSE- TURNOVER SEPTEMBER 30 FEES(A) PERIOD RETURN+ (IN 000'S) INCOME MENTS FEE CREDITS MENTS(B) RATE - ------------ ---------- ------ ------- -------- -------- ------- ----------- --------- -------- INTERMEDIATE BOND FUND CLASS AAA 2006 -- $10.81 2.7% $ 9,917 3.65% 1.06% 1.00% 1.53% 35% 2005 $(0.00)(c) 10.93 1.7 10,272 3.10 1.04 1.00 1.79 33 2004 0.00(c) 11.18 2.0 9,553 2.97 1.02 1.00 1.76 32 2003 -- 11.31 2.8 12,174 2.70 1.06 1.00 1.57 73 2002 -- 11.30 8.9 15,157 4.06 1.05 1.00 1.69 46 CLASS A 2006 -- $10.81 2.6% $ 92 3.59% 1.16% 1.10% 1.63% 35% 2005 $(0.00)(c) 10.93 1.6 58 3.00 1.14 1.10 1.88 33 2004 0.00(c) 11.18 1.8 75 2.88 1.12 1.10 1.86 32 2003 -- 11.31 2.8 138 2.60 1.16 1.10 1.67 73 2002 -- 11.30 8.8 56 3.96 1.15 1.10 1.79 46 CLASS B 2006 -- $10.81 2.0% $ 282 2.87% 1.81% 1.75% 2.28% 35% 2005 $(0.00)(c) 10.93 0.9 381 2.34 1.79 1.75 2.53 33 2004 0.00(c) 11.18 1.3 456 2.23 1.77 1.75 2.51 32 2003 -- 11.30 2.1 502 1.95 1.81 1.75 2.32 73 2002 -- 11.29 8.0 229 3.31 1.80 1.75 2.44 46 CLASS C 2006 -- $10.31 (0.3)% $ 0.1 3.08% 1.81% 1.75% 2.28% 35% 2005 $(0.00)(c) 10.82 1.4 0.1 2.50 1.79 1.75 2.90 33 2004 0.00(c) 11.17 1.5 0 2.21 1.77 1.75 2.51 32 2003 -- 11.30 2.1 46 1.95 1.81 1.75 2.32 73 2002 (d) -- 11.29 7.6 50 3.31(e) 1.80(e) 1.75(e) 2.44(e) 46 - -------------------------- + Total return represents aggregate total return of a hypothetical $1,000 investment at the beginning of the period and sold at the end of the period including reinvestment of distributions and does not reflect applicable sales charges. Total return for a period of less than one year is not annualized. (a) Per share data is calculated using the average shares outstanding method. (b) During the period, certain fees were voluntarily reduced and/or reimbursed. If such fee reductions and/or reimbursements had not occurred, the ratio would have been as shown. (c) Amount represents less than $0.005 per share. (d) From October 22, 2001 through September 30, 2002, the period through which Class C Shares were continuously outstanding. (e) Annualized. See accompanying notes to financial statements. 43 THE WESTWOOD FUNDS FINANCIAL HIGHLIGHTS ================================================================================ Selected data for a share of beneficial interest outstanding throughout each period: OPERATING PERFORMANCE ------------------------------------- NET REALIZED AND NET NET ASSET NET UNREALIZED TOTAL ASSET VALUE, INVESTMENT GAIN FROM VALUE, PERIOD ENDED BEGINNING INCOME (LOSS) ON INVESTMENT REDEMPTION END OF SEPTEMBER 30 OF PERIOD (LOSS)(A) INVESTMENTS OPERATIONS FEES(A) PERIOD - ------------ --------- --------- ----------- ---------- --------- ------ SMALLCAP EQUITY FUND CLASS AAA 2006 $11.29 $ 0.14 $ 1.08 $ 1.22 -- $12.51 2005 9.08 (0.01) 2.22 2.21 $(0.00)(c) 11.29 2004 8.18 (0.10) 1.00 0.90 0.00(c) 9.08 2003 7.49 (0.08) 0.77 0.69 -- 8.18 2002 8.86 (0.09) (1.28) (1.37) -- 7.49 CLASS A 2006 $11.25 $ 0.13 $ 1.07 $ 1.20 -- $12.45 2005 9.07 (0.04) 2.22 2.18 $(0.00)(c) 11.25 2004 8.18 (0.12) 1.01 0.89 0.00(c) 9.07 2003 7.51 (0.10) 0.77 0.67 -- 8.18 2002(e) 9.91 (0.09) (2.31) (2.40) -- 7.51 CLASS B 2006 $10.93 $ 0.05 $ 1.05 $ 1.10 -- $12.03 2005 8.86 (0.08) 2.15 2.07 $(0.00)(c) 10.93 2004 8.03 (0.17) 1.00 0.83 0.00(c) 8.86 2003 7.41 (0.13) 0.75 0.62 -- 8.03 2002 8.83 (0.16) (1.26) (1.42) -- 7.41 CLASS C 2006 $10.87 $ 0.09 $ 1.01 $ 1.10 -- $11.97 2005 8.99 (0.13) 2.01 1.88 $(0.00)(c) 10.87 2004 8.15 (0.17) 1.01 0.84 0.00(c) 8.99 2003 7.47 (0.10) 0.78 0.68 -- 8.15 2002(e) 9.91 (0.11) (2.33) (2.44) -- 7.47 RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA ------------------------------------------------------------------------ OPERATING EXPENSES OPERATING NET OF OPERATING NET EXPENSES WAIVERS/ EXPENSES ASSETS, NET NET OF REIMBURSE- BEFORE END OF INVESTMENT WAIVERS/ MENTS/ WAIVERS/ PORTFOLIO PERIOD ENDED TOTAL PERIOD INCOME REIMBURSE- CUSTODIAN REIMBURSE- TURNOVER SEPTEMBER 30 RETURN+ (IN 000'S) (LOSS) MENTS FEE CREDITS MENTS(B) RATE - ------------ ------- -------- ------ ------ ----------- --------- --------- SMALLCAP EQUITY FUND CLASS AAA 2006 10.8% $ 8,717 1.16% 1.71% 1.50% 2.02% 81% 2005 24.3 8,702 (0.10) 1.56 1.50 2.37 108 2004 11.0(d) 12,106 (1.11) 1.51 1.50 2.12 260 2003 9.2 15,721 (1.03) 1.53 1.50 1.99 329 2002 (15.5) 16,212 (0.98) 1.56 1.50 1.76 202 CLASS A 2006 10.7% $ 403 1.04% 1.96% 1.75% 2.27% 81% 2005 24.0 131 (0.35) 1.81 1.75 2.69 108 2004 10.9(d) 140 (1.31) 1.76 1.75 2.37 260 2003 8.9 112 (1.28) 1.78 1.75 2.24 329 2002(e) (24.2) 71 (1.23)(f) 1.80(f) 1.75(f) 2.01(f) 202 CLASS B 2006 10.1% $ 6 0.44% 2.46% 2.25% 2.77% 81% 2005 23.4 10 (0.81) 2.31 2.25 3.17 108 2004 10.3(d) 20 (1.93) 2.26 2.25 2.87 260 2003 8.4 65 (1.78) 2.28 2.25 2.74 329 2002 (16.1) 31 (1.73) 2.30 2.25 2.51 202 CLASS C 2006 10.1% $ 238 0.74% 2.46% 2.25% 2.77% 81% 2005 20.9 0.1 (1.40) 2.31 2.25 2.73 108 2004 10.3(d) 10 (1.98) 2.26 2.25 2.87 260 2003 9.1 111 (1.78) 2.28 2.25 2.74 329 