<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-5022
Skyline Funds
(Exact name of registrant as specified in charter)
311 South Wacker Drive, Suite 4500
Chicago, IL 60606
(Address of principal executive offices) (Zip Code)
William M. Dutton Alan Goldberg
Skyline Funds Bell, Boyd & Lloyd LLC
311 South Wacker Drive, Suite 4500 Three First National Plaza, #3300
Chicago, IL 60606 Chicago, IL 60602
(Name and address of agents for service)
Registrant's telephone number, including area code: (312) 913-0900
Date of fiscal year end: 12/31/04
Date of reporting period: 06/30/04
<Page>
ITEM 1. REPORT TO SHAREHOLDERS.
<Page>
SEMI-ANNUAL REPORT -- JUNE 30, 2004
SKYLINE SPECIAL
EQUITIES PORTFOLIO
[GRAPHIC]
SKYLINE SPECIAL EQUITIES PORTFOLIO
[SKYLINE FUNDS LOGO]
<Page>
COMMENTARY(1)
June 30, 2004
OVERVIEW
The Fund generated a loss of 0.98% for the second quarter, compared to a 0.47%
gain for the Russell 2000 Index and a 0.85% gain for the Russell 2000 Value
Index. The modest gains posted by small cap stocks in the second quarter were
the lowest since the first quarter of 2003 and ended a string of four
consecutive quarters of more substantial gains. Year to date, the Fund rose
5.04%, compared to a 6.76% increase for the Russell 2000 Index and a 7.83%
increase for the Russell 2000 Value Index.
We are disappointed by the results generated by the Fund during the second
quarter. The smallest and riskiest stocks, which had been the strongest
performing segment of the small cap market throughout most of 2003 and early
2004, were the poorest performing stocks during the second quarter. In this
environment, we would have expected that the Fund, which consists of larger,
higher quality companies, would have performed well relative to its benchmarks.
However, earnings disappointments among a handful of stocks that carried
relatively heavy weightings in the Fund detracted from performance during the
quarter.
MARKET REVIEW
Stocks posted modest gains during the second quarter, as indicated by a gain of
0.47% for the Russell 2000 Index, a 0.85% increase for the Russell 2000 Value
Index and a 1.72% increase for the S&P 500 Index. For the first six months of
the year, the Russell 2000 Index increased 6.76%, the Russell 2000 Value Index
was up 7.83%, and the S&P 500 Index rose 3.44%.
A surprisingly strong employment report on April 2, combined with subtle changes
in the language the Fed used to communicate its intentions with regards to
future rate increases, led to an increase in interest rates during the second
quarter. The yield on the 10-Year Treasury Bond, which rose from 3.53% on June
30, 2003, to 3.90% on April 1, 2004, increased sharply after the employment
report and ended the second quarter at 4.62%. On the last day of the quarter,
the Federal Open Market Committee announced that it was raising its target for
the Fed Funds rate by 25 basis points to 1 1/4%, confirming investor
expectations. Equity markets, which had risen steadily the previous four
quarters, stalled in the second quarter in response to the increase in interest
rates as investors were forced to focus on the potential impact those higher
rates might have on economic activity and stock price valuations.
For the first time in five quarters, small cap stocks underperformed large cap
stocks during the second quarter, as indicated by the Russell 2000 Index's 0.47%
gain compared to the 1.72% gain for the S&P 500 Index. Despite the
outperformance of large cap stocks during the second quarter, year to date,
small cap stocks have performed better, as indicated by the Russell 2000 Index's
6.76% gain compared to the
1
<Page>
3.44% gain posted by the S&P 500 Index. The strong performance of small cap
stocks relative to large cap stocks since March 2000 has eliminated the enormous
valuation disparity that existed between large and small stocks at that time.
Although a return to extreme disparity in relative valuations cannot be ruled
out, it is our belief that differences in performance between small and large
stocks will be more dependent on which group delivers better earnings results.
In terms of sector performance, energy-related and industrial sectors performed
best in the Russell 2000 Value Index during the second quarter. Energy-related
stocks benefited from higher oil and gas prices. In early May, for the first
time in 13 years, oil prices, driven by strong demand and concerns about supply
disruptions, exceeded $40 per barrel. The producer durables, autos and
transportation, and materials and processing sectors all performed well during
the second quarter in response to the continuing rebound in the industrial
portion of the economy. Technology stocks were the worst performing sector of
the Index during the second quarter, as investors tempered their growth
expectations for the sector. The Index's health care stocks also performed
poorly during the quarter, as biotech and pharmaceutical stocks gave back some
of their recent strong gains. The financial services and utilities sectors,
which were among the weaker performers during the quarter, were negatively
impacted by higher interest rates. On a year-to-date basis, sector performance
was similar to the second quarter, with the exceptions being consumer
discretionary and health care, both of which performed much better in the first
quarter than second quarter, and autos and transportation, which rebounded in
the second quarter after a weak first quarter.
PORTFOLIO REVIEW
The Fund's sector weightings did not have a significant impact on overall
portfolio performance relative to the Russell 2000 Value Index. On the positive
side, the Fund was overweighted in the strong performing producer durables and
materials and processing sectors, while underweighted in the poorer performing
financial services and utilities sectors. On the negative side, the Fund was
underweighted in the top performing energy sector, while overweighted in the
poorer performing health care and technology sectors.