2002(e) (24.6) 0.1 (1.73)(f) 2.30(f) 2.25(f) 2.51(f) 202 - -------------------------- + Total return represents aggregate total return of a hypothetical $1,000 investment at the beginning of the period and sold at the end of the period including reinvestment of distributions and does not reflect applicable sales charges. Total return for a period of less than one year is not annualized. (a) Per share data is calculated using the average shares outstanding method. (b) During the period, certain fees were voluntarily reduced and/or reimbursed. If such fee reductions and/or reimbursements had not occurred, the ratio would have been as shown. (c) Amount represents less than $0.005 per share. (d) Total return excluding the effect of the reimbursement from the Fund's Adviser of $51,180 for the year ended September 30, 2004 was 10.6%, 10.5%, 10.0%, and 9.9% for Class AAA, Class A, Class B, and Class C, respectively. The Adviser fully reimbursed the Fund for a loss on a transaction exceeding the Fund's investment restrictions, which otherwise would have reduced total return by 0.4%, 0.4%, 0.3%, and 0.4% for Class AAA, Class A, Class B, and Class C, respectively. (e) From November 26, 2001 through September 30, 2002, the period through which Class A Shares and Class C Shares were continuously outstanding. (f) Annualized. See accompanying notes to financial statements. 44 THE WESTWOOD FUNDS FINANCIAL HIGHLIGHTS ================================================================================ Selected data for a share of beneficial interest outstanding throughout each period: OPERATING PERFORMANCE DISTRIBUTIONS TO SHAREHOLDERS ---------------------------------------- ------------------------------------ NET REALIZED NET ASSET AND TOTAL NET VALUE, NET UNREALIZED GAIN FROM NET REALIZED PERIOD ENDED BEGINNING INVESTMENT (LOSS) ON INVESTMENT INVESTMENT GAIN ON TOTAL SEPTEMBER 30 OF PERIOD INCOME(A) INVESTMENTS OPERATIONS INCOME INVESTMENTS DISTRIBUTIONS - ------------ --------- ---------- ----------- ---------- -------- ----------- ------------- INCOME FUND CLASS AAA 2006 $16.53 $0.55 $(0.31) $0.24 $(0.40) $(4.33) $(4.73) 2005 14.12 0.28 3.12 3.40 (0.27) (0.73) (1.00) 2004 11.87 0.33 2.30 2.63 (0.33) (0.05) (0.38) 2003 10.03 0.38 1.85 2.23 (0.39) -- (0.39) 2002 9.76 0.43 0.31 0.74 (0.47) -- (0.47) CLASS A 2006 $16.76 $0.54 $(0.32) $0.22 $(0.31) $(4.33) $(4.64) 2005 14.33 0.29 3.13 3.42 (0.26) (0.73) (0.99) 2004 12.00 0.51 2.12 2.63 (0.26) (0.04) (0.30) 2003 10.04 0.38 1.85 2.23 (0.27) -- (0.27) 2002 9.76 0.41 0.30 0.71 (0.43) -- (0.43) CLASS B 2006 $16.86 $0.48 $(0.31) $0.17 $(0.14) $(4.33) $(4.47) 2005 14.33 0.18 3.16 3.34 (0.08) (0.73) (0.81) 2004 12.04 0.25 2.35 2.60 (0.27) (0.04) (0.31) 2003 10.07 0.27 1.91 2.18 (0.21) -- (0.21) 2002(d) 9.90 0.36 0.22 0.58 (0.41) -- (0.41) CLASS C 2006 $17.26 $0.50 $(0.32) $0.18 $(0.13) $(4.33) $(4.46) 2005 14.66 0.25 3.17 3.42 (0.09) (0.73) (0.82) 2004 12.32 0.24 2.41 2.65 (0.27) (0.04) (0.31) 2003 10.26 0.32 1.99 2.31 (0.25) -- (0.25) 2002(d) 9.90 0.09 0.49 0.58 (0.22) -- (0.22) RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA ------------------------------------------------------------------------- OPERATING EXPENSES OPERATING NET OF OPERATING NET NET EXPENSES WAIVERS/ EXPENSES ASSET ASSETS, NET OF REIMBURSE- BEFORE VALUE, END OF NET WAIVERS/ MENTS/ WAIVERS/ PORTFOLIO PERIOD ENDED REDEMPTION END OF TOTAL PERIOD INVESTMENT REIMBURSE- CUSTODIAN REIMBURSE- TURNOVER SEPTEMBER 30 FEES(A) PERIOD RETURN+ (IN 000'S) INCOME MENTS FEE CREDITS MENTS(B) RATE - ------------ ---------- ------ ------- -------- -------- ------- ----------- --------- -------- INCOME FUND CLASS AAA 2006 -- $12.04 3.4% $12,054 4.36% 1.65% 1.50% 2.02% 141% 2005 $0.01 16.53 24.9 16,182 1.83 1.62 1.50 2.40 58 2004 0.00(c) 14.12 22.5 16,472 2.51 1.54 1.50 1.85 28 2003 -- 11.87 22.8 13,923 3.70 1.56 1.50 2.05 33 2002 -- 10.03 7.5 9,122 4.42 1.59 1.50 2.61 47 CLASS A 2006 -- $12.34 3.2% $ 97 4.21% 1.90% 1.75% 2.27% 141% 2005 $0.00(c) 16.76 24.6 93 1.87 1.87 1.75 3.03 58 2004 0.00(c) 14.33 22.2 5 3.96 1.79 1.75 2.10 28 2003 -- 12.00 22.6 10 3.45 1.81 1.75 2.30 33 2002 -- 10.04 7.2 3 4.17 1.84 1.75 2.86 47 CLASS B 2006 -- $12.56 2.7% $ 2 3.72% 2.40% 2.25% 2.77% 141% 2005 $0.00(c) 16.86 23.9 2 1.14 2.37 2.25 3.18 58 2004 0.00(c) 14.33 21.8 2 1.86 2.29 2.25 2.60 28 2003 -- 12.04 22.0 2 2.95 2.31 2.25 2.80 33 2002(d) -- 10.07 5.8 10 3.67(e) 2.34(e) 2.25(e) 3.36(e) 47 CLASS C 2006 -- $12.98 2.8% $ 16 3.71% 2.40% 2.25% 2.77% 141% 2005 $0.00(c) 17.26 23.9 16 1.56 2.37 2.25 3.41 58 2004 0.00(c) 14.66 21.7 5 1.79 2.29 2.25 2.60 28 2003 -- 12.32 22.8 4 2.95 2.31 2.25 2.80 33 2002(d) -- 10.26 5.8 0.1 3.67(e) 2.34(e) 2.25(e) 3.36(e) 47 - -------------------------- + Total return represents aggregate total return of a hypothetical $1,000 investment at the beginning of the period and sold at the end of the period including reinvestment of distributions and does not reflect applicable sales charges. Total return for a period of less than one year is not annualized. (a) Per share data is calculated using the average shares outstanding method. (b) During the period, certain fees were voluntarily reduced and/or reimbursed. If such fee reductions and/or reimbursements had not occurred, the ratio would have been as shown. (c) Amount represents less than $0.005 per share. (d) From November 26, 2001 through September 30, 2002, the period through which Class B and C Shares were continuously outstanding. (e) Annualized. See accompanying notes to financial statements. 