The Fund trailed the Indexes during the quarter primarily due to stock
selection. In particular, the poor performance of a handful of stocks that were
heavily weighted in the Fund detracted from performance. For the most part,
these stocks suffered from weaker than expected fundamentals. The impact was
felt most severely in the consumer discretionary sector, where earnings
disappointments reported by four companies with relatively high weightings led
to a 7.7% decline for the sector during the quarter compared to a 0.8% gain for
the corresponding sector of the Russell 2000 Value Index. Three of those four
stocks were home-furnishings related, an area of the market that was
exceptionally weak. On a more positive note, five of the top ten performing
stocks during the quarter were in the producer durables sector, which helped
lead that sector of the Fund to a 13.3% gain compared to a 6.2% rise for the
corresponding sector of the Index.
2
<Page>
On a year-to-date basis, sector performance was similar to the second quarter.
The underperformance of the Fund was due primarily to stock selection rather
than sector weightings. As was the case in the second quarter, producer durables
stocks contributed the most to the Fund's relative performance during the first
six months of the year, while consumer discretionary stocks detracted the most.
OUTLOOK
Over the last five years, we have witnessed and reported on major imbalances in
the financial markets. We believed that the significantly higher valuations
awarded growth stocks compared to value stocks and large cap stocks compared to
small cap stocks in the 1998 to early 2000 time frame were unsustainable. More
recently, we commented on the potential for extremely attractive returns for
equity investors, particularly when compared to those available to holders of
fixed-income securities. Those imbalances created an enormous opportunity for
the Fund on both an absolute and relative basis. In fact, from March 1, 2000
through June 30, 2004, the Fund rose 103.38% versus an 8.38% return for the
Russell 2000 Index, an 89.02% return for the Russell 2000 Value Index, a 36.88%
loss for the Russell 2000 Growth Index, and a 10.94% loss for the S&P 500 Index.
The current market environment appears to us to be much more in balance than it
has been in some time. There does not appear to be great disparities in
valuations between large and small stocks or growth and value stocks. Overall
equity valuations appear reasonable given the level of interest rates. If our
optimism on the outlook for earnings growth proves correct, stock prices should
benefit. However, the economic environment necessary for sustained earnings
growth will likely lead to rising interest rates, which in turn may limit P/E
multiple expansion. In this environment, individual stock selection will be
critical. We are confident that we have the resources to successfully identify
the best opportunities.
3
<Page>
PERFORMANCE (%)(1)
<Table>
<Caption>
2Q SINCE
2004* YTD* 1 YR 3 YRS 5 YRS 10 YRS INCEPTION(2)
SPECIAL EQUITIES -0.98 5.04 29.27 11.57 10.60 12.46 14.13
RUSSELL 2000 VALUE 0.85 7.83 35.17 12.16 12.82 13.91 12.21
RUSSELL 2000 0.47 6.76 33.37 6.24 6.63 10.93 9.55
S&P 500 1.72 3.44 19.11 -0.69 -2.17 11.87 10.96
</Table>
<Table>
<Caption>
CALENDAR YEARS 2003 2002 2001 2000 1999 1998 1997 1996
SPECIAL EQUITIES 40.7 -7.3 13.9 24.2 -13.3 -7.2 35.4 30.4
RUSSELL 2000 VALUE 46.0 -11.4 14.0 22.8 -1.5 -6.5 31.8 21.4
RUSSELL 2000 47.3 -20.5 2.5 -3.0 21.3 -2.6 22.4 16.5
S&P 500 28.7 -22.1 -11.9 -9.2 21.1 28.8 33.4 23.3
</Table>
<Table>
<Caption>
CALENDAR YEARS 1995 1994 1993 1992 1991 1990 1989 1988 1987(2)
SPECIAL EQUITIES 13.8 -1.2 22.9 42.5 47.4 -9.3 24.0 29.7 -16.9
RUSSELL 2000 VALUE 25.8 -1.6 23.8 29.1 41.7 -21.8 12.4 29.5 -21.5
RUSSELL 2000 28.4 -1.8 18.9 18.4 46.1 -19.5 16.2 24.9 -24.3
S&P 500 37.5 1.3 10.0 7.7 30.6 -3.2 31.4 16.5 -12.0
</Table>
The table does not reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares.
* Not annualized.