45 THE WESTWOOD FUNDS FINANCIAL HIGHLIGHTS ================================================================================ Selected data for a share of beneficial interest outstanding throughout each period: OPERATING PERFORMANCE DISTRIBUTIONS TO SHAREHOLDERS ---------------------------------------- ------------------------------------ NET REALIZED NET ASSET NET AND TOTAL NET VALUE, INVESTMENT UNREALIZED FROM NET REALIZED PERIOD ENDED BEGINNING INCOME GAIN ON INVESTMENT INVESTMENT GAIN ON TOTAL SEPTEMBER 30 OF PERIOD (LOSS)(A) INVESTMENTS OPERATIONS INCOME INVESTMENTS DISTRIBUTIONS - ------------ --------- ---------- ----------- ---------- -------- ----------- ------------- MIGHTY MITES(SM) FUND CLASS AAA 2006 $16.73 $(0.04) $1.34 $1.30 -- $(2.02) $(2.02) 2005 15.07 (0.02) 2.97 2.95 -- (1.29) (1.29) 2004 13.42 (0.03) 1.84 1.81 -- (0.16) (0.16) 2003 11.29 (0.03) 2.25 2.22 $(0.04) (0.05) (0.09) 2002 10.99 0.03 0.37 0.40 (0.10) -- (0.10) CLASS A 2006 $16.70 $(0.10) $1.36 $1.26 -- $(2.02) $(2.02) 2005 15.08 (0.06) 2.97 2.91 -- (1.29) (1.29) 2004 13.46 (0.06) 1.84 1.78 -- (0.16) (0.16) 2003 11.36 (0.05) 2.26 2.21 $(0.06) (0.05) (0.11) 2002(e) 10.97 (0.01) 0.40 0.39 -- -- -- CLASS B 2006 $16.31 $(0.15) $1.29 $1.14 -- $(2.02) $(2.02) 2005 14.82 (0.14) 2.92 2.78 -- (1.29) (1.29) 2004 13.30 (0.14) 1.82 1.68 -- (0.16) (0.16) 2003 11.24 (0.11) 2.22 2.11 -- (0.05) (0.05) 2002 10.96 (0.02) 0.34 0.32 $(0.04) -- (0.04) CLASS C 2006 $16.24 $(0.15) $1.28 $1.13 -- $(2.02) $(2.02) 2005 14.77 (0.14) 2.90 2.76 -- (1.29) (1.29) 2004 13.25 0.02 1.66 1.68 -- (0.16) (0.16) 2003 11.19 (0.12) 2.23 2.11 -- (0.05) (0.05) 2002 10.98 (0.06) 0.37 0.31 $(0.10) -- (0.10) RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA ------------------------------------------------------------------------- OPERATING EXPENSES OPERATING NET OF OPERATING NET NET EXPENSES WAIVERS/ EXPENSES ASSET ASSETS, NET NET OF REIMBURSE- BEFORE VALUE, END OF INVESTMENT WAIVERS/ MENTS/ WAIVERS/ PORTFOLIO PERIOD ENDED REDEMPTION END OF TOTAL PERIOD INCOME REIMBURSE- CUSTODIAN REIMBURSE- TURNOVER SEPTEMBER 30 FEES(A) PERIOD RETURN+ (IN 000'S) (LOSS) MENTS FEE CREDITS MENTS(B) RATE - ------------ ---------- ------ ------- -------- -------- ------- ----------- --------- -------- MIGHTY MITES(SM) FUND CLASS AAA 2006 -- $16.01 9.0% $36,843 (0.28)% 1.61% 1.61% 1.61%(c) 4% 2005 $0.00(d) 16.73 20.4 46,497 (0.13) 1.50 1.50 1.74 9 2004 0.00(d) 15.07 13.6 50,805 (0.20) 1.50 1.50 1.66 36 2003 -- 13.42 19.8 51,138 (0.21) 1.50 1.50 1.66 14 2002 -- 11.29 3.6 31,103 0.27 1.50 1.50 1.78 18 CLASS A 2006 -- $15.94 8.7% $ 3 (0.63)% 1.86% 1.86% 1.86%(c) 4% 2005 $0.00(d) 16.70 20.1 41 (0.41) 1.75 1.75 2.00 9 2004 0.00(d) 15.08 13.3 39 (0.42) 1.75 1.75 1.91 36 2003 -- 13.46 19.7 33 (0.46) 1.75 1.75 1.91 14 2002(e) -- 11.36 3.6 1 0.02 1.75 1.75 2.03 18 CLASS B 2006 -- $15.43 8.1% $ 452 (1.00)% 2.36% 2.36% 2.36%(c) 4% 2005 $0.00(d) 16.31 19.6 433 (0.89) 2.25 2.25 2.49 9 2004 0.00(d) 14.82 12.7 400 (0.95) 2.25 2.25 2.41 36 2003 -- 13.30 18.9 517 (0.96) 2.25 2.25 2.41 14 2002 -- 11.24 2.9 4 (0.48) 2.25 2.25 2.53 18 CLASS C 2006 -- $15.35 8.1% $ 311 (1.01)% 2.36% 2.36% 2.36%(c) 4% 2005 $0.00(d) 16.24 19.5 327 (0.91) 2.25 2.25 2.49 9 2004 0.00(d) 14.77 12.7 308 (0.89) 2.25 2.25 2.41 36 2003 -- 13.25 19.0 99 (0.96) 2.25 2.25 2.41 14 2002 -- 11.19 2.8 59 (0.48) 2.25 2.25 2.53 18 - -------------------------- + Total return represents aggregate total return of a hypothetical $1,000 investment at the beginning of the period and sold at the end of the period including reinvestment of distributions and does not reflect applicable sales charges. (a) Per share data is calculated using the average shares outstanding method. (b) Prior to the period beginning October 1, 2005, certain fees were voluntarily reduced and/or reimbursed. If such fee reductions and/or reimbursements had not occurred, the ratio would have been as shown. (c) The fund incurred interest expense during the fiscal year ended September 30, 2006. If interest expense had not been incurred, the ratios of operating expenses to average net assets would have been 1.57% (Class AAA), 1.82% (Class A), and 2.32% (Class B and Class C). (d) Amount represents less than $0.005 per share. (e) From November 26, 2001 through September 30, 2002, the period through which Class A Shares were continuously outstanding. See accompanying notes to financial statements. 46 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of The Westwood Funds: In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Westwood Equity Fund, Westwood Balanced Fund, Westwood Intermediate Bond Fund, Westwood SmallCap Equity Fund, Westwood Income Fund, and Westwood Mighty Mites(SM) Fund (constituting The Westwood Funds, hereafter referred to as the "Funds") at September 30, 2006, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP NEW YORK, NY NOVEMBER 22, 2006 - -------------------------------------------------------------------------------- 2006 TAX NOTICE TO SHAREHOLDERS (UNAUDITED) U.S. GOVERNMENT INCOME: The percentage of the ordinary income dividend paid by the Equity Fund, Balanced Fund, Intermediate Bond Fund, SmallCap Equity Fund, Income Fund, and Mighty Mites(SM) Fund (collectively, the "Funds") during fiscal year 2006 which was derived from U.S. Treasury securities was 1.81%, 15.70%, 23.05%, 0.00%, 8.25%, and 0.00%, respectively. Such income is exempt from state and local tax in all states. However, many states, including New York and California, allow a tax exemption for a portion of the income earned only if a mutual fund has invested at least 50% of its assets at the end of each quarter of the Fund's fiscal year in U.S. Government securities. The Funds did not meet this strict requirement in 2006. Due to the diversity in state and local tax law, it is recommended that you consult your personal tax adviser for the applicability of the information provided as to your specific situation. WESTWOOD EQUITY FUND; WESTWOOD INCOME FUND 79.27% and 100% of the ordinary income dividend qualifies for the dividends received deduction available to corporations and 59.33% and 62.47% of the ordinary income distribution was qualified dividend income for the Equity Fund and Income Fund, respectively. On December 20, 2005, the Income Fund paid to shareholders a long-term capital gain distribution totaling $4.0740 per share. WESTWOOD BALANCED FUND 28.62% of the ordinary income dividend qualifies for the dividends received deduction available to corporations and 28.17% of the ordinary income distribution was qualified dividend income. On December 20, 2005, the Balanced Fund paid to shareholders a long-term capital gain distribution totaling $0.8094 per share. WESTWOOD INTERMEDIATE BOND FUND None of the ordinary income dividend qualifies for the dividends received deduction available to corporations and none of the ordinary income distribution was qualified dividend income. On December 20, 2005, the Intermediate Bond Fund paid to shareholders a long-term capital gain distribution totaling $0.0062 per share. MIGHTY MITES(SM) FUND None of the ordinary income dividend qualifies for the dividends received deduction available to corporations and 100% of the ordinary income distribution was qualified dividend income. On December 20, 2005, the Mighty Mites(SM) Fund paid to shareholders a long-term capital gain distribution totaling $2.0100 per share. QUALIFIED DIVIDEND INCOME An estimate of qualified dividend income of $3,685,067, $1,896,966, $195,139, $453,078, and $568,523 was received by the Equity Fund, Balanced Fund, Small Cap Equity Fund, Income Fund, and Mighty Mites(SM) Fund, respectively, through September 30, 2006 that qualifies for a reduced tax rate pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003. - -------------------------------------------------------------------------------- 47 THE WESTWOOD FUNDS BOARD CONSIDERATION AND RE-APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) In determining whether to approve the continuance of each of the Agreements, the Board considered the following information: 1) THE NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED BY THE ADVISER AND THE SUB-ADVISER. The Board reviewed in detail the nature and extent of the services provided by the Adviser and the Sub-Adviser under the Agreements and the quality of those services over the past year. The Board noted that these services included managing the investment program of the Funds, including the purchase and sale of portfolio securities, as well as the provision of general corporate services. The Board considered that the Adviser also provided, at its expense, office facilities for use by the Funds and supervisory personnel responsible for supervising the performance of administrative, accounting, and related services including, for each Fund, net asset value determinations, yield calculations, and monitoring to assure compliance with stated investment policies and restrictions under the 1940 Act and related securities regulations. The Board noted that, in addition to managing the investment program for the Funds, the Adviser provided certain non-advisory and compliance services, including services under the Funds' Rule 38a-1 