PORTFOLIO CHARACTERISTICS(1)
<Table>
<Caption>
SPECIAL RUSSELL 2000
EQUITIES VALUE RUSSELL 2000 S&P 500
P/E RATIO (EXCLUDING NEGATIVE EARNINGS) 17.2 17.4 20.4 19.0
PRICE/BOOK 1.89 1.63 2.17 2.97
PRICE/SALES 0.75 0.77 1.04 1.56
- --------------------------------------------------------------------------------------------------------
EPS GROWTH--3 YRS (HISTORICAL) 15.7% 5.1% 10.5% 8.2%
EPS GROWTH--1 YR (FORECASTED) 28.2% 29.8% 46.0% 26.7%
- --------------------------------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $1.5 billion $864 million $854 million $51 billion
ASSETS $546 million
NUMBER OF HOLDINGS 73
========================================================================================================
TICKER SYMBOL: SKSEX
CUSIP: 830833208
NET ASSET VALUE (PER SHARE): $29.18
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
</Table>
4
<Page>
SECTOR PERFORMANCE (%)(1) (AS OF JUNE 30, 2004)
2Q 2004**
<Table>
<Caption>
RUSSELL
SPECIAL 2000 RUSSELL
EQUITIES VALUE 2000
Producer Durables 13.3 6.2 4.8
- ---------------------------------------------------------------
Materials And Processing 6.8 5.2 4.2
- ---------------------------------------------------------------
Health Care 6.0 -3.1 2.1
- ---------------------------------------------------------------
Autos And Transportation 3.4 5.9 8.3
- ---------------------------------------------------------------
Other Energy 2.7 12.4 12.7
- ---------------------------------------------------------------
Technology -3.4 -4.4 -5.5
- ---------------------------------------------------------------
Financial Services -4.0 -2.5 -2.5
- ---------------------------------------------------------------
Consumer Discretionary -7.7 0.8 0.2
- ---------------------------------------------------------------
Consumer Staples -9.7 4.2 2.1
- ---------------------------------------------------------------
Integrated Oils NA* 24.5 24.5
- ---------------------------------------------------------------
Other NA* 8.0 8.4
- ---------------------------------------------------------------
Utilities NA* 0.0 1.4
</Table>
YTD 2004**
<Table>
<Caption>
RUSSELL
SPECIAL 2000 RUSSELL
EQUITIES VALUE 2000
Producer Durables 23.2 11.1 7.7
- ---------------------------------------------------------------
Health Care 12.5 7.1 10.8
- ---------------------------------------------------------------
Autos And Transportation 12.3 3.9 6.0
- ---------------------------------------------------------------
Materials And Processing 8.8 10.2 9.2
- ---------------------------------------------------------------
Financial Services 3.8 5.6 4.9
- ---------------------------------------------------------------
Other Energy 2.5 27.1 25.8
- ---------------------------------------------------------------
Consumer Discretionary 1.7 12.0 10.9
- ---------------------------------------------------------------
Technology -1.2 -1.7 -4.2
- ---------------------------------------------------------------
Consumer Staples -2.3 6.3 8.9
- ---------------------------------------------------------------
Integrated Oils NA 29.0 27.8
- ---------------------------------------------------------------
Other NA 14.7 15.0
- ---------------------------------------------------------------
Utilities NA 2.7 5.2
</Table>
* not applicable
** not annualized
5
<Page>
TOP TEN HOLDINGS(3)
<Table>
<Caption>
% OF NET ASSETS
AIRGAS, INC.
Gas distributor 2.7%
DAVITA INC.
Provider of dialysis services 2.4%
DELPHI FINANCIAL GROUP, INC.
Accident & health insurance 2.2%
PENTAIR, INC.
Industrial conglomerate 2.1%
CBRL GROUP, INC.
Family dining 2.1%
SPARTECH CORPORATION
Plastics producer 2.0%
COMMERCE BANCSHARES, INC
Regional bank 2.0%
FURNITURE BRANDS INTERNATIONAL, INC.
Furniture manufacturer 2.0%
ISTAR FINANCIAL INC.
Commercial real estate lender 1.8%
IDEX CORPORATION
Specialty pump products 1.8%
TOP TEN HOLDINGS 21.1%
</Table>
[CHART]
SECTOR WEIGHTINGS(3) (AS OF JUNE 30, 2004)
<Table>
Autos & Transportation 4.3%
Cash 1.9%
Consumer Discretionary 23.3%
Consumer Staples 1.3%
Financial Services 23.9%
Health Care 6.5%
Materials & Processing 14.2%
Other Energy 2.5%
Producer Durables 12.2%
Technology 9.9%
</Table>
6
<Page>
STOCK HIGHLIGHTS(3)
BENCHMARK ELECTRONICS, INC. (BHE)
Benchmark Electronics, Inc. is a provider of electronic manufacturing services
to original equipment manufacturers. BHE provides engineering, procurement,
circuit board assembly, final assembly and testing. BHE serves customers in the
computer, medical, industrial and telecommunications markets. We believe that
electronic manufacturing services is a growth industry as more and more
companies are outsourcing to companies like BHE. BHE has won numerous new
programs that should ramp into meaningful incremental revenues over the next
12-18 months. BHE's balance sheet is quite strong with almost $7.00 per share of
cash and no debt. BHE's shares trade at a reasonable mid-teens valuation after
adjusting for the net cash position and we believe that BHE will enjoy mid-teens
earnings growth over the foreseeable future.
WESTCORP INC. (WES)
Westcorp Inc. is one of the largest independent automobile finance companies
with a focus on pre-owned automobiles and more creditworthy customers. We
believe earnings will grow by more than 35% in 2004 and 15-18% over the next
several years thereafter. Earnings growth is being driven by a significant
improvement in credit quality, leading to lower credit costs. Credit quality is
improving due to an increasing percentage of originations coming from
prime/lower risk automobile loans as well as an improving economy. WES should
also benefit from higher growth rates in their newer east coast operations. In
addition, we believe that profitability will improve as the east coast
operations achieve greater economies of scale. Despite the strong earnings
growth and high returns the company is experiencing, the stock is selling at a
low P/E.
7
<Page>
NOTES TO PERFORMANCE
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PRINCIPAL VALUE AND
RETURN ON YOUR INVESTMENT WILL FLUCTUATE AND ON REDEMPTION MAY BE WORTH
MORE OR LESS THAN YOUR ORIGINAL COST. The performance for the one, three,
five, and ten years ended June 30, 2004, and for the period April 23, 1987
(inception) through June 30, 2004, is an average annual return calculation
which is described in the Fund's Statement of Additional Information.