compliance program. The Board also considered that the Adviser and Sub-Adviser paid for all compensation of officers and Board Members of the Funds that were affiliated with the Adviser or Sub-Adviser and that the Adviser further provided a substantial level of services to shareholders of the Funds who had invested through various programs offered by third party financial intermediaries ("Participating Organizations"). The Board evaluated these factors based on its direct experience with the Adviser and Sub-Adviser and in consultation with Trust Counsel. The Board noted that the Adviser had engaged, at its expense, PFPC, Inc. to assist it in performing certain of its administrative functions. The Board concluded that the nature and extent of the services provided was reasonable and appropriate in relation to the advisory fee, that the level of services provided by the Adviser, either directly or through PFPC, Inc., and by the Sub-Adviser, had not diminished over the past year and that the quality of service continued to be high. The Board reviewed the personnel responsible for providing services to the Funds and concluded, based on their experience and interaction with the Adviser and Sub-Adviser, that (i) the Adviser and Sub-Adviser were able to retain quality personnel, (ii) the Adviser, Sub-Adviser, and their agents exhibited a high level of diligence and attention to detail in carrying out their advisory and administrative responsibilities under the Agreements, (iii) the Adviser and Sub-Adviser were responsive to requests of the Board, (iv) the scope and depth of the Adviser's and Sub-Adviser's resources were adequate, and (v) the Adviser and Sub-Adviser had kept the Board apprised of developments relating to each Fund and the industry in general. The Board also focused on the Adviser's reputation and long standing relationship with the Funds. The Board also believed that the Adviser had devoted substantial resources and made substantial commitments to address new regulatory compliance requirements applicable to the Funds. 2) THE PERFORMANCE OF THE FUNDS, THE ADVISER, AND THE SUB-ADVISER. The Board reviewed the investment performance of each Fund, on an absolute basis, as compared to its Lipper peer group of other SEC registered funds, and against each Fund's broad based securities market benchmarks as reflected in each Fund's prospectus and annual report. The Board also considered rankings and ratings of the Funds issued by Lipper over the short, intermediate, and long term. The Board considered each Fund's one, three, five, and, where available, ten year average annual total returns for the periods ended June 30, 2006, but placed greater emphasis on a Fund's longer term performance. The peer groups considered by the Board were developed by Lipper and were comprised of funds of comparable size within the same Lipper peer group category (the "Peer Group"), regardless of asset size or primary channel of distribution. Each Fund's performance against the performance Peer Group (the "Performance Peer Group") was considered by the Board as providing an objective comparative benchmark against 48 which each Fund's performance could be assessed. The Board considered these comparisons helpful in their assessment as to whether the Adviser was obtaining for the Funds' shareholders the total return performance that was available in the marketplace, given each Fund's investment objectives, strategies, limitations, and restrictions. In reviewing the Funds' performance, the Board noted that each Fund's performance was generally acceptable, noting that on occasion Funds have underperformed and on other occasions Funds have outperformed certain of these Performance Peer Groups. In connection with its assessment of the performance of the Adviser and the Sub-Adviser, the Board considered the Adviser's and Sub-Adviser's financial condition and whether they had the resources necessary to continue to carry out their functions under the Agreements. The Board concluded that the Adviser and Sub-Adviser had the financial resources necessary to continue to perform their obligations under the Agreements and to continue to provide the high quality services that it has provided to the Funds to date. 3) THE COST OF THE ADVISORY SERVICES AND THE PROFITS TO THE ADVISER AND ITS AFFILIATES FROM THE RELATIONSHIP WITH THE FUNDS. In connection with the Board's consideration of the Agreements, the Board considered a number of factors. First, the Board compared the level of the advisory fee for each Fund against comparative Lipper expense peer groups ("Expense Peer Group"). The Board also considered comparative non-management fee expenses and comparative total fund expenses of the Funds and each Expense Peer Group. The Board considered this information as useful in assessing whether the Adviser and Sub-Adviser were providing services at a cost that was competitive with