The Russell 2000 Value Index is an unmanaged, value-oriented index
comprised of small stocks that have relatively low price-to-book ratios.
The Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. The S&P 500 Index, a widely quoted
stock market index, includes 500 of the largest companies publicly traded
in the United States. The Russell 2000 Growth Index is an unmanaged index
measuring the performance of those Russell 2000 companies with higher
price-to-book ratios and higher forecasted growth rates. The Dow Jones
Industrial Average is an average of the stock prices of 30 major
corporations in the United States. The NASDAQ Composite Index is an
unmanaged, market-value weighted index which measures all domestic and
non-U.S. based common stocks listed on the NASDAQ Stock Market. The acronym
stands for National Association of Securities Dealers Automated Quotations
system. All figures take into account reinvested dividends. You cannot
invest directly in an index.
Sources: Frank Russell Company and FactSet.
(2) Return is calculated from the Fund's inception on April 23, 1987. The
Russell 2000 Value performance reflects an inception date of May 1, 1987.
(3) Fund holdings are subject to change and should not be considered a
recommendation to buy or sell individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund that invests in stocks of small sized
companies, which tend to be more volatile and less liquid than stocks of large
cap companies. There are also risks in investing in value-oriented stocks,
including the risk that value-oriented stocks will underperform growth-oriented
stocks during some periods.
THE DISCUSSION OF THE FUND'S INVESTMENTS AND INVESTMENT STRATEGY REPRESENT THE
VIEWS OF SKYLINE ASSET MANAGEMENT, L.P., THE FUND'S INVESTMENT ADVISER, AT THE
TIME OF THIS REPORT. THE INVESTMENTS OF THE FUND ARE SUBJECT TO CHANGE AND
SHOULD NOT BE CONSIDERED A RECOMMENDATION TO BUY INDIVIDUAL SECURITIES.
DISTRIBUTOR: FUNDS DISTRIBUTOR, INC.
8
<Page>
GLOSSARY OF INVESTMENT TERMS
EARNINGS PER SHARE (EPS) A company's net income divided by its outstanding
shares.
EARNINGS PER SHARE GROWTH -- 3 YRS (HISTORICAL) The compounded annual growth
rate of a company's EPS over the last 3 years.
EARNINGS PER SHARE GROWTH -- 1 YR (FORECASTED) Analysts' consensus forecast for
a company's growth in operating EPS over the immediate future 12 months.
MEDIAN MARKET CAP An indicator of the size of companies in which a fund invests;
the mid-point of market capitalization (market price times shares outstanding)
of a fund's stocks, weighted by the proportion of the fund's assets invested in
each stock. Stocks representing half of the fund's assets have market
capitalizations above the median, and the rest below it.
PRICE/BOOK RATIO The share price of a stock divided by its net worth, or book
value, per share.
PRICE/EARNINGS (P/E) RATIO The ratio of a stock's current price to its per-share
earnings over the past 12 months. For a fund, the price/earnings ratio is the
weighted average P/E of the stocks in that fund. P/E is an indicator of market
expectations about corporate prospects.
PRICE/SALES RATIO The ratio of a stock's current price to its per-share revenue
over the past 12 months.
9
<Page>
PORTFOLIO HOLDINGS AS OF JUNE 30, 2004
<Table>
<Caption>
COMPANY NUMBER MARKET
DESCRIPTION SHARES VALUE
------------------------------ -------------- --------------
COMMON STOCKS
AUTOS & TRANSPORTATION -- 4.3%
OTHER TRANSPORTATION -- 3.2%
Interpool, Inc. Container leasing firm 306,700 $ 5,075,885
Laidlaw International, Inc. (a) Provider of transportation
services 459,500 5,955,120
Ryder System, Inc. Truck leasing company 164,400 6,587,508
--------------
17,618,513
TRUCKING -- 1.1%
Werner Enterprises Inc. Truckload carrier 295,557 6,236,253
--------------
TOTAL AUTOS & TRANSPORTATION 23,854,766
CONSUMER DISCRETIONARY -- 23.3%
COMMERCIAL SERVICES -- 6.1%
IKON Office Solutions, Inc. Distributor of copiers 694,000 7,960,180
ProQuest Company (a) Information content provider 286,000 7,793,500
Source Interlink
Companies, Inc. (a) Distributor of magazines 352,900 3,924,248
United Stationers Inc. (a) Office products distributor 169,200 6,720,624
Watson Wyatt & Company
Holdings Benefit consulting company 251,900 6,713,135
--------------
33,111,687
CONSUMER PRODUCTS/SERVICES -- 8.7%
Furniture Brands Int'l., Inc. Furniture manufacturer 426,700 10,688,835
Gildan Activewear, Inc. (a) T-shirt manufacturer 189,000 5,424,300
Polaris Industries Inc. Snowmobiles, ATVs,
motorcycles 148,300 7,118,400
School Specialty, Inc. (a) Non-textbook school supplies 260,403 9,455,233
Scotts Company (a) Turf & horticultural products 105,900 6,764,892
The Toro Company Turf maintenance products 116,500 8,163,155
--------------
47,614,815
PRINTING/PUBLISHING 1.0%
Journal Communications Media communication
Incorporated company 297,000 5,592,510
RESTAURANTS -- 3.0%
CBRL Group, Inc. Family dining 364,900 11,257,165
Ruby Tuesday, Inc. Casual dining 182,400 5,006,880
--------------
16,264,045
RETAIL -- 4.5%
Borders Group, Inc. Book retailer 397,300 9,312,712
Linens 'n Things, Inc. (a) Home textiles and
housewares retailer 303,500 8,895,585
Pier 1 Imports, Inc. Home furnishings retailer 358,500 6,341,865
--------------
24,550,162
TOTAL CONSUMER DISCRETIONARY 127,133,219
</Table>
10
<Page>
<Table>
<Caption>
COMPANY NUMBER MARKET
DESCRIPTION SHARES VALUE
------------------------------ -------------- --------------
CONSUMER STAPLES -- 1.3%
CONSUMER STAPLES -- 1.3%
Del Monte Foods Co. (a) Canned foods 678,700 $ 6,895,592
--------------
TOTAL CONSUMER STAPLES 6,895,592
FINANCIAL SERVICES -- 23.9%
BANKS/THRIFTS -- 3.5%
Commerce Bancshares, Inc. Regional bank 234,313 10,765,511
Netbank, Inc. Savings bank 448,900 4,906,477
Sterling Financial Corporation (a) Savings and loan 116,830 3,723,372
--------------
19,395,360
INSURANCE -- 13.4%
Amerus Group Co. Life insurer 171,700 7,108,380
Assured Guaranty LTD (a) Bond insurer 381,500 6,466,425
Clark, Inc. (a) Insurance brokerage and
consulting 235,600 4,370,380
Conseco, Inc. (a) Life insurer 296,300 5,896,370
Delphi Financial Group, Inc. Accident & health insurance 274,268 12,204,926
Direct General Corporation Personal auto insurance 186,300 6,010,038
Reinsurance Group of America Life reinsurer 140,800 5,723,520
Scottish Re Group Limited Life reinsurer 344,300 8,004,975
Selective Insurance Group, Inc. Property & casualty
insurance 147,535 5,883,696
Triad Guaranty Inc. (a) Mortgage insurance 79,813 4,645,117
U.S.I. Holdings Corporation (a) Insurance brokerage 431,953 6,824,857
--------------
73,138,684
OTHER FINANCIAL SERVICES -- 5.2%
Asset Acceptance Capital (a) Collector of charged-off
debt 358,100 6,087,700
Investment Technology
Group, Inc. (a) Trade execution firm 511,600 6,543,364
MCG Capital Corporation Business development
company 441,100 6,784,118
Westcorp Auto finance 194,200 8,826,390
--------------
28,241,572
REAL ESTATE INVESTMENT TRUSTS -- 1.8%
iStar Financial Inc. Commercial real estate
lender 244,100 9,764,000
--------------
TOTAL FINANCIAL SERVICES 130,539,616
HEALTH CARE -- 6.5%
HEALTH CARE SERVICES -- 6.5.%
Apria Healthcare Group Inc. (a) Home healthcare service
provider 215,900 6,196,330
Centene Corporation (a) Medicaid managed care 179,600 6,923,580
Davita Inc. (a) Provider of dialysis services 433,650 13,369,430
Triad Hospitals, Inc. (a) Hospital operator 247,100 9,199,533
--------------
TOTAL HEALTH CARE 35,688,873
</Table>
11
<Page>
<Table>
<Caption>
COMPANY NUMBER MARKET
DESCRIPTION SHARES VALUE
------------------------------ -------------- --------------
MATERIALS & PROCESSING -- 14.2%
BUILDING/CONSTRUCTION PRODUCTS -- 4.3%
Hughes Supply, Inc. Construction/industrial
supplies 157,200 $ 9,263,796
Jacuzzi Brands, Inc. (a) Manufacturer of bath and
plumbing products 614,800 4,955,288
York International Corporation Manufacturer of HVAC
products 223,800 9,191,466
--------------
23,410,550
ENGINEERING & CONSTRUCTION -- 1.2%
Shaw Group Inc. (a) Engineering and construction
company 654,700 6,632,111
PACKAGING & PAPER -- 1.4%
Albany International Corp. Manufacturer of paper
machine clothing 221,300 7,426,828
SPECIALTY CHEMICALS -- 7.3%
Airgas, Inc. Gas distributor 626,700 14,984,397
Cytec Industries, Inc. Specialty chemicals 132,000 5,999,400
Minerals Technologies Inc. Specialty minerals 142,200 8,247,600
Spartech Corp. Plastics producer 415,600 10,780,664
--------------
40,012,061
--------------
TOTAL MATERIALS & PROCESSING 77,481,550
OTHER ENERGY -- 2.5%
EQUIPMENT & SERVICES -- 0.9%
Key Energy Services, Inc. (a) Workover services provider 534,600 5,046,624
EXPLORATION & PRODUCTION -- 1.6%
Newfield Exploration
Company (a) Oil and gas producer 152,900 8,522,646
--------------
TOTAL OTHER ENERGY 13,569,270
PRODUCER DURABLES -- 12.2%
AEROSPACE -- 1.6%
Curtiss-Wright Corporation Aerospace & defense
components mfg. 153,800 8,642,022
DIVERSIFIED MANUFACTURING -- 5.2%
Ametek, Inc. Manufacturer of instruments
and specialty motors 264,400 8,169,960
Crane Co. Industrial conglomerate 276,900 8,691,891
Pentair, Inc. Industrial conglomerate 344,000 11,572,160
--------------
28,434,011
ELECTRICAL EQUIPMENT -- 1.1%
Acuity Brands, Inc. Manufacturer of lighting
fixtures 220,700 5,958,900
</Table>
12
<Page>
<Table>
<Caption>
COMPANY NUMBER MARKET
DESCRIPTION SHARES VALUE
------------------------------ -------------- --------------
MACHINERY -- 4.3%
Flowserve Corporation (a) Pump & valve manufacturer 313,100 $ 7,808,714
IDEX Corporation Specialty pump products 279,600 9,604,260
Kennametal Inc. Metal-cutting tools 138,300 6,334,140
--------------
23,747,114
--------------