other similar funds. In assessing this information, the Board considered both the comparative contract rates as well as the level of the advisory fees after waivers and/or reimbursements. The Board noted that three of the Funds operated pursuant to a Waiver and Expense Reimbursement Agreement with the Adviser wherein the Adviser had agreed to waive a portion of its fee or reimburse a Fund for a portion of its expenses necessary to limit the Fund's total operating expenses to the level set forth in the respective Fund's prospectus. The Board considered that despite the fact that the Westwood Equity Fund, Westwood Balanced Fund, and Westwood SmallCap Equity Fund's advisory fees and operating expenses were above the range of fees charged by their respective Peer Group, the expenses were reasonable in light of the fact that these Funds each outperformed most of the funds in their respective Peer Group over various time periods. The Board noted that despite the Waiver and Expense Reimbursement Agreement, the expenses of the Westwood Income Fund were above the range of fees charged by its Peer Group. The Board also noted that the Westwood Income Fund underperformed most of the funds in its Peer Group. The Board considered the fact that the Westwood Income Fund's investment objective was changed recently, and as a result, performance information was only available for less than one year, which may be less meaningful than performance information for a fund with a longer history. The Board concluded that they would continue to monitor the situation. The Board Members also reviewed the fees charged by the Adviser and Sub-Adviser to provide similar advisory services to other registered investment companies with similar investment objectives and to separate accounts, noting that in some cases the fees charged by the Adviser or Sub-Adviser were higher and in other cases lower, than the fees charged to the Funds. In evaluating this information, the Board considered the difference in services provided by the Adviser and Sub-Adviser to these other accounts. In particular, the Board considered the differences in risks involved in managing separate accounts and the Funds from a compliance and regulatory perspective. The Board also considered an analysis prepared by the Adviser of the estimated profitability to the Adviser of its relationship with the Funds and reviewed with the Adviser its cost allocation methodology in connection with its profitability. In this regard, the Board reviewed Pro-forma Income Statements of the Adviser for the year ended December 31, 2005. The Board considered one analysis for the Adviser as a whole, and a second analysis for the Adviser with respect to each of the Funds. With respect to the Fund analysis, the Board received an analysis based on each Fund's average net assets during the period as well as a pro-forma analysis of profitability at higher asset levels. The Board concluded that the profitability of the Funds to the Adviser under either analysis was not excessive. 49 4) THE EXTENT TO WHICH ECONOMIES OF SCALE WILL BE REALIZED AS THE FUNDS GROW AND WHETHER FEE LEVELS REFLECT THOSE ECONOMIES OF SCALE. With respect to the Board's consideration of economies of scale, the Board discussed whether economies of scale would be realized at higher asset levels. The Board also reviewed data from the Expense Peer Group to assess whether the Expense Peer Group funds had advisory fee breakpoints and, if so, at what asset levels. The Board also assessed whether certain of the Adviser's costs would increase if asset levels rise. The Board concluded that under foreseeable conditions, they were unable to assess at this time whether economies of scale would be realized if the Funds were to experience significant asset growth. In the event there were to be significant asset growth in the Funds, the Board determined to reassess whether the advisory fee appropriately took into account any economies of scale that had been realized as a result of that growth. 5) OTHER FACTORS. In addition to the above factors, the Board also discussed other benefits received by the Adviser and Sub-Adviser from their management of the Funds, including the use of soft-dollars by the Sub-Adviser. The Board considered that the Adviser did not use soft dollars in connection with its management of the Funds. Based on a consideration of all these factors in their totality, the Board Members, including all of the Independent Board Members, determined that each Fund's advisory fee and, except with respect to the Mighty Mites(SM) Fund, sub-advisory fee was fair and reasonable with respect to the quality of services provided and in light of the other factors described above that the Board deemed relevant. Accordingly, the Board Members determined to approve the continuation of each Fund's Advisory Agreement and, except with respect to the Mighty Mites(SM) Fund, Sub-advisory Agreement. The Board based its decision on evaluations of all these factors as a whole and did not consider any one factor as all-important or controlling. 