TOTAL PRODUCER DURABLES 66,782,047
TECHNOLOGY -- 9.9%
DISTRIBUTION -- 2.1%
Synnex Corporation (a) Distributor of PCs and
peripherals 247,200 3,881,040
Tech Data Corporation (a) Distributor of PCs and
peripherals 201,400 7,880,782
--------------
11,761,822
ELECTRONIC COMPONENTS -- 1.0%
KEMET Corporation (a) Capacitor manufacturer 456,300 5,575,986
OTHER TECHNOLOGY -- 3.3%
Benchmark Electronics, Inc. (a) Contract manufacturer 236,000 6,867,600
Electronics for Imaging, Inc. (a) Products that support color
printing 195,800 5,533,308
Park Electrochemical Corporation Advanced electronic
materials 219,600 5,544,900
--------------
17,945,808
SERVICES -- 2.4%
BearingPoint, Inc. (a) IT consulting 908,700 8,060,168
Ceridian Corporation (a) Payroll processing 218,800 4,923,000
--------------
12,983,168
SOFTWARE -- 1.1%
eFunds Corporation (a) Provider of EFT software 344,608 6,030,640
--------------
TOTAL TECHNOLOGY 54,297,424
--------------
TOTAL COMMON STOCKS -- 98.1%
(Cost $426,408,740) 536,242,357
--------------
MONEY MARKET INSTRUMENTS
US Bank Demand Note, 1.11% (b) 4,140,450
US Bank Commercial Paper, 1.05%, due 07/01/04 7,850,000
--------------
TOTAL MONEY MARKET INSTRUMENTS -- 2.2%
(Cost $11,990,450) 11,990,450
--------------
TOTAL INVESTMENTS -- 100.3%
(Cost $438,399,190) 548,232,807
OTHER ASSETS LESS LIABILITIES -- (0.3)% (1,763,650)
--------------
NET ASSETS -- 100% $ 546,469,157
==============
</Table>
(a) Non-income producing security.
(b) Variable rate demand note. Interest rate is reset every seven days. Rate
disclosed represents rate in effect on June 30, 2004.
See accompanying notes to financial statements.
13
<Page>
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2004 (UNAUDITED)
<Table>
ASSETS
Investments, at value (Cost: $438,399,190) $ 548,232,807
Receivable for:
Dividends and interest $ 287,234
Fund shares sold 184,435 471,669
---------------
Other assets 117,890
---------------
Total assets 548,822,366
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $ 1,432,040
Comprehensive management fee 640,193
Fund shares redeemed 163,086
Trustees deferred compensation 117,890 2,353,209
--------------- ---------------
Net assets applicable to shares outstanding $ 546,469,157
===============
Shares outstanding--no par value (unlimited number
of shares authorized) 18,728,334
===============
PRICING OF SHARES
Net asset value, offering price and redemption price per share $ 29.18
===============
ANALYSIS OF NET ASSETS
Paid-in capital $ 382,706,941
Undistributed net investment loss (1,164,079)
Accumulated net realized gain on sales of investments 55,092,678
Net unrealized appreciation of investments 109,833,617
---------------
Net assets applicable to shares outstanding $ 546,469,157
===============
</Table>
See accompanying notes to financial statements.
14
<Page>
STATEMENT OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2004 (UNAUDITED)
<Table>
INVESTMENT INCOME
Dividends $ 2,433,349
Interest 119,564
--------------
Total investment income 2,552,913
EXPENSES:
Comprehensive management fee 3,950,940
Fees to unaffilliated trustees 25,622
--------------
Total expenses 3,976,562
--------------
Net investment loss (1,423,649)
Net realized and unrealized gain/loss on investments:
Net realized gain on sales of investments 42,682,931
Change in unrealized appreciation (15,570,803)
--------------
Net realized and unrealized gain on investments 27,112,128
--------------
Net increase in net assets resulting from operations $ 25,688,479
==============
</Table>
See accompanying notes to financial statements.
15
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
PERIOD ENDED
6/30/04 YEAR ENDED
(UNAUDITED) 12/31/03
--------------- ---------------
From operations:
Net investment loss $ (1,423,649) $ (1,085,666)
Net realized gain on sales of investments 42,682,931 41,784,701
Change in unrealized appreciation (15,570,803) 109,634,105
--------------- ---------------
Net increase in net assets resulting
from operations 25,688,479 150,333,140
Distributions to shareholders from net realized gains -- (27,937,092)
From fund share transactions:
Proceeds from fund shares sold 52,490,724 139,277,671
Reinvestment of dividends -- 27,404,752
Payments for fund shares redeemed (56,285,050) (143,342,383)
--------------- ---------------
Net decrease/increase in net assets resulting
from share transactions (3,794,326) 23,340,040
--------------- ---------------
Total increase in net assets 21,894,153 145,736,088
Net assets at beginning of year 524,575,004 378,838,916
--------------- ---------------
Net assets at end of period
(including undistributed net investment
loss of $1,164,079 and undistributed net
investment income of $259,570, respectively) $ 546,469,157 $ 524,575,004
=============== ===============
</Table>
See accompanying notes to financial statements.
16
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
PERIOD ENDED YEAR YEAR YEAR YEAR YEAR
6/30/04 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
-----------------------------------------------------------------------------------------------
Net asset value at
beginning of year $ 27.78 $ 20.86 $ 22.50 $ 19.75 $ 15.90 $ 19.78
------------- ------------- ------------- ------------- ------------- -------------
Income from
Investment
Operations
Net investment
loss (0.07)* (0.06)* (0.06)* (0.04)* (0.06)* (0.14)*
Net realized and
unrealized
gain/(loss) on
investments 1.47 8.54 (1.58) 2.79 3.91 (2.51)
------------- ------------- ------------- ------------- ------------- -------------
Total from
investment
operations 1.40 8.48 (1.64) 2.75 3.85 (2.65)
------------- ------------- ------------- ------------- ------------- -------------
Less distributions
from net realized
gains on
investments -- (1.56) -- -- -- (1.23)
------------- ------------- ------------- ------------- ------------- -------------
Net asset value at
end of period $ 29.18 $ 27.78 $ 20.86 $ 22.50 $ 19.75 $ 15.90
============= ============= ============= ============= ============= =============
Total Return 5.04%(a) 40.71% (7.29)% 13.92% 24.21% (13.28)%
Ratios/Supplemental Data
Ratio of expenses
to average net
assets 1.46%b 1.48% 1.48% 1.49% 1.51% 1.48%
Ratio of net
investment
loss to average
net assets (0.52)%(b) (0.26)% (0.26)% (0.16)% (0.32)% (0.32)%
Portfolio turnover
rate 28%(a) 52% 81% 93% 92% 81%
Net assets, end
of period (in
thousands) $ 546,469 $ 524,575 $ 378,839 $ 374,945 $ 286,951 $ 220,346
============= ============= ============= ============= ============= =============
</Table>
* Based on monthly average shares outstanding.
(a) Not Annualized.
(b) Ratios have been determined on an annualized basis.
17
<Page>
NOTES TO FINANCIAL STATEMENTS
Skyline Funds is an open-end, diversified investment management company, the
sole portfolio of which is Special Equities Portfolio (the "Fund"). The Fund
commenced public offering of its shares on April 23, 1987. Skyline Special
Equities Portfolio closed to new investors on January 30, 1997 and re-opened to
new investors on October 27, 1999. The Fund's investment adviser is Skyline
Asset Management, L.P. ("The Adviser"). The Fund seeks maximum capital
appreciation primarily through investment in common stocks that The Adviser
considers to be undervalued.
1
SIGNIFICANT ACCOUNTING POLICIES
- - SECURITY VALUATION - Investments are stated at value. Each equity security
traded on a securities exchange shall be valued at the last current sale price
as of the time of valuation on the exchange on which the security is principally
traded (the "principal exchange"), or lacking any current reported sale on the
principal exchange at the time of valuation, at the most recent bid quotation on
the principal exchange. Each over-the-counter security traded in the Nasdaq
Stock Market ("Nasdaq") shall be valued at the Nasdaq Official Closing Price
("NOCP"), as determined by Nasdaq, or lacking an NOCP, the last current reported
sale price as of the time of valuation on Nasdaq, or lacking any current
reported sale on Nasdaq at the time of valuation, at the most recent bid
quotation on Nasdaq. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by an
independent pricing service. Short-term instruments with sixty days or less to
maturity are valued at amortized cost which approximates market value.
Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees or a
committee thereof.
- - SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on an accrual basis and includes amortization of premiums and discounts.
Realized gains and losses from security transactions are reported on an
identified cost basis.
- - FUND SHARE VALUATION - Fund shares are sold and redeemed on a continuous
basis at net asset value. Net asset value per share is determined as of the
close of regular session trading on the New York Stock Exchange (normally 3:00
p.m. Central Time), each day that the Exchange is open for trading. The net
asset value per share is determined by dividing the value of all securities and
other assets, less liabilities, by the number of shares of the Fund outstanding.
- - FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS - It is the Fund's policy
to comply with the special provisions of the Internal Revenue Code applicable to
regulated investment companies and, in the manner provided therein, to
distribute substantially all of its taxable income to shareholders. Such
provisions were complied
18
<Page>
with and, therefore, no federal income taxes have been accrued in the
accompanying financial statements.
As of December 31, 2003 the Fund had no capital loss carryforwards.
Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date. The timing and characterization of certain income and capital
gain distributions are determined annually in accordance with Federal income tax
regulations that may differ from accounting principles generally accepted in the
United States. As a result, net investment income or loss and net realized gain
or loss for a reporting period may differ from the amount distributed during
such period. In addition, the Fund may periodically record reclassifications
among certain capital accounts to reflect differences between financial
reporting and income tax purposes. These reclassifications will be updated at
the Fund's fiscal year-end.
On December 17, 2003, a distribution of $1.55614 per share was declared. The
dividend was paid on December 19, 2003, to shareholders of record on December
18, 2003.
The tax character of distributions paid during 2003 was as follows:
<Table>
Distributions paid from:
Ordinary income $ 8,393,488
Long-term capital gain 19,543,604
-------------
$ 27,937,092
</Table>
Cost of investments for federal income tax purposes was substantially the same
as book cost of $438,399,190 on June 30, 2004, net unrealized appreciation was
$109,833,617, consisting of gross unrealized appreciation of $119,941,367 and
gross unrealized depreciation of $10,107,750.
- - LINE OF CREDIT - The Fund has a $3 million committed revolving credit
facility for temporary or emergency purposes, including the meeting of
redemption requests that otherwise might require the untimely disposition of
securities. The Adviser pays a commitment fee of 10 basis points per annum of
the average daily unutilized portion of the committed line of credit not
utilized. Under the terms of the credit agreement, interest on each loan would
be fixed at the prime rate less 150 basis points. For the six month period ended
June 30, 2004, there were no loans outstanding under the credit facility.
19
<Page>
- - USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results may differ from
those estimates.
2
TRANSACTIONS WITH AFFILIATES
For the Adviser's management and advisory services and the assumption of most of
the Fund's ordinary operating expenses, the Fund incurs a monthly comprehensive
fee based on its average daily net assets at the annual rate of 1.50% of the
first $200 million, 1.45% of the next $200 million, 1.40% of the next $200
million, and 1.35% of any excess over $600 million. The total comprehensive
management fee incurred for the period ended June 30, 2004 was $3,950,940.
Certain officers and trustees of the Skyline Funds are also officers, limited
partners or shareholders of limited partners of the Adviser. The Fund makes no
direct payments to the officers or trustees who are affiliated with the Adviser.
For the period ended June 30, 2004, the Fund incurred fees of $25,622 to its
unaffiliated trustees.
The Fund provides a deferred compensation plan for its trustees who are not
officers, limited partners or shareholders of limited partners of the Adviser.
Under the deferred compensation plan, trustees may elect to defer all or a
portion of their compensation. Amounts deferred are retained by the Fund, and to
the extent permitted by the 1940 Act, as amended, may be invested in the common
shares of the Fund, as selected by the trustees. Investments in such funds are
reflected as "Other Assets" on the Statement of Assets and Liabilities at June
30, 2004. Appreciation/depreciation and distributions received from these
investments are recorded with an offsetting increase/decrease in the deferred
compensation obligation and do not affect the net asset value of the Fund.
20
<Page>
3
FUND SHARE TRANSACTIONS
As of June 30, 2004, there were an unlimited number of shares of beneficial
interest, no par value, authorized. Transactions in the Fund's shares of
beneficial interest were as follows:
<Table>
<Caption>
SHARES DOLLAR AMOUNT
------------------------------- -------------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
6/30/04 12/31/03 6/30/04 12/31/03
-----------------------------------------------------------------
Shares sold 1,826,527 5,795,462 $ 52,490,724 $ 139,277,671
Shares issued for
reinvestment of
dividends - 996,899 - 27,404,752
-------------- -------------- -------------- --------------
Total shares issued 1,826,527 6,792,361 52,490,724 166,682,423
Less shares redeemed (1,979,032) (6,070,255) (56,285,050) (143,342,383)
-------------- -------------- -------------- --------------
Net decrease/increase (152,505) 722,106 $ (3,794,326) $ 23,340,040
============== ============== ============== ==============
</Table>
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the period
ended June 30, 2004, were as follows:
<Table>
Cost of purchases $ 159,958,545
Proceeds from sales $ 142,608,134
</Table>
PROXY VOTING
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by calling 800.828.2759, and on the Securities and Exchange
Commission's website at www.sec.gov. The Fund's proxy voting record for the
twelve-month period ending June 30, 2004, will be available by August 31, 2004,
on the Securities and Exchange Commission's website at www.sec.gov or on the
Fund's website at www.skylinefunds.com or without charge by calling
800.828.2759.
21
<Page>
For 24-hour account information call: 1.800.828.2SKY
(1.800.828.2759)
To speak with a Skyline Funds Representative during normal business hours call:
1.800.828.2SKY and press 0 when prompted.
To learn more about our expertise in small cap value, please visit our website
at www.skylinefunds.com
[SKYLINE FUNDS LOGO]
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
<Page>
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, the "Disclosure
Controls") as of a date within 90 days prior to the filing date (the "Filing
Date") of this Form N-CSR (the "Report"), the Disclosure Controls are
effectively designed to ensure that information required to be disclosed by the
registrant in the Report is recorded, processed, summarized and reported by the
Filing
<Page>
Date, including ensuring that information required to be disclosed in the Report
is accumulated and communicated to the registrant's management, including the
registrant's principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940)
that occurred during the registrant's most recent fiscal year that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 11. EXHIBITS.
(a) Certifications of William M. Dutton, President and Trustee of Skyline
Funds and Benjamin J. Kim, Treasurer of Skyline Funds pursuant to
Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR
270.30a-2(a)), attached hereto as Exhibits (a)(2)(i) and (a)(2)(ii)
(b) Certification of William M. Dutton, President and Trustee of Skyline
Funds and Benjamin J. Kim, Treasurer of Skyline Funds pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, attached hereto as
Exhibit (b)
<Page>
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.
Skyline Funds
By: /s/ William M. Dutton
----------------------------------
William M. Dutton
President and Trustee
(Principal Executive Officer)
Date: August 25, 2004
----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ William M. Dutton
----------------------------------
William M. Dutton
President and Trustee
(Principal Executive Officer)
Date: August 25, 2004
----------------------------------
By: /s/ Benjamin J. Kim
----------------------------------
Benjamin J. Kim
Treasurer
(Principal Financial Officer)
Date: August 25, 2004
----------------------------------