50 THE WESTWOOD FUNDS ADDITIONAL FUND INFORMATION (UNAUDITED) ================================================================================ The business and affairs of the Trust are managed under the direction of its Board of Trustees. Information pertaining to the Trustees and officers of the Trust is set forth below. The Trust's Statement of Additional Information includes additional information about The Westwood Funds' Trustees and is available, without charge, upon request, by calling 800-GABELLI (800-422-3554) or by writing to The Westwood Funds at One Corporate Center, Rye, NY 10580-1422. TERM OF NUMBER OF NAME, POSITION(S) OFFICE AND FUNDS IN FUND ADDRESS 1 LENGTH OF COMPLEX OVERSEEN PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS AND AGE TIME SERVED 2 BY TRUSTEE DURING PAST FIVE YEARS HELD BY TRUSTEE 3 - ----------------- ------------- ---------------- ---------------------- ------------------- NON-INTERESTED TRUSTEES: - ----------------------- ANTHONY J. COLAVITA Since 1994 33 Partner in the law firm of -- Trustee Anthony J. Colavita, P.C. Age: 70 JAMES P. CONN Since 1994 Former Managing Director and Chief Director of LaQuinta Trustee Investment Officer of Financial Security Corp. (hotels) and Age: 68 Assurance Holdings Ltd. (1992-1998) First Republic Bank WERNER J. ROEDER, M.D. Since 1994 23 Medical Director of Lawrence Hospital -- Trustee and practicing private physician Age: 66 SALVATORE J. ZIZZA Since 2004 24 Chairman, Hallmark Electrical Director of Hollis-Eden Trustee Supplies Corp. Pharmaceuticals (biotechnology); Age: 60 Director of Earl Scheib, Inc. (automotive services) OFFICERS: - -------- BRUCE N. ALPERT Since 1994 -- Director and President of Gabelli Advisers, -- President Inc. since 1998, Executive Vice President Age: 54 and Chief Operating Officer of Gabelli Funds, LLC since 1988 and an officer of all of the registered investment companies in the Gabelli Funds complex AGNES MULLADY Since 2006 -- Officer of all of the registered investment -- Treasurer companies in the Gabelli Funds complex; Age: 48 Senior Vice President of U.S. Trust Company, N.A. and Treasurer and Chief Financial Officer of Excelsior Funds from 2004 through 2005; Chief Financial Officer of AMIC Distribution Partners from 2002 through 2004; Controller of Reserve Management Corporation and Reserve Partners, Inc. and Treasurer of Reserve Funds from 2000 through 2002 JAMES E. MCKEE Since 1995 -- Vice President, General Counsel and -- Secretary Secretary of GAMCO Investors, Inc. Age: 43 since 1999 and GAMCO Asset Management Inc. since 1993; Secretary of all of the registered investment companies in the Gabelli Funds complex PETER D. GOLDSTEIN Since 2004 -- Director of Regulatory Affairs for GAMCO -- Chief Compliance Officer Investors, Inc. since 2004; Chief Compliance Age: 53 Officer of all of the registered investment companies in the Gabelli Funds complex; Vice President of Goldman Sachs Asset Management (2000-2004) - --------------------- 1 Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise noted. 2 Each Trustee will hold office for an indefinite term until the earliest of (i) the next meeting of shareholders, if any, called for the purpose of considering the election or re-election of such Trustee and until the election and qualification of his or her successor, if any, elected at such meeting, or (ii) the date a Trustee resigns or retires, or a Trustee is removed by the Board of Trustees or shareholders, in accordance with the Trust's Amended By-Laws and Amended and Restated Declaration of Trust. Each officer will hold office for an indefinite term until the date he or she resigns or retires or until his or her successor is elected and qualified. 3 This column includes only directorships of companies required to report to the SEC under the Securities Exchange Act of 1934 (i.e. public companies) or other investment companies registered under the 1940 Act. 51 THE WESTWOOD FUNDS ================== One Corporate Center Rye, New York 10580-1422 GENERAL AND ACCOUNT INFORMATION: 800-GABELLI [800-422-3554] fax: 914-921-5118 website: www.gabelli.com e-mail: info@gabelli.com Board of Trustees ANTHONY J. COLAVITA WERNER J. ROEDER, MD ATTORNEY-AT-LAW MEDICAL DIRECTOR ANTHONY J. COLAVITA, P.C. LAWRENCE HOSPITAL JAMES P. CONN SALVATORE J. ZIZZA FORMER CHIEF INVESTMENT OFFICER CHAIRMAN FINANCIAL SECURITY ASSURANCE HALLMARK ELECTRICAL SUPPLIES CORP. HOLDINGS LTD. Officers BRUCE N. ALPERT JAMES E. McKEE PRESIDENT SECRETARY PETER D. GOLDSTEIN AGNES MULLADY CHIEF COMPLIANCE OFFICER TREASURER INVESTMENT ADVISER Gabelli Advisers, Inc. INVESTMENT SUB-ADVISER Westwood Management Corp. DISTRIBUTOR Gabelli & Company, Inc. CUSTODIAN The Bank of New York LEGAL COUNSEL Paul, Hastings, Janofsky & Walker LLP - -------------------------------------------------------------------------------- This report is submitted for the general information of the shareholders of The Westwood Funds. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. - -------------------------------------------------------------------------------- GABWWQ306AR THE WESTWOOD FUNDS EQUITY FUND BALANCED FUND INTERMEDIATE BOND FUND SMALLCAP EQUITY FUND INCOME FUND MIGHTY MITES(SM) FUND ANNUAL REPORT SEPTEMBER 30, 2006 ITEM 2. CODE OF ETHICS. (a) The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. (c) There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics description. (d) The registrant has not granted any waivers, including an implicit waiver, from a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this item's instructions. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. As of the end of the period covered by the report, the registrant's board of directors has determined that James P. Conn is qualified to serve as an audit committee financial expert serving on its audit committee and that he is "independent." ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. AUDIT FEES (a) The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $141,150 for 2006 and $141,982 for 2005. AUDIT-RELATED FEES (b) The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item are $0 for 2006 and $0 for 2005. TAX FEES (c) The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $21,900 for 2006 and $20,400 for 2005. Tax fees represent tax compliance services provided in connection with the review of the Registrant's tax returns. ALL OTHER FEES (d) The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for 2006 and $0 for 2005. (e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. Pre-Approval Policies and Procedures. The Audit Committee ("Committee") of the registrant is responsible for pre-approving (i) all audit and permissible non-audit services to be provided by the independent auditors to the registrant and (ii) all permissible non-audit services to be provided by the independent auditors to the Adviser, Gabelli Advisers, Inc., and any affiliate of Gabelli Funds, LLC ("Gabelli") that provides services to the registrant (a "Covered Services Provider") if the independent auditors' engagement related directly to the operations and financial reporting of the registrant. The Committee may delegate its responsibility to pre-approve any such audit and permissible non-audit services to the Chairperson of the Committee, and the Chairperson must report to the Committee, at its next regularly scheduled meeting after the Chairperson's pre-approval of such services, his or her decision(s). The Committee may also establish detailed pre-approval policies and procedures for pre-approval of such services in accordance with applicable laws, including the delegation of some or all of the Committee's pre-approval responsibilities to the other persons (other than Gabelli or the registrant's officers). Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the permissible non-audit services were not recognized by the registrant at the time of the engagement to be non-audit services; and (ii) such services are promptly brought to the attention of the Committee and approved by the Committee or Chairperson prior to the completion of the audit. (e)(2) The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows: (b) Not applicable (c) 100% (d) Not applicable (f) The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was zero percent (0%). (g) The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant was $0 for 2006 and $0 for 2005. (h) The registrant's audit committee of the board of directors has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of trustees, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR 240.14a-101), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of ethics, or any amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. 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. (registrant) The Westwood Funds ------------------------------------------------------------------- By (Signature and Title)* /s/ Bruce N. Alpert ------------------------------------------------------- Bruce N. Alpert, Principal Executive Officer Date 11/27/06 ---------------------------------------------------------------------------- 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 (Signature and Title)* /s/ Bruce N. Alpert ------------------------------------------------------- Bruce N. Alpert, Principal Executive Officer Date 11/27/06 ---------------------------------------------------------------------------- By (Signature and Title)* /s/ Agnes Mullady ------------------------------------------------------- Agnes Mullady, Principal Financial Officer and Treasurer Date 11/27/06 ---------------------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature.