<Page>
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 811-08200
---------------------------------------------
BRIDGEWAY FUNDS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
5615 Kirby Drive, Suite 518
Houston, Texas 77005-2448
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
John N.R. Montgomery, President
Bridgeway Capital Management, Inc.
5615 Kirby Drive, Suite 518
Houston, Texas 77005-2448
- -------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (713) 661-3500
----------------------------
Date of fiscal year end: June 30
--------------------------
Date of reporting period: December 31, 2004
-------------------------------------
<Page>
Item 1 - Reports to Stockholders
The following is a copy of the report to shareholders pursuant to Rule
30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
<Page>
[BRIDGEWAY FUNDS LOGO] AGGRESSIVE INVESTORS 1 FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
[GRAPHIC]
<Table>
NEW HIGH
12/28/04 $ 55.11
INTERIM LOW
3/11/03 $ 28.81
OLD HIGH
9/1/00 $ 54.83*
</Table>
* ADJUSTED FOR DIVIDENDS
Dear Fellow Aggressive Investors 1 Fund Shareholder,
Our Fund appreciated 17.96% in the December quarter compared to 9.23% for our
primary benchmark, the S&P 500 Index and 10.46% for our peer benchmark, the
Lipper Capital Appreciation Funds Index. It was a very strong quarter.
On the strength of the December quarter, our calendar year Fund return was
12.21%, beating both our primary market benchmark (up 10.88%) and our peer
benchmark (up 11.31%). It was another VERY strong year for small stocks,
however, and we underperformed the Russell 2000 Index (up 18.33%). This
represents the sixth year in a row--three bull market years and three bear
market years--that we have outperformed our primary market benchmark and our
peer benchmark. I am very proud of Bridgeway's record of consistency with this
Fund.
The table below presents our December quarter, one-year, five-year, ten-year and
life-to-date financial results according to the formula required by the SEC. See
page 2 for a graph of performance since inception.
<Table>
<Caption>
DEC. QTR. 1 YEAR 5 YEAR 10 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 1/1/00 TO 1/1/95 TO 8/5/94 TO
12/31/04 12/31/04 12/31/04 12/31/04 12/31/04
- --------------------------------------------------------------------------------------------------------------
AGGRESSIVE INVESTORS 1 FUND 17.96% 12.21% 7.40% 22.28% 22.30%
S&P 500 Index (large companies) 9.23% 10.88% -2.30% 12.05% 11.73%
Russell 2000 (small companies) 14.09% 18.33% 6.61% 11.54% 11.40%
Lipper Capital Appreciation Funds 10.46% 11.31% -4.07% 9.43% 9.36%
</Table>
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL
1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com.
THE S&P 500 INDEX IS A BROAD-BASED, UNMANAGED MEASUREMENT OF CHANGES IN STOCK
MARKET CONDITIONS BASED ON THE AVERAGE OF 500 WIDELY HELD COMMON STOCKS WHILE
THE RUSSELL 2000 INDEX IS AN UNMANAGED, MARKET VALUE WEIGHTED INDEX, THAT
MEASURES PERFORMANCE OF THE 2,000 COMPANIES THAT ARE BETWEEN THE 1,000TH AND
3,000TH LARGEST IN THE MARKET WITH DIVIDENDS REINVESTED. THE LIPPER CAPITAL
APPRECIATION FUNDS INDEX REFLECTS THE AGGREGATE RECORD OF MORE AGGRESSIVE
DOMESTIC GROWTH MUTUAL FUNDS, AS REPORTED BY LIPPER, INC. IT IS NOT POSSIBLE TO
INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT
ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED.
According to data from Lipper, Inc. at the end of December, the Aggressive
Investors 1 Fund ranked 155th of 421 capital appreciation funds for the last
twelve months, 26th of 255 over the last five years and 1st of 82 over the last
ten years. Lipper, Inc. is an independent mutual fund rating service that ranks
funds in various fund categories by making comparative calculations using total
returns.
<Page>
SHAREHOLDER LETTER
[CHART]
GROWTH OF $10,000 INVESTED IN AGGRESSIVE INVESTORS 1 FUND AND INDEXES FROM
8/5/94 (INCEPTION) TO 12/31/04
<Table>
<Caption>
DATE BRIDGEWAY AGGRESSIVE INVESTORS 1 FUND S&P 500 INDEX RUSSELL 2000 INDEX LIPPER CAPITAL APPRECIATION FUNDS
8/94 10000 10000 10000 10000
9/94 10520 10172 10515 10453
12/94 10877 10170 10320 10305
3/95 10891 11157 10797 11023
6/95 11953 12219 11809 12055
9/95 12963 13187 12975 13243
12/95 13824 13978 13256 13560
3/96 15397 14728 13933 14307
6/96 17123 15387 14630 14938
9/96 17894 15859 14679 15300
12/96 18275 17179 15443 15588
3/97 17106 17643 14644 14884
6/97 20538 20717 17018 17172
9/97 24189 22266 19551 19155
12/97 21614 22903 18896 18701
3/98 24979 26091 20797 21092
6/98 24251 26950 19827 21448
9/98 18606 24275 15833 18370
12/98 25782 29435 18415 22438
3/99 28119 30900 17416 23516
6/99 32345 33075 20125 25798
9/99 33588 31013 18852 24774
12/99 56878 35628 22330 31227
3/00 64095 36445 23911 34038
6/00 68921 35477 23008 30746
9/00 76644 35133 23262 31255
12/00 64602 32384 21655 27190
3/01 56339 28545 20246 23311
6/01 62444 30215 23139 25171
9/01 49282 25781 18329 19847
12/01 57366 28536 22193 22862
3/02 57486 28614 23078 22658
6/02 54359 24781 21150 19410
9/02 46676 20499 16624 16363
12/02 47034 22229 17647 17379
3/03 46334 21529 16855 17020
6/03 59466 24843 20803 19648
9/03 65004 25501 22691 20511
12/03 72419 28606 25987 22793
3/04 73268 29090 27614 23466
6/04 73595 29591 27744 23650
9/04 68890 29036 26951 22968
12/04 81263 31717 30750 25370
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
CUMULATIVE PERFORMANCE
TRANSLATION: Assuming that you have both reinvested all dividends and not
redeemed any shares, the value of your account just returned to an all-time
high.
The value of the Fund is its price per share adjusted for dividends. While the
Fund will continue to fluctuate in value, hitting an "all-time high" is
something to celebrate. At the end of December, the S&P 500 Index was still
14.6% below its all-time previous high established on March 2000, so our Fund
got there more quickly. I am pleased that we provided some "cushion" against the
pain in each calendar year of the bear market, and then recovered more quickly
in both of the two years since then. This is a good lesson in the value of
holding through a bear market and avoiding panic and the urge to sell when
things look bad. Remember, though, that this "holding through the downturn"
strategy works best in concert with other financial principles. These include:
saving, avoiding most kinds of debt, diversifying (and periodically rebalancing)
your portfolio, setting aside an emergency fund, and choosing well managed,
low-cost funds whose investment objectives - anything from very aggressive
growth to ultra-low-risk income - match the time-horizons of the investments
you're making. This is a fancy way of saying that the more years you can afford
to wait before tapping a particular pile of money, the more risk you can afford
to take with it.
YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S
DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR).
TRANSLATION: Notwithstanding news events (and the commentary of many market
pundits), 2004 was a remarkably average year. The combination of rising interest
rates, a declining U.S. dollar, inflation, the presidential election, war and
natural disasters should have produced some extraordinary results, right? Not so
fast . . .
2
<Page>
Let's look at the statistics purely from a market perspective. Over the 10 years
through December 31, 2004, the S&P 500 Index of large companies returned an
average of 12.05% per year. (I know, that sounds unbelievable, given how weak
the past few years' performance has been, but the market of the mid- and late
1990s really was pretty remarkable.) That's only about one and one-half
percentage points better than the Index's return for 2004. Furthermore, if we
look all the way back to 1925, we see that the market has returned an average of
10.4% per year - and that's over a 79-year period that includes the Great
Depression, World War II, the white-hot "go-go" market of the 1960s and the
brutal bear market of the early 1970s. In about two-thirds of those years, the
Index either beat or lagged that 10.4% average by more than 10 percentage
points. From that perspective, therefore, 2004's return of 10.88% was about as
average as you can get.
.. . . but wasn't this a very volatile year? No. In fact, the actual variation of
monthly returns in 2004 was about half of the average of the preceding decade.
Throughout that 10-year period, only one year - 1995 - was less volatile. In
other words, in 2004 the stock market "bounced around" a whole lot LESS than
normal.
In conclusion, what IS remarkable about 2004 is how average it was in terms of
returns and how "tame" it was with respect to volatility. Not what you might
conclude from reading standard financial commentaries, many of which described a
market lurching dramatically between struggle and triumph. All that drama can be
very compelling, but it doesn't necessarily lead to an accurate understanding of
the market's behavior in the long run, nor does it necessarily produce sound
investment decisions. For that reason, though I have four computer screens in my
office, none of them runs a ticker, and I frequently go home at the end of the
day without knowing whether the overall market was up or down. This frees up
tremendous emotional energy to spend on more important things (including
actually finding the next good stock pick).
All that said, the market of 2004 did exhibit some unusual characteristics, in
particular the continued - and extraordinary - performance of smaller stocks.
This was the sixth year in a row that small stocks beat large ones, the longest
period of consecutive annual small-stock dominance in the last eight decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, some investment strategies - such as buying small-cap stocks or
value stocks or real-estate-oriented stocks - that have worked well in the
recent past tend to keep working, as investors get caught up in the excitement
and become increasingly confident that a given strategy is the right way to go.
This is essentially a self-fulfilling prophecy: If everyone agrees that small
stocks, for example, are going to keep going up, they will go up, because
everyone buys them. So-called momentum investing has come in for a lot of
negative publicity in the past few years, because it was investors following a
momentum strategy who both fueled the tech-stocks bubble of the late '90s and
early 2000 and then (when they switched strategies) caused it to collapse. The
fact is, though, that a momentum strategy can work FOR PERIODS OF TIME, and
based on more than seven decades of history, when small stocks have done well
relative to the overall market in one year, they are more likely to do well in
the next one. So we could conceivably see a record-setting seventh year in a row
of small-stock dominance.
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but our computer models have no such concerns, and they are pointing to
a shift toward larger stocks. Specifically, over the past 12 months or so our
models began finding a larger number of "attractive" large stocks than at any
time I can remember in about five years. This is almost certainly a function of
relative valuation; i.e., based on a variety of financial measures, and thanks
to the multi-year run-up in the price of small stocks, larger stocks in general
are starting to look relatively attractive again. At Bridgeway, we don't put
much effort into trying to guess the market's direction, we're just trying to
find one good stock (of any size) at a time. Still, I believe it's likely that
the tide will turn back in favor of large stocks at SOME point in the next
couple of years. It's a good time (ok, any time is a good time) to make sure
your own portfolio is in balance with your long-term plan.
3
<Page>
Of course, company size is hardly the only investment variable. "Style," too,
plays a significant role, and the December quarter was pretty bad for
"growth"-oriented stocks, building on a very bad year and continuing a five-year
trend. The following bar chart shows the relative performance of growth versus
value oriented large stocks, over the past one, three, and five years, based on
data from Morningstar:
[CHART]
<Table>
<Caption>
VALUE GROWTH
1 Year 14.05% 0.19%
3 Year 6.95% -4.35%
5 Year 4.54% -16.22%
</Table>
This pattern of weak growth-stock performance is exactly what one would
expect...during the bear-market phase of a stock-market cycle. But from a
historical perspective, it's distinctly unusual for the last two years of a
recovery. Our models are suggesting a shift toward growth stocks, but not as
strongly as they indicate a shift toward large stocks. Any shift toward growth
stocks would probably benefit this Fund; a shift toward large stocks would
probably be neutral, since we have exposure to all size companies. My conclusion
from all this: make sure your portfolio is in balance with your target
allocation and long term plan.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE--WHAT WORKED WELL
TRANSLATION: Our Fund had reasonable representation in some of the market's
better performing industries, such as steel, Internet stocks, and utilities.
Overall, our models came through for us in the last quarter with a handful of
strong winners.
Our list of best performers highlights some of the market's sweet spots. It also
demonstrates the diversity of the Fund. Our top stock is from a very mature
industry (steel), while the next two are faster-growing technology companies.
The sixth-best performer, Marvell Technology, is a semiconductor company - an
industry that was, in general, in the basement for the year. Marvell offers a
nice reminder that it's possible to make money with a star performer even when
the industry itself is a dog. Across the Fund's portfolio, nine stocks gained
more than 30% in the December quarter.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- --------------------------------------------------------------------------------
1 AK Steel Holding Corp Iron/Steel 59.4%
2 Autodesk Inc Software 56.1%
3 Apple Computer Inc Computers 51.1%
4 Coldwater Creek Inc Retail 46.4%
5 Digital River Inc Internet 39.7%
6 Marvell Technology Group Ltd. Semiconductors 35.7%
7 Texas Utilities Corp Electric 34.7%
8 Cognizant Tech. Solutions Corp Computers 32.2%
9 Tenneco Automotive Inc Auto Parts & Equipment 31.6%
</Table>
The top percentage gainer for the quarter was AK Steel Holding Corporation,
which manufactures carbon steel products for the automotive industry (more than
30% of its sales come from General Motors and Ford), as well as for the
construction industry and other manufacturers. Thanks in large part to the boom
in China, demand for steel and steel-related products has been high, and AK
Steel has demonstrated good "pricing power" - a company's ability to pass the
higher costs of its raw materials onto its customers. In October, the company
reported a third straight quarterly profit, driven by both higher volume and
higher sales. In addition, the company said that it expected operating profit
for the December 2004 quarter to be even higher than they had been in the
September quarter. If December turns out to have conformed to those
expectations, 2004 will be AK Steel's first profitable year in four years.
4
<Page>
What I really find interesting about this stock is how the price behaved at the
time of our purchase. We initially bought a position equal to 1% of the Fund in
October. A couple of days later, concerns about the world demand for steel sent
the stock down almost 10%. Was this an indication that we had made a mistake and
should sell? Or was it time to buy more? The discipline of our modeling and
investment-management process really helped out here. Our model still rated the
stock a buy, and with even more favorable valuations, we ended up doubling the
size of our position to 2% of the Fund on the price decline. A few days later
the company reported excellent earnings and the price recovered nicely over just
a one week period, giving us an attractive short-term unrealized gain. Thus far,
our model has correctly predicted the direction of AK Steel's stock price, and
we ended the quarter with a net 59.4% gain.
Apple Computer also performed well for us during the quarter. A well known
computer and electronics manufacturer, Apple Computer makes the very popular
iPod digital music player, as well as the iMac and PowerCube personal computers.
The stock has done well over the last quarter on surging sales of iPods and the
growth of the digital music-player industry. In the holiday season just ended,
major retailers like Amazon.com (the biggest Internet retailer), and Best Buy
Company (the largest electronics retailer) ran out of or ran short of some
popular iPod models. By some estimates Apple could sell 4 million iPods in the
December quarter, compared with just over 700,000 in the previous holiday
season. We initially bought shares early in October, and watched our total
position gain 51.1% through the end of December.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE--WHAT DIDN'T WORK
I'm pleased to say that no stocks declined by more than 30% over the past
quarter. The biggest decliner, Lone Star Technologies, Inc., was down 26.6% for
the quarter (we sold our position). If this company sounds familiar, it may be
because I profiled it last quarter, when it was the top-performing stock. Lone
Star, a tube and steel supplier to the oil and automotive industries, had
reported record revenues and net income in its July earnings release, the second
consecutive quarter of positive operating earnings. In its October earnings
release, the company reported yet another quarter of record revenues, but noted
that a recent 20% jump in the cost of raw materials had hurt profitability, with
the result that earnings were lower than analysts had expected. Investors rushed
to ditch the stock, and we unwound our position later in the quarter for a 26.6%
loss.
DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE--WHAT WORKED WELL
TRANSLATION: To a certain extent, the December quarter really carried the year,
so the good news for the quarter and the year are largely the same. Over the
course of the calendar year, 16 companies in the Fund's portfolio gained more
than 30%.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- --------------------------------------------------------------------------------
1 Autodesk Inc Software 88.4%
2 Digital River Inc Internet 88.3%
3 Texas Utilities Corp Electric 75.2%
4 Research In Motion Ltd Computers 74.5%
5 AK Steel Holding Corp Iron/Steel 59.4%
6 Coldwater Creek Inc Retail 58.0%
7 XTO Energy Inc Oil & Gas 56.3%
8 Apple Computer Inc Computers 51.1%
9 Urban Outfitters Inc Retail 50.8%
10 Patina Oil & Gas Corp Oil & Gas 46.6%
11 Marvell Technology Group Ltd. Semiconductors 45.4%
12 Tesoro Petroleum Corp Oil & Gas 40.9%
13 Tenneco Automotive Inc Auto Parts & Equipment 36.8%
14 Carpenter Technology Iron/Steel 34.6%
15 Eastman Chemical Co Chemicals 31.1%
16 eBay Inc Internet 31.1%
</Table>
5
<Page>
Autodesk was a winner for both the quarter and the year, and I profiled the
company in our September quarterly letter. The company produces sophisticated
computer software for graphics-heavy applications - its products are used by
architects, surveyors, designers, and engineers, among others - and it has
continued to increase both revenues and profits. The stock hit a 52-week high in
the last week of the year and was the top performer in the S&P 500, with a gain
of more than nearly 210%. Our position in Autodesk, which we initially
established in the second quarter, was up 88.4% in 2004.
Energy stocks were something of a bright spot for us over the past twelve
months, with Oil & Gas companies taking three of the top slots in the Fund's
portfolio. Of these, the best performer was XTO Energy, whose oil and gas
producing properties are concentrated in the western states, including New
Mexico, Texas, Oklahoma, and Wyoming. This company ground out its impressive
results the old-fashioned way -- through operating performance: XTO's September
quarter was its seventh straight quarter of record revenues, and its second
quarter of record-breaking operating earnings per share. Even though earnings
over the past several quarters were lower than analysts had expected, investors
apparently voted to hold and buy more. We've owned our position since early
2003, and over the past year it gained 56.3%.
Apple Computer Inc., a top performer for the quarter, also shows up on our list
of the year's best-performing stocks. And in fact, for the year, the company's
stock was the second-best performer in the S&P 500.
DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE--WHAT DIDN'T WORK
TRANSLATION: Only six stocks in the Fund's portfolio lost more than 30% in 2004,
but a couple of them lost a lot more. This is a list I'd prefer to forget.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LOSS
- --------------------------------------------------------------------------------
1 Omnivision Technologies Inc Semiconductors -54.1%
2 Nortel Networks Corp Telecommunications -52.5%
3 Gevity HR Inc Commercial Services -34.8%
4 ImClone Systems Inc. Pharmaceuticals -34.5%
5 Career Education Corp Commercial Services -32.9%
6 AU Optronics Corp - ADR Electronics -31.2%
</Table>
I've written about most of the names on this list over the past three quarters,
including Omnivision Technologies, (the biggest loser of the year). As of the
end of December, we no longer hold any of the six stocks on this list, having
moved on to what I hope will be greener investment pastures.
TOP TEN HOLDINGS
At quarter end, Technology comprised our largest sector representation at 21.7%
of net assets, followed by Basic Materials at 20.2% and Communications at 15.8%.
Our top ten holdings represented 46.2% of net assets.
<Table>
<Caption>
PERCENT OF
RANK DESCRIPTION INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
1 Apple Computer Inc Computers 6.8%
2 Research In Motion Ltd Computers 6.1%
3 Eastman Chemical Co Chemicals 6.0%
4 Lyondell Chemical Co Chemicals 5.1%
5 Western Wireless Corp Telecommunications 4.9%
6 Autodesk Inc Software 4.4%
7 American Eagle Outfitters Inc Retail 3.3%
8 Digital River Inc Internet 3.3%
9 Carpenter Technology Iron/Steel 3.2%
10 Texas Utilities Corp Electric 3.1%
- --------------------------------------------------------------------------------
46.2%
</Table>
6
<Page>
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
As of December 2004, we are quite "heavy" on metals (basic materials) and
"light" on financial and consumer non-cyclical stocks.
<Table>
<Caption>
AGGRESSIVE INVESTORS 1 FUND S&P 500 INDEX DIFFERENCE
- -----------------------------------------------------------------------------------
Basic Materials 20.3% 2.9% 17.4%
Communications 15.9% 11.3% 4.6%
Consumer, Cyclical 13.9% 9.9% 4.0%
Consumer, Non-cyclical 7.0% 21.2% -14.2%
Energy 10.3% 7.2% 3.1%
Financial 1.1% 20.6% -19.5%
Industrial 6.5% 11.6% -5.1%
Technology 21.9% 12.4% 9.5%
Utilities 3.1% 2.9% 0.2%
- -----------------------------------------------------------------------------------
TOTAL 100.0% 100.0% 0.0%
</Table>
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views, including those of market sectors or individual stocks, are not
meant as investment advice and should not be considered predictive in nature.
Any favorable (or unfavorable) description of a holding applies only as of the
quarter end, December 31, 2004, unless otherwise stated. Security positions can
and do change thereafter. Discussions of historical performance do not guarantee
and are not indicative of future performance.
The Fund is subject to above average market risk (volatility) and is not an
appropriate investment for short-term investors. Investments in the small
companies within this multi-cap fund generally carry greater risk than is
customarily associated with larger companies for various reasons such as
narrower markets, limited financial resources and less liquid stock.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES,
RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S
WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND
SERVICES, LLC, DISTRIBUTOR. (02/05).
CONCLUSION
As always, we appreciate your feedback. We take your responses seriously and
discuss them at our weekly staff meetings. Please keep your ideas coming--we
continually look for ways to improve our service.
Sincerely,
/s/ John Montgomery
John Montgomery
7
<Page>
DISCLOSURE of FUND EXPENSES
(UNAUDITED)
As a shareholder to the Fund, you will incur no transactions costs, including
sales charges (loads) on purchases, on reinvested dividends, or on other
distributions. There are also no redemption fees or exchange fees. However, the
fund will incur ongoing costs, including management fees and other Fund
expenses. The following examples are intended to help you understand your
ongoing costs (in dollars) of investing in a Fund and to compare these costs
with the ongoing costs of investing in other mutual funds. The examples are
based on an investment of $1,000 invested on July 1, 2004 and held until
December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY AGGRESSIVE INVESTORS 1 FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSE PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- --------------------------------------------------------------------------------
Actual Fund Return $ 1,000.00 $ 1,104.19 $ 8.26
Hypothetical Fund Return $ 1,000.00 $ 1,017.36 $ 7.92
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.56% MULTIPLIED
BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF
DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR
(TO REFLECT THE ONE HALF-YEAR PERIOD).
8
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------------
COMMON STOCKS - 99.3%
AEROSPACE/DEFENSE - 1.3%
United Industrial Corp 125,000 $ 4,842,500
AGRICULTURE - 1.1%
Bunge Ltd 71,000 4,047,710
AUTO MANUFACTURERS - 4.0%
Ford Motor Co 618,400 9,053,376
General Motors Corp 140,800 5,640,448
--------------
14,693,824
AUTO PARTS & EQUIPMENT - 0.6%
Tenneco Automotive Inc* 134,200 2,313,608
CHEMICALS - 11.1%
Eastman Chemical Co 378,100 21,827,713
Lyondell Chemical Co 649,800 18,792,216
--------------
40,619,929
COMMERCIAL SERVICES - 1.0%
Korn/Ferry International* 170,000 3,527,500
COMPUTERS - 15.6%
Apple Computer Inc* 385,400 24,819,760
Cognizant Technology
Solutions Corp* 203,100 8,597,223
Network Appliance Inc* 31,300 1,039,786
Research In Motion
Ltd, ADR* 271,900 22,409,998
--------------
56,866,767
DISTRIBUTION / WHOLESALE - 0.0%^
SED International
Holdings Inc * 2 0
DIVERSIFIED FINANCIAL SERVICES - 1.0%
E*TRADE Financial Corp* 250,000 3,737,500
ELECTRIC - 3.1%
Texas Utilities Corp 174,800 11,285,088
FOREST PRODUCTS & PAPER - 3.0%
MeadWestvaco Corp 328,400 11,129,476
INTERNET - 6.4%
Digital River Inc* 286,200 11,908,782
eBay Inc* 70,000 8,139,600
Yahoo! Inc* 91,900 3,462,792
--------------
23,511,174
IRON/STEEL - 6.1%
AK Steel Holding Corp* 721,000 10,432,870
Carpenter Technology Corp 200,000 11,692,000
--------------
22,124,870
OIL & GAS - 10.2%
Chesapeake Energy Corp 306,000 5,049,000
ConocoPhillips 41,500 3,603,445
Occidental Petroleum Corp 71,700 4,184,412
Southwestern Energy Co* 132,500 6,716,425
Tesoro Petroleum Corp* 219,800 7,002,828
Transocean Inc* 2,900 122,931
Valero Energy Corp 112,300 $ 5,098,420
XTO Energy Inc 155,832 5,513,336
--------------
37,290,797
PHARMACEUTICALS - 4.9%
Bristol-Myers Squibb Co 306,400 7,849,968
Eon Labs Inc* 150,900 4,074,300
Kos Pharmaceuticals Inc* 157,300 5,920,772
--------------
17,845,040
RETAIL - 9.2%
Aeropostale Inc* 115,300 3,393,279
American Eagle Outfitters Inc 256,000 12,057,600
Coldwater Creek Inc* 158,150 4,882,091
J.C. Penney Co Inc Holding 124,800 5,166,720
Pacific Sunwear Of
California Inc* 31,040 690,950
Urban Outfitters Inc* 166,400 7,388,160
--------------
33,578,800
SEMICONDUCTORS - 1.8%
Marvell Technology Group Ltd* 190,700 6,764,129
SOFTWARE - 4.4%
Autodesk Inc 419,600 15,923,820
TELECOMMUNICATIONS - 9.4%
BellSouth Corp 141,100 3,921,169
SBC Communications Inc 352,600 9,086,502
Verizon Communications Inc 88,600 3,589,186
Western Wireless Corp* 605,700 17,747,010
--------------
34,343,867
TRANSPORTATION - 5.1%
Arkansas Best Corp 87,200 3,914,408
Kirby Corp* 10 444
Norfolk Southern Corp 157,500 5,699,925
OMI Corp 536,800 9,045,080
--------------
18,659,857
--------------
TOTAL COMMON STOCKS
(Cost $278,658,066) 363,106,256
--------------
PURCHASED CALL OPTIONS - 0.0%^
Research In Motion Ltd,
January $90.00* 325 29,250
Research In Motion Ltd,
February $90.00* 250 70,000
--------------
TOTAL PURCHASED CALL OPTIONS
(Cost $327,236) 99,250
--------------
MONEY MARKET MUTUAL FUNDS - 0.2%
First American Treasury
Obligations Fund - Class S 608,434 608,434
--------------
TOTAL MONEY MARKET MUTUAL FUNDS
(Cost $608,434) 608,434
--------------
TOTAL INVESTMENTS - 99.5%
(Cost $279,593,736) 363,813,940
Other Assets In Excess of Liabilities - 0.5% 1,849,191
--------------
NET ASSETS - 100.0% $ 365,663,131
==============
</Table>
* NON-INCOME PRODUCING SECURITY
^ LESS THAN 0.05% OF NET ASSETS
ADR - AMERICAN DEPOSITARY RECEIPT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments at value (cost - $279,593,736) $ 363,813,940
Receivable for investments sold 3,339,119
Receivable for fund shares sold 388,099
Dividends receivable 370,278
Interest receivable 7,188
Prepaid expenses 21,666
Variation margin 150
- -------------------------------------------------------------------------------------------------------------
Total assets 367,940,440
- -------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for fund shares redeemed 349,608
Payable for investments purchased 1,162,126
Accrued investment adviser fee 689,520
Accrued administration fee 25,567
Accrued directors fee 4,126
Other payables 46,362
- -------------------------------------------------------------------------------------------------------------
Total liabilities 2,277,309
- -------------------------------------------------------------------------------------------------------------
NET ASSETS $ 365,663,131
=============================================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 282,852,241
Accumulated net investment loss (1,049,080)
Accumulated net realized loss on investments (360,234)
Net unrealized appreciation of investments 84,220,204
- -------------------------------------------------------------------------------------------------------------
NET ASSETS $ 365,663,131
=============================================================================================================
Shares of common stock outstanding of $.001 par value, 15,000,000 shares authorized 6,699,921
- -------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share $ 54.58
=============================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<Page>
STATEMENT of OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
<Table>
INVESTMENT INCOME:
Dividends $ 1,453,314
Interest 70,331
- --------------------------------------------------------------------------------------------
Total investment income 1,523,645
EXPENSES:
Investment advisory fees 2,274,712
Administration fees 82,594
Accounting fees 25,111
Transfer agent fees 113,494
Audit fees 15,704
Tax fees 1,830
Custody fees 13,336
Legal fees 16,743
Blue sky fees 8,492
Directors fees 7,016
Registration fees 188
Miscellaneous 13,505
- --------------------------------------------------------------------------------------------
Total expenses 2,572,725
NET INVESTMENT LOSS (1,049,080)
- --------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment securities 21,611,020
Net realized gain on options 177,412
Net realized gain on futures contracts 204,580
Net change in unrealized appreciation / depreciation on investments 12,266,938
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 34,259,950
- --------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 33,210,870
============================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 2004* JUNE 30, 2004
- --------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss $ (1,049,080) $ (4,292,320)
Net realized gain on investment securities 21,611,020 56,699,765
Net realized gain (loss) on options 177,412 (129,169)
Net realized gain on futures contracts 204,580 -
Net change in unrealized appreciation / depreciation on investments 12,266,938 15,092,323
- --------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 33,210,870 67,370,599
- --------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares 13,314,271 65,313,080
Cost of shares redeemed (34,546,191) (60,374,899)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from share transactions (21,231,920) 4,938,181
- --------------------------------------------------------------------------------------------------------------
Net increase in net assets 11,978,950 72,308,780
NET ASSETS:
Beginning of period 353,684,181 281,375,401
- --------------------------------------------------------------------------------------------------------------
End of period ** $ 365,663,131 $ 353,684,181
==============================================================================================================
SHARES ISSUED & REDEEMED:
Issued 276,339 1,401,613
Redeemed (732,342) (1,291,117)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) (456,003) 110,496
Outstanding at beginning of period 7,155,924 7,045,428
- --------------------------------------------------------------------------------------------------------------
Outstanding at end of period 6,699,921 7,155,924
==============================================================================================================
* Unaudited
** Including accumulated net investment loss of: $ (1,049,080) $ 0
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
<Table>
<Caption>
SIX MONTHS ENDED
DECEMBER 31, FOR THE YEARS ENDED JUNE 30,
2004** 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 49.43 $ 39.94 $ 36.51 $ 41.94 $ 48.99 $ 26.02
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss^ (0.15) (0.58) (0.27) (0.34) (0.42) (0.60)
Net realized and unrealized
gain (loss) 5.30 10.07 3.70 (5.09) (4.21) 27.86
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 5.15 9.49 3.43 (5.43) (4.63) 27.26
- ----------------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders:
Net realized gain 0.00 0.00 0.00 0.00 (2.42) (4.29)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (2.42) (4.29)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 54.58 $ 49.43 $ 39.94 $ 36.51 $ 41.94 $ 48.99
==================================================================================================================================
TOTAL RETURN 10.42%# 23.76% 9.40% (12.95%) (9.40%) 113.08%+
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 365,663 $ 353,684 $ 281,375 $ 276,876 $ 257,396 $ 44,902
Ratios to average net assets:
Expenses after waivers
and reimbursements 1.56%* 1.74% 1.90% 1.81% 1.80% 2.00%
Expenses before waivers
and reimbursements 1.56%* 1.74% 1.90% 1.81% 1.80% 2.01%
Net investment loss after
waivers and reimbursements (0.63%)* (1.24%) (0.81%) (0.89%) (0.95%) (1.52%)
Portfolio turnover rate 76.6% 150.7% 138.0% 154.0% 109.6% 156.9%
</Table>
* ANNUALIZED
** UNAUDITED
+ TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING
THE PERIOD.
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<Page>
NOTES to FINANCIAL STATEMENTS
DECEMBER 31, 2004 (UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 15,000,000 shares have been classified into the Aggressive
Investors 1 Fund.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Aggressive Investors 1 Fund seeks to exceed the stock market total return
(primarily through capital appreciation) at a level of total risk roughly equal
to that of the stock market over longer periods of time (three years or more).
Bridgeway Capital Management, Inc. (the "Adviser") is the Adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of the financial statements of the Aggressive Investors 1 Fund (the
"Fund") are in conformity with accounting principles generally accepted in the
United States of America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other investments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees. The Fund also continues to receive
dividends on the securities loaned. The loans are secured by collateral at least
equal to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
Additionally, the Fund does not have the right to sell or repledge collateral
received in the form of securities unless the borrower goes into default. The
risks to the
14
<Page>
Fund of securities lending are that the borrower may not provide additional
collateral when required or return the securities when due. As of December 31,
2004, the Fund had no securities on loan. It is the Fund's policy to obtain
additional collateral from or return excess collateral to the borrower by the
end of the next business day, following the valuation date of the securities
loaned. Therefore, the value of the collateral held may be temporarily less than
the value of the securities on loan.
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, as
well as the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on
October 15, 1996 and amended on October 22, 2003, that permits the Adviser to
pay up to 0.25% of the Fund's average daily assets for sales and distribution of
Fund shares. Since the cost of distributing Fund shares is borne by the Adviser,
the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's
distributor. Prior to January 2, 2004, the Fund acted as its own distributor.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004 there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the current market value of the option
written. If an option which the Fund has written either expires on its
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or a loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such options is extinguished. If a call option that the
Fund has written is assigned, the Fund realizes a gain or loss from the sale of
the underlying security and the proceeds from such sale are increased by the
premium originally received. If a put option that the Fund has written is
assigned, the amount of the premium originally
15
<Page>
received reduces the cost of the security that the Fund purchased upon exercise
of the option. Buying calls increases the Fund's exposure to the underlying
security to the extent of any premium paid. Buying puts on a stock market index
tends to limit the Fund's exposure to a stock market decline. All options
purchased by the Fund were listed on exchanges and considered liquid positions
with readily available market quotes. As of December 31, 2004, the Fund held
$99,250 in purchased call options.
COVERED CALL OPTIONS AND SECURED PUTS The fund may write call options on a
covered basis, that is, the Fund will own the underlying security, or the Fund
may write secured puts. The principal reason for writing covered calls and
secured puts on a security is to attempt to realize income, through the receipt
of premiums. The option writer has, in return for the premium, given up the
opportunity for profit from a substantial price increase in the underlying
security so long as the obligation as a writer continues, but has retained the
risk of loss should the price of the security decline. All options were listed
on exchanges and considered liquid positions with readily available market
quotes.
A SUMMARY OF THE OPTION TRANSACTIONS WRITTEN BY THE AGGRESSIVE 1 FUND FOLLOWS:
<Table>
<Caption>
WRITTEN PUT OPTIONS
CONTRACTS PREMIUMS
- ---------------------------------------------------------------------
Outstanding, June 30, 2004 - -
Positions Opened 834 $ 601,824
Exercised - -
Expired - -
Closed (834) (601,824)
Split - -
Outstanding, December 31, 2004 - -
Market Value, December 31, 2004 - -
</Table>
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, directors, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred. However, the Fund has not
had prior claims or losses pursuant to these contracts.
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser, a shareholder
of the Fund. As compensation for the advisory services rendered, facilities
furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total
fee, which is comprised of a Base Fee and a Performance Adjustment. The Base Fee
equals the Base Fee Rate times the average daily net assets of the Fund. The
Base Fee Rate is based on the following annual rates: 0.90% of the first $250
million of the Fund's average daily net assets, 0.875% of the next $250 million
and 0.85% of any excess over $500 million.
The Performance Adjustment equals 4.67% times the difference in cumulative total
return between the Fund and the Standard and Poor's 500 Index with dividends
reinvested (hereinafter "Index") over a rolling five-year performance period.
The Performance Adjustment Rate varies from a minimum of -0.70% to a maximum of
+0.70% However, the Performance Adjustment Rate is zero if the difference
between the cumulative Fund performance and the Index performance is less than
or equal to 2%.
On September 15, 2004, the Securities and Exchange Commision ("SEC") announced
that it accepted a settlement offer to an administrative proceeding against the
Adviser and John Montgomery concerning non-compliance with Rule 205-2 of the
Investment Advisers Act of 1940, dealing with the calculation of
performance-based fees of the Fund. Rule 205-2 requires the performance rate to
be applied to the average of net assets over the performance period (a five-year
rolling period for this Fund) rather than average daily net assets as was done
previously. Because the assets were generally increasing over time and the Fund
had beaten its market benchmark over most time periods, the Fund overpaid
advisory fees in the amount of $3,989,346. The Adviser will repay this amount,
plus interest, to current and previous shareholders of the Fund after SEC
approval of a proposed repayment plan. In addition, current shareholders must
approve new contracts between the Fund and the Adviser at an upcoming
shareholder meeting. Both the Fund and Adviser have taken steps necessary to
strengthen the compliance program.
16
<Page>
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 2.00% of the value of its average net assets for the six
months ended December 31, 2004. There were no reimbursements to the Fund for the
six months ended December 31, 2004.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. These trades are reviewed quarterly by the Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management acts as Administrator
for the Fund. Under the terms of the agreement, Bridgeway Capital Management
provides or arranges for the provision of certain accounting and other
administrative services to the Fund that it is not required to provide under the
terms of the investment advisory agreement. As compensation under the Master
Administrative Agreement, Bridgeway Capital Management receives a monthly fee
from each Fund calculated at the annual rate of 0.05% of average daily net
assets.
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is considered
to be "affiliated" and "interested." Compensation of Mr. Montgomery is borne by
the Adviser rather than the Fund.
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004. The amount attributable to Aggressive Investors 1 Fund is
disclosed in the Statement of Operations.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Aggregate purchases and sales of investment securities, other than U.S.
government securities and cash equivalents were $247,423,526 and $266,735,392,
respectively, for the six months ended December 31, 2004.
5. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and distribute substantially all of
its net taxable income including net realized gains on investments, if any, to
its shareholders each year. The fund is not subject to income or excise taxes to
the extent such distributions are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, were as
follows:
<Table>
Gross unrealized appreciation $ 91,216,394
Gross unrealized (depreciation) (6,996,190)
- --------------------------------------------------------------------------------
Net unrealized appreciation
on investments $ 84,220,204
================================================================================
Cost of investments $ 279,593,736
================================================================================
</Table>
As of June 30, 2004, the Fund had capital loss carryovers of $6,321,216 and
$15,884,934 available to offset capital gains to the extent provided in
regulations, which will expire on June 30, 2010 and 2011, respectively. The Fund
used $38,202,155 of capital loss carryovers for the year ended June 30, 2004 to
offset net realized gains for federal income tax purposes.
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 0
Accumulated capital losses (22,206,150)
</Table>
The temporary differences between book and tax are primarily due to wash sales
and post October losses.
17
<Page>
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually. Distributions to shareholders
are recorded on ex-date. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America.
6. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
18
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the
SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the
SEC's Public Reference Room in Washington, D.C. For more information about the
operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 45% of the Fund.
19
<Page>
[BRIDGEWAY FUNDS LOGO] AGGRESSIVE INVESTORS 2 FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
Dear Fellow Aggressive Investors 2 Fund Shareholder,
Our Fund appreciated 19.17% in the December quarter, compared with 9.23% for the
S&P 500 Index and 10.46% for our peer benchmark, the Lipper Capital Appreciation
Funds Index. It was a very strong quarter.
On the strength of the December quarter, our calendar-year Fund return was
16.23%, beating both our primary market benchmark (up 10.88%) and our peer
benchmark (up 11.31%). Though our Fund has only been in existence for three full
calendar years - two bear-market years and one bull-market year - it has
outperformed both its primary market benchmark and its peer group in every one
of those years. I am very pleased with this record of consistency. However, 2004
was another very strong year for small stocks, and we lagged the Russell 2000
Index, which gained 18.33% for the period.
The table below presents our December quarter, one-year, and life-to-date
financial results as per SEC requirements. See below for a graph of performance
since inception.
<Table>
<Caption>
DEC. QTR. 1 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 10/31/03 TO
12/31/04 12/31/04 12/31/04
- --------------------------------------------------------------------------------
AGGRESSIVE INVESTORS 2 FUND 19.17% 16.23% 11.48%
S&P 500 Index (large companies)(1) 9.23% 10.88% 6.13%
Russell 2000 (small companies)(1) 14.09% 18.33% 15.66%
Lipper Capital Appreciation Funds(2) 10.46% 11.31% 6.58%
</Table>
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL
1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com.
(1) THE S&P 500 INDEX IS A BROAD-BASED, UNMANAGED MEASUREMENT OF CHANGES IN
STOCK MARKET CONDITIONS BASED ON THE AVERAGE OF 500 WIDELY HELD COMMON STOCKS,
WHILE THE RUSSELL 2000 INDEX IS AN UNMANAGED, MARKET VALUE WEIGHTED INDEX THAT
MEASURES PERFORMANCE OF THE 2,000 COMPANIES THAT ARE BETWEEN THE 1,000TH AND
3,000TH LARGEST IN THE MARKET WITH DIVIDENDS REINVESTED. (2) THE LIPPER CAPITAL
APPRECIATION FUNDS INDEX REFLECTS THE AGGREGATE RECORD OF MORE AGGRESSIVE
DOMESTIC GROWTH MUTUAL FUNDS, AS REPORTED BY LIPPER, INC. IT IS NOT POSSIBLE TO
INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT
ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED.
According to data from Lipper, Inc. at the end of December, the Aggressive
Investors 2 Fund ranked 77th of 421 capital appreciation funds for the last
twelve months. Lipper, Inc. is an independent mutual fund rating service that
ranks funds in various fund categories by making comparative calculations using
total returns.
[CHART]
GROWTH OF $10,000 INVESTED IN AGGRESSIVE INVESTORS 2 FUND AND INDEXES FROM
8/5/94 (INCEPTION) TO 12/31/04
<Table>
<Caption>
BRIDGEWAY AGGRESSIVE INVESTORS 2 FUND S&P 500 INDEX RUSSELL 2000 INDEX LIPPER CAPITAL APPRECIATION FUNDS
10/01 10000 10000 10000 10000
12/01 10410 10862 11440 11027
3/02 10380 10891 11896 10929
6/02 10250 9432 10903 9363
9/02 8330 7803 8569 7892
12/02 8430 8461 9097 8383
3/03 7870 8195 8688 8210
6/03 10280 9456 10724 9477
9/03 11020 9706 11697 9894
12/03 12140 10888 13396 10994
3/04 12500 11072 14234 11319
6/04 12750 11263 14302 11408
9/04 11840 11052 13893 11078
12/04 14110 12072 15851 12237
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
<Page>
SHAREHOLDER LETTER
CUMULATIVE PERFORMANCE
TRANSLATION: Assuming that you have not redeemed any shares, the value of your
account just returned to an all-time high.
The value of the Fund is its price per share adjusted for dividends. Given the
Fund's relatively short track record, hitting an "all-time high" may not quite
be cause for fireworks, but it does beat all available alternatives. And it's
important to remember that the first year and a half of this Fund's existence
coincided with a severe bear market. This is not to excuse performance; as noted
above, we're pretty pleased. Rather, it highlights the value of holding through
a bear market and avoiding panic and the urge to sell when things look bad.
Remember, though, that this "holding through the downturn" strategy works best
in concert with other financial principles. These include: saving, avoiding most
kinds of debt, diversifying (and periodically rebalancing) your portfolio,
setting aside an emergency fund, and choosing well-managed, low-cost funds whose
investment objectives - anything from very aggressive growth to ultra-low-risk
income - match the time-horizons of the investments you're making. This is a
fancy way of saying that the more years you can afford to wait before tapping a
particular pile of money, the more risk you can afford to take with it.
YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S
DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR).
TRANSLATION: Notwithstanding news events (and the commentary of many market
pundits), 2004 was a remarkably average year. The combination of rising interest
rates, a declining U.S. dollar, inflation, the presidential election, war and
natural disasters should have produced some extraordinary results, right? Not so
fast . . .
Let's look at the statistics purely from a market perspective. Over the 10 years
through the 31st of December, 2004, the S&P 500 Index of large companies
returned an average of 12.05% per year. (I know, that sounds unbelievable, given
how weak the past few years' performance has been, but the market of the mid-
and late 1990s really was pretty remarkable.) That's only about one and one-half
percentage points better than the Index's return for 2004. Furthermore, if we
look all the way back to 1925, we see that the market has returned an average of
10.4% per year - and that's over a 79-year period that includes the Great
Depression, World War II, the white-hot "go-go" market of the 1960s and the
brutal bear market of the early 1970s. In about two-thirds of those years, the
Index either beat or lagged that 10.4% average by more than 10 percentage
points. From that perspective, therefore, 2004's return of 10.88% was about as
average as you can get.
.. . . but wasn't this a very volatile year? No. In fact, the actual variation of
monthly returns in 2004 was about half of the average of the preceding decade.
Throughout that 10-year period, only one year - 1995 - was less volatile. In
other words, in 2004 the stock market "bounced around" a whole lot LESS than
normal.
In conclusion, what IS remarkable about 2004 is how average it was in terms of
returns and how "tame" it was with respect to volatility. Not what you might
conclude from reading standard financial commentaries, many of which described a
market lurching dramatically between struggle and triumph. All that drama can be
very compelling, but it doesn't necessarily lead to an accurate understanding of
the market's behavior in the long run, nor does it necessarily produce sound
investment decisions. For that reason, though I have four computer screens in my
office, none of them runs a ticker, and I frequently go home at the end of the
day without knowing whether the overall market was up or down. This frees up
tremendous emotional energy to spend on more important things (including
actually finding the next good stock pick).
All that said, the market of 2004 did exhibit some unusual characteristics, in
particular the continued - and extraordinary - performance of smaller stocks.
This was the sixth year in a row that small stocks beat large ones, the longest
period of consecutive annual small-stock dominance in the last eight decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, some investment strategies - such as buying small-cap stocks or
value stocks or real-estate-oriented stocks - that have worked well in the
recent past tend to keep working, as investors get caught up in the excitement
and become increasingly confident that a given strategy is the right way to go.
This is essentially a self-fulfilling prophecy: If everyone agrees that small
stocks, for example, are going to keep going up, they will go up, because
everyone buys them. So-called momentum investing has come in for a lot of
negative publicity in the past few years, because it was investors following a
momentum strategy who both fueled the
2
<Page>
tech-stocks bubble of the late '90s and early 2000 and then (when they switched
strategies) caused it to collapse. The fact is, though, that a momentum strategy
can work FOR PERIODS OF TIME, and based on more than seven decades of history,
when small stocks have done well relative to the overall market in one year,
they are more likely to do well in the next one. So we could conceivably see a
record-setting seventh year in a row of small-stock dominance.
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but our computer stock picking models have no such concerns, and they
are pointing to a shift toward larger stocks. Specifically, over the past 12
months or so our models began finding a larger number of "attractive" large
stocks than at any time I can remember in about five years. This is almost
certainly a function of relative valuation; i.e., based on a variety of
financial measures, and thanks to the multi-year run-up in the price of small
stocks, larger stocks in general are starting to look relatively attractive
again. At Bridgeway, we don't put much effort into trying to guess the market's
direction; we're just trying to find one good stock (of any size) at a time.
Still, I believe it's likely that the tide will turn back in favor of large
stocks at SOME point in the next couple of years. It's a good time (ok, any time
is a good time) to make sure your own portfolio is in balance with your
long-term plan.
Of course, company size is hardly the only investment variable. "Style," too,
plays a significant role, and 2004 was pretty bad for "growth"-oriented stocks,
building on a very bad five-year trend. The following bar chart shows the
relative performance of growth versus value oriented large stocks, over the past
one, three, and five years ended 12/31/04, based on data from Morningstar:
[CHART]
<Table>
<Caption>
VALUE GROWTH
1 Year 14.05% 0.19%
3 Year 6.95% -4.35%
5 Year 4.54% -16.22%
</Table>
This pattern of weak growth-stock performance is exactly what one would
expect...during the bear-market phase of a stock-market cycle. But from a
historical perspective, it's distinctly unusual for the last two years of a
recovery. Our models are suggesting a shift toward growth stocks, but not as
strongly as they indicate a shift toward large stocks. My conclusion from all
this: make sure your portfolio is in balance with your target allocation and
long term plan.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL
TRANSLATION: Our Fund had reasonable representation in some of the market's
better performing industries, such as steel, Internet stocks, and utilities.
Overall, our models came through for us in the last quarter with a handful of
strong winners.
Our list of best performers highlights some of the market's sweet spots. It also
demonstrates the diversity of the Fund. Our top stock is from a very mature
industry (steel), while the next two are faster-growing technology companies.
The seventh-best performer, Marvell Technology, is a semiconductor company - an
industry that was "in the basement" for the year. Marvell offers a nice reminder
that it's possible to make money with a star performer even when the industry
itself is a dog. Across the Fund's portfolio, 10 stocks gained more than 30% in
the December quarter.
3
<Page>
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- --------------------------------------------------------------------------------
1 AK Steel Holding Corp. Iron/Steel 57.5%
2 Autodesk Inc. Software 56.1%
3 Apple Computer Inc. Computers 51.2%
4 NS Group Inc. Metal Fabrication/Hardware 47.3%
5 Coldwater Creek Inc. Retail 41.9%
6 Digital River Inc. Internet 39.7%
7 Marvell Technol. Grp. Ltd. Semiconductors 35.7%
8 Texas Utilities Corp. Electric 34.7%
9 Cognizant Tech. Solutions Computers 32.7%
10 Ceradyne Inc. Misc. Manufacturers 30.3%
</Table>
The top percentage gainer for the quarter was AK Steel Holding Corporation,
which manufactures carbon steel products for the automotive industry (more than
30% of its sales come from General Motors and Ford), as well as for the
construction industry and other manufacturers. Thanks in large part to the boom
in China, demand for steel and steel-related products has been high, and AK
Steel has demonstrated good "pricing power" - a company's ability to pass the
higher costs of its raw materials onto its customers. In October, the company
reported a third straight quarterly profit, driven by both higher volume and
higher sales. In addition, the company said that it expected operating profit
for the December 2004 quarter to be even higher than they had been in the
September quarter. If December turns out to have conformed to those
expectations, 2004 will be AK Steel's first profitable year in four years.
What I really find interesting about this stock is how the price behaved at the
time of our purchase. We initially bought a position equal to 1% of the Fund in
October. A couple of days later, concerns about the world demand for steel sent
the stock down almost 10%. Was this an indication that we had made a mistake and
should sell? Or was it time to buy more? The discipline of our modeling and
investment-management process really helped out here. Our model still rated the
stock a buy, and with even more favorable valuations, we ended up doubling the
size of our position to 2% of the Fund on the price decline. A few days later
the company reported excellent earnings and the price recovered nicely over just
a one week period, giving us an attractive short-term unrealized gain. Thus far,
our model has correctly predicted the direction of AK Steel's stock price, and
we ended the quarter with a net 57.5% gain.
Apple Computer also performed well for us during the quarter. A well-known
computer and electronics manufacturer, Apple Computer makes the very popular
iPod digital music player, as well as the iMac and PowerCube personal computers.
The stock has done well over the last quarter on surging sales of iPods and the
growth of the digital music-player industry. In the holiday season just ended,
major retailers like Amazon.com (the biggest Internet retailer), and Best Buy
Company (the largest electronics retailer) ran out of or ran short of some
popular iPod models. By some estimates Apple could sell 4 million iPods in the
December quarter, compared with just over 700,000 in the previous holiday
season. We initially bought shares early in October, and watched our total
position gain 51.2% through the end of December.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK
I'm pleased to say that no stocks declined by more than 30% over the past
quarter. The biggest decliner, Lone Star Technologies, Inc., was down 25.1% for
the quarter (we sold our position). If this company sounds familiar, it may be
because I profiled it last quarter, when it was the top-performing stock. Lone
Star, a tube and steel supplier to the oil and automotive industries, had
reported record revenues and net income in its July earnings release, the second
consecutive quarter of positive operating earnings. In its October earnings
release, the company reported yet another quarter of record revenues, but noted
that a recent 20% jump in the cost of raw materials had hurt profitability, with
the result that earnings were lower than analysts had expected. Investors rushed
to ditch the stock, and we unwound our position later in the quarter for a 25.1%
loss.
4
<Page>
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT WORKED WELL
TRANSLATION: For the calendar year, nineteen companies appreciated at least 30%,
with five stocks making it into triple-digit territory.
Given the strength of the fourth quarter, it's not surprising that some of the
winners for the year have that quarter to thank for their place on the list.
However, some of 2004's best performers simply opened well and just kept
climbing.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- --------------------------------------------------------------------------------
1 Ceradyne Inc Miscellaneous Manufacturing 152.0%
2 General Maritime Corp Industrial 126.5%
3 Research In Motion Ltd Technology 111.9%
4 Autodesk Inc Software 111.7%
5 Urban Outfitters Inc Retail 109.5%
6 Texas Utilities Corp Electric 75.3%
7 Tesoro Petroleum Corp Oil & Gas 71.4%
8 AK Steel Holding Corp Iron/Steel 57.5%
9 Digital River Inc Internet 56.3%
10 Apple Computer Inc Computers 51.2%
11 j2 Global Communications Inc Internet 47.9%
12 NS Group Inc Metal Fabricate/Hardware 47.3%
13 Marvell Technology Group Ltd. Semiconductors 46.8%
14 Coldwater Creek Inc Retail 41.9%
15 Korn/Ferry International Commercial Services 40.6%
16 Carpenter Technology Iron/Steel 38.2%
17 Patina Oil & Gas Corp Oil & Gas 32.1%
18 eBay Inc Internet 31.2%
19 Eastman Chemical Co Chemicals 30.9%
</Table>
Ceradyne, the year's best performer, was one of the steady marchers. The company
makes a variety of sophisticated ceramic products that are used in medical and
industrial applications. What fueled the stock this year, though, were
Ceradyne's defense-related products, including ceramic plates used to protect
Humvees and other military vehicles. With U.S. soldiers busy in Iraq,
Afghanistan, and elsewhere, the company had a lot of business; earnings for the
first quarter were up 181% over the same period in 2003, and the pattern
persisted for the rest of the year, with the stock price moving right alongside.
Number five on the list, Urban Outfitters, was also a steady gainer for the
year. The good news started with the release of the company's results from the
fiscal fourth quarter of 2003 (ended January 31). The upscale retailer of trendy
women's clothing and home furnishings had doubled its net income in that
quarter, thanks to strong revenue growth, and the stock began to climb. Despite
the spring rollout of a spectacularly offensive series of products - the company
logged 250,000 angry email responses to one refrigerator-magnet alone - Urban
Outfitters continued to prosper; in the third quarter, the company boosted
earnings by 88% over the same period in the previous year, on strong increases
in same-store sales.
By contrast, Autodesk, fourth on the list and a member of the triple-digit club,
has the fourth quarter to thank for its results. The company makes software for
graphics-heavy applications - its products are used by architects, surveyors,
designers, and engineers, among others - and it has continued to increase both
revenues and profits. The stock hit a 52-week high in the last week of the year,
and was the top performer in the S&P 500 Index, with a gain of nearly 210%. Our
position in Autodesk was up by close to 112% for the year.
Apple Computer and AK Steel - both of which positions earned a "mere" 50-odd%
for the year - were also big fourth-quarter plays. Thanks in large part to the
boom in China, demand for steel and steel-related products has been high, and AK
Steel has been able to pass along the higher costs of its raw materials to its
customers. But what really prompted the stock to take off was the news, in
October, that the company was reporting a third straight quarterly profit, and
expected operating profits for the December quarter to be even higher.
Meanwhile, Apple surged in the final quarter of the year thanks to
5
<Page>
high holiday-season demand for its popular iPod digital-music player. Major
retailers like Amazon.com (the biggest Internet retailer) and Best Buy Co. (the
largest retailer of electronics) ran out of or ran short of some particularly
desirable iPod models. By some estimates, Apple looks to have sold 4 million
iPods in the December quarter, compared with just 700,000 in the 2003 holiday
season.
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: Nine stocks in our portfolio lost more than 30% for the year, with
two - painfully - losing more than half their value.
Like happy families - at least, according to the Russian writer Anton Checkov -
happy stocks are all alike; it's almost always a story of improving earnings.
But unhappy stocks often fail in their own unique ways, and that was certainly
true for 2004.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LOSS
- --------------------------------------------------------------------------------
1 Carrier Access Corp Telecommunications -53.3%
2 Nortel Networks Corp Telecommunications -52.5%
3 Gevity HR Inc Commercial Services -44.9%
4 Omnivision Technologies Inc Semiconductors -39.8%
5 America West Holdings Corp Airlines -39.3%
6 Komag Inc Computers -38.0%
7 Eon Labs Inc Consumer, Non-cyclical -37.7%
8 Encore Wire Corp Electrical Comp. & Equip. -34.6%
9 ImClone Systems Inc. Pharmaceuticals -34.3%
</Table>
For example, sometimes it's the sector and sometimes it just isn't. Take America
West Holdings, our fifth-worst performer for the year. The airline operates
low-cost flights with primary hubs in Phoenix and Las Vegas. Unfortunately,
airlines in general had a miserable year, hammered by a combination of high fuel
costs and overcapacity (particularly in markets such as....Phoenix and Las
Vegas), as well as by lingering problems stemming from 2003's SARS epidemic and
the now ever-present fear of terrorism. But while the sector's woes do get
credit for some of America West's 39.3% loss to our Fund, it should also be said
that the company was not well placed to ride a downdraft. In particular, it had
failed to protect itself sufficiently against the possibility - which this past
year made real - of rising fuel prices, and it had few options for
distinguishing itself among the fleet of low-cost carriers serving its primary
markets. The stock paid the price for these planning errors.
ImClone Systems, last on the list (meaning it dropped by "only" 34.3%) was also
in an industry that got hit hard in 2004. But this is to a large extent a story
of a stock's failing in spite of itself. ImClone makes the colon-cancer drug
Erbitux, and sales were strong in the first quarter. They were strong in the
second quarter as well - at more than $71 million, strong enough to quadruple
revenues over the same period in 2003, strong enough to propel the company to
its second consecutive quarter of profitability, strong enough to produce
earnings of 29 cents per share, compared with a loss of 47 cents per share a
year earlier.
But they weren't strong enough. "Guidance" from the company had led investors to
expect sales of upwards of $80 million for the quarter, and the stock dropped
19% on the disappointment. It fell again when one widely followed analyst
pointed out that the company's royalty payments - for patents it had purchased
in developing Erbitux - would skyrocket if the drug, as expected, was approved
by the FDA for treating additional forms of cancer. And it fell again in
November, when ImClone announced its third-quarter results. Yes, the company had
increased revenues by some 300% over the previous year. But Erbitux sales were
$3 million shy of the figure that analysts had been projecting, and so the stock
tumbled, ultimately costing us a hefty loss in our position.
TOP TEN HOLDINGS
As of the end of the year, our largest sector-weighting was in Technology, at
20.8% of net assets, followed by Basic Materials at 19.3% and Communications at
17.5%. All in all, our top 10 holdings represented 44.5% of net assets.
6
<Page>
<Table>
<Caption>
PERCENT OF
RANK DESCRIPTION INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
1 Apple Computer Inc Computer 6.6%
2 Research In Motion Ltd Technology 5.9%
3 Eastman Chemical Co Chemicals 5.7%
4 Western Wireless Corp Telecommunications 5.0%
5 Lyondell Chemical Co Chemicals 4.9%
6 Autodesk Inc Software 4.2%
7 American Eagle Outfitters Retail 3.2%
8 Carpenter Technology Iron/Steel 3.0%
9 Texas Utilities Corp Electric 3.0%
10 MeadWestvaco Corp Forest Products & Paper 3.0%
- --------------------------------------------------------------------------------
44.5%
</Table>
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
As of December 2004, we are "heavy" on metals (basic materials) and "light" on
financial and consumer non-cyclical stocks.
<Table>
<Caption>
AGGRESSIVE S&P 500
INVESTORS 2 FUND INDEX DIFFERENCE
- -----------------------------------------------------------------------------
Basic Materials 19.7% 2.9% 16.8%
Communications 17.8% 11.3% 6.5%
Consumer, Cyclical 13.5% 9.9% 3.6%
Consumer, Non-cyclical 7.8% 21.2% -13.4%
Energy 9.5% 7.2% 2.3%
Financial 1.0% 20.6% -19.6%
Industrial 6.4% 11.6% -5.2%
Technology 21.2% 12.4% 8.8%
Utilities 3.1% 2.9% 0.2%
- -----------------------------------------------------------------------------
Total 100.0% 100.0% 0.0%
</Table>
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views, including those of market sectors or individual stocks, are not
meant as investment advice and should not be considered predictive in nature.
Any favorable (or unfavorable) description of a holding applies only as of the
quarter end, December 31, 2004, unless otherwise stated. Security positions can
and do change thereafter. Discussions of historical performance do not guarantee
and are not indicative of future performance.
The Fund is subject to above average market risk (volatility) and is not an
appropriate investment for short-term investors. Investments in the small
companies within this multi-cap fund generally carry greater risk than is
customarily associated with larger companies for various reasons such as
narrower markets, limited financial resources and less liquid stock.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES,
RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S
WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND
SERVICES, LLC, DISTRIBUTOR. (02/05).
CONCLUSION
As always, we appreciate your feedback. We take your responses seriously and
discuss them at our weekly staff meetings. Please keep your ideas coming--we
continually look for ways to improve our service.
Sincerely,
/s/ John Montgomery
John Montgomery
7
<Page>
DISCLOSURE OF FUND EXPENSES
(UNAUDITED)
As a shareholder to the Fund, you will incur no transactions costs, including
sales charges (loads) on purchases, on reinvested dividends, or on other
distributions. There are also no redemption fees or exchange fees. However, the
fund will incur ongoing costs, including management fees and other Fund
expenses. The following examples are intended to help you understand your
ongoing costs (in dollars) of investing in a Fund and to compare these costs
with the ongoing costs of investing in other mutual funds. The examples are
based on an investment of $1,000 invested on July 1, 2004 and held until
December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY AGGRESSIVE INVESTORS 2 FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSE PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- -------------------------------------------------------------------------------------------
Actual Fund Return $ 1,000.00 $ 1,106.67 $ 7.23
Hypothetical Fund Return $ 1,000.00 $ 1,018.34 $ 6.93
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.36%
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE
NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE
CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD).
8
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------------
COMMON STOCKS - 98.7%
AGRICULTURE - 1.1%
Bunge Ltd 22,300 $ 1,271,323
AUTO MANUFACTURERS - 3.3%
Ford Motor Co 150,830 2,208,151
General Motors Corp 45,160 1,809,110
--------------
4,017,261
CHEMICALS 10.6%
Eastman Chemical Co 118,200 6,823,686
Lyondell Chemical Co 205,200 5,934,384
--------------
12,758,070
COMMERCIAL SERVICES - 2.9%
Korn/Ferry International* 165,000 3,423,750
COMPUTERS - 14.8%
Apple Computer Inc* 123,600 7,959,840
Cognizant Technology
Solutions* 63,600 2,692,188
Research In Motion Ltd, ADR* 86,100 7,096,362
--------------
17,748,390
DISTRIBUTION/WHOLESALE - 1.0%
Wesco International Inc* 39,000 1,155,960
DIVERSIFIED FINANANCIAL SERVICES - 1.0%
E*TRADE Financial Corp* 79,200 1,184,040
ELECTRIC - 3.0%
Texas Utilities Corp 56,000 3,615,360
FOREST PRODUCTS & PAPER - 3.0%
MeadWestvaco Corp 105,500 3,575,395
INTERNET - 8.2%
Digital River Inc* 85,500 3,557,655
eBay Inc* 23,700 2,755,836
j2 Global Communications Inc* 70,200 2,421,900
Yahoo! Inc* 28,600 1,077,648
--------------
9,813,039
IRON/STEEL - 5.8%
AK Steel Holding Corp* 225,600 3,264,432
Carpenter Technology Corp 62,400 3,647,904
--------------
6,912,336
METAL FABRICATE/HARDWARE - 1.3%
NS Group Inc* 55,800 1,551,240
MISCELLANEOUS MANUFACTURING - 1.0%
Ceradyne Inc* 21,750 1,244,317
OIL & GAS - 8.6%
Chesapeake Energy Corp 85,060 1,403,490
ConocoPhillips 13,000 1,128,790
Occidental Petroleum Corp 22,300 1,301,428
Southwestern Energy Co* 64,300 3,259,367
Tesoro Petroleum Corp* 50,800 1,618,488
Valero Energy Corp 35,200 1,598,080
--------------
10,309,643
OIL & GAS SERVICES - 0.8%
Carbo Ceramics Inc 14,200 979,800
PHARMACEUTICALS - 3.8%
Bristol-Myers Squibb Co 115,400 $ 2,956,548
Kos Pharmaceuticals Inc* 42,100 1,584,644
--------------
4,541,192
RETAIL - 9.0%
Aeropostale Inc* 36,400 1,071,252
American Eagle Outfitters Inc 80,300 3,782,130
Coldwater Creek Inc* 49,300 1,521,891
J.C. Penney Co Inc Holding 39,500 1,635,300
Urban Outfitters Inc* 63,000 2,797,200
--------------
10,807,773
SEMICONDUCTORS - 1.9%
Marvell Technology
Group Ltd* 63,400 2,248,798
SOFTWARE - 4.2%
Autodesk Inc 133,800 5,077,710
TELECOMMUNICATIONS - 9.4%
BellSouth Corp 44,300 1,231,097
SBC Communications Inc 113,200 2,917,164
Verizon Communications Inc 28,400 1,150,484
Western Wireless Corp* 203,700 5,968,410
--------------
11,267,155
TRANSPORTATION - 4.0%
Arkansas Best Corp 27,400 1,229,986
General Maritime Corp* 15,200 607,240
Norfolk Southern Corp 49,500 1,791,405
OMI Corp 68,000 1,145,800
--------------
4,774,431
TOTAL COMMON STOCKS
(Cost $89,116,235) 118,276,983
--------------
PURCHASED CALL OPTIONS -0.0%^
Research In Motion Ltd,
January $90.00* 100 9,000
Research In Motion Ltd,
February $90.00* 80 22,400
--------------
TOTAL PURCHASED CALL OPTIONS
(Cost $102,710) 31,400
--------------
MONEY MARKET MUTUAL FUNDS - 0.3%
First American Treasury
Obligations Fund - Class S 420,903 420,903
--------------
TOTAL MONEY MARKET MUTUAL FUNDS
(Cost $420,903) 420,903
--------------
TOTAL INVESTMENTS - 99.0%
(Cost $89,639,848) 118,729,286
Other Assets In Excess of Liabilities - 1.0% 1,159,007
--------------
NET ASSETS - 100.0% $ 119,888,293
==============
</Table>
* NON-INCOME PRODUCING SECURITY
^ LESS THAN 0.05% OF NET ASSETS
ADR - AMERICAN DEPOSITARY RECEIPT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments at value (cost - $89,639,848) $ 118,729,286
Receivable for investments sold 1,510,964
Receivable for fund shares sold 398,860
Dividends receivable 106,669
Interest receivable 2,691
Prepaid expenses 34,180
- -------------------------------------------------------------------------------------------------------------
Total assets 120,782,650
- -------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for fund shares redeemed 662,563
Accrued investment adviser fee 153,903
Accrued administration fee 4,815
Accrued directors fee 1,838
Other payables 71,238
- -------------------------------------------------------------------------------------------------------------
Total liabilities 894,357
- -------------------------------------------------------------------------------------------------------------
NET ASSETS $ 119,888,293
=============================================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 99,758,353
Accumulated net investment loss (304,022)
Accumulated net realized loss on investments (8,655,476)
Net unrealized appreciation of investments 29,089,438
- -------------------------------------------------------------------------------------------------------------
NET ASSETS $ 119,888,293
=============================================================================================================
Shares of common stock outstanding of $.001 par value, 130,000,000 shares authorized 8,499,326
- -------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share $ 14.11
=============================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
<Table>
INVESTMENT INCOME:
Dividends $ 386,345
Interest 18,969
- -----------------------------------------------------------------------------------------------
Total investment income 405,314
EXPENSES:
Investment advisory fees 568,007
Administration fees 26,038
Accounting fees 25,071
Transfer agent fees 60,926
Audit fees 9,444
Tax fees 1,830
Custody fees 4,026
Legal fees 3,294
Directors fees 2,196
Registration fees 3,478
Miscellaneous 5,026
- -----------------------------------------------------------------------------------------------
Total expenses 709,336
NET INVESTMENT LOSS (304,022)
- -----------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment securities (5,938,725)
Net realized gain on options 85,275
Net change in unrealized appreciation / depreciation on investments 16,807,326
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 10,953,876
- -----------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 10,649,854
===============================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 2004* JUNE 30, 2004
- ------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss $ (304,022) $ (717,485)
Net realized gain (loss) on investment securities (5,938,725) 220,963
Net realized gain (loss) on options 85,275 (7,919)
Net change in unrealized appreciation / depreciation on investments 16,807,326 8,327,048
- ------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 10,649,854 7,822,607
- ------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares 30,049,266 127,023,905
Cost of shares redeemed (31,205,899) (46,558,653)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from share transactions (1,156,633) 80,465,252
- ------------------------------------------------------------------------------------------------------------------
Net increase in net assets 9,493,221 88,287,859
NET ASSETS:
Beginning of period 110,395,072 22,107,213
- ------------------------------------------------------------------------------------------------------------------
End of period ** $ 119,888,293 $ 110,395,072
==================================================================================================================
SHARES ISSUED & REDEEMED:
Issued 2,422,462 10,496,946
Redeemed (2,581,346) (3,990,245)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) (158,884) 6,506,701
Outstanding at beginning of period 8,658,210 2,151,509
- ------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 8,499,326 8,658,210
==================================================================================================================
* Unaudited
** Including accumulated net investment loss of: $ (304,022) $ 0
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
<Table>
<Caption>
SIX MONTHS ENDED PERIOD FROM
DECEMBER 31, FOR THE YEAR ENDED JUNE 30, OCTOBER 31, 2001 TO
2004*** 2004 2003 JUNE 30, 2002**
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 12.75 $ 10.28 $ 10.25 $ 10.00
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss^ (0.04) (0.09) (0.09) (0.08)
Net realized and unrealized gain 1.40 2.56 0.12 0.33
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.36 2.47 0.03 0.25
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 14.11 $ 12.75 $ 10.28 $ 10.25
===============================================================================================================================
TOTAL RETURN 10.67%# 24.03% 0.29% 2.50%#+
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 119,888 $ 110,395 $ 22,107 $ 11,448
Ratios to average net assets:
Expenses after waivers
and reimbursements 1.36%* 1.58% 1.90% 1.90%*
Expenses before waivers
and reimbursements 1.36%* 1.58% 1.90% 1.98%*
Net investment loss after
waivers and reimbursements (0.58%)* (1.13%) (1.05%) (1.24%)*
Portfolio turnover rate 75.3% 151.5% 143.2% 68.0%*
</Table>
* ANNUALIZED
** COMMENCED OPERATIONS ON OCTOBER 31, 2001.
*** UNAUDITED
+ TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING
THE PERIOD.
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 (UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 130,000,000 shares have been classified into the Aggressive
Investors 2 Fund.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Aggressive Investors 2 Fund seeks to exceed the stock market total return
(primarily through capital appreciation) at a level of total risk roughly equal
to that of the stock market over longer periods of time (three years or more).
Bridgeway Capital Management, Inc. (the "Adviser") is the adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of the financial statements of the Aggressive Investors 2 Fund (the
"Fund") are in conformity with accounting principles generally accepted in the
United States of America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other investments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees. The Fund also continues to receive
dividends on the securities loaned. The loans are secured by collateral at least
equal to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
Additionally, the Fund does not have the right to sell or repledge collateral
received in the form of securities unless the borrower goes into default. The
risks to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. As of
December 31, 2004, the Fund had no
14
<Page>
securities on loan. It is the Fund's policy to obtain additional collateral from
or return excess collateral to the borrower by the end of the next business day,
following the valuation date of the securities loaned. Therefore, the value of
the collateral held may be temporarily less than the value of the securities on
loan.
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, as
well as the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on
October 15, 1996 and amended on October 22, 2003, that permits the Adviser to
pay up to 0.25% of the Fund's average daily assets for sales and distribution of
Fund shares. Since the cost of distributing Fund shares is borne by the Adviser,
the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's
distributor. Prior to January 2, 2004, the Fund acted as its own distributor.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004 there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the current market value of the option
written. If an option which the Fund has written either expires on its
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or a loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such options is extinguished. If a call option that the
Fund has written is assigned, the Fund realizes a gain or loss from the sale of
the underlying security and the proceeds from such sale are increased by the
premium originally received. If a put option that the Fund has written is
assigned, the amount of the premium originally received reduces the cost of the
security that the Fund purchased upon exercise of the option. Buying calls
increases the Fund's exposure to the underlying security to the extent
15
<Page>
of any premium paid. Buying puts on a stock market index tends to limit the
Fund's exposure to a stock market decline. All options purchased by the Fund
were listed on exchanges and considered liquid positions with readily available
market quotes. As of December 31, 2004, the Fund held $31,400 in purchased call
options.
COVERED CALL OPTIONS AND SECURED PUTS The fund may write call options on a
covered basis, that is, the Fund will own the underlying security, or the Fund
may write secured puts. The principal reason for writing covered calls and
secured puts on a security is to attempt to realize income, through the receipt
of premiums. The option writer has, in return for the premium, given up the
opportunity for profit from a substantial price increase in the underlying
security so long as the obligation as a writer continues, but has retained the
risk of loss should the price of the security decline. All options were listed
on exchanges and considered liquid positions with readily available market
quotes.
A SUMMARY OF THE OPTION TRANSACTIONS WRITTEN BY THE AGGRESSIVE 2 FUND FOLLOWS:
<Table>
<Caption>
WRITTEN PUT OPTIONS
CONTRACTS PREMIUMS
- ------------------------------------------------------------------
Outstanding, June 30, 2004 - -
Positions Opened 300 $ 191,316
Exercised - -
Expired - -
Closed (300) (191,316)
Split - -
- ------------------------------------------------------------------
Outstanding, December 31, 2004 - -
Market Value, December 31, 2004 - -
</Table>
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, directors, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred. However, the Fund has not
had prior claims or losses pursuant to these contracts.
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser, a shareholder
of the Fund. As compensation for the advisory services rendered, facilities
furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total
fee, which is comprised of a Base Fee and a Performance Adjustment. The Base Fee
equals the Base Fee Rate times the average daily net assets of the Fund. The
Base Fee Rate is based on the following annual rates: 0.90% of the first $250
million of the Fund's average daily net assets, 0.875% of the next $250 million
and 0.85% of any excess over $500 million.
The Performance Adjustment equals 4.67% times the difference in cumulative total
return between the Fund and the Standard and Poor's 500 Index with dividends
reinvested (hereinafter "Index") over a rolling five-year performance period.
The Performance Adjustment Rate varies from a minimum of -0.70% to a maximum of
+0.70% However, the Performance Adjustment Rate is zero if the difference
between the cumulative Fund performance and the Index performance is less than
or equal to 2%.
On September 15, 2004, the Securities and Exchange Commision ("SEC") announced
that it accepted a settlement offer to an administrative proceeding against the
Adviser and John Montgomery concerning non-compliance with Rule 205-2 of the
Investment Advisers Act of 1940, dealing with the calculation of
performance-based fees of the Fund. Rule 205-2 requires the performance rate to
be applied to the average of net assets over the performance period (a five-year
rolling period for this Fund) rather than average daily net assets as was done
previously. Because the assets were generally increasing over time and the Fund
had beaten its market benchmark over most time periods, the Fund overpaid
advisory fees in the amount of $110,365. The Adviser will repay this amount,
plus interest, to current and previous shareholders of the Fund after SEC
approval of a proposed repayment plan. In addition, current shareholders must
approve new contracts between the Fund and the Adviser at an upcoming
shareholder meeting. Both the Fund and Adviser have taken steps necessary to
strengthen the compliance program.
16
<Page>
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 1.90% of the value of its average net assets for the six
months ended December 31, 2004. There were no reimbursements to the Fund for
the six months ended December 31, 2004.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. These trades are reviewed quarterly by the Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management acts as Administrator
for the Fund. Under the terms of the agreement, Bridgeway Capital Management
provides or arranges for the provision of certain accounting and other
administrative services to the Fund that it is not required to provide under the
terms of the investment advisory agreement. As compensation under the Master
Administrative Agreement, Bridgeway Capital Management receives a monthly fee
from each Fund calculated at the annual rate of 0.05% of average daily net
assets.
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is considered
to be "affiliated" and "interested." Compensation of Mr. Montgomery is borne by
the Adviser rather than the Fund.
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004. The amount attributable to the Aggressive Investors 2 Fund is
disclosed in the Statement of Operations.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Aggregate purchases and sales of investment securities, other than U.S.
government securities and cash equivalents were $77,329,149 and $77,606,351,
respectively, for the six months ended December 31, 2004.
5. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and distribute substantially all of
its net taxable income including net realized gains on investments, if any, to
its shareholders each year. The fund is not subject to income or excise taxes to
the extent such distributions are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, were as
follows:
<Table>
Gross unrealized appreciation $ 29,851,959
Gross unrealized (depreciation) (767,955)
- --------------------------------------------------------------
Net unrealized appreciation
on investments $ 29,084,004
==============================================================
Cost of investments $ 89,645,282
==============================================================
</Table>
The difference between book and tax net unrealized appreciation is wash sale
loss deferrals.
As of June 30, 2004, the Fund had a capital loss carryover of $1,948,412
available to offset capital gains to the extent provided in regulations, which
will expire on June 30, 2011. The Fund used $271,259 of capital loss carryovers
for the year ended June 30, 2004 to offset net realized gains for federal income
tax purposes. The Fund has deferred to its fiscal year ending June 30, 2005,
$848,180 of losses recognized during the period November 1, 2003 to June 30,
2004.
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 0
Accumulated capital losses (1,948,412)
Unrealized appreciation 12,276,678
Cumulative Effect of other timing differences (848,180)
</Table>
The temporary differences between book and tax are primarily due to wash sales
and post October losses.
17
<Page>
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually. Distributions to shareholders
are recorded on ex-date. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America.
6. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
18
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the
SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the
SEC's Public Reference Room in Washington, D.C. For more information about the
operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 42% of the Fund.
19
<Page>
[BRIDGEWAY FUNDS LOGO] ULTRA-SMALL COMPANY FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
Dear Fellow Ultra-Small Company Shareholder,
Our Fund was up 21.13% in the December quarter vs. 14.09% return for the Russell
2000 Index, 13.28% for our peer group, the Lipper Small-Cap Stock Funds Index,
and 16.35% for our primary benchmark, the CRSP Cap-Based Portfolio 10 Index. The
table below presents the December quarter, one-year, five-year, ten-year and
life-to-date performance of our Fund and benchmarks, and following that is a
graph of performance since inception and a new, SEC-mandated breakdown of sector
representation in the Fund.
<Table>
<Caption>
DEC. QTR. 1 YEAR 5 YEAR 10 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 1/1/00 TO 1/1/95 TO 8/5/94 TO
12/31/04 12/31/04 12/31/04 12/31/04 12/31/04
- --------------------------------------------------------------------------------------------------------------
ULTRA-SMALL COMPANY FUND 21.13% 23.33% 27.69% 26.35% 24.87%
Lipper Small-Cap Stock Funds(1) 13.28% 17.00% 1.94% 10.34% 10.65%
Russell 2000 (small companies)(2) 14.09% 18.33% 6.61% 11.54% 11.40%
CRSP Cap-Based Port. 10 Index(3) 16.35% 18.69% 20.49% 18.24% 17.35%
</Table>
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL
1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com.
(1) THE LIPPER SMALL-CAP STOCK FUNDS IS AN INDEX OF SMALL-COMPANY FUNDS COMPILED
BY LIPPER, INC. (2) THE RUSSELL 2000 INDEX IS AN UNMANAGED, MARKET VALUE
WEIGHTED INDEX, WHICH MEASURES PERFORMANCE OF THE 2,000 COMPANIES THAT ARE
BETWEEN THE 1,000TH AND 3,000TH LARGEST IN THE MARKET WITH DIVIDENDS REINVESTED.
(3) THE CRSP CAP-BASED PORTFOLIO 10 INDEX IS AN UNMANAGED INDEX OF 1,682 OF THE
SMALLEST PUBLICLY TRADED U.S. STOCKS (WITH DIVIDENDS REINVESTED), AS REPORTED BY
THE CENTER FOR RESEARCH ON SECURITY PRICES. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED.
For the calendar year 2004, our Fund was up 23.33% vs. 18.33% for the Russell
2000 Index, 17.00% for the Lipper Small-Cap Stock Funds Index, and 18.69% for
the CRSP Cap-Based Portfolio 10 Index.
According to data from Lipper, Inc., for the period ended December 31, 2004, the
Ultra-Small Company Fund ranked 7th of 72 micro-cap funds for the last twelve
months, 1st of 43 over the last five years and 1st of 8 for ten years. Lipper,
Inc. is an independent mutual fund rating service that ranks funds in various
fund categories by making comparative calculations using total returns.
[CHART]
GROWTH OF $10,000 INVESTED IN ULTRA-SMALL COMPANY FUND AND INDEXES FROM 8/5/94
(INCEPTION) TO 12/31/04
<Table>
<Caption>
BRIDGEWAY
ULTRA-SMALL COMPANY FUND LIPPER SMALL CO. FUNDS RUSSELL 2000 INDEX CRSP CAP-BASED PORTFOLIO 10 INDEX
8/94 10000 10000 10000 10000
9/94 10214 10735 10515 10525
12/94 9724 10720 10320 9892
3/95 10249 11322 10797 10799
6/95 11047 12371 11809 11860
9/95 12673 13917 12975 13390
12/95 13598 14110 13256 12881
3/96 14718 14906 13933 13972
6/96 16838 16089 14630 15302
9/96 16435 16292 14679 14968
12/96 17642 16136 15443 15081
3/97 17148 14617 14644 15033
6/97 21212 17102 17018 16437
9/97 28094 19710 19551 19813
12/97 24345 18560 18896 18387
3/98 28048 20549 20797 20660
6/98 25081 19756 19827 19328
9/98 18256 15529 15833 14684
12/98 21153 18401 18415 16263
3/99 19067 17532 17416 15880
6/99 21455 20135 20125 18205
9/99 22089 19689 18852 17713
12/99 29701 26045 22330 20811
3/00 33716 28960 23911 24482
6/00 31068 27236 23008 22410
9/00 34003 28153 23262 22571
12/00 31111 24329 21655 18102
3/01 34651 20670 20246 20099
6/01 38838 23722 23139 22718
9/01 36104 18449 18329 19408
12/01 41690 22061 22193 24659
3/02 44796 22252 23078 26431
6/02 45458 20156 21150 24882
9/02 38047 16365 16624 20356
12/02 43348 17339 17647 23264
3/03 44606 16567 16855 23202
6/03 60028 20001 20803 31816
9/03 70163 21531 22691 37767
12/03 81741 24504 25987 44533
3/04 85002 25730 27614 48762
6/04 84569 26163 27744 47410
9/04 83227 25309 26951 45428
12/04 100815 28670 30750 52857
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
<Page>
SHAREHOLDER LETTER
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
<Table>
<Caption>
SECTOR % OF STOCKS
- -------------------------------------------------
Basic Materials 4.0%
Communications 9.0%
Consumer, Cyclical 26.2%
Consumer, Non-cyclical 21.1%
Energy 13.2%
Financial 7.4%
Industrial 13.5%
Technology 5.4%
Utilities 0.2%
- -------------------------------------------------
Total 100.0%
</Table>
PERFORMANCE SUMMARY
TRANSLATION: The early part of the year was lackluster, and by the end of the
third quarter our Fund's net asset value was just barely above its level at the
beginning of 2004. However, an extremely powerful fourth quarter propelled us
ahead, allowing us to finish the year with more than a 23% gain (beating both
our benchmarks and our peer group) and offering a good lesson in the value of
avoiding panic and the urge to sell when things look less than great. It's
important to remember, though, that this "holding through the downturn" strategy
works best in concert with other financial principles, such as saving, avoiding
most kinds of debt, diversifying (and regularly rebalancing) your portfolio,
setting aside an emergency fund, and choosing well managed, low-cost funds whose
investment objectives -anything from very aggressive growth to ultra-low-risk
income - match with the time horizons of the investments you're making. Which is
a fancy way of saying that the more years you can afford to wait before tapping
a particular pile of money, the more risk you can afford to take with it.
YEAR-TO-DATE MARKET COMMENTARY
TRANSLATION: While the overall market chugged along in a (surprisingly?) average
fashion, small stocks continued their remarkable run.
Notwithstanding news events (and the commentary of many market pundits), 2004
was a remarkably average year for the broad U.S. market. The combination of
rising interest rates, a declining U.S. dollar, inflation, the presidential
election, war and natural disasters should have produced some extraordinary
results, right? Not exactly. In 2004, the S&P 500 Index of large stocks returned
10.88% -- a figure remarkably close to the 10.4% that the market has returned,
on average, every year since 1925. From a returns-perspective, therefore, 2004
was about as average as it gets. Furthermore, though standard financial
commentaries throughout the year often described a market lurching dramatically
between struggle and triumph, the fact is that the market in 2004 was much LESS
volatile than it has been, on average, over the past 10 years.
In truth, the only really remarkable thing about the market this past year has
been the continued dominance of smaller stocks - good news for shareholders of
our Fund. This was the sixth year in a row that small stocks beat large ones,
the longest period of consecutive annual small-stock dominance in the last eight
decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, investment strategies - such as buying small-cap stocks or value
stocks or real-estate-oriented stocks - that have worked well in the recent past
tend to keep working, as investors get caught up in the excitement and become
increasingly confident that a given strategy is the right way to go. This is
essentially a self-fulfilling prophecy: If everyone agrees that small stocks,
for example, are going to keep going up, they will go up, because everyone buys
them. So-called momentum investing has come in for a lot of negative publicity
in the past few years, because it was investors following a momentum strategy
who both fueled the tech-stock bubble of the late '90s and early 2000 and then
(when they switched strategies) caused it to collapse. The fact is, though, that
a momentum strategy can work for periods of time, and statistically, when small
stocks have done well relative to the overall market in one year, they are more
likely to do well in the next one. So we could conceivably see a record-setting
seventh year in a row of small-stock dominance.
2
<Page>
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but our computer models have no such concerns, and they are pointing
pretty strongly to a shift toward larger stocks. Indeed, over the past 12 months
or so our models began finding a larger number of "attractive" large stocks than
at any time I can remember in about five years. This is almost certainly a
function of relative valuation; i.e., based on a variety of financial measures,
and thanks to the multi-year run-up in the price of small stocks, larger stocks
in general are starting to look like bargains. At Bridgeway, we don't put much
effort into trying to guess the market's direction, but we do put a lot of faith
in our models. So for that reason, I believe it's likely that the tide will turn
back in favor of large stocks at some point in the next couple of years. For
shareholders of this Fund, that might be another reminder of the importance of
diversification.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL
TRANSLATION: After the less-than-inspiring returns of the first nine months of
the year, it was great to see some of the companies in our Fund really surge in
the fourth quarter, often on the back of surprisingly strong growth in both
sales and earnings per share.
Thirty-five stocks gained at least 30% in the December quarter, with four
turning in triple-digit gains. Interestingly, three of the four (and more than
half of the 30%-plus list) were companies that provide goods and/or services to
individuals, suggesting that the U.S. consumer is not yet tapped out, despite
having so nobly carried the economy for so long. Communications companies also
performed well - as a sector, they were the strongest performer of the quarter,
after having turning in fairly weak results earlier in the year.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- --------------------------------------------------------------------------------
1 Innodata Isogen Inc Software 115.7%
2 Monarch Casino & Resort Inc Lodging 112.6%
3 Criticare Systems Inc Healthcare-Products 102.3%
4 Metropolitan Health Networks Inc Healthcare-Services 102.1%
5 AirGate PCS Inc Telecommunications 81.6%
6 Parlux Fragrances Inc Cosmetics/Personal Care 72.9%
7 EZCORP Inc Retail 67.5%
8 Denny's Corp Retail 66.7%
9 Image Sensing Systems Inc Electronics 61.8%
10 Toreador Resources Corp Oil&Gas 61.6%
11 Titan International Inc Auto Parts & Equipment 57.3%
12 I-many Inc Internet 56.8%
13 Cantel Medical Corp Healthcare-Products 55.9%
14 Aldila Inc Leisure Time 54.9%
15 INVESTools Inc Software 51.8%
16 Ark Restaurants Corp Retail 50.5%
17 Unify Corp Software 50.0%
18 Lancer Corp Machinery-Diversified 48.9%
19 Hansen Natural Corp Beverages 47.8%
20 Continucare Corp Healthcare-Services 47.4%
21 Park-Ohio Holdings Corp Misc. Manufacturing 44.7%
22 American Retirement Corp Healthcare-Services 44.4%
23 Hollywood Media Corp Internet 43.1%
24 Olympic Steel Inc Iron/Steel 42.1%
25 SFBC International Inc Commercial Services 41.2%
26 Collectors Universe Inc Commercial Services 39.9%
27 Building Materials Holding Corp Distribution/Wholesale 39.1%
28 LeCroy Corp Electronics 39.1%
29 Comtech Telecommunications Corp Telecommunications 38.8%
30 Deckers Outdoor Corp Apparel 38.2%
</Table>
3
<Page>
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- --------------------------------------------------------------------------------
31 First Cash Financial Services Inc Retail 33.4%
32 Central European Distr. Corp Distribution/Wholesale 32.2%
33 Moldflow Corp Software 31.6%
34 Badger Meter Inc Electronics 31.2%
35 E*TRADE Financial Corp Diversified Finan Svcs. 30.9%
</Table>
Of the triple-digit club, three of the four members simply posted extraordinary
growth in the third quarter, propelling the stock price into temporary orbit
over the next few months. Monarch Casino & Resort Inc, for example, which
operates the Atlantis Casino Resort in Reno, saw its third-quarter earnings grow
by 50% over the previous year's quarter, thanks to significant increases in
casino, hotel, food, and beverage revenues. Then there's Innodata Isogen Inc, a
New Jersey-based "information management" company that makes software that -
among other things - helps libraries digitize their collections, helps
intelligence organizations improve their analysis of potential security threats,
and helps technology companies create documentation for their products that can
be customized to accommodate various countries' legal and regulatory
requirements. Innodata Isogen Inc's revenues for the first three quarters of the
year showed a 56% jump over the same period in 2003, but it was the third
quarter's 42% increase that really pushed the stock forward. And Metropolitan
Health Networks Inc, which provides healthcare services to about 25,000 members
in central and south Florida, announced a 213% rise in third-quarter net income.
(It didn't hurt that in November, the company - which had previously been traded
Over the Counter - was listed on the American Stock Exchange, where executives
of the company rang the opening bell.)
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE--WHAT DIDN'T WORK
TRANSLATION: Our fund had a terrific fourth quarter, gaining - in just three
months - about double what the S&P 500 Index typically gains in a year. But that
doesn't mean we didn't make any bad bets, and one stock lost more than 30% for
the period.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LOSS
- --------------------------------------------------------------------------------
1 SupportSoft Inc Internet -35.8%
</Table>
SupportSoft Inc, of Redwood City, CA, makes software that essentially checks for
problems in primary software applications - like those associated with
performing customer-service functions - and fixes the problems. Unfortunately,
in early October the company reported results for its September quarter, which
included the fact that revenues were down 9% from the same period in the
previous year. The stock lost roughly half its value (though it then regained
some ground), and attorneys rushed to file class-action lawsuits. We sold this
stock in October.
DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT WORKED
TRANSLATION: It was a good year. Thirty-five stocks in the Fund's portfolio
gained more than 50%, and nearly half of them gained more than 100%. As in the
fourth quarter, consumer-oriented stocks were heavily represented on our list of
best bets - they make up about half the list below - but old-school industrial
companies (a trucking firm, a maker of scientific instruments) also made a
strong showing.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- --------------------------------------------------------------------------------
1 Advocat Inc Healthcare Services 190.8%
2 Navarre Corp Distribution/Wholesale 180.4%
3 Parlux Fragrances Inc Cosmetics/Personal Care 148.4%
4 Onyx Acceptance Corp Diversified Finan Serv 133.3%
5 Taser International Inc Electronics 129.6%
6 Somanetics Corp Healthcare-Products 128.3%
7 Cantel Medical Corp Healthcare-Products 127.7%
8 Innodata Corp Software 124.8%
</Table>
4
<Page>
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- --------------------------------------------------------------------------------
9 Ventiv Health Inc Advertising 122.1%
10 Building Material Holding Corp Distribution/Wholesale 116.6%
11 Monarch Casino & Resort Inc Lodging 115.6%
12 Metropolitan Health Networks Inc Healthcare Services 103.4%
13 Deckers Outdoor Corp Apparel 102.9%
14 Hurco Companies Inc Machinery-Diversified 102.5%
15 SFBC International Inc Commercial Services 100.0%
16 SMTEK International Inc Electronics 90.1%
17 Denny's Corp Retail 87.6%
18 AirGate PCS Inc Telecommunications 85.3%
19 Nash Finch Co Food 75.6%
20 Image Sensing Systems Inc Electronics 71.0%
21 Hansen Natural Corp Beverages 68.1%
22 Collectors Universe Commercial Services 63.3%
23 INVESTools Inc Software 63.2%
24 Petroleum Development Corp Oil & Gas 62.7%
25 Titan International Inc Auto Parts & Equipment 61.8%
26 Toreador Resources Corp Oil & Gas 61.6%
27 Hawaiian Holdings Inc Airlines 58.2%
28 First Cash Financial Services Inc Retail 56.3%
29 Park-Ohio Holdings Corp Misc. Manufacturer 55.9%
30 Ark Restaurants Corp Retail 55.8%
31 Dynamex Inc Transportation 54.4%
32 Layne Christensen Co Engineering & Construction 53.5%
33 Books-A-Million Inc Retail 53.5%
34 Lancer Corp Machinery-Diversified 53.2%
35 I-many Inc Internet 50.5%
</Table>
Ironically, the best performer of the year made the top of the list not by doing
particularly well, but by doing considerably better than it had in the past.
Advocat, Inc., a Tennessee firm that provides long-term care to patients in
nursing homes - lost $1.53 per share in the second quarter of 2003, so this
year's second-quarter gain of 36 cents per share was cause for real celebration.
The stock-price party continued with the announcement of third-quarter results,
showing a loss that had narrowed by 90% since the same period last year.
Seventh-best performer Cantel Medical Corp. was in something of a similar boat.
Its stock shot up by 55% in the fourth quarter alone, on the back of a 73% jump
in earnings, year over year, for the fiscal quarter ended October 31. However,
to some extent that earnings growth was deceptive; the company does a lot of
business with Canada, and the SARS epidemic of 2003 had prevented sales reps
from visiting hospitals in the Toronto area. (This is particularly ironic since
Cantel Medical Corp.'s products focus on preventing and controlling the spread
of infection.) As a result, earnings for 2003 were unusually weak, making the
2004 comparisons very easy. Nevertheless, the company had also benefited from a
restructuring of its sales force and expectations of yet more business in
Canada, thanks to the Canadian government's plan to increase healthcare
spending.
Meanwhile, third-best performer Parlux Fragrances Inc. finished the year
smelling like roses after one quarter and then another showed impressive gains.
The Ft. Lauderdale company makes and markets colognes and other personal
products, often under celebrity names that it licenses (most recent to hit the
shelves: "Paris Hilton," the perfume). But while it may be easy to poke fun at
the products, it's difficult to laugh at the numbers: In early November the
company announced that earnings for its second fiscal quarter were up 70% over
the same period last year - and that was after doubling profits in the fourth
fiscal quarter of the year.
5
<Page>
DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: The only good thing that can be said about the following list of
losers is that it's short: just three companies in the Fund lost more than 50%
for the year.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LOSS
- --------------------------------------------------------------------------------
1 Network Engines Inc Internet -57.3%
2 Evolving Systems Inc Software -54.7%
3 SupportSoft Inc Internet -52.5%
</Table>
SupportSoft Inc. and Network Engines Inc. may both be classified as internet
companies, but the drops in their stock prices didn't follow any particular
pattern. Network Engines Inc., which makes products that allow software vendors
to provide network security and data-storage, saw its stock drift down by more
than 75% in the six months between February and August, following the company's
announcement that a renegotiation of one of its distribution agreements was
going to take a bite out of the first quarter's operating margins. The stock
recouped some of its losses, particularly in the fourth quarter of 2004, but not
enough. We sold this stock in June.
Like Network Engines Inc., SupportSoft Inc. was having a poor if undramatic
year. The company makes software that monitors primary software programs - like
those used to support customer-serve efforts - and fixes any problems that
arise. But in the early fall, instead of turning north, the stock abruptly lost
a further 35% of its value on news that revenues for the September quarter were
down 9% from the levels of the previous year. Attorneys rushed to file
class-action suits, and the stock closed the year down 52%. We sold the stock in
October.
TOP TEN HOLDINGS
At quarter end, Consumer, Cyclical stocks comprised our largest sector
representation at 26.0% of net assets, followed by Consumer, Non-cyclical at
20.9% of net assets and Industrial stocks at 13.3%. Here are the top ten
holdings at the end of December:
<Table>
<Caption>
PERCENT OF
RANK DESCRIPTION INDUSTRY NET ASSETS
- -------------------------------------------------------------------------------------
1 Deckers Outdoor Corp Apparel 5.4%
2 SFBC International Inc Commercial Services 4.4%
3 Park-Ohio Holdings Corp Miscellaneous Manufacturing 3.9%
4 Petroleum Development Corp Oil & Gas 3.3%
5 Navarre Corp Distribution/Wholesale 2.8%
6 America Service Group Inc Healthcare Services 2.8%
7 Olympic Steel Inc Iron/Steel 2.5%
8 Ventiv Health Inc Advertising 2.5%
9 AirGate PCS Inc Telecommunications 2.4%
10 Giant Industries Inc Oil & Gas 2.4%
- -------------------------------------------------------------------------------------
32.4%
</Table>
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views are not meant as investment advice and should not be considered
predictive in nature. Any favorable (or unfavorable) description of a holding
applies only as of December 31, 2004, unless otherwise stated. Security
positions can and do change thereafter. Discussions of historical performance do
not guarantee and are not indicative of future performance.
The Fund is subject to above-average market risk (volatility) and is not an
appropriate investment for short-term investors. Investments in the small
companies within this multi-cap fund generally carry greater risk than is
customarily associated with larger companies for various reasons such as
narrower markets, limited financial resources and less liquid stock.
6
<Page>
BEFORE INVESTING YOU SHOULD CAREFULLY THE FUND'S INVESTMENT OBJECTIVE, RISKS,
CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF
WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE.
FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05).
CONCLUSION
As always, we appreciate your feedback. We've gotten quite a bit of positive
feedback from shareholders recently, both about our performance and some of our
policies in light of recent industry scandals. We take your responses seriously
and discuss them at our weekly staff meetings. Please keep your ideas coming--we
continually look for ways to improve our service.
Sincerely,
/s/ John Montgomery
John Montgomery
7
<Page>
DISCLOSURE OF FUND EXPENSES
(UNAUDITED)
As a shareholder to the Fund, you will incur no transactions costs, including
sales charges (loads) on purchases, on reinvested dividends, or on other
distributions. There are also no redemption fees or exchange fees. However, the
fund will incur ongoing costs, including management fees and other Fund
expenses. The following examples are intended to help you understand your
ongoing costs (in dollars) of investing in a Fund and to compare these costs
with the ongoing costs of investing in other mutual funds. The examples are
based on an investment of $1,000 invested on July 1, 2004 and held until
December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY ULTRA-SMALL COMPANY FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSE PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- --------------------------------------------------------------------------------------------
Actual Fund Return $ 1,000.00 $ 1,192.11 $ 6.25
Hypothetical Fund Return $ 1,000.00 $ 1,019.50 $ 5.76
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.13% MULTIPLIED
BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF
DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR
(TO REFLECT THE ONE HALF-YEAR PERIOD).
8
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------------
COMMON STOCKS - 99.0%
ADVERTISING - 2.5%
Ventiv Health Inc* 141,800 $ 2,881,376
AEROSPACE/DEFENSE - 0.2%
Spacehab Inc* 103,400 220,242
APPAREL - 6.2%
Ashworth Inc* 83,000 903,870
Deckers Outdoor Corp*+ 136,000 6,390,640
--------------
7,294,510
AUTO PARTS & EQUIPMENT - 1.5%
R&B Inc* 8,900 222,411
Titan International Inc 99,000 1,494,900
--------------
1,717,311
BANKS - 4.8%
Bank of the Ozarks Inc 57,600 1,960,128
Cascade Financial Corp 6,324 118,891
Guaranty Federal
Bancshares Inc 13,000 312,728
Northrim BanCorp Inc 4,800 112,800
Pinnacle Financial
Partners Inc* 25,000 565,525
Pointe Financial Corp 3,100 126,325
Vineyard National Bancorp Co 42,000 1,380,120
Wilshire Bancorp Inc* 64,200 1,061,868
--------------
5,638,385
BEVERAGES - 2.3%
Hansen Natural Corp* 72,501 2,639,761
BUILDING MATERIALS - 0.2%
Juno Lighting Inc 6,000 252,000
CHEMICALS - 1.1%
American Vanguard Corp+ 21,000 772,380
Balchen Corp 7,800 270,582
ICO Inc* 68,300 210,364
--------------
1,253,326
COMMERCIAL SERVICES - 5.3%
Collectors Universe Inc* 25,930 528,713
Discovery Partners
International Inc* 63,000 299,250
Learning Care Group Inc* 33,000 106,920
SFBC International Inc * 130,849 5,168,536
Total Logistics Inc* 2,108 56,830
--------------
6,160,249
COMPUTERS - 0.6%
Innodata Isogen Inc* 68,500 674,040
COSMETICS/PERSONAL CARE - 1.3%
Parlux Fragrances Inc* 69,600 1,564,608
DISTRIBUTION/WHOLESALE - 7.4%
Building Materials
Holding Corp 57,000 2,182,530
Central European Distribution
Corp* 88,950 2,627,583
Huttig Building Products Inc* 62,000 647,900
Navarre Corp * 185,984 3,273,318
--------------
8,731,331
DIVERSIFIED FINANCIAL SERVICES - 0.1%
E*TRADE Financial Corp* 4,585 $ 68,546
ELECTRICAL COMPONENTS & EQUIPMENT - 0.8%
Insteel Industries Inc* 54,300 980,712
ELECTRONICS - 3.7%
Badger Meter Inc 11,000 329,450
Image Sensing Systems Inc* 26,900 457,004
Labarge Inc* 94,100 1,195,070
LeCroy Corp* 50,000 1,167,000
Lowrance Electronics Inc 28,600 900,871
SMTEK International Inc* 21,324 300,668
--------------
4,350,063
ENGINEERING & CONSTRUCTION - 0.4%
Layne Christensen Co* 24,300 441,045
FOOD - 1.7%
Nash Finch Co 51,981 1,962,803
GAS - 0.2%
Chesapeake Utilities Corp 7,700 205,590
HEALTHCARE PRODUCTS - 2.4%
Atrion Corp 8,400 380,058
Cantel Medical Corp* 14,300 535,106
Criticare Systems Inc* 68,300 244,514
Del Global Technologies Corp* 1,408 0
Quinton Cardiology
Systems Inc* 115,600 1,220,736
Somanetics Corp* 28,000 431,480
--------------
2,811,894
HEALTHCARE SERVICES - 4.2%
Advocat, Inc* 53,200 263,340
America Service Group Inc* 121,050 3,240,509
American Retirement Corp* 22,000 259,380
Continucare Corp* 89,600 225,792
Five Star Quality Care Inc* 45,000 381,150
InterDent, Inc 1 0
Metro Health Networks Inc* 190,000 537,700
--------------
4,907,871
HOME BUILDERS - 0.4%
Cavalier Homes Inc* 84,100 495,349
INSURANCE - 1.8%
Brooke Corp 8,500 205,360
Fidelity National Financial Inc 2,338 106,776
Navigators Group Inc* 18,000 541,980
Penn-America Group Inc 84,100 1,269,910
--------------
2,124,026
INTERNET - 2.0%
Corillian Corp* 172,857 850,456
Hollywood Media Corp* 161,900 785,215
IBasis Inc*+ 285,500 702,330
--------------
2,338,001
IRON/STEEL - 2.9%
Great Northern Iron
ORE Properties 3,800 444,600
Olympic Steel Inc* 110,400 2,926,704
--------------
3,371,304
</Table>
9
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------------
LEISURE TIME - 1.1%
Aldila Inc 79,100 $ 1,225,259
LODGING - 1.0%
Monarch Casino &
Resort Inc* 30,000 1,216,500
MACHINERY-DIVERSIFIED - 1.3%
Benthos Inc* 22,000 375,540
Hurco Companies Inc* 40,000 660,000
Lancer Corp* 8,200 137,350
Paragon Technologies Inc* 12,000 118,800
Twin Disc Inc 7,700 196,735
--------------
1,488,425
METAL FABRICATE/HARDWARE - 0.7%
Webco Industries Inc* 76,500 823,905
MISCELLANEOUS MANUFACTURING - 4.2%
Atlantis Plastics Inc* 18,600 331,080
Park-Ohio Holdings Corp* 178,900 4,633,510
--------------
4,964,590
OFFICE FURNISHINGS - 0.1%
CompX International Inc 6,000 99,180
OIL & GAS - 13.0%
CREDO Petroleum Corp* 7,400 104,710
Edge Petroleum Corp* 122,114 1,780,422
Giant Industries Inc* 105,700 2,802,107
Goodrich Petroleum Corp* 132,800 2,152,688
Mission Resources Corp* 290,000 1,693,600
Petroleum Development
Corp* 100,600 3,880,142
Toreador Resources Corp* 77,958 1,729,888
Vaalco Energy Inc* 297,500 1,154,300
--------------
15,297,857
PHARMACEUTICALS - 3.8%
Matrixx Initiatives Inc* 225,884 2,617,996
National Medical Health
Card Systems Inc* 81,750 1,888,507
--------------
4,506,503
RETAIL - 7.6%
America's Car Mart Inc* 11,300 429,400
Ark Restaurants Corp 4,517 177,066
Books-A-Million Inc 37,900 364,598
Collegiate Pacific Inc 80,000 1,106,400
Cosi Inc* 59,800 361,790
Cost-U-Less Inc* 114,850 803,950
Denny's Corp* 320,000 1,440,000
EZCORP Inc* 54,406 838,396
First Cash Financial
Services Inc* 77,250 2,063,348
National Vison Inc* 56,000 417,200
The Pantry Inc* 21,200 637,908
Zones Inc* 49,000 324,870
--------------
8,964,926
SAVINGS & LOANS - 0.6%
Beverly Hills Bancorp Inc 37,800 381,780
NewMil Bancorp Inc 4,800 150,240
Pacific Premier Bancorp Inc* 15,000 198,900
--------------
730,920
SEMICONDUCTORS - 1.6%
ADE Corp* 101,100 $ 1,892,592
SOFTWARE - 3.1%
Altiris Inc* 24,000 850,320
AMICAS Inc 62,231 276,928
INVESTools Inc* 220,000 748,000
Mind CTI Ltd 69,285 403,239
Moldflow Corp * 33,500 532,650
Phoenix Technologies Ltd* 99,000 817,740
Unify Corp* 101,837 61,102
--------------
3,689,979
TELECOMMUNICATIONS - 4.5%
AirGate PCS Inc* 78,800 2,805,280
Comtech
Telecommunications Corp* 32,850 1,235,489
Network Equipment Tech Inc* 120,200 1,180,364
Stratos International Inc* 16,745 73,511
--------------
5,294,644
TEXTILES - 0.6%
Hallwood Group Inc* 6,900 734,850
TRANSPORTATION - 1.8%
Air T Inc 19,700 357,929
Dynamex Inc* 94,400 1,749,232
--------------
2,107,161
TOTAL COMMON STOCKS
(Cost $69,184,560) 116,121,634
--------------
MONEY MARKET MUTUAL FUNDS - 0.8%
First American Treasury
Obligations Fund - Class S 964,830 964,830
--------------
TOTAL MONEY MARKET MUTUAL FUNDS
(Cost $964,830) 964,830
--------------
TOTAL INVESTMENTS - 99.8%
(Cost $70,149,390) 117,086,464
Other Assets In Excess of Liabilities - 0.2% 261,609
--------------
NET ASSETS - 100.0% $ 117,348,073
==============
</Table>
* NON-INCOME PRODUCING SECURITY
+ THIS SECURITY OR A PORTION OF THIS SECURITY IS OUT ON LOAN AT DECEMBER 31,
2004
TOTAL LOANED SECURITIES HAD A MARKET VALUE OF $7,811,230 AT DECEMBER 31, 2004
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31,2004 (UNAUDITED)
<Table>
ASSETS:
Investments at value (cost - $70,149,390) $ 117,086,464
Receivable for investments sold 306,638
Receivable for fund shares sold 70,324
Dividends receivable 23,758
Interest receivable 23,780
Prepaid expenses 12,525
- -----------------------------------------------------------------------------------------------------------
Total assets 117,523,489
- -----------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for fund shares redeemed 12,693
Accrued investment adviser fee 86,559
Accrued administration fee 39,729
Accrued directors fee 1,135
Other payables 35,300
- -----------------------------------------------------------------------------------------------------------
Total liabilities 175,416
- -----------------------------------------------------------------------------------------------------------
NET ASSETS $ 117,348,073
===========================================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 66,417,008
Accumulated net investment loss (327,812)
Accumulated net realized gain on investments 4,321,803
Net unrealized appreciation of investments 46,937,074
- -----------------------------------------------------------------------------------------------------------
Net Assets $ 117,348,073
===========================================================================================================
Shares of common stock outstanding of $.001 par value,5,000,000 shares authorized 2,954,101
- -----------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share $ 39.72
===========================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31,2004 (UNAUDITED)
<Table>
INVESTMENT INCOME:
Dividends $ 113,477
Interest 32,299
Securities lending 101,317
- -----------------------------------------------------------------------------------------------------------
Total investment income 247,093
- -----------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 456,918
Administration fees 25,384
Accounting fees 26,352
Transfer agent fees 27,255
Audit fees 6,993
Tax fees 2,013
Custody fees 8,735
Legal fees 9,111
Directors fees 2,013
Registration fees 188
Reports to shareholders 1,600
Miscellaneous 8,343
- -----------------------------------------------------------------------------------------------------------
Total expenses 574,905
- -----------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (327,812)
- -----------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment securities 9,249,841
Net change in unrealized appreciation / depreciation on investments 10,107,934
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 19,357,775
- -----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $ 19,029,963
===========================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 2004* JUNE 30, 2004
- -----------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss $ (327,812) $ (816,119)
Net realized gain on investment securities 9,249,841 28,241,288
Net change in unrealized appreciation / depreciation on investments 10,107,934 3,806,027
- -----------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 19,029,963 31,231,196
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net realized gain (22,040,000) (12,258,703)
- -----------------------------------------------------------------------------------------------------------------------
Net decrease in net assets from distributions (22,040,000) (12,258,703)
- -----------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares 868,667 1,106,614
Reinvestment of distributions 21,593,554 12,016,891
Cost of shares redeemed (3,337,103) (8,312,596)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in net assets from share transactions 19,125,118 4,810,909
- -----------------------------------------------------------------------------------------------------------------------
Net increase in net assets 16,115,081 23,783,402
NET ASSETS:
Beginning of period 101,232,992 77,449,590
- -----------------------------------------------------------------------------------------------------------------------
End of period ** $ 117,348,073 $ 101,232,992
=======================================================================================================================
SHARES ISSUED & REDEEMED:
Issued 22,046 27,516
Distributions reinvested 543,644 300,646
Redeemed (82,703) (209,082)
- -----------------------------------------------------------------------------------------------------------------------
Net increase 482,987 119,080
Outstanding at beginning of period 2,471,114 2,352,034
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 2,954,101 2,471,114
=======================================================================================================================
* Unaudited
** Including accumulated net investment loss of: $ (327,812) $ 0
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
<Table>
<Caption>
SIX MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDED JUNE 30,
2004** 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 40.97 $ 32.93 $ 28.83 $ 26.99 $ 21.59 $ 14.91
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss^ (0.13) (0.33) (0.21) (0.14) (0.22) (0.26)
Net realized and unrealized gain 8.00 13.66 7.99 4.43 5.62 6.94
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 7.87 13.33 7.78 4.29 5.40 6.68
- ----------------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders:
Net realized gain (9.12) (5.29) (3.68) (2.45) 0.00 0.00
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (9.12) (5.29) (3.68) (2.45) 0.00 0.00
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 39.72 $ 40.97 $ 32.93 $ 28.83 $ 26.99 $ 21.59
==================================================================================================================================
TOTAL RETURN 19.21%# 40.88% 32.00% 17.04% 25.01% 44.80%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 117,348 $101,233 $ 77,450 $ 60,809 $ 51,764 $ 41,959
Ratios to average net assets:
Expenses after waivers
and reimbursements 1.13%* 1.15% 1.29% 1.26% 1.61% 1.85%
Expenses before waivers
and reimbursements 1.13%* 1.15% 1.29% 1.26% 1.61% 1.85%
Net investment loss after
waivers and reimbursements (0.65%)* (0.84%) (0.82%) (0.53%) (0.93%) (1.36%)
Portfolio turnover rate 38.1% 71.1% 56.1% 120.6% 57.0% 65.4%
</Table>
* ANNUALIZED
** UNAUDITED
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 (UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 5,000,000 shares have been classified into the Ultra-Small
Company Fund.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Ultra-Small Compnay Fund seeks to provide a long-term total return of
capital, primarily throught capital appreciation.
Bridgeway Capital Management, Inc. (the "Adviser") is the adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of the financial statements of the Ultra-Small Company Fund (the
"Fund") are in conformity with accounting principles generally accepted in the
United States of America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other investments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees. The Fund also continues to receive
dividends on the securities loaned. The loans are secured by collateral at least
equal to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
Additionally, the Fund does not have the right to sell or repledge collateral
received in the form of securities unless the borrower goes into default. The
risks to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. As of
December 31, 2004, the Fund had securities on loan valued at $7,811,230 and
received U.S. Treasury securities with a value of $7,842,244 as collateral. It
is the Fund's policy to obtain additional collateral from or return excess
collateral to the borrower by the end of the next business day, following the
valuation date of the securities loaned. Therefore, the value of the collateral
held may be temporarily less than the value of the securities on loan.
15
<Page>
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, as
well as the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on
October 15, 1996 and amended on October 22, 2003, that permits the Adviser to
pay up to 0.25% of the Fund's average daily assets for sales and distribution of
Fund shares. Since the cost of distributing Fund shares is borne by the Adviser,
the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's
distributor. Prior to January 2, 2004, the Fund acted as its own distributor.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004 there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the current market value of the option
written. If an option which the Fund has written either expires on its
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or a loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such options is extinguished. If a call option which
the Fund has written is assigned, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
premium originally received. If a put option which the Fund has written is
assigned, the amount of the premium originally received reduces the cost of the
security which the Fund purchased upon exercise of the option. Buying calls
increases the Fund's exposure to the underlying security to the extent of any
premium paid. Buying puts on a stock market index tends to limit the Fund's
exposure to a stock market decline. As of December 31, 2004, there were no
outstanding options.
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, directors, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred. However, the Fund has not
had prior claims or losses pursuant to these contracts.
16
<Page>
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser, a shareholder
of the Fund. As compensation for the advisory services rendered, facilities
furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total
fee, which is computed daily and paid monthly. The Fund pays a flat 0.9% annual
management fee of average daily net assets, computed daily and payable monthly,
except that while the net assets range from $27.5 million to $55 million the fee
will be $495,000 annually subject to a maximum rate of 1.49% and a maximum
expense ratio of 2.0%.
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 2.00% of the value of its average net assets for the six
months ended December 31, 2004. There were no reimbursements to the Fund for the
six months ended December 31, 2004.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. The transactions are reviewed quarterly by Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management acts as Administrator
for the Fund. Under the terms of the agreement, Bridgeway Capital Management
provides or arranges for the provision of certain accounting and other
administrative services to the Fund that it is not required to provide under the
terms of the investment advisory agreement. As compensation under the Master
Administrative Agreement, Bridgeway Capital Management receives a monthly fee
from each Fund calculated at the annual rate of 0.05% of average daily net
assets.
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is considered
to be "affiliated" and "interested." Compensation of Mr. Montgomery is borne by
the Adviser rather than the Fund.
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004. The amount paid attributable to the Ultra-Small Company Fund
is disclosed in the Statement of Operations.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Aggregate purchases and sales of investment securities, other than U.S.
government securities and cash equivalents were $37,289,769 and $39,052,826,
respectively, for the six months ended December 31, 2004.
5. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and distribute substantially all of
its net taxable income including net realized gains on investments, if any, to
its shareholders each year. The fund is not subject to income or excise taxes to
the extent such distributions are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, were as
follows:
<Table>
Gross unrealized appreciation $ 48,047,869
Gross unrealized (depreciation) (1,185,191)
- ---------------------------------------------------------
Net unrealized appreciation
on investments $ 46,862,678
=========================================================
Cost of investments $ 70,223,786
=========================================================
</Table>
The difference between book and tax net unrealized appreciation is wash sale
loss deferrals.
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 2,156,231
Accumulated capital gains 15,071,322
Unrealized appreciation 36,713,549
</Table>
The temporary differences between book and tax are primarily due to wash sales
and post October losses.
As of June 30, 2004, the tax character of the distributions paid were:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
- -----------------------------------------------------------
Ordinary income $ 1,778,425 $ -
Long-term capital gains 11,659,278 7,812,988
</Table>
17
<Page>
The Fund incurred a net loss from investment operations and made no
distributions from net investment income during the year. However, distributions
of net realized short-term capital gains are, for federal income tax purposes,
taxable as ordinary income to shareholders.
During the year ended June 30, 2004, the Fund paid a long-term capital gain of
$4.214 per share to shareholders of record.
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually. Distributions to shareholders
are recorded on ex-date. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America.
6. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
18
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on
the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at
the SEC's Public Reference Room in Washington, D.C. For more information about
the operation of the Public Reference Room, please call the SEC at
1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 11% of the Fund.
19
<Page>
[BRIDGEWAY FUNDS LOGO] ULTRA-SMALL COMPANY MARKET FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
Dear Ultra-Small Company Market Fund Shareholder,
Our Fund was up 15.93% in the December quarter of 2004. This compares to a
14.09% return for the Russell 2000 Index, 13.28% for our peer benchmark, the
Lipper Small-Cap Stock Funds Index, and 16.35% for our primary benchmark, the
CRSP Cap-Based Portfolio 10 Index. Results were strong on an absolute basis, but
mixed on a relative basis.
For the twelve months through December, the Fund was up 20.12%, beating each of
our performance benchmarks. The table below presents our December quarter,
one-year, five-year, and life-to-date financial results according to the formula
required by the SEC.
<Table>
<Caption>
DEC. QTR. 1 YEAR 5 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 1/1/00 TO 7/31/97 TO
12/31/04 12/31/04 12/31/04 12/31/04
- ---------------------------------------------------------------------------------------------------
ULTRA-SMALL COMPANY MARKET FUND 15.93% 20.12% 23.06% 18.97%
CRSP Cap-Based Portfolio 10 Index (1) 16.35% 18.69% 20.49% 17.02%
Lipper Small-Cap Stock Funds Index (2) 13.28% 17.00% 1.94% 7.21%
Russell 2000 Index (3) 14.09% 18.33% 6.61% 7.64%
</Table>
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL
1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com.
(1)THE CRSP CAP-BASED PORTFOLIO 10 INDEX IS AN UNMANAGED INDEX OF 1,682 OF THE
SMALLEST PUBLICLY TRADED U.S. STOCKS (WITH DIVIDENDS REINVESTED), AS REPORTED BY
THE CENTER FOR RESEARCH ON SECURITY PRICES. (2)THE LIPPER SMALL-CAP STOCK FUNDS
IS AN INDEX OF SMALL-COMPANY FUNDS COMPILED BY LIPPER, INC. (3)THE RUSSELL 2000
INDEX IS AN UNMANAGED, MARKET VALUE WEIGHTED INDEX, WHICH MEASURES PERFORMANCE
OF THE 2,000 COMPANIES THAT ARE BETWEEN THE 1,000TH AND 3,000TH LARGEST IN THE
MARKET WITH DIVIDENDS REINVESTED. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN
INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER
THAN ONE YEAR ARE ANNUALIZED.
According to data from Lipper, Inc., the Ultra-Small Company Market Fund ranked
31st of 72 micro-cap funds for the calendar year and 5th of 43 over the last
five years and 4th out of 30 since inception. Lipper, Inc. is an independent
mutual fund rating service that ranks funds in various fund categories by making
comparative calculations using total returns.
<Page>
SHAREHOLDER LETTER
[CHART]
GROWTH OF $10,000 INVESTED IN ULTRA-SMALL COMPANY MARKET FUND AND INDEXES FROM
7/31/97 (INCEPTION) TO 12/31/04
<Table>
<Caption>
BRIDGEWAY
ULTRA-SMALL COMPANY MARKET FUND CRSP CAP-BASED PORTFOLIO 10 INDEX RUSSELL 2000 INDEX LIPPER SMALL-CAP STOCK FUNDS
7/97 10000 10000 10000 10000
9/97 11280 12028 10978 11525
12/97 9960 11162 10610 10852
3/98 11720 12542 11677 12016
6/98 11380 11734 11133 11552
9/98 8780 8914 8890 9080
12/98 9780 9873 10340 10760
3/99 9160 9641 9779 10252
6/99 9920 11052 11300 11774
9/99 10300 10753 10585 11513
12/99 12860 12634 12538 15229
3/00 14140 14863 13426 16934
6/00 13240 13605 12918 15926
9/00 14440 13702 13061 16462
12/00 12946 10989 12159 14226
3/01 13228 12202 11368 12087
6/01 14537 13791 12992 13871
9/01 13611 11783 10291 10788
12/01 16051 14970 12461 12900
3/02 17805 16046 12958 13011
6/02 17543 15106 11875 11786
9/02 15023 12358 9334 9569
12/02 16837 14123 9909 10139
3/03 16918 14085 9464 9687
6/03 22141 19315 11680 11695
9/03 25670 22928 12741 12590
12/03 30211 27035 14591 14328
3/04 32941 29603 15504 15045
6/04 32638 28782 15578 15298
9/04 31303 27579 15133 14799
12/04 36290 32089 17265 16764
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
<Table>
<Caption>
SECTOR % OF STOCKS
- ------------------------------------------------
Basic Materials 3.0%
Communications 10.9%
Consumer, Cyclical 13.0%
Consumer, Non-cyclical 24.6%
Energy 3.2%
Financial 18.9%
Industrial 14.7%
Technology 10.8%
Utilities 0.9%
- ------------------------------------------------
TOTAL 100.0%
</Table>
PERFORMANCE SUMMARY
TRANSLATION: Overall, this has been a very strong period for small stocks, and
since our Fund specializes in the smallest of the small, that has been good
news. The size-related tailwind, though, couldn't keep us from an unpleasant
4%-plus loss in the third quarter of the year, but a strong comeback in the last
three months of the year more than made up for the loss, and allowed us to
finish out 2004 with nearly a 16% gain.
The losses of the third quarter weren't catastrophic by any means, but that
doesn't mean they made us happy. However, the pattern of this six-month period -
losses followed by gains - offers almost a textbook lesson in the value of
avoiding panic and the urge to sell when things look less than great.
Hypothetically, a shareholder who had sold after the third quarter would
(depending on what he had subsequently done with that money) have ended the year
considerably worse off than the shareholder who had stuck it out through the
downturn and then captured all the upside of the next three months.
It's important to remember, though, that this "holding through the downturn"
strategy works best in concert with other financial principles, such as saving,
avoiding most kinds of debt, diversifying (and regularly rebalancing) your
portfolio, setting aside an emergency fund, and choosing well managed, low-cost
funds whose investment objectives - anything from very aggressive growth to
ultra-low-risk income - matches with the time-horizons of the investments you're
making. This is a fancy way of saying that the more years you can afford to wait
before tapping a particular pile of money, the more risk you can afford to take
with it.
2
<Page>
YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S
DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR).
TRANSLATION: Notwithstanding news events (and the commentary of many market
pundits), 2004 was a remarkably average year. The combination of rising interest
rates, a declining U.S. dollar, inflation, the presidential election, war and
natural disasters should have produced some extraordinary results, right? Not so
fast....
Let's look at the statistics purely from a market perspective. Over the 10 years
through the 31st of December, 2004, the S&P 500 Index of large companies
returned an average of 12.05% per year. (I know, that sounds unbelievable, given
how weak the past few years' performance has been, but the market of the mid-
and late 1990s really was pretty remarkable.) That's only about one and one-half
percentage points better than the Index's return for 2004. Furthermore, if we
look all the way back to 1925, we see that the market has returned an average of
10.4% per year - and that's over a 79-year period that includes the Great
Depression, World War II, the white-hot "go-go" market of the 1960s and the
brutal bear market of the early 1970s. In about two-thirds of those years, the
Index beat or lagged that 10.4% average by more than 10 percentage points. From
that perspective, therefore, 2004's return of 10.88% was about as average as you
can get.
Well, but wasn't this a very volatile year? No. In fact, the actual variation of
monthly returns in 2004 was about half of the average of the preceding decade's.
Throughout that 10-year period, only one year - 1995 - was less volatile. In
other words, in 2004 the stock market "bounced around" a whole lot LESS than
normal.
In conclusion, what is remarkable about 2004 is how average it was in terms of
returns and how "tame" it was with respect to volatility. Not what you might
conclude from reading standard financial commentaries, many of which described a
market lurching dramatically between struggle and triumph. All that drama can be
very compelling, but it doesn't necessarily lead to an accurate understanding of
the market's behavior in the long run (meaning over more than a single day), nor
does it necessarily produce sound investment decisions. For that reason, though
I have four computer screens in my office, none of them runs a ticker, and I
frequently go home at the end of the day without knowing whether the overall
market was up or down.
All that said, the market of 2004 did exhibit some unusual characteristics, in
particular the continued - and extraordinary - outperformance of smaller stocks.
This was the sixth year in a row that small stocks beat large ones, the longest
period of consecutive annual small-stock dominance in the last eight decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, investment strategies - such as buying small-cap stocks or value
stocks or real-estate-oriented stocks - that have worked well in the recent past
tend to keep working, as investors get caught up in the excitement and become
increasingly confident that a given strategy is the right way to go. This is
essentially a self-fulfilling prophecy: If everyone agrees that small stocks,
for example, are going to keep going up, they will go up, because everyone buys
them. So-called momentum investing has come in for a lot of negative publicity
in the past few years, because it was investors following a momentum strategy
who both fueled the tech-stocks bubble of the late '90s and early 2000 and then
(when they switched strategies) caused it to collapse. The fact is, though, that
a momentum strategy can work for periods of time, and statistically, when small
stocks have done well relative to the overall market in one year, they are more
likely to do well in the next one. So we could conceivably see a record-setting
seventh year in a row of small-stock dominance, which would be good news for
shareholders of this Fund.
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but our computer models have no such concerns, and they are pointing
pretty strongly to a shift toward larger stocks. Indeed, over the past 12 months
or so our models began finding a larger number of "attractive" large stocks than
at any time I can remember in about five years. This is almost certainly a
function of relative valuation; i.e., based on a variety of financial measures,
and thanks to the multi-year run-up in the price of small stocks, larger stocks
in general are starting to look like bargains. At Bridgeway, we don't put much
effort into trying to guess the market's direction, but we do put a lot of faith
in our models. So for that reason, I believe it's likely that the tide will turn
back in favor of large stocks at some point in the next couple of years.
3
<Page>
Of course, company-size is hardly the only investment variable. "Style," too,
plays a significant role, and the market during the December quarter was
modestly tilted toward the "value" end of the spectrum, following on a year that
was definitely tilted in that direction, and a five-year period that was really,
REALLY tilted. The following table shows the performance, over the past one,
three, and five years, of various fund categories, based on data from
Morningstar:
[CHART]
<Table>
<Caption>
VALUE GROWTH
1 Year 14.05% 0.19%
3 Year 6.95% -4.35%
5 Year 4.54% -16.22%
</Table>
This pattern of weak growth-stock performance is exactly what one would
expect...during the bear-market phase of a stock-market cycle. But from a
historical perspective, it's distinctly unusual for the last two years of a
recovery. Bridgeway's models are at last suggesting a shift toward growth
stocks, though not as strongly as they indicate a shift toward large stocks.
When will these shifts occur? That we can't say. And though it may be tempting
to try to "time" the shift - betting on its occurring at such-and-such a point,
and switching investment strategies in an effort to capture the market's change
of direction - we really would recommend against this. Of all the "foolproof
systems" that investors have developed over the centuries to beat the market,
"market timing" has generally been one of the least successful. In an upcoming
shareholder letter, we'll discuss some of the theories of market timing and some
of the reasons why they have so rarely paid off. But for now, we'd simply
suggest that you revisit your original investment plan, make any changes to your
portfolio necessary to bring it in line with that plan, and sit tight. In many
parts of the country, locals are fond of remarking that if you don't like the
weather, you should just wait five minutes. Absent a little hyperbole, the same
is true of the market.
DETAILED EXPLANATION OF SIX MONTHS PERFORMANCE--WHAT WORKED
TRANSLATION: The bias toward small stocks certainly helped our Fund over this
six-month period: Fifty-one of the stocks in our portfolio appreciated by more
than 50%, and 9 (18% of the 50%-plus list) earned returns in the triple digits.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- ------------------------------------------------------------------------------------------------------------
1 Monarch Casino & Resort Inc Lodging 187.6%
2 Essex Corp Telecommunications 150.3%
3 Sirius Satellite Radio Inc Media 148.4%
4 ATP Oil & Gas Corp Oil & Gas 142.2%
5 Zones Inc Retail 133.5%
6 Park-Ohio Holdings Corp Miscellaneous Manufacturer 118.7%
7 Comtech Telecommunications Corp Telecommunications 111.8%
8 Parlux Fragrances Inc Cosmetics/Personal Care 105.3%
9 Virage Logic Corp Semiconductors 104.3%
10 Mannatech Inc Pharmaceuticals 98.3%
11 Introgen Therapeutics Inc Pharmaceuticals 98.1%
12 EndWave Corp Telecommunications 96.8%
13 AirGate PCS Inc Telecommunications 95.9%
14 Spartan Stores Inc Food 95.6%
</Table>
4
<Page>
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- ------------------------------------------------------------------------------------------------------------
15 Five Star Quality Care Inc Healthcare Services 92.5%
16 Third Wave Technologies Inc Biotechnology 91.5%
17 Napster Inc Internet 91.5%
18 Novamed Eyecare Inc Healthcare-Services 90.7%
19 Lifecore Biomedical Inc Healthcare-Products 83.4%
20 Greenbrier Cos Inc Trucking & Leasing 77.7%
21 Rigel Pharmaceuticals Inc Pharmaceuticals 71.9%
22 Cantel Medical Corp Healthcare-Products 69.9%
23 Material Sciences Corp Iron/Steel 68.9%
24 Onyx Acceptance Corp Diversified Finan Serv 68.7%
25 Ubiquitel Inc Telecommunications 68.7%
26 Jupitermedia Corp Internet 67.9%
27 Famous Dave's Of America Inc Retail 65.5%
28 Vineyard National Bancorp Co Banks 64.8%
29 Caliper Life Sciences Inc Healthcare-Products 61.9%
30 Bankrate Inc Commercial Services 61.8%
31 @ Road Inc Internet 61.3%
32 Digi International Inc Software 60.4%
33 Ceradyne Inc Miscellaneous Manufacturer 59.9%
34 Deckers Outdoor Corp Apparel 59.3%
35 Clean Harbors Inc Environmental Control 59.1%
36 Northfield Laboratories Inc Biotechnology 58.1%
37 Collectors Universe Inc Commercial Services 56.8%
38 Westmoreland Coal Co Coal 56.6%
39 Sirenza Microdevices Inc Telecommunications 56.5%
40 Books-A-Million Inc Retail 56.3%
41 Washington Savings Bank Savings & Loans 55.0%
42 MarketWatch.com Inc Internet 53.5%
43 Dialysis Corp Of America Healthcare-Services 52.8%
44 Argon St Inc Aerospace/Defense 52.5%
45 Merge Technologies Inc Healthcare-Products 52.1%
46 Roanoke Electric Steel Corp Iron/Steel 52.0%
47 HMS Holdings Corp Commercial Services 51.1%
48 SI International Inc Computers 50.9%
49 Nanometrics Inc Semiconductors 50.6%
50 Aladdin Knowledge Systems Internet 50.5%
51 The Andersons Inc Agriculture 50.1%
</Table>
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE
FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS.
Of the triple-digit club, several members really caught fire in the fourth
quarter. This is a pattern we've seen in many stocks this year, usually as a
result of companies' announcing strong third-quarter results, and that was
certainly the case with Monarch Casino & Resort Inc., which operates the
Atlantis Casino Resort in Reno, and saw its third-quarter earnings grow by 50%
over the previous year, thanks to significant increases in casino, hotel, food,
and beverage revenues.
Parlux Fragrances Inc. also owed its success to impressive quarterly
performance. The Ft. Lauderdale company makes and markets colognes and personal
products, often under celebrity names that it licenses (most recent to hit the
shelves: "Paris Hilton," the perfume). But while it may be easy to poke fun at
the products, it's difficult to laugh at the numbers: In early November the
company announced that earnings for its second fiscal quarter were up 70% over
the same period in
5
<Page>
the previous year - and that was after doubling profits in the fourth fiscal
quarter of the year. Smelling success, investors bid up the stock to a 105.3%
gain for the second half of 2004.
And then there's Sirius Satellite Radio Inc., which is not an earnings story at
all. In fact, in the third quarter, the company lost 14 cents per share,
compared with a loss of 11 cents per share in the third quarter of last year. So
why did the stock appreciate by more than 148% in the second half? Credit
"shock-jock" disk-jockey Howard Stern, who in October made a highly publicized
move from broadcast radio to Sirius' line-up, giving Sirius' stock a significant
shot in the arm. The stock got another hefty boost a month later, when Mel
Karmazin, a cost-cutting specialist and former president of Viacom, Inc., joined
Sirius as CEO. The two hires raised the company's profile and elevated it, in
the eyes of many investors, well above the status of its former competitor.
DETAILED EXPLANATION OF SIX MONTHS PERFORMANCE--WHAT DIDN'T WORK
Translation: As noted above, even a remarkably strong market for small stocks
can't prevent small-stock losses, particularly when companies just plain mess up
- - which was the case with several of the 13 stocks in the Fund that lost more
than 50% in the six months ending December 31, 2004.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LOSS
- ------------------------------------------------------------------------------------------------------------
1 Trump Hotels & Casino Resorts Inc Lodging -84.5%
2 Intermet Corp Metal Fabricate/Hardware -79.1%
3 Maxim Pharmaceuticals Inc Biotechnology -69.2%
4 Netopia Inc Internet -61.1%
5 Three-Five Systems Inc Semiconductors -60.9%
6 Urologix Inc Healthcare-Products -58.1%
7 Brillian Corp Semiconductors -57.2%
8 MGP Ingredients Inc Food -55.3%
9 Ap Pharma Inc Pharmaceuticals -55.1%
10 Applica Inc Home Furnishings -51.1%
11 Intelligroup Inc Computers -51.1%
12 Extended Systems Inc Computers -50.8%
13 ATA Holdings Corp Airlines -50.1%
</Table>
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE
FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS.
If many of the stocks on our winners' list were beneficiaries of a
"fourth-quarter effect," making their most impressive gains in the last three
months of the year, Maxim Pharmaceuticals Inc. was...the reverse. In September,
the stock dropped by 46% on news that clinical trials of the company's cancer
drug indicated that the drug did not in fact improve survival rates in patients
with advanced cancer. Additional test results - with similar findings - were
announced in December, provoking another crash in the share price. Even a plan
to slash costs by laying off 50% of the company's work force failed to lift the
stock, and it didn't help that among the departing employees were Maxim
Pharmaceuticals Inc.'s CFO and Chief Scientific Officer. Given the pain, it's
not surprising that we lost more than 69% on our position in the second half of
the year.
Brillian Corp. was also a fourth-quarter loser. The company makes technology
used in high-end display applications, such as binoculars and high-definition
television sets. Hopes were riding high earlier in the year when the company
announced that a major U.S. retailer - later identified as Sears - had agreed to
sell Brillian Corp. large-screen TVs, expected to ship just in time for football
season. But in September, Sears bailed on the plan when Brillian Corp.'s was
unable to provide the TVs in time, thanks to a failure on the part of JDS
Uniphase to deliver necessary components. Brillian's Corp.'s stock lost more
than 76% in the two months following Sears' bailout, though it later recovered
enough to cost us "just" 57.2% in the second half.
Then again, there were straight "bad numbers" stories, like Applica Inc. Based
in Miramar, FL, the company makes small household appliances, such as
coffee-makers. But Applica Inc. brewed up nothing but trouble for investors this
year, as
6
<Page>
each quarter presented yet another earnings disappointment. (In the third
quarter, for example, the company produced a loss of 41 cents per share,
compared with a profit of 20 cents per share in 2003.) To be fair, some of that
loss is a function of moves that may ultimately benefit the company, such as the
sale of one of its divisions and the sale of its manufacturing facility in
China. But any such benefits didn't show up in time to prevent our Fund from
taking more than a 51% loss on our Applica Inc. position.
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views are not meant as investment advice and should not be considered
predictive in nature. Any favorable (or unfavorable) description of a holding
applies only as of December 31, 2004, unless otherwise stated. Security
positions can and do change thereafter. Discussions of historical performance do
not guarantee and are not indicative of future performance.
The Fund is subject to above-average market risk (volatility) and is not an
appropriate investment for short-term investors. Investments in small companies
generally carry greater risk than is customarily associated with larger
companies for various reasons such as narrower markets, limited financial
resources and less liquid stock.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES,
RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S
WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND
SERVICES, LLC, DISTRIBUTOR. (02/05)
CONCLUSION
As always, we appreciate your feedback. We take your responses seriously and
discuss them at our weekly staff meetings. Please keep your ideas coming--we
continually look for ways to improve our service.
Sincerely,
/s/ John Montgomery
John Montgomery
7
<Page>
DISCLOSURE OF FUND EXPENSES
(UNAUDITED)
As a shareholder to the Fund, you incur two types of costs: (1) transaction
costs (such as the 2% fee on redemption of Fund shares made within 6 months of
purchase or if the S&P 500 Index without dividends reinvested has declined more
than 5% cumulatively over the previous five trading days) and (2) ongoing costs
including management fees and other Fund expenses. The following examples are
intended to help you understand your ongoing costs (in dollars) of investing in
a Fund and to compare these costs with the ongoing costs of investing in other
mutual funds. The examples are based on an investment of $1,000 invested on July
1, 2004 and held until December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY ULTRA-SMALL COMPANY MARKET FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSE PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- --------------------------------------------------------------------------------------------------------------------
Actual Fund Return $ 1,000.00 $ 1,111.92 $ 3.62
Hypothetical Fund Return $ 1,000.00 $ 1,021.77 $ 3.47
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.68% MULTIPLIED
BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF
DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR
(TO REFLECT THE ONE HALF-YEAR PERIOD).
8
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------
COMMON STOCKS - 95.5%
ADVERTISING - 0.7%
Traffix Inc 248,700 $ 1,579,245
Ventiv Health Inc* 198,300 4,029,456
--------------
5,608,701
AEROSPACE/DEFENSE - 0.8%
Argon St Inc* 137,600 4,877,920
Arotech Corp*+ 703,000 1,138,860
CPI Aerostructures Inc* 38,100 436,245
EDO Corp 3,700 117,475
Titan Corp* 2,832 45,878
--------------
6,616,378
AGRICULTURE - 0.3%
The Andersons Inc 101,181 2,580,115
AIRLINES - 0.3%
Hawaiian Holdings Inc* 19,000 129,770
MAIR Holdings Inc* 116,414 1,071,009
Midwest Air Group Inc* 300,000 873,000
--------------
2,073,779
APPAREL - 1.8%
Ashworth Inc* 135,807 1,478,938
Deckers Outdoor Corp*+ 146,100 6,865,239
Haggar Corp 100,450 2,358,465
Hartmarx Corp* 199,200 1,547,784
Lakeland Industries Inc* 26,200 531,598
Rocky Shoes & Boots Inc* 11,064 328,601
Tandy Brands Accessories Inc 65,009 963,433
--------------
14,074,058
AUTO PARTS & EQUIPMENT - 0.8%
Noble International Ltd 77,400 1,578,186
R&B Inc* 38,157 953,543
Tenneco Automotive Inc* 73,000 1,258,520
Titan International Inc 144,000 2,174,400
Transpro Inc* 127,700 778,970
--------------
6,743,619
BANKS - 10.2%
ABC Bancorp 61,500 1,291,500
Abigail Adams National
Bancorp 22,200 429,068
Banc Corp* 36,700 302,408
Bancorp Rhode Island Inc 65,200 2,575,400
Bank of America Corp 59,718 2,806,149
Bank of the Ozarks Inc 40,800 1,388,424
Banknorth Group Inc 17,793 651,224
BB&T Corp 1,300 54,665
BNCCORP Inc 50,310 835,146
Bryn Mawr Bank Corp 22,560 496,094
Capital Bank Corp 61,200 1,123,632
Capital Corp of the West 52,900 2,486,353
Capital Crossing Bank* 87,600 2,688,444
Cardinal Financial Corp* 120,500 1,343,575
Cascade Bancorp 900 18,198
Cascade Financial Corp 59,373 1,116,212
Cass Information
Systems Inc 40,837 1,427,253
Center Financial Corp 135,600 2,714,712
Central Bancorp Inc 30,000 840,300
City National Corp 579 40,906
CoBiz Inc 900 $ 18,270
Columbia Bancorp 27,725 947,918
Columbia Bancorp / OR 24,310 475,747
Commercial Bankshares Inc 10,937 421,074
Fidelity Southern Corp 57,476 1,092,044
First Mariner Bancorp Inc* 116,678 2,048,866
First Mutual Bancshares Inc 16,335 413,602
FirstBank Corp 2,709 76,665
FNB Corp 15,788 301,077
FNB Financial Services Corp 35,375 806,550
First Place Financial Corp 14,388 322,147
First State Bancorp 8,500 312,460
Fulton Financial Corp 99,332 2,315,429
Glacier Bancorp Inc 778 26,483
Greater Community Bancorp 4,478 73,529
Guaranty Federal
Bancshares Inc 62,556 1,504,847
Heritage Commerce Corp* 15,000 285,300
Lakeland Financial Corp 25,200 1,000,440
Macatawa Bank Corp 59,595 1,924,323
MB Financial Inc 47,818 2,015,529
Mercantile Bank Corp 35,883 1,417,379
Merchants Bancshares Inc 25,000 725,000
Midsouth Bancorp Inc 44,837 1,210,599
MidWestOne Financial
Group Inc 77,412 1,622,556
North Valley Bancorp 17,100 332,253
Northrim BanCorp Inc 81,878 1,924,133
NSD Bancorp Inc 4,800 174,240
Oak Hill Financial Inc 54,373 2,109,129
PAB Bankshares Inc 70,000 917,700
Pelican Financial Inc* 75,000 499,500
Pinnacle Financial
Partners Inc* 127,700 2,888,702
PrivateBancorp Inc 37,200 1,198,956
Prosperity Bancshares Inc 800 23,368
Redwood Empire Bancorp 26,265 777,444
South Financial Group Inc 72,457 2,357,026
Southern Community
Financial Corp 48,065 497,473
Southside Bancshares Inc 46,856 1,070,660
Southwest Bancorp Inc 36,678 897,877
State Financial Services Corp 65,400 1,968,540
Summit Bancshares Inc 4,809 180,337
Susquehanna Bancshares Inc 52,158 1,301,342
Umpqua Holdings Corp 100,288 2,528,260
UnionBanCal Corp 10,606 683,875
United Security Bancshares 29,296 719,217
Vail Banks Inc 78,000 1,014,000
Valley Bancorp* 12,700 542,163
Vineyard National Bancorp Co 91,940 3,021,148
Virginia Commerce Bancorp* 74,975 2,123,292
Western Sierra Bancorp* 64,744 2,483,256
Wilshire Bancorp Inc* 234,944 3,885,974
Yardville National Bancorp 6,200 212,412
--------------
82,319,774
BEVERAGES - 0.2%
Green Mountain Coffee
Roasters Inc* 56,300 1,413,130
Peet's Coffee & Tea Inc* 17,400 460,578
Redhook Ale Brewery Inc* 23,000 80,753
--------------
1,954,461
</Table>
9
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------
BIOTECHNOLOGY - 3.6%
Aksys Ltd*+ 54,800 $ 304,688
Aphton Corp* 77,800 241,958
Arqule Inc* 387,489 2,243,561
Avant
Immunotherapeutics Inc* 82,415 165,654
Curis Inc* 151,153 789,019
Embrex Inc* 146,024 1,934,818
Encysive
Pharmaceuticals Inc* 330,900 3,285,837
Gene Logic Inc* 61,899 227,788
Genetronics Biomedical
Corp* 337,800 1,330,932
GenVec Inc* 321,393 523,871
Harvard Biosciences Inc* 33,300 154,179
Illumina Inc* 52,843 500,952
Immunogen Inc* 95,600 845,104
Keryx
Biopharmaceuticals Inc* 57,647 666,976
Lifecell Corp* 299,250 3,058,355
Maxim
Pharmaceuticals Inc*+ 108,700 328,274
Nanogen Inc* 448,811 3,303,249
Northfield Laboratories Inc* 11,700 263,835
Orchid BioSciences Inc* 307,974 3,541,701
Oscient Pharmaceuticals
Corp* 164,500 600,425
Oxigene Inc* 107,200 589,600
Regeneration T
echnologies Inc* 34,186 358,269
Sangamo Biosciences Inc* 112,300 673,800
Seattle Genetics Inc* 115,055 751,309
Sonus Pharmaceuticals Inc* 96,900 341,088
Stratagene Corp* 53,513 414,726
Third Wave
Technologies Inc* 136,400 1,173,040
--------------
28,613,008
BUILDING MATERIALS - 0.2%
Aaon Inc* 787 12,647
Comfort Systems USA Inc* 43,900 337,152
Craftmade International Inc 54,778 1,080,277
--------------
1,430,076
CHEMICALS - 1.1%
Aceto Corp 104,964 1,998,514
American Vanguard Corp+ 57,000 2,096,460
Balchem Corp 53,800 1,866,322
Landec Corp* 116,500 796,860
Lesco Inc* 107,400 1,384,386
NewMarket Corp* 29,200 581,080
--------------
8,723,622
COAL - 0.2%
Westmoreland Coal Co* 39,500 1,203,170
COMMERCIAL SERVICES - 3.8%
ACE Cash Express Inc* 94,000 2,788,040
Bankrate Inc* 144,800 2,005,480
Cadmus Communications
Corp 67,446 863,309
Carriage Services Inc* 134,500 664,430
Cenveo Inc* 2,500 7,750
Collectors Universe Inc* 14,700 299,733
Cornell Cos Inc* 120,900 $ 1,835,262
Discovery Partners
International Inc* 363,534 1,726,786
Exponent Inc* 73,762 2,027,717
FTI Consulting Inc* 4,050 85,333
Geo Group Inc* 101,400 2,695,212
Healthcare Services
Group Inc 23,700 493,908
HMS Holdings Corp* 114,500 1,029,355
Hudson Highland
Group Inc* 16,295 469,296
Kendle International Inc* 22,390 197,032
Medical Staffing Network
Holdings Inc* 29,900 244,881
Medifast Inc* 37,900 133,408
Multi-Color Corp* 59,136 1,062,083
National Research Corp* 40,300 650,845
NCO Group Inc* 39,131 1,011,536
Opinion Research Corp* 17,400 116,406
Perceptron Inc* 119,274 870,700
Princeton Review Inc* 10,261 63,105
Providence Services Corp* 52,992 1,111,242
RCM Technologies Inc* 173,319 871,968
Rent-Way Inc* 94,300 755,343
Rock of Ages Corp 8,900 64,970
SFBC International Inc* 86,070 3,399,765
SM&A* 153,850 1,312,494
Source Interlink Cos Inc* 145,432 1,931,337
--------------
30,788,726
COMPUTERS - 4.4%
AMX Corp* 13,700 225,639
Ansoft Corp* 50,300 1,016,060
BindView
Development Corp* 254,500 1,107,075
Brooktrout Inc* 143,225 1,720,132
Ciber Inc* 2,498 24,081
Cyberguard Corp* 103,200 650,160
Dataram Corp* 82,533 524,910
Delphax Technologies Inc* 26,950 106,452
Dynamics Research Corp* 80,900 1,442,447
Extended Systems Inc* 301,000 740,460
Immersion Corp* 20,226 147,447
Inforte Corp* 171,700 1,352,996
Innodata Isogen Inc* 156,450 1,539,468
Intervoice-Brite Inc* 257,500 3,437,625
Maxwell Technologies Inc* 72,600 736,164
Merge Technologies Inc* 59,200 1,317,200
Mobility Electronics Inc* 49,800 427,284
Nuance
Communications Inc* 169,600 702,144
Overland Storage Inc* 6,800 113,492
Pomeroy IT Solutions Inc* 99,600 1,514,916
Printronix Inc* 69,800 1,250,118
Rimage Corp* 120,069 1,928,308
SI International Inc* 76,700 2,359,292
Sigma Designs Inc* 210,660 2,092,696
Stratasys Inc* 87,050 2,921,398
TechTeam Global Inc* 141,770 1,441,801
Tier Technologies Inc* 166,600 1,541,050
Transact Technologies Inc* 136,050 2,906,028
Tripos Inc* 19,443 103,631
Xanser Corp* 151,200 423,360
--------------
35,813,834
</Table>
10
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------
COSMETICS/PERSONAL CARE - 1.1%
Chattem Inc* 5,800 $ 191,980
Parlux Fragrances Inc* 381,363 8,573,040
--------------
8,765,020
DISTRIBUTION/WHOLESALE - 1.8%
Advanced Marketing
Services Inc 24,425 245,715
Brightpoint Inc* 138,375 2,703,848
Central European
Distribution Corp* 69,750 2,060,415
Huttig Building Products Inc* 31,800 332,310
Navarre Corp* 521,700 9,181,920
--------------
14,524,208
DIVERSIFIED FINANANCIAL SERVICE - 1.3%
Asta Funding Inc 62,100 1,666,764
BKF Capital Group Inc 52,200 1,978,380
Consumer Portfolio
Services Inc* 332,800 1,620,736
Education Lending
Group Inc* 8,300 128,733
Maxcor Financial Group Inc 110,300 977,258
Nicholas Financial Inc 6,800 97,369
Onyx Acceptance Corp 63,525 1,776,159
Sanders Morris Harris
Group Inc 85,509 1,522,915
United PanAm Financial Corp* 53,100 1,012,086
The Washtenaw Group Inc* 22,100 34,034
--------------
10,814,434
ELECTRIC - 0.3%
Green Mountain Power Corp 51,100 1,473,213
Unitil Corp 24,000 679,200
--------------
2,152,413
ELECTRICAL COMPONENTS & EQUIPMENT - 0.9%
Active Power Inc* 462,309 2,126,621
American Semiconductor
Corp* 125,100 1,862,739
Capstone Turbine Corp* 658,700 1,205,421
The Lamson & Sessions Co* 203,600 1,852,760
Nortech Systems Inc* 1,400 7,895
TII Network Technologies Inc* 143,700 219,861
--------------
7,275,297
ELECTRONICS - 5.0%
Advanced Photonix Inc -
Class A* 156,350 284,557
Axsys Technologies Inc* 61,200 1,075,896
Badger Meter Inc 84,400 2,527,780
Bonso Electronic
International Inc 40,971 216,696
Fargo Electronics Inc* 33,550 502,881
Faro Technologies Inc* 84,500 2,634,710
Frequency Electronics Inc 41,100 610,335
LeCroy Corp* 107,500 2,509,050
Lowrance Electronics Inc 57,900 1,823,792
Measurement Specialties Inc* 99,800 2,540,908
Merix Corp* 146,447 1,687,069
Metrologic Instruments Inc* 105,000 2,231,250
OI Corp* 35,200 334,752
Sonic Solutions Inc* 107,700 2,416,788
Spectrum Control Inc* 69,300 503,118
SRS Labs Inc* 50,800 $ 317,551
Sypris Solutions Inc 12,800 195,968
Taser International Inc*+ 574,000 18,132,660
--------------
40,545,761
ENERGY - ALTERNATE SOURCES - 0.2%
Electric City Corp* 317,900 391,017
Evergreen Solar Inc* 178,400 779,608
--------------
1,170,625
ENGINEERING & CONSTRUCTION - 0.9%
Bluegreen Corp* 104,300 2,068,269
Keith Cos Inc* 47,500 826,025
Layne Christensen Co* 161,900 2,938,485
Michael Baker Corp* 51,700 1,013,320
Perini Corp* 5,500 91,795
--------------
6,937,894
ENTERTAINMENT - 0.6%
Canterbury Park
Holdings Corp* 59,400 1,202,850
Gaylord Entertainment Co* 44,852 1,862,704
Image Entertainment Inc 114,740 681,556
Nevada Gold & Casinos Inc* 96,000 1,171,200
--------------
4,918,310
ENVIRONMENTAL CONTROL - 0.7%
Clean Harbors Inc* 157,947 2,381,841
Darling International Inc* 379,200 1,653,312
Waste Industries USA Inc 130,900 1,623,160
--------------
5,658,313
FOOD - 0.9%
Imperial Sugar Co* 79,016 1,505,255
M&F Worldwide Corp* 40,300 548,886
MGP Ingredients Inc 42,504 367,235
Monterey Gourmet Foods Inc* 230,800 780,104
Rocky Mountain Chocolate
Factory Inc 42,240 618,816
Spartan Stores Inc* 343,650 2,285,272
Village Super Market Inc -
Class A 12,300 450,426
Zapata Corp* 10,900 652,910
--------------
7,208,904
FOREST PRODUCTS & PAPER - 0.1%
Pope & Talbot Inc 56,200 961,582
GAS - 0.3%
Chesapeake Utilities Corp 48,700 1,300,290
EnergySouth Inc 44,250 1,240,770
--------------
2,541,060
HAND/MACHINE TOOLS - 0.1%
Starrett (L.S.) Co - Class A 29,200 601,520
HEALTHCARE PRODUCTS - 5.7%
Abaxis Inc* 169,700 2,458,953
Abiomed Inc*+ 189,902 2,932,087
Arrhythmia Research
Technology Inc* 37,000 780,330
Atrion Corp 39,148 1,771,251
Bruker BioSciences Corp* 13,237 53,345
Caliper Life Sciences Inc* 68,000 512,040
Candela Corp* 118,035 1,340,878
Cantel Medical Corp* 54,800 2,050,616
</Table>
11
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------
HEALTHCARE PRODUCTS (CONTINUED)
Cardiotech International Inc* 201,100 $ 593,245
Compex Technologies Inc* 181,040 845,457
Criticare Systems Inc* 252,650 904,487
Encore Medical Corp* 111,400 756,406
Endocardial Solutions Inc* 208,400 2,438,280
Endologix Inc* 80,000 546,400
Enpath Medical Inc* 24,700 266,760
Implant Sciences Corp* 85,100 829,725
LCA-Vision Inc 241,297 5,643,937
Lifecore Biomedical Inc* 217,646 2,450,694
Medical Action Industries Inc* 40,000 788,000
Merit Medical Systems Inc* 17,500 267,400
Microvision Inc* 109,444 766,108
NMT Medical Inc* 52,600 260,370
Orthologic Corp* 2,000 12,500
Orthovita Inc* 115,800 485,202
PhotoMedex Inc* 188,200 508,140
Quidel Corp* 397,600 2,019,808
Quinton Cardiology
Systems Inc* 253,500 2,676,960
Rita Medical Systems Inc* 224,222 867,739
Somanetics Corp* 234,200 3,609,022
Spectranetics Corp* 159,500 896,549
SRI/Surgical Express Inc* 28,800 142,848
Tutogen Medical Inc* 248,200 627,946
Urologix Inc* 187,000 1,209,890
Utah Medical Products Inc 49,900 1,121,253
Vital Images Inc* 125,936 2,109,428
Zila Inc* 73,500 314,580
--------------
45,858,634
HEALTHCARE SERVICES - 2.4%
Air Methods Corp* 120,655 1,037,633
Almost Family Inc* 5,800 83,810
Amedisys Inc* 171,100 5,541,929
America Service Group Inc* 109,500 2,931,315
Amsurg Corp* 1,200 35,448
Bio-Imaging Technologies Inc* 77,400 424,152
Bio-Reference
Laboratories Inc* 135,600 2,359,440
Chronimed Inc* 60,400 394,412
Dialysis Corp of America* 18,600 454,398
Five Star Quality Care Inc* 34,000 287,980
Horizon Health Corp* 56,300 1,569,644
Medcath Corp* 50,020 1,232,493
Novamed Eyecare Inc* 64,300 423,094
Option Care Inc 4,875 83,801
Psychiatric Solutions Inc* 52,300 1,912,088
Radiologix Inc* 129,000 567,600
--------------
19,339,237
HOLDING COMPANIES-DIVERSIFIED - 0.0%^
Resources American Inc 1,298 42,185
HOME BUILDERS - 0.1%
Hovnanian Enterprises Inc -
Class A* 822 40,705
Meritage Homes Corp* 900 101,430
Nobility Homes Inc 11,300 263,290
Orleans Homebuilders Inc* 24,400 484,340
Technical Olympic USA Inc 1,125 28,552
--------------
918,317
HOME FURNISHINGS - 0.6%
Cobra Electronics Corp* 33,700 $ 273,307
Flexsteel Industries Inc 34,730 612,950
Koss Corp 4,138 77,587
The Rowe Cos* 26,800 138,556
Salton Inc* 171,900 972,954
Stanley Furniture Co Inc 44,300 1,991,285
Universal Electronics Inc* 23,500 413,600
--------------
4,480,239
HOUSEHOLD PRODUCTS/WARES - 0.2%
CNS Inc 105,050 1,318,377
Nashua Corp* 38,600 438,496
--------------
1,756,873
HOUSEWARES - 0.3%
Enesco Group Inc* 120,000 969,600
Lifetime Hoan Corp 70,480 1,120,632
--------------
2,090,232
INSURANCE - 1.7%
American Independence Corp* 45,135 659,422
Brooke Corp 10,800 260,928
Ceres Group Inc* 354,900 1,831,284
Donegal Group Inc 104,302 2,391,645
Fidelity National Financial Inc 45,941 2,098,125
FPIC Insurance Group Inc* 3,200 113,216
Investors Title Co 56,432 2,077,262
Meadowbrook Insurance
Group Inc* 370,400 1,848,296
Merchants Group Inc 3,400 81,600
Penn-America Group Inc 37,010 558,851
PMA Capital Corp - Class A* 65,390 676,785
SCPIE Holdings Inc* 18,200 180,180
Vesta Insurance Group Inc 345,200 1,270,336
--------------
14,047,930
INTERNET - 4.3%
Aladdin Knowledge
Systems Ltd* 101,295 2,507,051
Ask Jeeves Inc* 227,500 6,085,625
@ Road Inc* 79,964 552,551
Blue Coat Systems Inc* 55,300 1,029,133
Captiva Software Corp* 232,000 2,366,400
Corillian Corp* 474,800 2,336,016
Digitas Inc* 134,521 1,284,675
drugstore.com Inc* 23,200 78,880
E-Loan Inc* 258,310 873,088
ePlus Inc* 100,800 1,190,448
FindWhat.com* 52,700 934,371
Harris Interactive Inc* 70,300 555,370
Ibasis Inc*+ 186,500 458,790
I-many Inc* 523,200 784,800
Jupitermedia Corp* 164,000 3,899,920
LookSmart Ltd* 799,626 1,751,181
Marketwatch.com Inc* 211,705 3,810,690
Online Resources Corp* 158,500 1,207,770
Quotesmith.com Inc* 30,400 151,605
Selectica Inc* 94,035 336,645
Sina Corp* 33,900 1,086,834
TheStreet.com Inc* 167,000 681,360
United Online Inc* 14,029 161,754
Valueclick Inc* 38,914 518,724
--------------
34,643,681
</Table>
12
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------
IRON/STEEL - 1.3%
Great Northern Iron Ore
Properties 15,100 $ 1,766,700
Material Sciences Corp* 33,500 602,665
Olympic Steel Inc* 40,300 1,068,353
Oregon Steel Mills Inc* 170,000 3,449,300
Roanoke Electric Steel Corp 90,000 1,860,390
Steel Technologies Inc 50,816 1,397,948
--------------
10,145,356
LEISURE TIME - 0.4%
Aldila Inc 58,479 905,840
Ambassadors International Inc 77,600 1,220,648
Johnson Outdoors Inc* 60,250 1,211,025
--------------
3,337,513
LODGING - 0.7%
Lodgian Inc* 43,000 528,900
Monarch Casino & Resort Inc* 82,400 3,341,320
Suburban Lodges of
America Inc* 40400 0
Wyndham International Inc -
Class A* 1,490,000 1,773,100
--------------
5,643,320
MACHINERY-DIVERSIFIED - 1.0%
Gehl Co* 110,100 2,570,835
Hurco Cos Inc* 219,934 3,628,911
Paul Mueller Co 15,000 451,605
Twin Disc Inc 68,200 1,742,510
--------------
8,393,861
MEDIA - 0.7%
Pegasus Communications
Corp*+ 76,600 719,274
Point.360* 61,200 221,605
Sirius Satellite Radio Inc* 582,300 4,454,595
--------------
5,395,474
METAL FABRICATE/HARDWARE - 0.9%
Hawk Corp* 17,400 150,336
Ladish Co Inc* 64,700 743,403
Metals USA Inc* 220,500 4,090,275
Northwest Pipe Co* 75,600 1,886,220
Webco Industries Inc* 3,800 40,926
--------------
6,911,160
MINING - 0.5%
Brush Engineered
Materials Inc* 153,100 2,832,350
Kinross Gold Corp* 22,353 157,365
Vista Gold Corp* 161,500 613,700
--------------
3,603,415
MISCELLANEOUS MANUFACTURING - 1.8%
Ceradyne Inc* 81,750 4,676,917
EnPro Industries Inc* 13,600 402,152
EXX Inc - Class A* 19,800 32,472
Flanders Corp* 270,542 2,597,203
Park-Ohio Holdings Corp* 235,715 6,105,018
Raven Industries Inc 35,600 758,636
Summa Industries Inc 14,450 143,344
--------------
14,715,742
OFFICE/BUSINESS EQUIPMENT - 0.2%
TRM Corp* 75,750 $ 1,790,730
OIL & GAS - 2.6%
Adams Resources & Energy Inc 5,600 98,784
ATP Oil & Gas Corp* 199,400 3,704,852
Brigham Exploration Co* 198,600 1,787,400
Castle Energy Corp 7,650 95,541
Clayton Williams Energy Inc* 41,500 950,350
Edge Petroleum Corp* 197,750 2,883,195
Giant Industries Inc* 133,800 3,547,038
Harvest Natural
Resources Inc* 95,900 1,656,193
Magnum Hunter
Resources Inc 200 0
Meridian Resource Corp* 404,000 2,444,200
Petrocorp* 6,100 0
Petroleum Development Corp* 74,400 2,869,608
Remington Oil & Gas Corp* 1,400 38,150
Royale Energy Inc* 93,856 674,825
--------------
20,750,136
OIL & GAS SERVICES - 0.2%
Lufkin Industries Inc 47,871 1,910,436
PACKAGING & CONTAINERS - 0.1%
AEP Industries Inc* 58,800 872,004
PHARMACEUTICALS - 5.1%
Alteon Inc* 41,900 54,889
Anika Therapeutics Inc* 131,400 1,202,310
Ap Pharma Inc* 134,600 222,090
Bradley Pharmaceuticals Inc* 2,100 40,740
Collagenex
Pharmaceuticals Inc* 120,724 886,114
D&K Healthcare
Resources Inc 46,730 377,578
Dendreon Corp* 62,575 674,558
Dov Pharmaceuticals Inc* 158,400 2,859,120
Eli Lilly & Co 34,669 1,967,466
Emisphere Technologies Inc* 144,800 586,440
First Horizon
Pharmaceutical Corp* 279,200 6,390,888
Guilford Pharmaceuticals Inc* 133,769 662,156
HealthExtras Inc* 21,900 356,970
Heska Corp* 95,700 111,873
Hi-Tech Pharmacal Co Inc* 112,476 2,074,057
Hollis-Eden
Pharmaceuticals Inc* 49,739 468,541
Insmed Inc* 126,400 277,954
Integrated Biopharma Inc* 100,100 690,690
Intrabiotics
Pharmaceuticals Inc* 112,300 458,184
Introgen Therapeutics Inc*+ 109,175 923,620
Ista Pharmaceuticals Inc* 101,400 1,026,168
La Jolla Pharmaceuticals Co* 522,100 871,907
Mannatech Inc 90,680 1,726,547
Matrixx Initiatives Inc* 90,300 1,046,577
Nastech Pharmaceutical Co* 146,600 1,772,394
National Medical Health
Cardinal Systems Inc* 103,408 2,388,828
Neogen Corp* 69,281 1,569,215
Nutraceutical International
Corp* 107,139 1,651,012
</Table>
13
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------
PHARMACEUTICALS (CONTINUED)
Nuvelo Inc* 136,104 $ 1,340,624
Orphan Medical Inc* 132,279 1,186,543
Pain Therapeutics Inc* 114,000 821,940
Penwest Pharmaceuticals Co* 28,000 334,880
Pharmacyclics Inc* 207,300 2,170,431
Rigel Pharmaceuticals Inc* 35,566 868,522
Vivus Inc* 234,337 1,042,800
--------------
41,104,626
REAL ESTATE - 0.8%
California Coastal
Communities Inc* 109,900 2,637,600
Consolidated - Tomoka
Land Co 43,800 1,883,400
United Capital Corp* 47,900 1,084,935
Wellsford Real Properties Inc* 60,100 866,642
Wilshire Enterprises Inc* 27,300 177,450
--------------
6,650,027
RETAIL - 4.4%
AC Moore Arts & Crafts Inc* 7,400 213,194
America's Car Mart Inc* 74,700 2,838,600
Ark Restaurants Inc 17,250 676,200
Blair Corp 32,200 1,148,252
The Bombay Co Inc* 81,900 452,907
Books-A-Millions Inc 191,906 1,846,136
Buffalo Wild Wings Inc 28,600 995,566
Christopher & Banks Corp 1,350 24,907
Collegiate Pacific Inc 25,000 345,750
Cosi Inc* 36,547 221,109
Dave & Buster's Inc* 143,600 2,900,720
Famous Dave's Of
America Inc* 158,800 2,018,507
Finlay Enterprises Inc* 89,500 1,771,205
First Cash Financial
Services Inc* 116,250 3,105,037
Friendly's Ice Cream Corp* 97,900 822,360
Frisch's Restaurants Inc 47,800 1,139,074
GTSI Corp* 117,235 1,232,140
Hastings Entertainment Inc* 125,400 1,038,312
JOS A Bank Clothiers Inc* 40,125 1,135,538
Luby's Inc* 252,700 1,895,250
Movie Gallery Inc 6,975 133,013
National Vision Inc* 88,600 660,070
PC Mall Inc* 89,993 2,014,043
The Pantry Inc* 3,300 99,297
Rush Enterprises Inc -
Class A* 43,600 707,628
Rush Enterprises Inc -
Class B* 43,600 754,716
The Sportsman's Guide Inc* 110,600 2,488,500
Total Entertainment Rest
Corp* 122,581 1,461,165
Trans World Entertainment
Corp* 70,300 876,641
Zones Inc* 60,000 397,800
--------------
35,413,637
SAVINGS & LOANS - 4.0%
Berkshire Hills Bancorp Inc 34,800 1,292,820
Beverly Hills Bancorp Inc 82,822 836,502
BostonFed Bancorp Inc 400 18,108
Carver Bancorp Inc 107,000 2,135,720
Centrue Financial Corp 26,000 $ 733,460
Citizens First Financial Corp 5,400 175,338
Cooperative Bankshares Inc 1,400 37,814
Fidelity Bancorp Inc 46,080 1,161,216
First Defiance Financial Corp 27,800 791,466
First Federal Bankshares Inc 86,320 1,238,688
First Pactrust Bancorp Inc 53,800 1,471,430
FirstBank NW Corp 21,492 610,588
HMN Financial Inc 55,300 1,775,130
Harrington West Financial
Group Inc 88,320 1,581,814
Heritage Financial Corp 6,100 134,932
Horizon Financial Corp 65,300 1,343,874
Itla Capital Corp* 400 23,516
LSB Corp 76,350 1,414,002
Lincoln Bancorp 14,800 285,477
MASSBANK Corp 23,936 896,403
MutualFirst Financial Inc 6,715 163,510
Mystic Financial Inc 37,178 1,530,246
NewAlliance Bancshares Inc 67,028 1,025,528
NewMil Bancorp Inc 45,600 1,427,280
North Central Bancshares Inc 19,650 814,492
Northeast Bancorp 4,700 107,160
Provident Financial
Holdings Inc 54,849 1,582,394
Pulaski Financial Corp 75,462 1,546,971
PVF Capital Corp 75,720 1,044,936
Rainer Pacific Financial
Group Inc 26,100 467,190
Riverview Bancorp Inc 25,800 571,728
Sovereign Bancorp Inc 1 23
Sterling Financial Corp* 804 31,565
Synergy Financial Group Inc 21,400 287,616
Teche Holding Co 11,400 436,050
Timberland Bancorp Inc 19,800 452,430
Union Community Bancorp 44,600 832,236
Washington Savings Bank 95,850 1,528,807
--------------
31,808,460
SEMICONDUCTORS - 2.3%
ADE Corp* 130,000 2,433,600
Advanced Power
Technology Inc* 206,500 1,598,310
Aetrium Inc* 116,900 458,248
All American
Semiconductor Inc* 13,200 78,144
Alliance Semiconductor Corp* 40,140 148,518
Anadigics Inc* 333,401 1,250,254
Brilliant Corp* 34,825 120,146
Catalyst Semiconductor Inc* 93,173 512,451
Ceva Inc* 157,696 1,436,137
Diodes Inc* 42,150 953,854
Electroglas Inc* 59,498 282,615
FSI International Inc* 77,408 361,495
HI/FN Inc* 28,300 260,926
IXYS Corp* 2,700 27,864
Kopin Corp* 92,100 356,427
LogicVision Inc* 41,500 121,595
Monolithic System
Technology Inc* 57,789 360,025
Nanometrics Inc* 44,800 722,131
PLX Technology Inc* 261,500 2,719,600
Ramtron International Corp* 40,200 160,800
Richardson Electronics Ltd 67,545 716,652
</Table>
14
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------
Rudolph Technologies Inc* 56,464 $ 969,487
Supertex Inc* 304 6,597
Therma-Wave Inc* 160,300 554,638
Virage Logic Corp* 50,897 945,157
White Electronic
Designs Corp* 171,400 1,084,962
--------------
18,640,633
SOFTWARE - 3.7%
Allscripts Healthcare
Soutions Inc* 94,453 1,007,813
American Software Inc 25,238 152,185
Aspen Technology Inc* 58,800 365,148
Authentidate Holding Corp* 63,000 389,970
CAM Commerce Solutions Inc* 93,900 1,592,638
Captaris Inc* 310,700 1,603,212
Computer Programs &
Systems Inc 16,547 383,063
Concord Communications, Inc* 39,000 432,120
Concur Technologies Inc* 112,900 1,005,939
Digi International Inc* 112,936 1,941,370
DocuCorp International Inc* 161,800 1,537,100
Document Sciences Corp* 8,788 42,806
Embarcadero
Technologies Inc* 56,500 531,665
Evolving Systems Inc* 275,900 1,238,791
Intervideo Inc* 17,700 234,171
INVESTools Inc* 22,700 77,180
MetaSolv Inc* 399,900 1,059,735
Mind CTI Ltd 351,310 2,044,624
Moldflow Corp* 163,600 2,601,240
MSC Software Corp* 42,200 441,834
Napster Inc* 208,000 1,955,200
Pervasive Software Inc* 174,800 847,780
Phoenix Technologies Ltd* 28,905 238,755
PLATO Learning Inc* 100,533 748,971
QAD Inc 49,150 438,418
Quality Systems Inc* 23,000 1,375,400
Staktek Holdings Inc* 60,190 279,282
TradeStation Group Inc* 245,974 1,726,737
Vastera Inc* 73,550 193,437
Viewpoint Corp* 199,884 619,640
Witness Systems Inc* 138,850 2,424,321
--------------
29,530,545
TELECOMMUNICATIONS - 4.4%
AirGate PCS Inc* 57,300 2,039,880
Anaren Inc* 31,800 412,128
Avici Systems Inc* 115,900 1,048,895
Aware Inc* 373,800 1,812,930
Boston Communications
Group Inc* 350,945 3,242,732
CalAmp Corp* 293,700 2,625,678
Comarco Inc* 12,100 104,060
Communications Systems Inc 7,000 84,070
Comtech Telecommunications
Corp* 4,700 176,767
CoSine Communications Inc* 17,360 48,261
Crossroads Systems Inc* 331,700 484,614
Ditech Communications Corp* 191,670 2,865,466
EndWave Corp* 103,842 1,812,043
Essex Corp* 11,800 238,950
Forgent Networks Inc* 15,119 32,203
Glenayre Technologies Inc* 541,400 1,180,252
Globecomm Systems Inc* 68,500 $ 435,660
Hickory Tech Corp 26,530 283,606
Lightbridge Inc* 40,500 244,620
MRV Communications Inc* 9,900 36,333
Network Equipment
Technologies Inc* 36,000 353,520
NMS Communications Corp* 92,600 584,306
Optical Cable Corp* 89,225 507,512
Paradyne Networks Corp* 373,900 1,342,301
Performance
Technologies Inc* 148,850 1,384,305
Radyne Comstream Corp* 88,100 658,107
SafeNet Inc* 27,100 995,654
SBA Communications Corp* 11,100 103,008
Sirenza Microdevices Inc* 193,400 1,268,704
Spectralink Corp 82,400 1,168,432
Stratos International Inc 212,779 934,100
Telular Corp* 80,000 680,800
Ubiquitel Inc* 618,000 4,400,160
Verlink Corp* 73,955 200,418
Vyyo Inc* 12,031 103,587
Warwick Valley Telephone Co 5,400 121,662
WJ Communications Inc* 505,100 1,737,544
XETA Technologies Inc* 25,200 90,619
--------------
35,843,887
TEXTILES - 0.3%
Angelica Corp 46,000 1,244,300
Culp Inc* 148,400 1,006,152
Quaker Fabric Corp 24,235 135,716
--------------
2,386,168
TOYS/GAMES/HOBBIES - 0.2%
Department 56 Inc* 73,900 1,230,435
RC2 Corp* 15,700 511,820
--------------
1,742,255
TRANSPORTATION - 1.5%
Celadon Group Inc* 113,900 2,534,275
Dynamex Inc* 148,600 2,753,558
Forward Air Corp* 300 13,410
HUB Group Inc - Class A* 72,300 3,775,506
Marten Transport Ltd* 112,066 2,547,260
Patriot Transportation
Holdings Inc* 16,400 737,820
--------------
12,361,829
TRUCKING & LEASING - 0.3%
Greenbrier Cos Inc 77,800 2,633,530
WATER - 0.2%
Artesian Resources Corp -
Class A 14,850 417,582
Middlesex Water Co 28,088 531,987
Pennichuck Corp 3,466 90,463
York Water Co 40,200 780,282
--------------
1,820,314
TOTAL COMMON STOCKS
(Cost $423,695,443) 769,201,048
--------------
</Table>
15
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------
EXCHANGE TRADED FUNDS- 3.3%
iShares Russell 2000
Index Fund 104,600 $ 13,545,700
iShares Russell 2000 Value
Index Fund 67,809 13,066,794
--------------
TOTAL EXCHANGE TRADED FUNDS
(Cost $18,710,159) 26,612,494
--------------
MONEY MARKET MUTUAL FUNDS - 1.2%
First American Treasury
Obligations Fund - Class S 9,885,435 9,885,435
--------------
TOTAL MONEY MARKET MUTUAL FUNDS
(Cost $9,885,435) 9,885,435
--------------
TOTAL INVESTMENTS - 100.0%
(Cost $452,291,037) 805,698,977
Assets In Excess of Other Liabilities - 0.0%^ 251,059
--------------
NET ASSETS - 100.0% $ 805,950,036
==============
</Table>
* NON-INCOME PRODUCING SECURITY
^ LESS THAN 0.05% OF NET ASSETS
+ THIS SECURITY OR A PORTION OF THIS SECURITY IS OUT ON LOAN AT DECEMBER 31,
2004
TOTAL LOANED SECURITIES HAD A MARKET VALUE OF $33,899,952 AT DECEMBER 31,
2004
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
16
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments at value (cost - $452,291,037) $ 805,698,977
Receivable for investments sold 1,596,694
Receivable for fund shares sold 1,279,737
Dividends receivable 247,867
Interest receivable 23,269
Receivable from securities lending 151,653
Prepaid expenses 55,694
- ---------------------------------------------------------------------------------------------------
Total assets 809,053,891
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for fund shares redeemed 431,414
Payable for investments purchased 2,219,630
Accrued investment adviser fee 297,351
Accrued administration fee 85,135
Accrued directors fee 8,862
Other payables 61,463
- ---------------------------------------------------------------------------------------------------
Total liabilities 3,103,855
- ---------------------------------------------------------------------------------------------------
NET ASSETS $ 805,950,036
===================================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 461,707,091
Undistributed net investment income 107,360
Accumulated net realized loss on investments (9,272,355)
Net unrealized appreciation of investments 353,407,940
- ---------------------------------------------------------------------------------------------------
NET ASSETS $ 805,950,036
===================================================================================================
Shares of common stock outstanding of $.001 par value, 100,000,000
shares authorized 45,364,443
- ---------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share $ 17.77
===================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
17
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
<Table>
INVESTMENT INCOME:
Dividends $ 2,277,266
Interest 64,871
Securities lending 699,860
- ---------------------------------------------------------------------------------------------------
Total investment income 3,041,997
- ---------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 1,839,365
Administration fees 183,937
Accounting fees 35,464
Transfer agent fees 108,610
Audit fees 94,799
Tax fees 2,013
Custody fees 58,360
Legal fees 38,844
Blue sky fees 45,418
Directors fees 16,230
Registration fees 11,938
Interest on outstanding loan payable 38,423
Miscellaneous 66,194
- ---------------------------------------------------------------------------------------------------
Total expenses before advisory fees waived 2,539,595
Less investment advisory fees waived (36,171)
- ---------------------------------------------------------------------------------------------------
Net expenses 2,503,424
NET INVESTMENT INCOME 538,573
- ---------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment securities (9,137,950)
Net realized loss on futures contracts (315)
Net change in unrealized appreciation / deprecitation on investments 81,513,490
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 72,375,225
- ---------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 72,913,798
===================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 2004* JUNE 30, 2004
- ---------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 538,573 $ 808,120
Net realized gain (loss) on investment securities (9,137,950) 7,562,069
Net realized gain (loss) on futures contracts (315) 2,436,990
Net change in unrealized appreciation / depreciation on investments 81,513,490 218,092,749
Net change in unrealized appreciation on futures 0 752,593
- ---------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 72,913,798 229,652,521
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income (1,225,018) 0
From net realized gain (6,669,718) (2,130,005)
- ---------------------------------------------------------------------------------------------------------------------
Net decrease in net assets from distributions (7,894,736) (2,130,005)
- ---------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares 77,187,157 481,488,578
Reinvestment of distributions 7,133,428 1,980,857
Cost of shares redeemed (net of redemption fees of
$116,117 and $809,313 for the period indicated) (160,137,903) (206,285,112)
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from share transactions (75,817,318) 277,184,323
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets (10,798,256) 504,706,839
NET ASSETS:
Beginning of period 816,748,292 312,041,453
- ---------------------------------------------------------------------------------------------------------------------
End of period ** $ 805,950,036 $ 816,748,292
=====================================================================================================================
SHARES ISSUED & REDEEMED:
Issued 4,900,971 35,892,678
Distributions reinvested 403,018 131,969
Redeemed (10,535,587) (13,839,493)
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) (5,231,598) 22,185,154
Outstanding at beginning of period 50,596,041 28,410,887
- ---------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 45,364,443 50,596,041
=====================================================================================================================
* Unaudited
** Including undistributed net investment income of: $ 107,360 $ 793,805
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
19
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
<Table>
<Caption>
SIX MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDED JUNE 30,
2004** 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of
period $ 16.14 $ 10.98 $ 8.70 $ 7.22 $ 6.62 $ 4.96
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income (loss)^ 0.01 0.02 (0.03) 0.00 0.05 0.03
Net realized and unrealized gain 1.80 5.16 2.31 1.49 0.59 1.63
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.81 5.18 2.28 1.49 0.64 1.66
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders:
Net investment income (0.03) 0.00 0.00 (0.01) (0.04) 0.00
Net realized gain (0.15) (0.04) 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.18) (0.04) 0.00 (0.01) (0.04) 0.00
- --------------------------------------------------------------------------------------------------------------------------------
Paid-in-capital from
redemption fees 0.00 0.02 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 17.77 $ 16.14 $ 10.98 $ 8.70 $ 7.22 $ 6.62
================================================================================================================================
TOTAL RETURN 11.19%#+ 47.41% 26.21% + 20.70% + 9.80% + 33.50% +
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 805,950 $ 816,748 $ 312,041 $ 68,824 $ 9,078 $ 2,386
Ratios to average net assets:
Expenses after waivers and
reimbursements 0.68%* 0.67% 0.75% 0.75% 0.75% 0.75%
Expenses before waivers and
reimbursements 0.69%* 0.67% 0.85% 1.01% 1.61% 1.94%
Net investment income (loss)
after waivers and
reimbursements 0.15%* 0.11% (0.14%) (0.05%) 0.77% 0.53%
Portfolio turnover rate 6.5% 19.4% 17.7% 55.8% 215.0% 39.5%
</Table>
* ANNUALIZED
** UNAUDITED
+ TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING
THE PERIOD.
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
20
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 (UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 100,000,000 shares have been classified into the Ultra-Small
Company Market Fund.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Ultra-Small Company Market Fund seeks to provide a long-term total return of
capital, primarily through capital appreciation.
Bridgeway Capital Management, Inc. (the "Adviser") is the adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of the financial statements of the Ultra-Small Company Market Fund
(the "Fund") are in conformity with accounting principles generally accepted in
the United States of America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price (NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other investments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees. The Fund also continues to receive
dividends on the securities loaned. The loans are secured by collateral at least
equal to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
Additionally, the Fund does not have the right to sell or repledge collateral
received in the form of securities unless the borrower goes into default. The
risks to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. As of
December 31, 2004, the Fund had securities on loan valued at $33,899,952 and
received U.S. Treasury securities with a value of $34,346,419 as collateral. It
is the Fund's policy to obtain additional collateral from or return excess
collateral to the borrower by the end of the next business day, following the
valuation date of the securities loaned. Therefore, the value of the collateral
held may be temporarily less than the value of the securities on loan.
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, as
well as the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
21
<Page>
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on
October 15, 1996 and amended on October 22, 2003, that permits the Adviser to
pay up to 0.25% of the Fund's average daily assets for sales and distribution of
Fund shares. Since the cost of distributing Fund shares is borne by the Adviser,
the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's
distributor. Prior to January 2, 2004, the Fund acted as its own distributor.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets. Fees
provided for under the Rule 12b-1 plan of a particular class of the fund are
charged to the operations of such class. All other expenses are allocated among
the classes on relative net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004, there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the current market value of the option
written. If an option which the Fund has written either expires on its
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or a loss if the cost of a closing
purchase tranaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such options is extinguished. If a call option which
the Fund has written is assigned, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
premium originally received. If a put option which the Fund has written is
assigned, the amount of the premium originally received reduces the cost of the
security which the Fund purchased upon exercise of the option. Buying calls
increases the Fund's exposure to the underlying security to the extent of any
premium paid. Buying puts on a stock market index tends to limit the Fund's
exposure to a stock market decline. As of December 31, 2004, there were no
outstanding options.
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, trustees, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred. However, the Fund has not
had prior claims or losses pursuant to these contracts.
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser, a shareholder
of the Fund. As compensation for the advisory services rendered, facilities
furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total
fee, which is computed daily and paid monthly.
22
<Page>
The Fund pays a flat 0.5% annual management fee, computed daily and payable
monthly subject to a maximum expense ratio of 0.75%.
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 0.75% of the value of its average net assets for the six
months ended December 31, 2004. For the six months ended December 31, 2004, the
Adviser waived fees of $36,171.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. These trades are reviewed quarterly by the Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management acts as Administrator
for the Fund. Under the terms of the agreement, Bridgeway Capital Management
provides or arranges for the provision of certain accounting and other
administrative services to the Fund that it is not required to provide under the
terms of the investment advisory agreement. As compensation under the Master
Administrative Agreement, Bridgeway Capital Management receives a monthly fee
from each Fund calculated at the annual rate of 0.05% of average daily net
assets.
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is considered
to be "affiliated" and "interested." Compensation of Mr. Montgomery is borne by
the Adviser rather than the Fund.
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004. The amount attributable to the Ultra-Small Company Market
Fund is disclosed in the Statement of Operations.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Aggregate purchases and sales of long-term investment securities other than U.S.
government securities and cash equivalents were $47,777,650 and $138,923,613
respectively, for the six months ended December 31, 2004.
5. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and distribute substantially all of
its net taxable income including net realized gains on investments, if any, to
its shareholders each year. The fund is not subject to income or excise taxes to
the extent such distributions are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, were as
follows:
<Table>
Gross unrealized appreciation $ 363,232,484
Gross unrealized (depreciation) (9,932,829)
- --------------------------------------------------------------
Net unrealized appreciation
on investments $ 353,299,655
==============================================================
Cost of investments $ 452,399,322
==============================================================
</Table>
The difference between book and tax net unrealized appreciation is wash sale
loss deferrals.
The Fund used $1,248,680 of capital loss carryovers for the year ended June 30,
2004 to offset net realized gains for federal income tax purposes.
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 793,805
Accumulated capital gains 6,666,382
Unrealized appreciation 271,764,012
</Table>
The temporary differences between book and tax are primarily due to wash sales.
As of June 30, 2004, the tax character of the distributions paid were:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
- -------------------------------------------------------------
Ordinary income $ - $ -
Long-term capital gains 710,875 -
</Table>
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually. Distributions to shareholders
are recorded on ex-date. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America.
23
<Page>
6. LINE OF CREDIT:
The Fund has established a line of credit agreement ("LOC") with U.S. Bank, N.A.
(the "Bank" or "Lender") which matures on June 1, 2005 and is renewable annually
at the Bank's option, to be used for temporary or emergency purposes, primarily
for financing redemption payments. Any and all advances under this Facility
would be for a maximum of fifteen (15) business days and are at the sole
discretion of the Lender based on the merits of the specific transaction.
Advances under the Facility are limited to the lesser of $36,750,000 or 33 1/3%
of the Fund's net assets. Borrowings under the line of credit bear interest
based on the Lender's Prime Rate. Principal is due fifteen days after each
advance and at the Maturity. Interest is payable monthly in arrears. The minimum
advance is $1,000. As of December 31, 2004, the Fund had a zero balance with its
secured line of credit. During the six months ended December 31, 2004, the
average borrowing was $1,815,408 with an average rate on borrowings of 4.37%.
7. REDEMPTION FEES:
Shares of Ultra Small Company Market Fund held for less than six months are
subject to a redemption fee of 2.00%, based on the redeemed share's market
value. Redemption fees are paid directly to the Fund.
8. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
24
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge , upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on
the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at
the SEC's Public Reference Room in Washington, D.C. For more information about
the operation of the Public Reference Room, please call the SEC at
1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 64% of the Fund.
25
<Page>
This Page Intentionally Left Blank
<Page>
This Page Intentionally Left Blank
<Page>
[BRIDGEWAY FUNDS LOGO] MICRO-CAP LIMITED FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
Dear Fellow Micro-Cap Limited Shareholder,
The Fund was up 15.57% in the December quarter, compared to the 16.50% return
for our primary benchmark, the CRSP Cap-Based Portfolio 9 Index, 13.28% for our
peer benchmark, the Lipper Small-Cap Stock Index, and 14.09% for the Russell
2000 Index of small companies. It was a strong quarter in absolute terms, but
somewhat mixed on a relative basis.
For the twelve months through December, the Fund was up 9.46%. This was the
first calendar year since inception that our Fund did not beat both it's peer
benchmark and the Russell 2000 Index. The table below presents our December
quarter, one-year, five-year, and life-to-date financial results according to
the formula required by the SEC.
<Table>
<Caption>
DEC. QTR 1 YEAR 5 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 1/1/00 TO 6/30/98 TO
12/31/04 12/31/04 12/31/04 12/31/04
- ----------------------------------------------------------------------------------------------------------
MICRO-CAP LIMITED FUND 15.57% 9.46% 16.04% 20.62%
CRSP Cap-Based Portfolio 9 Index (1) 16.50% 15.11% 12.32% 12.86%
Lipper Small-Cap Stock Funds (2) 13.28% 17.00% 1.94% 5.89%
Russell 2000 Index (small stocks) (3) 14.09% 18.33% 6.61% 6.98%
</Table>
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL
1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com.
(1) THE CRSP CAP-BASED PORTFOLIO 9 INDEX IS AN UNMANAGED INDEX OF 627 MICRO-CAP
COMPANIES COMPILED BY THE CENTER FOR RESEARCH IN SECURITY PRICES, WITH DIVIDENDS
REINVESTED. (2) THE LIPPER SMALL CAP STOCK FUNDS IS AN INDEX OF SMALL-CAP FUNDS
COMPILED BY LIPPER, INC. (3) THE RUSSELL 2000 INDEX IS AN UNMANAGED, MARKET
VALUE WEIGHTED INDEX, WHICH MEASURES PERFORMANCE OF THE 2,000 COMPANIES THAT ARE
BETWEEN THE 1,000TH AND 3,000TH LARGEST IN THE MARKET WITH DIVIDENDS REINVESTED.
IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN
ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED.
According to data from Lipper, Inc., the Micro-Cap Limited Fund ranked 58th of
72 micro-cap funds for the past twelve months, and 15th of 43 such funds over
the past five years, and 5th of 42 funds since inception. Lipper, Inc. is an
independent mutual fund rating service that ranks funds in various fund
categories by making comparative calculations using total returns. The following
graph presents our financial performance by quarter since inception.
GROWTH OF $10,000 INVESTED IN MIRCO-CAP LIMITED FUND AND INDEXES FROM 6/30/98
(INCEPTION) TO 12/31/04
[CHART]
<Table>
<Caption>
BRIDGEWAY
MICRO-CAP LIMITED FUND LIPPER SMALL-CAP STOCK FUNDS RUSSELL 2000 INDEX CRSP CAP-BASED PORTFOLIO 9 INDEX
6/98 10000 10000 10000 10000
9/98 7600 7860 7985 7633
12/98 10760 9314 9288 9068
3/99 9400 8874 8784 8601
6/99 12760 10192 10150 10232
9/99 12320 9966 9508 10026
12/99 16091 13183 11262 12289
3/00 16279 14659 12060 14227
6/00 16426 13786 11604 12798
9/00 18285 14251 11732 13142
12/00 17060 12315 10922 10592
3/01 17370 10463 10211 10839
6/01 21951 12008 11670 13407
9/01 18454 9338 9244 10765
12/01 22213 11167 11193 13955
3/02 23097 11263 11639 14418
6/02 23726 10202 10667 13545
9/02 18813 8283 8384 10245
12/02 18523 8777 8901 11329
3/03 18318 8386 8501 11004
6/03 23946 10124 10492 14446
9/03 27349 10898 11444 16382
12/03 30928 12403 13106 19087
3/04 30236 13024 13927 20103
6/04 29765 13243 13993 20069
9/04 29295 12811 13593 18859
12/04 33854 14512 15509 21971
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
<Page>
SHAREHOLDER LETTER
PERFORMANCE SUMMARY
TRANSLATION: Returns for the first three quarters of the year were weak, and by
the end of the third quarter the Fund's net asset value had dropped by more than
5%. However, a very strong fourth quarter more than made up for the loss,
allowing the Fund to finish up the year with better than a 9% gain.
After the first three (slightly) negative return quarters in calendar 2004, it
was nice to enjoy the strong returns of the December quarter. The first three
quarters of red ink offers a good lesson in the value of avoiding panic and the
urge to sell when things look less than great. It's important to remember,
though, that this "holding through the downturn" strategy works best in concert
with other financial principles, such as saving, avoiding most kinds of debt,
diversifying (and regularly rebalancing) your portfolio, setting aside an
emergency fund, and choosing well managed, low-cost funds whose investment
objectives - anything from very aggressive growth to ultra-low-risk income -
match with the time horizons of the investments you're making. This is a fancy
way of saying that the more years you can afford to wait before tapping a
particular pile of money, the more risk you can afford to take with it.
YEAR-TO-DATE MARKET COMMENTARY
TRANSLATION: While the overall market chugged along in a (surprisingly?) average
fashion, small stocks continued their remarkable run.
Notwithstanding news events (and the commentary of many market pundits), 2004
was a remarkably average year for the broad U.S. market. The combination of
rising interest rates, a declining U.S. dollar, inflation, the presidential
election, war and natural disasters should have produced some extraordinary
results, right? Not exactly . . .
In 2004, the S&P 500 Index of large stocks returned 10.88% - a figure remarkably
close to the 10.4% that the market has returned, on average, every year since
1925. From the perspective of returns, therefore, 2004 was about as average as
it gets. Furthermore, though standard financial commentaries throughout the year
often described a market lurching dramatically between struggle and triumph, the
fact is that the market in 2004 was much LESS volatile than it has been, on
average, over the past 10 years.
In truth, the only really remarkable thing about the market this past year has
been the continued dominance of smaller stocks - good news for shareholders of
our Fund. This was the sixth year in a row that small stocks beat large ones,
the longest period of consecutive annual small-stock dominance in the last eight
decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, investment strategies - such as buying small-cap stocks or value
stocks or real-estate-oriented stocks - that have worked well in the recent past
tend to keep working, as investors get caught up in the excitement and become
increasingly confident that a given strategy is the right way to go. This is
essentially a self-fulfilling prophecy: If everyone agrees that small stocks,
for example, are going to keep going up, they will go up, because everyone buys
them. So-called momentum investing has come in for a lot of negative publicity
in the past few years, because it was investors following a momentum strategy
who both fueled the tech-stock bubble of the late '90s and early 2000 and then
(when they switched strategies) caused it to collapse. The fact is, though, that
a momentum strategy can work for periods of time, and statistically, when small
stocks have done well relative to the overall market in one year, they are more
likely to do well in the next one. So we could conceivably see a record-setting
seventh year in a row of small-stock dominance.
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but the computer models of our Aggressive Investors funds have no such
concerns, and they are pointing to a shift toward larger stocks. Specifically,
over the past 12 months or so our models began finding a larger number of
"attractive" large stocks than at any time I can remember in about five years.
This is almost certainly a function of relative valuation; i.e., based on a
variety of financial measures, and thanks to the multi-year run-up in the price
of small stocks, larger stocks in general are starting to look relatively
attractive again. At Bridgeway, we don't put much effort into trying to guess
the market's direction, rather we're just trying to find one good (in this case,
micro-cap) stock
2
<Page>
at a time. Still, I believe it's likely that the tide will turn back in favor
of large stocks at SOME point in the next couple of years. If this happens,
my job will be to seek to outperform our index by enough to offset this
disadvantage, something we've done a good job of since inception, but not in
the last year. At any rate, it's a good time (ok, any time is a good time) to
make sure your own portfolio is in balance with your long-term plan.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL
TRANSLATION: After the less-than-inspiring returns of the first nine months of
the year, it was great to see some of the companies in our Fund really surge in
the fourth quarter, often on the back of surprisingly strong growth financial
fundamentals, such as sales and earnings.
Fully half of our top gainers for the quarter were companies that provide goods
and/or services to individuals, suggesting that the U.S. consumer is not yet
tapped out, despite having so nobly carried the economy for so long.
Communications companies also performed well. As a sector, they were the
strongest performer of the quarter, after turning in distinctly lackluster
results earlier in the year. However, though sector-analysis can be both
interesting and useful, it's by no means the final word. For proof, look below
at the list of the Fund's worst performers for the year, both of which were also
in the communications industry.
EIGHTEEN OF OUR STOCKS GAINED AT LEAST 30% IN THE QUARTER:
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- ----------------------------------------------------------------------------------------
1 US Unwired Inc Telecommunications 79.1%
2 Bluegreen Corp Entertainment 77.4%
3 EZCORP Inc Retail 77.1%
4 Illumina Inc Biotechnology 60.4%
5 Cantel Medical Corp Healthcare-Products 55.9%
6 Ubiquitel Inc Telecommunications 53.8%
7 NS Group Inc Metal Fabricate/Hardware 52.3%
8 Jakks Pacific Inc Toys/Games/Hobbies 42.4%
9 Greenbrier Cos Inc Trucking & Leasing 41.0%
10 RPC Inc Oil & Gas Services 40.5%
11 Digital River Inc Internet 39.7%
12 Comtech Telecommunications Telecommunications 38.8%
13 HUB Group Inc Transportation 38.5%
14 LCA-Vision Inc Healthcare-Products 36.0%
15 Steiner Leisure LTD Commercial Services 33.6%
16 Building Materials Holding Corp Distribution/Wholesale 33.0%
17 Trizetto Group Internet 32.4%
18 Ambassadors Group Inc Leisure Time 31.9%
</Table>
EZCORP, Inc., a chain of pawn shops and "payday loan" providers based in Austin,
TX, was a surprisingly good member of the team. The company's stock had suffered
during the early part of the year, thanks to disappointing financial results,
but it jumped by 19% in November when EZCORP announced numbers for its fourth
fiscal quarter, indicating that earnings had grown by 66% since the same period
in 2003.
If EZCORP's profits are based on folks' needing a little extra cash to tide them
over, the next company makes it's money at the other end of the spectrum, from
people with a bit more money looking for a vacation home. Bluegreen,
headquartered in Boca Raton, is primarily in the timeshare business, offering
clients "time" at any one of 35 resorts, mostly in the southeastern United
States. Between 1999 and 2003 the company's timeshare sales doubled, and it also
saw solid growth in interest income (from financing the purchases of timeshares)
and sales of land to people who want to build homes in Bluegreen's resort
locations. The stock really took off in the fourth quarter of this year,
however, when the company paid down a chunk of debt and announced record sales
and operating revenues.
3
<Page>
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: Our Fund had a very good fourth quarter, gaining in just three
months roughly 50% more than the S&P 500 Index has typically gained in an entire
year. That doesn't mean we didn't make some bad bets, but only one stock lost
more than 30% for the period.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LOSS
1 SupportSoft Inc Internet -34.7%
</Table>
SupportSoft, of Redwood City, CA, makes software that essentially checks for
problems in primary software applications, like those associated with performing
customer-service functions. It then fixes the problems. Unfortunately, in early
October the company reported results for its September quarter, which included
the fact that revenues were down 9% from the same period in the previous year.
The stock lost roughly half its value (though it then regained some ground), and
attorneys rushed to file class-action lawsuits.
DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT WORKED WELL
TRANSLATION: What worked well in 2004 was the fourth quarter, so to a large
extent, the "good news" stocks of the quarter show up on the "good news" list
for the year.
For the year, ten stocks gained more than 50%.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- ----------------------------------------------------------------------------------------
1 Cantel Medical Corp Healthcare-Products 131.1%
2 NS Group Inc Metal Fabricate/Hardware 97.7%
3 Digital River Inc Internet 88.3%
4 US Unwired Inc Telecommunications 83.6%
5 RPC Inc Oil & Gas Services 73.4%
6 Bluegreen Corp Entertainment 68.3%
7 Ubiquitel Inc Telecommunications 64.6%
8 Petroleum Development Corp Oil & Gas 62.7%
9 EZCORP Inc Retail 58.1%
10 HUB Group Inc Transportation 51.1%
</Table>
We couldn't wrap up the year without talking briefly about Cantel Medical, which
turned in a spectacular triple-digit gain over the past 12 months. Nearly half
of that appreciation was in the fourth quarter, when Cantel's stock shot up by
55% on the back of a 73% increase in earnings, year over year, for the fiscal
quarter ended October 31. To some extent, Cantel's earnings growth is deceptive;
the company does a lot of business with Canada, and the SARS epidemic of 2003
had prevented sales reps from visiting hospitals in the Toronto area. (This is
particularly ironic since Cantel's products focus on preventing and controlling
the spread of infection.) As a result, earnings for 2003 were unusually weak,
making the 2004 comparisons something of a lay-up. Nevertheless, the company has
also benefited from a restructuring of its sales force and expectations of yet
more business in Canada, thanks to the Canadian government's plan to increase
healthcare spending.
DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: We only had two serious dogs in the Fund this year, but they barked
awfully loud, losing more than 50% each. Both are telecommunications companies,
an industry which appreciated 15% for the year. This is proof once again that
dogs can show up in even solid sectors.
4
<Page>
We had two stocks that declined by more than 50% in 2004.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LOSS
- ----------------------------------------------------------------------------------------
1 Carrier Access Corp Telecommunications -52.1%
2 Talk America Holdings Inc Telecommunications -52.0%
</Table>
Carrier Access, the louder of the dogs (by a slender margin) was in part a
victim of its own success: After a stunning 2003, when the stock appreciated by
an astonishing 3,000% (yes, you read that right), the company saw its stock
price drop by more than 50% in July, as consolidation among wireless-phone
companies - to which Carrier Access sells equipment - prompted Carrier to warn
of sharply reduced sales in the second half of the year. The stock dropped again
in September, this time by a "mere" 18%, on further warnings of a revenue
shortfall, and wasn't helped by the departure, in November, of the company's
CFO.
Talk America, by contrast, sells "bundled" phone service (local plus
long-distance). Between March and September, the stock lost about half its
value, thanks to an FCC ruling that cost the company its previously
bargain-priced access to phone lines owned by former "Baby Bells" such as
Verizon and BellSouth. In November the stock jumped by 17% on bright
expectations for the fourth quarter, but that gain came as a drop in the bucket,
and we closed out the year with a painful 52% loss in our position.
TOP TEN HOLDINGS
Our top ten holdings comprised 38.2% of the Fund's net assets at the end of
December, with only one company comprising more than 5%:
<Table>
<Caption>
PERCENT OF
RANK DESCRIPTION INDUSTRY NET ASSETS
- ----------------------------------------------------------------------------------------
1 United Industrial Corp Aerospace/Defense 5.5%
2 NS Group Inc Metal Fabricate/Hardware 4.1%
3 Comtech Telecommunications Telecommunications 4.1%
4 ASV Inc Auto Manufacturers 4.1%
5 Steiner Leisure LTD Commercial Services 3.8%
6 Bluegreen Corp Entertainment 3.7%
7 Metals USA Inc Metal Fabricate/Hardware 3.5%
8 j2 Global Communications Inc Internet 3.3%
9 Middleby Corp Machinery-Diversified 3.1%
10 Digital River Inc Internet 3.0%
- ----------------------------------------------------------------------------------------
38.2%
</Table>
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
At quarter end, Industrials comprised our largest sector representation at 24.6%
of all stocks, followed by Consumer, Cyclical at 17.7% and Communications at
16.5%. The following full table fulfills a new disclosure requirement of the
SEC.
<Table>
<Caption>
SECTOR % OF STOCKS
Basic Materials 4.3%
Communications 16.5%
Consumer, Cyclical 17.7%
Consumer, Non-cyclical 14.8%
Energy 8.2%
Financial 2.9%
Industrial 24.6%
Technology 11.0%
TOTAL 100.0%
</Table>
5
<Page>
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views are not meant as investment advice and should not be considered
predictive in nature. Any favorable (or unfavorable) description of a holding
applies only as of December 31, 2004, unless otherwise stated. Security
positions can and do change thereafter. Discussions of historical performance do
not guarantee and are not indicative of future performance.
THE FUND IS SUBJECT TO ABOVE AVERAGE MARKET RISK (VOLATILITY) AND IS NOT AN
APPROPRIATE INVESTMENT FOR SHORT-TERM INVESTORS. INVESTMENTS IN SMALL COMPANIES
GENERALLY CARRY GREATER RISK THAN IS CUSTOMARILY ASSOCIATED WITH LARGER
COMPANIES FOR VARIOUS REASONS SUCH AS NARROWER MARKETS, LIMITED FINANCIAL
RESOURCES AND LESS LIQUID STOCK.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES,
RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S
WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND
SERVICES, LLC, DISTRIBUTOR. (02/05)
CONCLUSION
As always, we appreciate your feedback. We take your responses seriously and
discuss them at our weekly staff meetings. Please keep your ideas coming--we
continually look for ways to improve our service.
Sincerely,
/s/ John Montgomery
John Montgomery
6
<Page>
DISCLOSURE OF FUND EXPENSES
(UNAUDITED)
As a shareholder to the Fund, you will incur no transactions costs, including
sales charges (loads) on purchases, on reinvested dividends, or on other
distributions. There are also no redemption fees or exchange fees. However, the
fund will incur ongoing costs, including management fees and other Fund
expenses. The following examples are intended to help you understand your
ongoing costs (in dollars) of investing in a Fund and to compare these costs
with the ongoing costs of investing in other mutual funds. The examples are
based on an investment of $1,000 invested on July 1, 2004 and held until
December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY MICRO-CAP LIMITED FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSEPAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- --------------------------------------------------------------------------------
Actual Fund Return $ 1,000.00 $ 1,137.38 $ 9.84
Hypothetical Fund Return $ 1,000.00 $ 1,016.00 $ 9.28
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.83% MULTIPLIED
BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF
DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR
(TO REFLECT THE ONE HALF-YEAR PERIOD).
7
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------------
COMMON STOCKS - 100.0%
ADVERTISING - 0.5%
Ventiv Health Inc* 16,100 $ 327,152
AEROSPACE/DEFENSE - 5.5%
United Industrial Corp 88,500 3,428,490
AUTO MANUFACTURERS - 4.1%
ASV Inc* 53,113 2,544,113
AUTO PARTS & Equipment - 0.6%
Noble International Ltd 19,500 397,605
BANKS - 0.6%
Old Second Bancorp Inc 12,254 390,658
BIOTECHNOLOGY - 0.7%
Illumina Inc* 42,602 403,867
COMMERCIAL SERVICES - 4.8%
ACE Cash Express Inc* 21,000 622,860
Steiner Leisure Ltd* 78,050 2,332,134
--------------
2,954,994
COMPUTERS - 1.0%
Agilysys Inc 36,000 617,040
DISTRIBUTION/WHOLESALE - 2.4%
Building Materials
Holding Corp 39,100 1,497,139
ELECTRONICS - 3.9%
II-VI Inc* 27,000 1,147,230
Itron Inc* 39,500 944,445
Molecular Devices Corp* 15,000 301,500
--------------
2,393,175
ENTERTAINMENT - 3.8%
Bluegreen Corp* 116,900 2,318,127
ENVIRONMENTAL CONTROL - 0.2%
Duratek Inc* 5,200 129,532
FOOD - 0.9%
Nash Finch Co 15,000 566,400
HEALTHCARE PRODUCTS - 3.9%
Cantel Medical Corp* 13,400 501,428
LCA - Vision Inc 62,550 1,463,044
Lifeline Systems Inc* 17,200 443,072
--------------
2,407,544
HEALTHCARE SERVICES - 4.2%
Amedisys Inc* 52,900 1,713,431
America Service Group Inc* 21,150 566,185
Res-Care Inc* 20,300 308,966
--------------
2,588,582
INSURANCE - 0.7%
Penn-America Group Inc 26,700 403,170
INTERNET - 7.2%
Digital River Inc* 44,700 $ 1,859,967
j2 Global
Communications Inc* 58,900 2,032,050
Trizetto Group Inc* 60,000 570,000
--------------
4,462,017
IRON/STEEL - 3.0%
Ryerson Tull Inc 116,700 1,838,025
LEISURE TIME - 0.9%
Ambassadors Group Inc 15,000 534,150
MACHINERY-DIVERSIFIED - 3.1%
Middleby Corp 38,200 1,937,504
METAL FABRICATE/HARDWARE - 7.6%
Metals USA Inc* 116,400 2,159,220
NS Group Inc* 92,300 2,565,940
--------------
4,725,160
MINING - 1.3%
Titanium Metals Corp* 34,000 820,760
OIL & GAS - 7.7%
Giant Industries Inc* 45,000 1,192,950
Petroleum Development
Corp* 25,600 987,392
Plains Exploration &
Production Co* 58,774 1,528,124
Goodrich Petroleum Corp* 65,800 1,066,618
--------------
4,775,084
OIL & GAS SERVICES - 0.5%
RPC Inc 13,000 326,560
PHARMACEUTICALS - 0.4%
National Medical Health
Card Systems Inc* 11,100 256,421
RETAIL - 5.8%
Brookstone Inc* 49,396 965,692
Denny's Corp 47,000 211,500
EZCORP Inc* 17,694 272,665
The Pantry Inc* 33,616 1,011,505
Smart & Final Inc* 40,000 575,600
Systemax Inc* 74,800 549,032
--------------
3,585,994
SAVINGS & LOANS - 1.5%
Sterling Financial Corp* 23,328 915,857
SEMICONDUCTORS - 0.8%
ADE Corp* 27,800 520,416
SOFTWARE - 9.2%
Quality Systems Inc* 24,200 1,447,160
SS&C Technologies Inc 86,500 1,786,225
Seachange International Inc* 91,000 1,587,040
Witness Systems Inc* 50,000 873,000
--------------
5,693,425
</Table>
8
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 8.7%
ACT Teleconferencing Inc* 207,287 $ 273,619
Comtech
Telecommunications Corp* 68,000 2,557,480
Ubiquitel Inc* 237,000 1,687,440
US Unwired Inc* 182,300 875,040
--------------
5,393,579
TOYS/GAMES/HOBBIES - 0.2%
Jakks Pacific Inc* 4,580 101,264
TRANSPORTATION - 3.0%
HUB Group Inc, Class A* 25,700 1,342,054
Nordic American Tanker
Shipping Ltd 12,500 488,125
--------------
1,830,179
TRUCKING & LEASING - 1.3%
Greenbrier Companies Inc 23,500 795,475
--------------
TOTAL COMMON STOCKS
(Cost $41,531,042) 61,879,458
--------------
MONEY MARKET MUTUAL FUNDS - 0.3%
First American Treasury
Obligations Fund - Class S 188,161 188,161
--------------
TOTAL MONEY MARKET MUTUAL FUNDS
(Cost $188,161) 188,161
--------------
TOTAL INVESTMENTS - 100.3%
(Cost $41,719,203) 62,067,619
Liabilities in Excess of other Assets - (0.3%) (177,811)
--------------
NET ASSETS - 100.0% $ 61,889,808
==============
</Table>
* Non-income producing security
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
ASSETS:
Investments at value (cost - $41,719,203) $ 62,067,619
Receivable for fund shares sold 9,909
Dividends receivable 4,598
Interest receivable 2,649
Prepaid expenses 2,033
- -------------------------------------------------------------------------------------------------------------
Total assets 62,086,808
- -------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for fund shares redeemed 52
Accrued investment adviser fee 132,928
Accrued administration fee 25,555
Accrued directors fee 817
Other payables 37,648
- -------------------------------------------------------------------------------------------------------------
Total liabilities 197,000
- -------------------------------------------------------------------------------------------------------------
NET ASSETS $ 61,889,808
=============================================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 40,115,752
Accumulated net investment loss (437,808)
Accumulated net realized gain on investments 1,863,448
Net unrealized appreciation of investments 20,348,416
- -------------------------------------------------------------------------------------------------------------
NET ASSETS $ 61,889,808
=============================================================================================================
Shares of common stock outstanding of $.001 par value, 10,000,000 shares authorized 6,033,553
- -------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share $ 10.26
=============================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INVESTMENT INCOME:
Dividends $ 61,204
Interest 10,061
- -------------------------------------------------------------------------------------------------------------
Total investment income 71,265
EXPENSES:
Investment advisory fees 420,405
Administration fees 13,929
Accounting fees 25,631
Transfer agent fees 22,310
Audit fees 5,093
Tax fees 6,013
Custody fees 3,499
Legal fees 2,846
Blue sky fees 3,520
Directors fees 1,106
Miscellaneous 4,721
- -------------------------------------------------------------------------------------------------------------
Total expenses 509,073
NET INVESTMENT LOSS (437,808)
- -------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment securities 1,628,268
Net change in unrealized appreciation / depreciation on investments 6,290,618
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 7,918,886
- -------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,481,078
=============================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 2004* JUNE 30, 2004
- -------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss $ (437,808) $ (966,813)
Net realized gain on investment securities 1,628,268 16,897,460
Net change in unrealized appreciation / depreciation on investments 6,290,618 (1,547,034)
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 7,481,078 14,383,613
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net realized gain (10,119,533) (5,574,303)
- -------------------------------------------------------------------------------------------------------------------
Net decrease in net assets from distributions (10,119,533) (5,574,303)
- -------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares 112,310 745,182
Reinvestment of distributions 9,801,849 5,230,736
Cost of shares redeemed (3,136,199) (13,457,002)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from share transactions 6,777,960 (7,481,084)
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets 4,139,505 1,328,226
NET ASSETS:
Beginning of period 57,750,303 56,422,077
- -------------------------------------------------------------------------------------------------------------------
End of period ** $ 61,889,808 $ 57,750,303
===================================================================================================================
SHARES ISSUED & REDEEMED:
Issued 10,786 69,944
Distributions reinvested 947,955 460,436
Redeemed (297,296) (1,185,129)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) 661,445 (654,749)
Outstanding at beginning of period 5,372,108 6,026,857
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 6,033,553 5,372,108
===================================================================================================================
* Unaudited
** Including accumulated net investment loss of: $ (437,808) $ 0
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
<Table>
<Caption>
SIX MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDEDJUNE 30,
2004** 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 10.75 $ 9.36 $ 10.19 $ 9.92 $ 7.86 $ 6.38
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment loss^ (0.08) (0.17) (0.11) (0.12) (0.05) (0.09)
Net realized and unrealized gain 1.57 2.49 0.01 0.87 2.53 1.87
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.49 2.32 (0.10) 0.75 2.48 1.78
- ----------------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders:
Net realized gain (1.98) (0.93) (0.73) (0.48) (0.42) (0.30)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.98) (0.93) (0.73) (0.48) (0.42) (0.30)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.26 $ 10.75 $ 9.36 $ 10.19 $ 9.92 $ 7.86
==================================================================================================================================
TOTAL RETURN+ 13.74% # 24.30% 0.93% 8.09% 33.64% 28.73%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 61,890 $ 57,750 $ 56,422 $ 57,885 $ 51,451 $ 24,773
Ratios to average net assets:
Expenses after waivers and
reimbursements 1.83%* 1.79% 1.90% 1.90% 1.90% 1.90%
Expenses before waivers and
reimbursements 1.83%* 1.79% 2.13% 1.94% 2.09% 2.36%
Net investment loss after
waivers and reimbursements (1.57%)* (1.50%) (1.35%) (1.22%) (0.62%) (1.25%)
Portfolio turnover rate 41.0% 98.2% 99.1% 124.0% 74.3% 86.7%
</Table>
* ANNUALIZED
** UNAUDITED
+ TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING
THE PERIOD.
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 (UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 10,000,000 shares have been classified into the Micro-Cap
Limited Fund.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Micro-Cap Limited Fund was offered to the public beginning June 22, 1998 in
accordance with the subscription offering. Until July 1, 1998, the Fund's
operations were restricted to accepting subscription funds. On July 1, 1998, the
Fund began investing in micro-cap stocks and commenced other operations. The
Fund closed to new investors when net assets exceeded $27.5 million on August
21, 2000, and closed to all investors on July 7, 2003.
The Micro-Cap Limited Fund seeks to provide a long-term total return of capital,
primarily through capital appreciation.
Bridgeway Capital Management, Inc. (the "Adviser") is the adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of the financial statements of the Micro-Cap Limited Fund (the
"Fund") are in conformity with accounting principles generally accepted in the
United States of America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other investments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees.
14
<Page>
The Fund also continues to receive dividends on the securities loaned. The loans
are secured by collateral at least equal, to the fair value of the securities
loaned plus accrued interest. Gain or loss in the fair value of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund. The Fund has the right under the lending agreement to recover the
securities from the borrower on demand. Additionally, the Fund does not have the
right to sell or repledge collateral received in the form of securities unless
the borrower goes into default. The risks to the Fund of securities lending are
that the borrower may not provide additional collateral when required or return
the securities when due. As of December 31, 2004, the Fund had no securities on
loan. It is the Fund's policy to obtain additional collateral from or return
excess collateral to the borrower by the end of the next business day, following
the valuation date of the securities loaned. Therefore, the value of the
collateral held may be temporarily less than the value of the securities on
loan.
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, as
well as the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on
October 15, 1996 and amended on October 22, 2003, that permits the Adviser to
pay up to 0.25% of the Fund's average daily assets for sales and distribution of
Fund shares. Since the cost of distributing Fund shares is borne by the Adviser,
the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's
distributor. Prior to January 2, 2004, the Fund acted as its own distributor.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004, there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the
15
<Page>
current market value of the option written. If an option that the Fund has
written either expires on its stipulated expiration date, or if the Fund enters
into a closing purchase transaction, the Fund realizes a gain (or a loss if the
cost of a closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such options is extinguished.
If a call option that the Fund has written is assigned, the Fund realizes a gain
or loss from the sale of the underlying security and the proceeds from such sale
are increased by the premium originally received. If a put option that the Fund
has written is assigned, the amount of the premium originally received reduces
the cost of the security that the Fund purchased upon exercise of the option.
Buying calls increases the Fund's exposure to the underlying security to the
extent of any premium paid. Buying puts on a stock market index tends to limit
the Fund's exposure to a stock market decline. All options purchased by the Fund
were listed on exchanges and considered liquid positions with readily available
market quotes. As of December 31, 2004, there were no outstanding options.
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, directors, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred. However, the Fund has not
had prior claims or losses pursuant to these contracts.
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser, a shareholder
of the Fund. As compensation for the advisory services rendered, facilities
furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total
fee, which is comprised of a Base Fee and a Performance Adjustment. The Base Fee
equals the Base Fee Rate times the average daily net assets of the Fund. The
Base Fee Rate is based on the following annual rates: 0.90% of the first $250
million of the Fund's average daily net assets, 0.875% of the next $250 million
and 0.85% of any excess over $500 million. However, during the quarter that the
Fund's net assets range from $27,500,000 to $55,000,000 the Advisory Fee will be
determined as if the Fund had $55,000,000 under management (that is, $55 million
times 0.009 equals $495,000). This is limited to a maximum annualized ratio of
1.49% of the assets in the quarter the Advisory Fee is determined.
The Performance Adjustment equals 2.87% times the difference in cumulative total
return between the Fund and the CRSP Cap-based Portfolio 9 Index with dividends
reinvested (hereinafter "Index") over a rolling five-year performance period.
The Performance Adjustment Rate varies from a minimum of -0.70% to a maximum of
+0.70% However, the Performance Adjustment Rate is zero if the difference
between the cumulative Fund performance and the Index performance is less than
or equal to 2%.
On September 15, 2004, the Securities and Exchange Commision ("SEC") announced
that it accepted a settlement offer to an administrative proceeding against the
Adviser and John Montgomery concerning non-compliance with Rule 205-2 of the
Investment Advisers Act of 1940, dealing with the calculation of
performance-based fees of the Fund. Rule 205-2 requires the performance rate to
be applied to the average of net assets over the performance period (a five-year
rolling period for this Fund) rather than average daily net assets as was done
previously. Because the assets were generally increasing over time and the Fund
had beaten its market benchmark over most time periods, the Fund overpaid
advisory fees in the amount of $307,989. The Adviser will repay this amount,
plus interest, to current and previous shareholders of the Fund after SEC
approval of a proposed repayment plan. In addition, current shareholders must
approve new contracts between the Fund and the Adviser at an upcoming
shareholder meeting. Both the Fund and Adviser have taken steps necessary to
strengthen the compliance program.
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 1.90% of the value of its average net assets for the six
months ended
16
<Page>
December 31, 2004. There were no reimbursements to the Fundfor thesix months
ended December 31, 2004.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. These trades are reviewed quarterly by the Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management acts as Administrator
for the Fund. Under the terms of the agreement, Bridgeway Capital Management
provides or arranges for the provision of certain accounting and other
administrative services to the Fund that it is not required to provide under the
terms of the investment advisory agreement. As compensation under the Master
Administrative Agreement, Bridgeway Capital Management receives a monthly fee
from each Fund calculated at the annual rate of 0.05% of average daily net
assets.
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is considered
to be "affiliated" and "interested." Compensation of Mr. Montgomery is borne by
the Adviser rather than the Fund.
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004. The amount attributable to the Micro-Cap Limited Fund is
disclosed in the Statement of Operations.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Aggregate purchases and sales of investment securities, other than U.S.
government securities and cash equivalents were $22,685,058 and $26,901,428,
respectively, for the six months ended December 31, 2004.
5. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and distribute substantially all of
its net taxable income including net realized gains on investments, if any, to
its shareholders each year. The fund is not subject to income or excise taxes to
the extent such distributions are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, were as
follows:
<Table>
Gross unrealized appreciation $ 20,768,491
Gross unrealized (depreciation) (420,075)
- --------------------------------------------------------------
Net unrealized appreciation
on investments $ 20,348,416
==============================================================
Cost of investments $ 41,719,203
==============================================================
</Table>
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 5,138,085
Accumulated capital gains 5,216,628
Unrealized appreciation 14,057,798
</Table>
The temporary differences between book and tax are primarily due to wash sales
and post October losses.
As of June 30, 2004, the tax character of the distributions paid were:
<Table>
<Caption>
YEAR ENDED YEARENDED
JUNE 30, 2004 JUNE 30, 2003
- ------------------------------------------------------------
Ordinary income $ 1,375,981 $ -
Long-term capital gains 5,054,263 3,989,955
Return on capital - 18,006
</Table>
Distribuitions of net realized short-term capital gains are, for federal income
tax purposes, taxable as ordinary income to shareholders.
The ordinary income distributions did not qualify for the dividends received
deductions of corporate shareholders.
17
<Page>
During the year ended June 30, 2004, the Fund paid a long-term capital gain of
$0.7309 per share to shareholders of record.
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually. Distributions to shareholders
are recorded on ex-date. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America.
6. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
18
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the
SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the
SEC's Public Reference Room in Washington, D.C. For more information about the
operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 35% of the Fund.
19
<Page>
[BRIDGEWAY FUNDS LOGO] SMALL-CAP GROWTH FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
Dear Small-Cap Growth Shareholder,
Our Fund had a positive return of 16.46% for the December 2004 quarter, compared
to a 15.08% return for our primary market benchmark, the Russell 2000 Growth
Index, and a 14.86% return of our peer benchmark, the Lipper Small-Cap Growth
Index.
The table below presents our performance for the December quarter and 1 year,
and annualized performance since inception, followed by a graph of performance
since inception as well as a new, SEC-mandated breakdown of sector
representation in the Fund.
<Table>
<Caption>
DEC. QTR. 1 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 10/31/03 TO
12/31/04 12/31/04 12/31/04
- --------------------------------------------------------------------------------
SMALL-CAP GROWTH FUND-CLASS N 16.46% 11.59% 12.39%
SMALL-CAP GROWTH FUND-CLASS R 16.50% 11.39% 12.22%
Russell 2000 Growth Index 15.08% 14.31% 15.71%
Lipper Small-Cap Growth Index 14.86% 10.79% 11.80%
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
DATA QUOTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
FOR THE MOST RECENT MONTH END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT
THE FUND'S WEBSITE AT www.bridgeway.com
THE RUSSELL 2000 GROWTH INDEX IS AN UNMANAGED INDEX WHICH CONSISTS OF STOCKS IN
THE RUSSELL 2000 INDEX WITH HIGHER PRICE-TO-BOOK RATIOS AND HIGHER FORECASTED
GROWTH VALUES. THE LIPPER SMALL-CAP GROWTH INDEX IS AN INDEX OF SMALL-COMPANY,
GROWTH-ORIENTED FUNDS COMPILED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS
LONGER THAN ONE YEAR ARE ANNUALIZED.
[CHART]
GROWTH OF $10,000 INVESTED IN SMALL-CAP GROWTH FUND AND INDEXES FROM 10/31/03
(INCEPTION) TO 12/31/04
<Table>
<Caption>
BRIDGEWAY BRIDGEWAY LIPPER
SMALL-CAP GROWTH FUND - CLASS N SMALL-CAP GROWTH FUND - CLASS R RUSSELL 2000 INDEX SMALL-CAP GROWTH FUND INDEX
10/03 10000 10000 10000 10000
12/03 10270 10270 10372 10281
3/04 10520 10510 10951 10647
6/04 10840 10830 10961 10633
9/04 9840 9820 10302 9917
12/04 11460 11440 11856 11390
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
<Page>
SHAREHOLDER LETTER
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
<Table>
<Caption>
INDUSTRY % OF NET ASSETS
- ----------------------------------------------
Basic Materials 1.0%
Communications 16.7%
Consumer, Cyclical 24.9%
Consumer, Non-cyclical 24.6%
Energy 5.0%
Financial 3.5%
Industrial 13.5%
Technology 10.8%
- ----------------------------------------------
TOTAL 100.0%
</Table>
PERFORMANCE SUMMARY
TRANSLATION: For the December quarter, both share classes of the Fund beat both
the Russell 2000 Growth Index of small, growth-oriented stocks and the
peer-group average. For the year, however, both share classes of the Fund
underperformed the Russell 2000 Growth Index, but outperformed the peer-group
average.
WE ARE NOT PLEASED WITH THESE RESULTS. However, the difference in the Fund's
relative performance for the quarter and the year is interesting: Clearly, we
were lagging our benchmark index and our peer group fairly badly during the
first nine months of the year, and then sprinted ahead in the final quarter,
though not quite enough to make up for the earlier shortfall. We say this not to
excuse our performance, but because it offers a good reminder of the value of
sticking with investment decisions and resisting panic and the urge to sell when
things look less than great. Remember, though, that this "holding through the
downturn" strategy works best in concert with other financial principles, such
as saving, avoiding most kinds of debt, diversifying (and regularly rebalancing)
your portfolio, setting aside an emergency fund, and choosing well- managed,
low-cost funds whose investment objectives - anything from very aggressive
growth to ultra-low-risk income - matches with the time-horizons of the
investments you're making. This is a fancy way of saying that the more years you
can afford to wait before tapping a particular pile of money, the more risk you
can afford to take with it.
YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S
DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR).
TRANSLATION: Notwithstanding news events (and the commentary of many market
pundits), 2004 was a remarkably average year. The combination of rising interest
rates, a declining U.S. dollar, inflation, the presidential election, war and
natural disasters should have produced some extraordinary results, right? Not so
fast....
Let's look at the statistics purely from a market perspective. Over the 10 years
through the 31st of December, 2004, the S&P 500 Index of large companies
returned an average of 12.05% per year. (I know, that sounds unbelievable, given
how weak the past few years' performance has been, but the market of the mid-
and late 1990s really was pretty remarkable.) That's only about one and one-half
percentage points better than the Index's return for 2004. Furthermore, if we
look all the way back to 1925, we see that the market has returned an average of
10.4% per year - and that's over a 79-year period that includes the Great
Depression, World War II, the white-hot "go-go" market of the 1960s and the
brutal bear market of the early 1970s. In about two-thirds of those years, the
Index either beat or lagged that 10.4% average by more than 10 percentage
points. From that perspective, therefore, 2004's return of 10.88% was about as
average as you can get.
.. . . but wasn't this a very volatile year? No. In fact, the actual variation of
monthly returns in 2004 was about half of the average of the preceding decade.
Throughout that 10-year period, only one year - 1995 - was less volatile. In
other words, in 2004 the stock market "bounced around" a whole lot LESS than
normal. This frees up tremendous emotional energy to spend on more important
things (including actually finding the next good stock pick).
In conclusion, what is remarkable about 2004 is how average it was in terms of
returns and how "tame" it was with respect
2
<Page>
to volatility. Not what you might conclude from reading standard financial
commentaries, many of which described a market lurching dramatically between
struggle and triumph. All that drama can be very compelling, but it doesn't
necessarily lead to an accurate understanding of the market's behavior in the
long run, nor does it necessarily produce sound investment decisions. For that
reason, though I have four computer screens in my office, none of them runs a
ticker, and I frequently go home at the end of the day without knowing whether
the overall market was up or down.
All that said, the market of 2004 did exhibit some unusual characteristics, in
particular the continued - and extraordinary - performance of smaller stocks.
This was the sixth year in a row that small stocks beat large ones, the longest
period of consecutive annual small-stock dominance in the last eight decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, investment strategies - such as buying small-cap stocks or value
stocks or real-estate-oriented stocks - that have worked well in the recent past
tend to keep working, as investors get caught up in the excitement and become
increasingly confident that a given strategy is the right way to go. This is
essentially a self-fulfilling prophecy: If everyone agrees that small stocks,
for example, are going to keep going up, they will go up, because everyone buys
them. So-called momentum investing has come in for a lot of negative publicity
in the past few years, because it was investors following a momentum strategy
who both fueled the tech-stocks bubble of the late '90s and early 2000 and then
(when they switched strategies) caused it to collapse. The fact is, though, that
a momentum strategy can work for periods of time, and statistically, when small
stocks have done well relative to the overall market in one year, they are more
likely to do well in the next one. So we could conceivably see a record-setting
seventh year in a row of small-stock dominance - hardly what investors in a
large-stock fund want to hear.
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but our computer stock picking models have no such concerns, and they
are pointing to a shift toward larger stocks. Specifically, over the past 12
months or so our models began finding a larger number of "attractive" large
stocks than at any time I can remember in about five years. This is almost
certainly a function of relative valuation; i.e., based on a variety of
financial measures, and thanks to the multi-year run-up in the price of small
stocks, larger stocks in general are starting to look relatively attractive
again. At Bridgeway, we don't put much effort into trying to guess the market's
direction; we're just trying to find one good stock (of any size) at a time.
Still, I believe it's likely that the tide will turn back in favor of large
stocks at SOME point in the next couple of years. It's a good time (ok, any time
is a good time) to make sure your own portfolio is in balance with your
long-term plan.
Of course, company size is hardly the only investment variable. "Style," too,
plays a significant role, and 2004 was pretty bad for "growth"-oriented stocks,
building on a very bad five-year trend. The following bar chart shows the
relative performance of growth versus value oriented large stocks, over the past
one, three, and five years ended 12/31/04, based on data from Morningstar:
This pattern of weak growth-stock performance is exactly what one would
expect...during the bear-market phase of a stock-
[CHART]
<Table>
<Caption>
VALUE GROWTH
1 Year 14.05% 0.19%
3 Year 6.95% -4.35%
5 Year 4.54% -16.22%
</Table>
3
<Page>
market cycle. But from a historical perspective, it's distinctly unusual for the
last two years of a recovery. Our models are suggesting a shift toward growth
stocks, but not as strongly as they indicate a shift toward large stocks. My
conclusion from all this: make sure your portfolio is in balance with your
target allocation and long term plan.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL
TRANSLATION: The Communications sector really came through for us in the fourth
quarter of the year: Four stocks - three of them in Communications - appreciated
by more than 50% for the period.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- -----------------------------------------------------------------------------------
1 Travelzoo Inc. Internet 83.5%
2 UbiquiTel Inc. Telecommunications 78.0%
3 Essex Corp. Telecommunications 75.6%
4 Faro Technologies Inc. Electronics 53.3%
</Table>
Travelzoo crawls the web looking for travel-related deals, which it passes on to
readers of its newsletters and website. On April 25, the company was still a
tiny Internet outfit that few people had heard of. But on April 26, the company
announced its first-quarter numbers. Earnings, said Travelzoo, were up 160% over
the previous year, on revenue gains of 70%. Flash forward to third-quarter
results, which featured a 240% rise in earnings and a doubling of revenues.
Flash again to the end of the year, at which point Travelzoo had seen its share
price increase by an astonishing 1003% in 12 months. This has been a
momentum-story par excellence - sometimes they really do work - and our only
regret is that we didn't buy the company a lot earlier.
Second-best performer UbiquiTel had a much less dramatic year, though its
transition to profitability, in the third quarter, propelled the stock to a
pretty impressive gain in the last three months of 2004. It didn't hurt that the
company - which provides wireless phone service in the western part of the
country - had boosted its subscriber-base by 32% over the third quarter of 2003.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: We're happy to say that no stocks in the Fund lost more than 50% in
the December quarter.
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT WORKED
TRANSLATION: Thirteen stocks in the Fund gained more than 50% for the year, and
five of them appreciated by more than 100%.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- -----------------------------------------------------------------------------------
1 Ceradyne Inc Miscellaneous Manufacturing 125.8%
2 Urban Outfitters Inc Retail 121.7%
3 Essex Corp. Telecommunications 112.2%
4 Marine Products Corp Leisure Time 107.3%
5 Travelzoo Inc. Internet 104.7%
6 Ubiquitel Inc Telecommunications 76.3%
7 Deckers Outdoor Corp Apparel 73.3%
8 Cognizant Tech. Solutions Corp Computers 72.1%
9 Coldwater Creek Inc Retail 65.1%
10 JB Hunt Transport Services Inc Transportation 63.2%
11 Guitar Center Inc Retail 61.4%
12 Bright Horizons Family Sol. Inc Commercial Services 54.2%
13 Infospace Inc Internet 52.6%
</Table>
4
<Page>
Had we bought into Travelzoo just a little earlier (see section on quarterly
results, above), it would almost certainly have been our top performer for the
year. Still, we don't have much quarrel with a 104% return, and we're happy to
highlight Ceradyne, which does head the list. Ceradyne makes a variety of
sophisticated ceramic products that are used in medical and industrial
applications. What fueled the stock this year, though, were Ceradyne's
defense-related products, including ceramic plates used to protect Humvees and
other military vehicles. With U.S. soldiers busy in Iraq, Afghanistan, and
elsewhere, the company had a lot of business; earnings for the first quarter
were up 181% over the same period in 2003, and that pattern persisted for the
rest of the year, with the stock price marching right alongside.
Interestingly, the second-best performer, Urban Outfitters, was also a steady
gainer for the year. The good news started with the release of the company's
results from the fiscal fourth quarter of 2003 (ended January 31). The upscale
retailer of trendy women's clothing and accessories had doubled its net income
in that quarter, thanks to strong revenue growth, and the stock began to climb.
Despite the spring rollout of a spectacularly offensive series of products - the
company logged 250,000 angry email responses to one refrigerator magnet alone -
Urban Outfitters continued to prosper; in the third quarter, the company boosted
earnings by 88% over the same period in the previous year, on strong increases
in same-store sales.
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: Semiconductors and Pharmaceuticals were two of the hardest-hit
sectors in the market this year, so it's not surprising that stocks from those
sectors show up on our list of biggest losers of 2004. And Corinthian Colleges
may fall in the "Commercial Services" sector, according to Bloomberg, but less
euphemistically, it's in the for-profit education business - a business that
spent much of the year mired in scandal, with Corinthian no exception. We're
relieved that only three stocks in our Fund lost more than 50% for the year.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LOSS
- -----------------------------------------------------------------------------------
1 aaiPharma Inc Pharmaceuticals -81.1%
2 Corinthian Colleges Inc Commercial Services -59.4%
3 Cypress Semiconductor Corp Semiconductors -58.6%
</Table>
Very simply, Cypress Semiconductor went from misery to misery this year, with
one earnings disappointment after another, and the stock followed suit. By the
third quarter, the company was acknowledging that its problem with excess
inventory had extended across all its business lines. We sold the stock in
October. aaiPharma was also an extended tale of disappointing earnings. In this
instance, though, the feeble numbers were compounded by the departure of first
one and then another CEO, by a lawsuit stemming from a reconsidered merger, and
by problems with the board of directors, which was asking questions about the
company's excess inventory and accounting glitches. That's the kind of board we
like, but we sure didn't like the stock this year. Fortunately this was a small
diversifying position and we sold this stock in early June.
Corinthian Colleges operates some 90 schools and colleges across the country.
The stock essentially coasted through the first quarter, but then the lawsuits
began, alleging inappropriate use of student financial-aid documents, violations
of regulations relating to federal financial-aid programs, and fraud. The SEC
got interested. By July, the company was warning that it earnings for both its
fourth fiscal quarter and its full fiscal year would miss analyst estimates,
thanks in part to publicity surrounding the litigation and SEC investigation. As
it happens, the fourth quarter turned out to be less painful than the company
had projected, but by that point, the damage had been done. We sold this stock
in August.
TOP TEN HOLDINGS
At the end of the quarter, the Consumer, Cyclical sector was our largest sector
weighting, at 24.9% of net assets, followed by Consumer, Non-cyclical at 24.6%,
and Communications, at 16.7%. Our top ten holdings represented 24.0% of total
net assets, and ten different industries.
5
<Page>
<Table>
<Caption>
PERCENT OF
RANK DESCRIPTION INDUSTRY NET ASSETS
- -------------------------------------------------------------------------------------
1 Ceradyne Inc Miscellaneous Manufacturing 4.2%
2 Cognizant Tech. Solutions Corp Computers 2.8%
3 Urban Outfitters Inc Retail 2.5%
4 JB Hunt Transport Services Inc Transportation 2.5%
5 Armor Holdings Inc Aerospace/Defense 2.1%
6 CNET Networks Inc Internet 2.1%
7 Deckers Outdoor Corp Apparel 2.0%
8 Navigant Consulting Inc Commercial Services 2.0%
9 Matrixx Initiatives Inc Pharmaceuticals 1.9%
10 DaVita Inc Healthcare Services 1.9%
- ----------------------------------------------------------------------------------
24.0%
</Table>
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views, including those of market sectors or individual stocks, are not
meant as investment advice and should not be considered predictive in nature.
Any favorable (or unfavorable) description of a holding applies only as of the
quarter end, December 31, 2004, unless otherwise stated. Security positions can
and do change thereafter. Discussions of historical performance do not guarantee
and are not indicative of future performance.
The Fund is subject to above average market risk (volatility) and is not an
appropriate investment for short-term investors. Investments in small companies
carry greater risk than is customarily associated with larger companies for
various reasons such as narrower markets, limited financial resources and less
liquid stock.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES,
RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S
WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND
SERVICES, LLC, DISTRIBUTOR. (02/05)
CONCLUSION
As always, we appreciate your feedback. We take your responses seriously and
discuss them at our weekly staff meetings. Please keep your ideas coming--we
continually look for ways to improve our service.
Sincerely,
/s/ John Montgomery
John Montgomery
6
<Page>
DISCLOSURE OF FUND EXPENSES
(UNAUDITED)
As a shareholder to the Fund, you will incur no transactions costs, including
sales charges (loads) on purchases, on reinvested dividends, or on other
distributions. There are also no redemption fees or exchange fees. However, the
fund will incur ongoing costs, including management fees; distribution (12b-1)
fees; and other Fund expenses. The following examples are intended to help you
understand your ongoing costs (in dollars) of investing in a Fund and to compare
these costs with the ongoing costs of investing in other mutual funds. The
examples are based on an investment of $1,000 invested on July 1, 2004 and held
until December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY SMALL-CAP GROWTH FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSE PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- -----------------------------------------------------------------------------------------------
CLASS N Actual Fund Return $ 1,000.00 $ 1,057.20 $ 4.87
Hypothetical Fund Return $ 1,000.00 $ 1,020.47 $ 4.78
CLASS R Actual Fund Return $ 1,000.00 $ 1,056.33 $ 6.16
Hypothetical Fund Return $ 1,000.00 $ 1,019.21 $ 6.05
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 0.94% AND 1.19%
FOR CLASS N AND CLASS R, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE
PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR
DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR
PERIOD).
7
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------------
COMMON STOCKS - 98.4%
ADVERTISING - 0.5%
Ventiv Health Inc* 12,975 $ 263,652
AEROSPACE/DEFENSE - 6.1%
Armor Holdings Inc* 24,800 1,166,096
Engineered Support
Systems Inc 16,900 1,000,818
Teledyne Technologies Inc* 8,000 235,440
United Defense Industries Inc* 13,100 618,975
United Industrial Corp 7,000 271,180
--------------
3,292,509
APPAREL - 2.8%
Deckers Outdoor Corp* 23,400 1,099,566
Guess ? Inc* 33,700 422,935
--------------
1,522,501
BANKS - 3.2%
Old Second Bancorp Inc 7,800 248,664
PrivateBancorp Inc 24,200 779,966
Western Sierra Bancorp* 18,450 707,650
--------------
1,736,280
BEVERAGES - 0.9%
Hansen Natural Corp* 14,100 513,381
BIOTECHNOLOGY - 3.3%
Affymetrix Inc* 24,400 891,820
Arqule Inc* 19,050 110,299
Invitrogen Corp* 11,500 771,995
--------------
1,774,114
CHEMICALS - 1.7%
Eastman Chemical Co 14,000 808,220
The Mosaic Co* 8,000 130,560
--------------
938,780
COAL - 0.3%
Peabody Energy Corp 2,000 161,820
COMMERCIAL SERVICES - 7.8%
Bright Horizons Family
Solutions Inc* 4,400 284,944
Education Management Corp* 12,300 406,023
ITT Educational Services Inc* 13,256 630,323
Korn/Ferry International* 19,500 404,625
Manning (Greg) Auctions Inc*+ 49,600 614,048
Navigant Consulting Inc* 40,660 1,081,556
PDI Inc* 9,500 211,660
Strayer Education Inc 5,740 630,195
--------------
4,263,374
COMPUTERS - 3.2%
AMX Corp* 12,800 210,816
Cognizant Technology
Solutions Corp* 36,440 1,542,505
--------------
1,753,321
DISTRIBUTION/WHOLESALE - 0.6%
Navarre Corp* 18,100 318,560
ELECTRICAL COMPONENTS & EQUIPMENT - 0.5%
Artesyn Technologies Inc* 26,300 297,190
ELECTRONICS - 2.1%
Faro Technologies Inc* 22,500 $ 701,550
Keithley Instruments Inc 16,300 321,110
Zygo Corp* 10,000 117,900
--------------
1,140,560
HEALTHCARE PRODUCTS - 4.0%
Advanced Neuromodulation
Systems Inc* 11,600 457,736
LCA-Vision Inc 38,850 908,702
Techne Corp* 20,100 781,890
--------------
2,148,328
HEALTHCARE SERVICES - 3.4%
Amedisys Inc* 10,100 327,139
Davita Inc* 25,785 1,019,281
UnitedHealth Group Inc 5,625 495,169
--------------
1,841,589
HOUSEHOLD PRODUCTS/WARES - 1.7%
Yankee Candle Co Inc* 27,600 915,768
INTERNET - 9.8%
1-800-FLOWERS.COM Inc -
Class A* 63,500 534,035
CNET Networks Inc* 100,400 1,127,492
Cybersource Corp* 34,300 245,245
Digital River Inc* 7,000 291,270
Earthlink Inc* 65,400 753,408
Infospace Inc* 2,725 129,574
LookSmart Ltd* 82,300 180,237
Macrovision Corp* 8,700 223,764
NetFlix Inc* 6,400 78,912
Sapient Corp* 42,250 334,198
Travelzoo Inc* 4,000 381,720
United Online Inc* 36,700 423,151
WebEx Communications Inc* 25,200 599,256
--------------
5,302,262
IRON/STEEL - 1.5%
Carpenter Technology Corp 8,900 520,294
Schnitzer Steel Industries Inc 9,300 315,549
--------------
835,843
LEISURE TIME - 1.1%
Marine Products Corp 22,800 595,308
MACHINERY DIVERSIFIED - 1.1%
Middleby Corp 11,500 583,280
METAL FABRICATE/HARDWARE - 0.2%
Timken Co 4,825 125,546
MINING - 0.4%
Titanium Metals Corp* 8,800 212,432
MISCELLANEOUS MANUFACTURING - 4.8%
Actuant Corp* 6,000 312,900
Ceradyne Inc* 40,100 2,294,121
--------------
2,607,021
OFFICE FURNISHING - 1.3%
HNI Corp 16,300 701,715
</Table>
8
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------------
OIL & GAS - 1.8%
Petroleum Development Corp* 10,200 $ 393,414
Southwestern Energy Co* 11,700 593,073
--------------
986,487
OIL & GAS SERVICES - 0.5%
Maverick Tube Corp* 8,700 263,610
PHARMACEUTICALS - 4.0%
Eon Labs Inc* 29,000 783,000
Kos Pharmaceuticals Inc* 5,200 195,728
Matrixx Initiatives Inc* 91,200 1,057,008
Tanox Biosystems* 9,900 150,480
--------------
2,186,216
RETAIL - 15.0%
CEC Entertainment Inc* 18,000 719,460
Chico's FAS Inc* 17,700 805,881
Claire's Stores Inc 34,100 724,625
Coldwater Creek Inc* 9,400 290,178
Copart Inc* 24,300 639,576
Cosi Inc* 30,700 185,735
Cost Plus Inc* 7,900 253,827
Electronics Boutique
Holdings Corp* 13,300 571,102
Guitar Center Inc* 5,680 299,279
MarineMax Inc* 8,250 245,520
O'Reilly Automotive Inc* 16,900 761,345
The Sportsman's Guide Inc* 40,100 902,250
TBC Corp* 13,300 369,740
Urban Outfitters Inc* 30,800 1,367,520
--------------
8,136,038
SEMICONDUCTORS - 1.7%
ADE Corp* 14,400 269,568
Pixelworks Inc* 48,000 544,320
PLX Technology Inc* 8,300 86,320
--------------
900,208
SOFTWARE - 4.4%
Avid Technology Inc* 4,572 282,321
IDX Systems Corp* 23,790 819,803
Novell Inc* 37,700 254,475
SS&C Technologies Inc 14,850 306,652
Transaction Systems
Architects Inc* 36,200 718,570
--------------
2,381,821
TELECOMMUNICATIONS - 5.0%
Essex Corp* 18,700 378,675
Plantronics Inc 22,500 933,075
Ubiqitel Inc* 34,900 248,488
Viasat Inc* 24,400 592,188
Western Wireless Corp* 20,100 588,930
--------------
2,741,356
TOYS/GAMES/HOBBIES - 1.2%
Marvel Enterprises Inc* 31,500 645,120
TRANSPORTATION - 2.5%
JB Hunt Transport Services Inc 30,250 1,356,712
--------------
TOTAL COMMON STOCKS
(Cost $45,099,908) 53,442,702
--------------
TOTAL INVESTMENTS - 98.4%
(Cost $45,099,908) $ 53,442,702
Other Assets In Excess of Liabilities - 1.6% 891,594
--------------
NET ASSETS - 100.0% $ 54,334,296
==============
</Table>
* NON-INCOME PRODUCING SECURITY
+ THIS SECURITY OR A PORTION OF THIS SECURITY IS OUT ON LOAN AT DECEMBER 31,
2004
TOTAL LOANED SECURITIES HAD A MARKET VALUE OF $614,048 AT DECEMBER 31, 2004
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments at value (cost - $45,099,908) $ 53,442,702
Receivable for investments sold 120,498
Receivable for fund shares sold 1,023,384
Dividends receivable 4,716
Interest receivable 1,509
Prepaid expenses 21,669
- -------------------------------------------------------------------------------------------------
Total assets 54,614,478
- -------------------------------------------------------------------------------------------------
LIABILITIES:
Overdraft 98,307
Payable for fund shares redeemed 90,505
Accrued investment adviser fee 22,722
Accrued administration fee 2,944
Accrued directors fee 298
Accrued distribution fee 6,534
Other payables 58,872
- -------------------------------------------------------------------------------------------------
Total liabilities 280,182
- -------------------------------------------------------------------------------------------------
NET ASSETS $ 54,334,296
=================================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 49,605,898
Accumulated net investment loss (186,732)
Accumulated net realized loss on investments (3,427,664)
Net unrealized appreciation of investments 8,342,794
- -------------------------------------------------------------------------------------------------
NET ASSETS $ 54,334,296
=================================================================================================
NET ASSET VALUE PER SHARE
Net assets
Class N $ 44,027,508
Class R $ 10,306,788
Shares of beneficial interest outstanding of $.001 par value
Class N, 100,000,000 shares authorized 3,841,039
Class R, 40,000,000 shares authorized 901,190
Net asset value, offering and redemption price per share
Class N $ 11.46
Class R $ 11.44
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
<Table>
INVESTMENT INCOME:
Dividends $ 46,984
Interest 900
Securities lending 1,927
- -------------------------------------------------------------------------------------------------
Total investment income 49,811
EXPENSES:
Investment advisory fees 143,535
Administration fees 11,962
Accounting fees 27,790
Transfer agent fees 37,600
Audit fees 7,025
Tax fees 1,830
Custody fees 6,059
Legal fees 5,965
Blue sky fees 3,864
Distribution fees - Class R 11,819
Directors fees 916
Registration fees 1,974
Reports to shareholders 2,500
Miscellaneous 1,648
- -------------------------------------------------------------------------------------------------
Total expenses before fees waived 264,487
Less investment advisory fees waived (27,944)
- -------------------------------------------------------------------------------------------------
Net expenses 236,543
- -------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (186,732)
- -------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment securities (2,935,667)
Net change in unrealized appreciation / depreciation on investments 6,165,925
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 3,230,258
- -------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,043,526
=================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED PERIOD ENDED
DECEMBER 31, 2004* JUNE 30, 2004**
- -------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss $ (186,732) $ (141,551)
Net realized loss on investment securities (2,935,667) (491,997)
Net change in unrealized appreciation / depreciation on investments 6,165,925 2,176,869
- -------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 3,043,526 1,543,321
- -------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares
Class N 10,460,642 44,725,291
Class R 1,241,226 11,391,083
Cost of shares redeemed
Class N (6,956,724) (8,038,046)
Class R (1,834,159) (1,241,864)
- -------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from share transactions 2,910,985 46,836,464
- -------------------------------------------------------------------------------------------------------------------------
Net increase in net assets 5,954,511 48,379,785
NET ASSETS:
Beginning of period 48,379,785 0
- -------------------------------------------------------------------------------------------------------------------------
End of period *** $ 54,334,296 $ 48,379,785
=========================================================================================================================
SHARES ISSUED & REDEEMED:
Issued
Class N 1,026,434 4,279,022
Class R 119,209 1,079,752
Redeemed
Class N (686,916) (777,501)
Class R (179,216) (118,555)
- -------------------------------------------------------------------------------------------------------------------------
Net increase 279,511 4,462,718
Outstanding at beginning of period 4,462,718 0
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 4,742,229 4,462,718
=========================================================================================================================
* Unaudited
** Commenced operations on October 31, 2003
*** Including accumulated net investment loss of: $ (186,732) $ 0
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
CLASS N
<Table>
<Caption>
SIX MONTHS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 31, 2003 TO
2004*** JUNE 30, 2004**
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 10.84 $ 10.00
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss^ (0.04) (0.05)
Net realized and unrealized gain 0.66 0.89
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.62 0.84
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.46 $ 10.84
=========================================================================================================================
TOTAL RETURN+# 5.72% 8.40%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 44,028 $ 37,968
Ratios to average net assets:
Expenses after waivers and reimbursements* 0.94% 0.94%
Expenses before waivers and reimbursements* 1.06% 1.25%
Net investment loss after
waivers and reimbursements* (0.73%) (0.74%)
Portfolio turnover rate 16.2% 16.6%
</Table>
Class R
<Table>
<Caption>
SIX MONTHS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 31, 2003 TO
2004*** JUNE 30, 2004**
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 10.83 $ 10.00
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss^ (0.05) (0.05)
Net realized and unrealized gain 0.66 0.88
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.61 0.83
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.44 $ 10.83
=========================================================================================================================
TOTAL RETURN+# 5.63% 8.30%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 10,307 $ 10,412
Ratios to average net assets:
Expenses after waivers and reimbursements* 1.19% 1.19%
Expenses before waivers and reimbursements* 1.31% 1.44%
Net investment loss after
waivers and reimbursements* (0.98%) (0.99%)
Portfolio turnover rate 16.2% 16.6%
</Table>
* ANNUALIZED
** COMMENCED OPERATIONS ON OCTOBER 31, 2003.
*** UNAUDITED
+ TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING
THE PERIOD.
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 (UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 100,000,000 and 40,000,000 shares have been classified into
Class N and Class R of the Small-Cap Growth Fund, respectively.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Small-Cap Growth Fund seeks to provide long-term total return of capital,
primarily through capital appreciation.
Bridgeway Capital Management, Inc. (the "Adviser") is the adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of the financial statements of the Small-Cap Growth Fund (the
"Fund") are in conformity with accounting principles generally accepted in the
United States of America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other investments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees. The Fund also continues to receive
dividends on the securities loaned. The loans are secured by collateral at least
equal to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
Additionally, the Fund does not have the right to sell or repledge collateral
received in the form of securities unless the borrower goes into default. The
risks to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. As of
December 31, 2004, the Fund had securities on loan valued at $614,048 and
received U.S. Treasury securities with a value of $628,027 as collateral. It is
the Fund's policy to obtain additional collateral from or return excess
collateral to the borrower by the end of the next business day, following the
valuation date of the securities loaned. Therefore, the value of the collateral
held may be temporarily less than the value of the securities on loan.
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America,
14
<Page>
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets. Fees
provided for under the Rule 12b-1 plan of a particular class of the fund are
charged to the operations of such class. All other expenses are allocated among
the classes on relative net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004, there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the current market value of the option
written. If an option which the Fund has written either expires on its
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or a loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such options is extinguished. If a call option which
the Fund has written is assigned, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
premium originally received. If a put option which the Fund has written is
assigned, the amount of the premium originally received reduces the cost of the
security which the Fund purchased upon exercise of the option. Buying calls
increases the Fund's exposure to the underlying security to the extent of any
premium paid. Buying puts on a stock market index tends to limit the Fund's
exposure to a stock market decline. As of December 31, 2004, there were no
outstanding options.
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, directors, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred. However, the Fund has not
had prior claims or losses pursuant to these contracts.
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser. As
compensation for the advisory services rendered,
15
<Page>
facilities furnished, and expenses borne by the Adviser, the Fund pays the
Adviser a total fee, which is comprised of a Base Fee and a Performance
Adjustment. The Base Fee equals the Base Fee Rate times the average daily net
assets of the Fund. The Base Fee Rate is based on the annual rate of 0.60% of
the value of the Fund's average daily net assets.
The Performance Adjustment equals 0.33% times the difference in cumulative total
return between the Fund and the Russell 2000 Growth Index with dividends
reinvested (hereinafter "Index") over a rolling five-year performance period.
Since the Fund does not have a five-year operating history, the Performance
Adjustment Rate will be calculated as follows during the initial five-year
period: (a) From inception through September 30, 2004, the Performance
Adjustment Rate was inoperative thus the Advisory Fee was calculated based on
the Base Advisory Fee Rate times the average daily net assets of the Fund only;
(b) From September 30, 2004 through September 30, 2008, the Performance
Adjustment Rate will be calculated based upon a comparison of the investment
performance of the Fund and the Index over the number of quarters that have
elapsed since the Fund's inception. Each time the Performance Adjustment Rate is
calculated, it will cover a longer time span, until it can cover a running
five-year period as intended. In the meantime, the early months of the
transition period will have a disproportionate effect on the performance
adjustment of the fee. The Performance Adjustment Rate varies from a minimum of
- -0.05% to a maximum of +0.05% However, the Performance Adjustment Rate is zero
if the difference between the cumulative Fund performance and the Index
performance is less than or equal to 2%.
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 0.94% of the value of its average net assets for Class N
shares and 1.19% of the value of its average net assets for Class R shares for
the six months ended December 31, 2004. For the six months ended December 31,
2004, the Adviser waived fees of $27,944.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. These trades are reviewed quarterly by the Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management acts as Administrator
for the Fund. Under the terms of the agreement, Bridgeway Capital Management
provides or arranges for the provision of certain accounting and other
administrative services to the Fund that it is not required to provide under the
terms of the investment advisory agreement. As compensation under the Master
Administrative Agreement, Bridgeway Capital Management receives a monthly fee
from each Fund calculated at the annual rate of 0.05% of average daily net
assets.
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is considered
to be "affiliated" and "interested." Compensation of Mr. Montgomery is borne by
the Adviser rather than the Fund.
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004.The amount attributable to the Small-Cap Growth Fund is
disclosed in the Statement of Operations.
4. DISTRIBUTION AND SHAREHOLDER SERVICING FEES:
Forum Fund Services, LLC acts as distributor of the Fund's shares pursuant to a
Distribution Agreement dated January 2, 2004. The Adviser pays all costs and
expenses associated with distribution of the Fund's Class N shares pursuant to a
protective plan adopted by shareholders pursuant to Rule 12b-1 on October 15,
1996. On October 22, 2003, shareholders of the seven investment portfolios of
the fund then existing approved an amendment to the Rule 12b-1 plan to permit
the creation of a second class of shares, Class R, that would pay distribution
and service fees to the distributor up to 0.25% of average daily net assets of
the Class R shares. Class R shares were subsequently created for the new
Small-Cap Growth Fund, Small-Cap Value Fund, Large-Cap Growth Fund and the
Large-Cap Value Fund. During the six months ended December 31, 2004 distribution
fees of $11,819 were accrued to Small-Cap Growth Fund Class R shareholders.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Aggregate purchases and sales of investment securities, other than U.S.
government securities and cash equivalents were $9,893,960 and $7,752,261,
respectively, for the six months ended December 31, 2004.
16
<Page>
6. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and distribute substantially all of
its net taxable income including net realized gains on investments, if any, to
its shareholders each year. The fund is not subject to income or excise taxes to
the extent such distributions are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, was as
follows:
<Table>
Gross unrealized appreciation $ 10,310,637
Gross unrealized (depreciation) (1,967,843)
- --------------------------------------------------------------
Net unrealized appreciation
on investments $ 8,342,794
==============================================================
Cost of investments $ 45,099,908
==============================================================
</Table>
The Fund has deferred to its fiscal year ending June 30, 2005, $450,542 of
losses recognized during the period November 1, 2003 to June 30, 2004.
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 0
Cumulative Effect of other timing differences (450,542)
Unrealized appreciation 2,135,414
</Table>
The temporary differences between book and tax are primarily due to wash sales
and post October losses.
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually. Distributions to shareholders
are recorded on ex-date. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America.
7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
17
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the
SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the
SEC's Public Reference Room in Washington, D.C. For more information about the
operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 43% of the Fund.
18
<Page>
This Page Intentionally Left Blank
<Page>
[BRIDGEWAY FUNDS LOGO] SMALL-CAP VALUE FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
Dear Fellow Small-Cap Value Shareholder,
Our Fund was up 16.20% in the December 2004 quarter, compared to a 13.20% gain
for our primary market benchmark, the Russell 2000 Value Index, and a 12.68%
return of our peer benchmark, the Lipper Small-Cap Value Index.
The table below presents our performance for the December quarter, 1 year, and
annualized performance since inception, followed by a graph of performance since
inception, as well as a new SEC-mandated breakdown of sector representation in
the Fund.
<Table>
<Caption>
DEC. QTR. 1 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 10/31/03 TO
12/31/04 12/31/04 12/31/04
- -----------------------------------------------------------------------------------
SMALL-CAP VALUE FUND - CLASS N 16.20% 17.33% 17.32%
SMALL-CAP VALUE FUND - CLASS R 16.15% 16.94% 16.99%
Russell 2000 Value Index 13.20% 22.25% 26.47%
Lipper Small-Cap Value Index 12.68% 20.65% 25.64%
</Table>
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL
1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com.
THE RUSSELL 2000 VALUE INDEX IS AN UNMANAGED INDEX WHICH CONSISTS OF STOCKS IN
THE RUSSELL 2000 INDEX WITH LOWER PRICE-TO-BOOK RATIOS AND LOWER FORECASTED
GROWTH VALUES. THE LIPPER SMALL-CAP VALUE INDEX IS AN INDEX OF SMALL-COMPANY,
VALUE-ORIENTED FUNDS COMPILED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS
LONGER THAN ONE YEAR ARE ANNUALIZED.
[CHART]
GROWTH OF $10,000 INVESTED IN SMALL-CAP VALUE FUND AND INDEXES FROM 10/31/03
(INCEPTION) TO 12/31/04
<Table>
<Caption>
BRIDGEWAY BRIDGEWAY
SMALL-CAP VALUE FUND - CLASS N SMALL-CAP VALUE FUND - CLASS R RUSSELL 2000 VALUE INDEX LIPPER SMALL-CAP VALUE INDEX
10/03 10000 10000 10000 10000
12/03 10270 10270 10759 10819
3/04 10620 10600 11504 11463
6/04 10460 10440 11601 11652
9/04 10370 10340 11619 11584
12/04 12050 12010 13153 13053
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
<Page>
SHAREHOLDER LETTER
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
<Table>
<Caption>
SECTOR % OF NET ASSETS
- --------------------------------------------
Basic Materials 5.7%
Communications 9.1%
Consumer, Cyclical 25.6%
Consumer, Non-cyclical 9.8%
Energy 11.0%
Financial 10.6%
Industrial 23.5%
Technology 2.8%
Utilities 1.9%
- --------------------------------------------
TOTAL 100.0%
</Table>
PERFORMANCE SUMMARY
TRANSLATION: For the December quarter, both share classes of the Fund beat both
the Russell 2000 Value Index of small, value-oriented stocks and the peer-group
average. For the year, however, both share classes of the Fund underperformed
both the Russell 2000 Value Index and the peer-group average.
We are NOT pleased with these results. However, the difference in the Fund's
relative performance for the quarter and the year is interesting: Clearly, we
were lagging our benchmark index and our peer group fairly badly during the
first nine months of the year, and then sprinted ahead in the final quarter,
though not quite enough to make up for the earlier shortfall. We say this not to
excuse our performance, but because it offers a good reminder of the value of
sticking with investment decisions and resisting panic and the urge to sell when
things look less than great. Remember, though, that this "holding through the
downturn" strategy works best in concert with other financial principles, such
as saving, avoiding most kinds of debt, diversifying (and regularly rebalancing)
your portfolio, setting aside an emergency fund, and choosing well- managed,
low-cost funds whose investment objectives - anything from very aggressive
growth to ultra-low-risk income - matches with the time-horizons of the
investments you're making. This is a fancy way of saying that the more years you
can afford to wait before tapping a particular pile of money, the more risk you
can afford to take with it.
YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S
DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR).
TRANSLATION: Notwithstanding news events (and the commentary of many market
pundits), 2004 was a remarkably average year. The combination of rising interest
rates, a declining U.S. dollar, inflation, the presidential election, war and
natural disasters should have produced some extraordinary results, right? Not so
fast....
Let's look at the statistics purely from a market perspective. Over the 10 years
through the 31st of December, 2004, the S&P 500 Index of large companies
returned an average of 12.05% per year. (I know, that sounds unbelievable, given
how weak the past few years' performance has been, but the market of the mid-
and late 1990s really was pretty remarkable.) That's only about one and one-half
percentage points better than the Index's return for 2004. Furthermore, if we
look all the way back to 1925, we see that the market has returned an average of
10.4% per year - and that's over a 79-year period that includes the Great
Depression, World War II, the white-hot "go-go" market of the 1960s and the
brutal bear market of the early 1970s. In about two-thirds of those years, the
Index either beat or lagged that 10.4% average by more than 10 percentage
points. From that perspective, therefore, 2004's return of 10.88% was about as
average as you can get.
.. . . but wasn't this a very volatile year? No. In fact, the actual variation of
monthly returns in 2004 was about half of the average of the preceding decade.
Throughout that 10-year period, only one year - 1995 - was less volatile. In
other words, in 2004 the stock market "bounced around" a whole lot LESS than
normal. This frees up tremendous emotional energy to spend on more important
things (including actually finding the next good stock pick).
2
<Page>
In conclusion, what is remarkable about 2004 is how average it was in terms of
returns and how "tame" it was with respect to volatility. Not what you might
conclude from reading standard financial commentaries, many of which described a
market lurching dramatically between struggle and triumph. All that drama can be
very compelling, but it doesn't necessarily lead to an accurate understanding of
the market's behavior in the long run, nor does it necessarily produce sound
investment decisions. For that reason, though I have four computer screens in my
office, none of them runs a ticker, and I frequently go home at the end of the
day without knowing whether the overall market was up or down.
All that said, the market of 2004 did exhibit some unusual characteristics, in
particular the continued - and extraordinary - performance of smaller stocks.
This was the sixth year in a row that small stocks beat large ones, the longest
period of consecutive annual small-stock dominance in the last eight decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, investment strategies - such as buying small-cap stocks or value
stocks or real-estate-oriented stocks - that have worked well in the recent past
tend to keep working, as investors get caught up in the excitement and become
increasingly confident that a given strategy is the right way to go. This is
essentially a self-fulfilling prophecy: If everyone agrees that small stocks,
for example, are going to keep going up, they will go up, because everyone buys
them. So-called momentum investing has come in for a lot of negative publicity
in the past few years, because it was investors following a momentum strategy
who both fueled the tech-stocks bubble of the late '90s and early 2000 and then
(when they switched strategies) caused it to collapse. The fact is, though, that
a momentum strategy can work for periods of time, and statistically, when small
stocks have done well relative to the overall market in one year, they are more
likely to do well in the next one. So we could conceivably see a record-setting
seventh year in a row of small-stock dominance - hardly what investors in a
large-stock fund want to hear.
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but our computer stock picking models have no such concerns, and they
are pointing to a shift toward larger stocks. Specifically, over the past 12
months or so our models began finding a larger number of "attractive" large
stocks than at any time I can remember in about five years. This is almost
certainly a function of relative valuation; i.e., based on a variety of
financial measures, and thanks to the multi-year run-up in the price of small
stocks, larger stocks in general are starting to look relatively attractive
again. At Bridgeway, we don't put much effort into trying to guess the market's
direction; we're just trying to find one good stock (of any size) at a time.
Still, I believe it's likely that the tide will turn back in favor of large
stocks at SOME point in the next couple of years. It's a good time (ok, any time
is a good time) to make sure your own portfolio is in balance with your
long-term plan.
Of course, company size is hardly the only investment variable. "Style," too,
plays a significant role, and 2004 was pretty bad for "growth"-oriented stocks,
building on a very bad five-year trend. The following bar chart shows the
relative performance of growth versus value oriented large stocks, over the past
one, three, and five years ended 12/31/04, based on data from Morningstar:
[CHART]
<Table>
<Caption>
VALUE GROWTH
1 Year 14.05% 0.19%
3 Year 6.95% -4.35%
5 Year 4.54% -16.22%
</Table>
3
<Page>
This pattern of weak growth-stock performance is exactly what one would
expect...during the bear-market phase of a stock-market cycle. But from a
historical perspective, it's distinctly unusual for the last two years of a
recovery. Our models are suggesting a shift toward growth stocks, but not as
strongly as they indicate a shift toward large stocks. My conclusion from all
this: make sure your portfolio is in balance with your target allocation and
long term plan.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL
TRANSLATION: For the most part, the Fund's winners in the fourth quarter of 2004
were earnings stories - stocks that took off in the fourth quarter after
reporting surprisingly strong results for the earlier part of the year. In all,
five stocks in the Fund appreciated by more than 50% over the course of the
quarter.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- -------------------------------------------------------------------------------
1 UNOVA Inc Machinery-Diversified 80.0%
2 Bluegreen Corp Entertainment 78.2%
3 US Unwired Inc Telecommunications 72.9%
4 Airgate PCS Inc Telecommunications 69.6%
5 PacifiCare Health Systems Inc Healthcare Services 54.0%
</Table>
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.1% IMPACT ON THE
FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS.
Top performer UNOVA Inc. was a sterling example of the "earnings effect." Based
in Everett, WA, the company offers uniquely "rugged" wireless computing devices
and services that can be used in a number of applications where a desktop PC is
not an option - everything from checking inventory in a warehouse to surveying
property. (A separate division makes and services high-end manufacturing
equipment.) For much of the year, UNOVA Inc. attracted little attention -- its
stock had slowly drifted down about 35% from a peak in early 2004 - but with the
release of the company's third-quarter numbers, the stock abruptly spiked up 31%
on news that earnings had nearly tripled analysts' expectations. And it then
continued rising, giving us an 80% gain in our position for the period.
Bluegreen Corp. is in a very different business, but its stock followed a
similar pattern. Headquartered in Boca Raton, Bluegreen Corp. is primarily in
the timeshare business, offering clients "time" at any one of 35 resorts, mostly
in the southeastern United States. Though the company's timeshare sales had
doubled between 1999 and 2003, and it had also seen solid growth in both
interest income (from financing the purchase of timeshares) and sales of land to
people who want to build homes in Bluegreen Corp's. resort locations, the stock
was stalled for much of 2004. It jumped nicely in the fourth quarter, however,
when the company paid down a chunk of debt and announced record sales and
operating revenues.
Then there's PacifiCare Health Systems Inc., a provider of healthcare insurance
to companies and individuals in various locations around the U.S. Its stock rose
in the fourth quarter with news that third-quarter profits were up by 31%; the
fact that the company was continuing its share-buyback program didn't hurt,
either. Nor - oddly - was US Unwired Inc. particularly hurt by the flurry of
class-action lawsuits brought against the company over the summer. Its
announcement that earnings had increased by more than 140% in the first-half of
the year (from the year earlier period) was apparently enough to quell any fears
of litigation. At least, that's what we assume; the stock appreciated by 62.8%
in the last six months of the year, and our position showed a nice 72.9%
increase for the fourth quarter.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: The fourth quarter was strong for both small stocks and value
stocks, giving our Fund something of a double-tailwind. As a result, no stocks
declined by more than 50% for the period.
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT WORKED WELL
TRANSLATION: Darn! If Ventiv Health Inc. and American Science & Engineering Inc.
had worked just that little bit better, we would have been looking at two
triple-digit gainers for the year. We really like those. Nevertheless, we'll
happily take their returns, and the returns of the other 18 stocks in the Fund
that appreciated by more than 50% in 2004.
4
<Page>
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- -------------------------------------------------------------------------------
1 Ventiv Health Inc Advertising 99.2%
2 American Science & Eng. Inc Electronics 99.1%
3 US Unwired Inc Telecommunications 81.6%
4 Stein Mart Inc Retail 77.9%
5 Trans World Entertainment Corp Retail 75.1%
6 Petroleum Development Corp Oil & Gas 73.4%
7 Airgate PCS Inc Telecommunications 73.3%
8 OMI Corp Transportation 71.3%
9 Vans Inc Apparel 69.9%
10 SMTEK International Inc Electronics 67.6%
11 United Fire & Casualty Co Insurance 67.1%
12 Commercial Metals Co Metal Fabricate/Hardware 67.0%
13 Carpenter Technology Corp Iron/Steel 65.6%
14 PacifiCare Health Systems Inc Healthcare Services 65.1%
15 Bluegreen Corp Entertainment 60.1%
16 Toll Brothers Inc Home Builders 56.7%
17 Badger Meter Inc Electronics 52.2%
18 Eagle Materials Inc Building Materials 51.7%
19 Beazer Homes USA Inc Home Builders 50.7%
20 Metal Management Inc Environmental Control 50.7%
</Table>
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE
FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS.
Ventiv Health Inc. may have provided a dramatic return for the Fund, but the
stock's progress for the year was anything but dramatic, just a steady climb
upward. Indeed, when the company released its third-quarter results, showing
that earnings for the quarter had jumped by 50% over the previous year,
investors yawned, rewarding the stock with a scant 1% uptick. That's fine: the
company had plenty to celebrate even if investors didn't throw a party. Compared
with 2003, for example, the company's operating margin nearly doubled, and its
collections efficiency - the number of days needed to collect on the typical
outstanding receivable - was markedly improved. Ventiv Health Inc. provides
marketing and consulting services to pharmaceutical and biotech firms, including
some of the most recognizable names in the field. That may not sound exciting,
but at Bridgeway, we think a 99% gain is definitely something to get excited
about.
Barely in second place was American Science & Engineering Inc., based in
Billerica, MA. The company makes cargo-inspection equipment - a field that has
gained a lot of visibility over the past few years, given our increased
awareness of the need for better security. Here, too, there was little that was
dramatic about the stock's performance, other than its relentless march upward
over the course of the year.
By contrast, it was strong fourth-quarter numbers that helped several stocks
find a place on this list. US Unwired Inc., Airgate PCS Inc., Bluegreen Corp.
and PacifiCare Health Systems Inc. all took honors for the quarter as well as
the year, while homebuilders Toll Brothers and Beazer Homes USA Inc. all soared
in the last few months of the year on the back of powerful, sometimes
record-setting, quarterly numbers.
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: The three stocks listed below have little in common beyond their
all having declined by more than 50% over the course of the calendar year.
5
<Page>
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LOSS
- -----------------------------------------------------------------------------
1 Applica Inc Home Furnishings -58.6%
2 America West Holdings Corp Airlines -54.2%
3 Safeguard Scientifics Inc Software -50.3%
</Table>
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE
FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS.
Sometimes it's the sector, and sometimes it just isn't. America West Holdings
Corp., for example, is an airline, operating low-cost flights with primary hubs
in Phoenix and Las Vegas. Unfortunately, airlines in general had a miserable
year, hammered by a combination of high fuel costs and overcapacity
(particularly in markets such as...Phoenix and Las Vegas), as well as by
lingering problems stemming from 2003's SARS epidemic and the now-ever-present
fear of terrorism. But while the sector's woes do get credit for some of America
West's 54.2% loss to our Fund, it should also be said that the company was not
well placed to ride a downdraft. In particular, it had failed to protect itself
sufficiently against the possibility - which this past year made real - of
rising fuel prices, and it had few options for distinguishing itself among the
fleet of low-cost carriers serving its primary markets. The stock paid the price
for these planning errors. We sold this stock in the 3rd quarter.
On the other hand, there is Applica Inc. which makes small household appliances,
such as coffee-makers. Applica Inc. brewed up nothing but trouble for investors
this year, as each quarter presented yet another earnings disappointment. (In
the third quarter, for example, the company produced a loss of 41 cents per
share, compared with a profit of 20 cents per share in 2003.) To be fair, some
of that loss is a function of moves that may ultimately benefit the company,
such as the sale of one of its divisions and the sale of its manufacturing
facility in China. But any such benefits didn't show up in time to prevent our
Fund from taking a 58.6% loss on our Applica Inc. position. We sold this stock
in the 3rd quarter.
TOP TEN HOLDINGS
At the end of the quarter, Consumer (Cyclical) represented our largest sector
weighting, at 25.6% of net assets, followed by Industrial, at 23.5%, and Energy,
at 11.0%. Our top ten holdings - listed below -- represented 19.0% of total net
assets and seven different industries.
<Table>
<Caption>
PERCENT OF
RANK DESCRIPTION INDUSTRY NET ASSETS
- -------------------------------------------------------------------------------
1 Petroleum Development Corp Oil & Gas 2.3%
2 Badger Meter Inc Electronics 2.2%
3 Universal Forest Products Inc Building Materials 2.1%
4 Commercial Metals Co Metal Fabricate/Hardware 2.1%
5 AAR Corp Aerospace/Defense 1.8%
6 Smart & Final Inc Retail 1.8%
7 Stein Mart Inc Retail 1.8%
8 Park-Ohio Holdings Corp Miscellaneous Manufacturer 1.7%
9 MarineMax Inc Retail 1.6%
10 Maverick Tube Corp Oil & Gas Services 1.6%
- -------------------------------------------------------------------------------
19.0%
</Table>
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views, including those of market sectors or individual stocks, are not
meant as investment advice and should not be considered predictive in nature.
Any favorable (or unfavorable) description of a holding applies only as of the
quarter end, December 31, 2004, unless otherwise stated. Security positions can
and do change thereafter. Discussions of historical performance do not guarantee
and are not indicative of future performance.
6
<Page>
The Fund is subject to above average market risk (volatility) and is not an
appropriate investment for short-term investors. Investments in the small
companies within this fund carry greater risk than is customarily associated
with larger companies for various reasons such as narrower markets, limited
financial resources and less liquid stock.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES,
RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S
WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND
SERVICES, LLC, DISTRIBUTOR. (02/05)
CONCLUSION
As always, we appreciate your feedback. We take your responses seriously and
discuss them at our weekly staff meetings. Please keep your ideas coming--we
read them looking for ways to improve our service.
Sincerely,
/S/ John Montgomery
John Montgomery
7
<Page>
DISCLOSURE OF FUND EXPENSES
(UNAUDITED)
As a shareholder to the Fund, you will incur no transactions costs, including
sales charges (loads) on purchases, on reinvested dividends, or on other
distributions. There are also no redemption fees or exchange fees. However, the
fund will incur ongoing costs, including management fees; distribution (12b-1)
fees; and other Fund expenses. The following examples are intended to help you
understand your ongoing costs (in dollars) of investing in a Fund and to compare
these costs with the ongoing costs of investing in other mutual funds. The
examples are based on an investment of $1,000 invested on July 1, 2004 and held
until December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY SMALL-CAP VALUE FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSE PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- -----------------------------------------------------------------------------------------------------
CLASS N Actual Fund Return $ 1,000.00 $ 1,152.01 $ 5.09
Hypothetical Fund Return $ 1,000.00 $ 1,020.47 $ 4.78
CLASS R Actual Fund Return $ 1,000.00 $ 1,150.38 $ 6.44
Hypothetical Fund Return $ 1,000.00 $ 1,019.22 $ 6.04
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 0.94% AND
1.19% FOR CLASS N AND CLASS R, RESPECTIVELY, MULTIPLIED BY THE AVERAGE
ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE
FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT
THE ONE HALF-YEAR PERIOD).
8
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -------------------------------------------------------------------------------------------
COMMON STOCKS - 99.9%
ADVERTISING - 1.5%
Ventiv Health Inc* 30,300 $ 615,696
AEROSPACE/DEFENSE - 1.8%
AAR Corp* 56,100 764,082
AIRLINES - 1.2%
Northwest Airlines Corp* 46,200 504,966
BANKS - 2.2%
Community Bank System Inc 18,300 516,975
Fremont General Corp 12,400 312,232
Irwin Financial Corp 3,700 105,043
---------------
934,250
BEVERAGES - 0.9%
Constellation Brands Inc -
Class A* 8,500 395,335
BUILDING MATERIALS - 3.6%
Eagle Materials Inc 7,300 630,355
Universal Forest Products Inc 20,400 885,360
---------------
1,515,715
CHEMICALS - 1.3%
Lyondell Chemical Co 8,360 241,771
OM Group Inc* 8,900 288,538
---------------
530,309
COAL - 0.9%
CONSOL Energy Inc 4,000 164,200
Peabody Energy Corp 2,590 209,557
---------------
373,757
COMMERCIAL SERVICES - 4.7%
Consolidated Graphics Inc* 14,500 665,550
Korn/Ferry International* 18,400 381,800
Manning (Greg) Auctions Inc*+ 27,900 345,402
PDI Inc* 13,700 305,236
Teltech Holdings Inc* 29,500 285,855
---------------
1,983,843
COMPUTERS - 0.3%
Intervoice-Brite Inc* 10,800 144,180
DISTRIBUTION/WHOLESALE - 1.7%
Huttig Building Products Inc* 29,900 312,455
Wesco International Inc* 13,000 385,320
---------------
697,775
DIVERSIFIED FINANCIAL SERVICES - 2.5%
AmeriCredit Corp* 6,100 149,145
Nelnet Inc* 13,000 350,090
Raymond James Financial Inc 17,150 531,307
---------------
1,030,542
ELECTRIC - 0.8%
Alliant Energy Corp 3,200 91,520
OGE Energy Corp 5,400 143,154
Westar Energy Inc 4,500 102,915
---------------
337,589
ELECTRICAL COMPONENTS & EQUIPMENT - 0.2%
Belden Inc 2,900 $ 67,280
ELECTRONICS - 4.1%
American Science &
Engineering Inc* 6,000 247,260
Badger Meter Inc 30,600 916,470
SMTEK International Inc* 32,397 456,798
TTM Technologies Inc* 6,800 80,240
---------------
1,700,768
ENGINEERING & CONSTRUCTION - 1.1%
McDermott International Inc* 25,000 459,000
ENTERTAINMENT - 1.4%
Argosy Gaming Co* 5,900 275,530
Bluegreen Corp* 16,200 321,246
---------------
596,776
ENVIRONMENTAL CONTROL - 0.6%
Metal Management Inc 10,000 268,700
FOREST PRODUCTS & PAPER - 2.2%
Energen Corp 7,900 465,705
Longview Fibre Co 24,900 451,686
---------------
917,391
HEALTHCARE SERVICES - 4.1%
America Service Group Inc* 17,250 461,783
Humana Inc* 13,460 399,627
PacifiCare Health Systems Inc* 9,500 536,940
Res-Care Inc* 20,300 308,966
---------------
1,707,316
HOME BUILDERS - 8.2%
Beazer Homes USA Inc 1,900 277,799
Brookfield Homes Corp 6,500 220,350
Building Materials Holding Corp 9,300 356,097
Cavalier Homes Inc* 23,600 139,004
Fleetwood Enterprise Inc* 18,300 246,318
Hovnanian Enterprises Inc -
Class A* 11,820 585,326
KB Home 3,440 359,136
MDC Holdings Inc 3,740 323,286
National RV Holdings Inc* 8,200 78,966
Standard-Pacific Corp 4,600 295,044
Toll Brothers Inc* 7,800 535,158
---------------
3,416,484
HOUSEWARES - 0.6%
Toro Co 2,900 235,915
INSURANCE - 3.4%
American Physicians Cap Inc* 6,700 241,334
Commerce Group Inc 4,700 286,888
Ohio Casualty Corp* 15,100 350,471
Reinsurance Group of
America Inc 2,400 116,280
United Fire & Casualty Co 5,000 168,550
Vesta Insurance Group Inc 69,400 255,392
---------------
1,418,915
INTERNET - 1.4%
Sapient Corp* 74,000 585,340
</Table>
9
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -------------------------------------------------------------------------------------------
IRON/STEEL - 2.9%
Carpenter Technology Corp 4,100 $ 239,686
Reliance Steel and
Aluminum Co 17,300 674,008
Ryerson Tull Inc 18,000 283,500
---------------
1,197,194
MACHINERY DIVERSIFIED - 1.7%
Briggs & Stratton Corp 3,400 141,372
UNOVA Inc* 23,200 586,728
---------------
728,100
MEDIA - 1.2%
Thomas Nelson Inc 22,600 510,760
METAL FABRICATE/HARDWARE - 4.4%
Commercial Metals Co 17,500 884,800
Maverick Tube Corp* 22,600 684,780
Metals USA Inc* 13,800 255,990
---------------
1,825,570
MINING - 0.5%
Titanium Metals Corp* 8,500 205,190
MISCELLANEOUS MANUFACTURER - 2.2%
The Brink's Co 4,800 189,696
Park-Ohio Holdings Corp* 27,900 722,610
---------------
912,306
OFFICE FURNISHING - 1.7%
CompX International Inc 7,300 120,669
Steelcase Inc 42,400 586,816
---------------
707,485
OIL & GAS - 6.7%
Callon Petroleum Corp* 15,000 216,900
Giant Industries Inc* 11,100 294,261
Harvest Natural Resources Inc* 18,800 324,676
Holly Corp 9,900 275,913
Petroleum Development Corp* 25,500 983,535
Petroquest Energy Inc* 67,000 331,650
Tesoro Corp* 12,500 398,250
---------------
2,825,185
OIL & GAS SERVICES - 1.7%
Seacor Holdings Inc* 7,200 384,480
Veritas DGC Inc* 15,100 338,391
---------------
722,871
PACKAGING & CONTAINERS - 1.4%
Silgan Holdings Inc 9,700 591,312
REITS - 1.0%
New Century Financial Corp 6,500 415,415
RETAIL - 10.8%
7-Eleven Inc* 5,600 $ 134,120
Cost-U-Less Inc* 45,100 315,700
Dillard's Inc - Class A 12,700 341,249
Foot Locker Inc 10,800 290,844
Luby's Inc* 37,600 282,000
MarineMax Inc* 23,100 687,456
Men's Wearhouse Inc* 3,200 102,272
The Pantry Inc* 18,900 568,701
Retail Ventures Inc* 23,700 168,270
Smart & Final Inc* 52,000 748,280
Stein Mart Inc* 43,700 745,522
Trans World Entertainment
Corp* 12,900 160,863
---------------
4,545,277
SAVINGS & LOANS - 1.6%
Berkshire Hills Bancorp Inc 17,500 650,125
SEMICONDUCTORS - 1.7%
ADE Corp* 8,000 149,760
Cohu Inc 7,300 135,488
PLX Technology Inc* 22,300 231,920
PMC - Sierra Inc* 18,800 211,500
---------------
728,668
SOFTWARE - 0.7%
Wind River Systems Inc. Com* 22,000 298,100
TELECOMMUNICATIONS - 5.0%
Airgate PCS Inc* 7,100 252,760
Boston Communications
Group Inc* 57,600 532,224
Lantronix Inc* 269,900 272,599
Sycamore Networks Inc* 107,800 437,668
USA Mobility Inc* 8,300 293,073
US Unwired Inc* 65,700 315,360
---------------
2,103,684
TRANSPORTATION - 4.0%
Arkansas Best Corp 6,000 269,340
Hub Group Inc* 8,232 429,875
Offshore Logistics Inc* 10,900 353,923
OMI Corp 37,770 636,424
---------------
1,689,562
TOTAL COMMON STOCKS
(Cost $33,934,506) 41,858,728
---------------
TOTAL INVESTMENTS - 99.9%
(Cost $33,934,506) 41,858,728
Other Assets In Excess of Liabilities - 0.1% 28,402
---------------
NET ASSETS - 100.0% $ 41,887,130
===============
</Table>
* NON-INCOME PRODUCING SECURITY
+ THIS SECURITY OR A PORTION OF THIS SECURITY IS OUT ON LOAN AT DECEMBER 31,
2004
TOTAL LOANED SECURITIES HAD A MARKET VALUE OF $185,700 AT DECEMBER 31, 2004
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments at value (cost - $33,934,506) $ 41,858,728
Receivable for investments sold 295,950
Receivable for fund shares sold 314,842
Dividends receivable 19,736
Interest receivable 672
Prepaid expenses 19,272
- ----------------------------------------------------------------------------------------
Total assets 42,509,200
- ----------------------------------------------------------------------------------------
LIABILITIES:
Overdraft 68,640
Payable for fund shares redeemed 38,968
Payable for investments purchased 427,946
Accrued investment adviser fee 14,207
Accrued administration fee 2,818
Accrued directors fee 816
Accrued distribution fee 3,167
Other payables 65,508
- ----------------------------------------------------------------------------------------
Total liabilities 622,070
- ----------------------------------------------------------------------------------------
NET ASSETS $ 41,887,130
========================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 36,470,207
Accumulated net investment loss (76,351)
Accumulated net realized loss on investments (2,430,948)
Net unrealized appreciation of investments 7,924,222
- ----------------------------------------------------------------------------------------
NET ASSETS $ 41,887,130
========================================================================================
NET ASSET VALUE PER SHARE
Net assets
Class N $ 36,897,367
Class R $ 4,989,763
Shares of beneficial interest outstanding of $.001 par value
Class N, 100,000,000 shares authorized 3,061,007
Class R, 40,000,000 shares authorized 415,374
Net asset value, offering and redemption price per share
Class N $ 12.05
Class R $ 12.01
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
<Table>
INVESTMENT INCOME:
Dividends $ 90,140
Interest 1,339
Securities lending 583
- ------------------------------------------------------------------------------------------------
Total investment income 92,062
- ------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 103,909
Administration fees 8,659
Accounting fees 28,659
Transfer agent fees 28,610
Audit fees 6,525
Tax fees 5,830
Custody fees 8,987
Legal fees 4,416
Blue sky fees 3,864
Distribution fees - Class R 5,661
Directors fees 1,233
Registration fees 1,410
Reports to shareholders 2,500
Miscellaneous 1,282
- ------------------------------------------------------------------------------------------------
Total expenses before fees waived 211,545
Less investment advisory fees waived (43,132)
- ------------------------------------------------------------------------------------------------
Net expenses 168,413
- ------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (76,351)
- ------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment securities (1,429,966)
Net change in unrealized appreciation / depreciation on investments 6,907,028
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 5,477,062
- ------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,400,711
================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED PERIOD ENDED
DECEMBER 31, 2004* JUNE 30, 2004**
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss $ (76,351) $ (58,240)
Net realized loss on investment securities (1,429,966) (1,000,982)
Net change in unrealized appreciation / depreciation on investments 6,907,028 1,017,194
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations 5,400,711 (42,028)
- --------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares
Class N 7,293,720 37,031,329
Class R 505,718 7,946,732
Cost of shares redeemed
Class N (3,329,606) (8,884,162)
Class R (877,073) (3,158,211)
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets from share transactions 3,592,759 32,935,688
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets 8,993,470 32,893,660
NET ASSETS:
Beginning of period 32,893,660 0
- --------------------------------------------------------------------------------------------------------------------
End of period *** $ 41,887,130 $ 32,893,660
====================================================================================================================
SHARES ISSUED & REDEEMED:
Issued
Class N 686,004 3,578,047
Class R 48,487 753,572
Redeemed
Class N (320,565) (882,479)
Class R (83,554) (303,131)
- --------------------------------------------------------------------------------------------------------------------
Net increase 330,372 3,146,009
Outstanding at beginning of period 3,146,009 0
- --------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 3,476,381 3,146,009
====================================================================================================================
* Unaudited
** Commenced operations on October 31, 2003
*** Including accumulated net investment loss of: $ (76,351) $ 0
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
CLASS N
<Table>
<Caption>
SIX MONTHS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 31, 2003 TO
2004*** JUNE 30, 2004**
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 10.46 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss^ (0.02) (0.03)
Net realized and unrealized gain 1.61 0.49
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.59 0.46
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.05 $ 10.46
=======================================================================================================================
TOTAL RETURN+# 15.20% 4.60%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 36,897 $ 28,193
Ratios to average net assets:
Expenses after waivers and reimbursements* 0.94% 0.94%
Expenses before waivers and reimbursements* 1.19% 1.49%
Net investment loss after
waivers and reimbursements* (0.41%) (0.42%)
Portfolio turnover rate 30.1% 20.5%
</Table>
CLASS R
<Table>
<Caption>
SIX MONTHS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 31, 2003 TO
2004*** JUNE 30, 2004**
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 10.44 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss^ (0.03) (0.04)
Net realized and unrealized gain 1.60 0.48
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.57 0.44
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.01 $ 10.44
=======================================================================================================================
TOTAL RETURN+# 15.04% 4.40%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 4,990 $ 4,701
Ratios to average net assets:
Expenses after waivers and reimbursements* 1.19% 1.19%
Expenses before waivers and reimbursements* 1.44% 1.64%
Net investment loss after
waivers and reimbursements* (0.66%) (0.67%)
Portfolio turnover rate 30.1% 20.5%
</Table>
* ANNUALIZED
** COMMENCED OPERATIONS ON OCTOBER 31, 2003.
*** UNAUDITED
+ TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING
THE PERIOD.
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 (UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 100,000,000 and 40,000,000 shares have been classified into
Class N and Class R of the Small-Cap Value Fund, respectively.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Small-Cap Value Fund seeks to provide long-term total return of capital,
primarily through capital appreciation.
Bridgeway Capital Management, Inc. (the "Adviser") is the adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of the financial statements of the Small-Cap Value Fund (the "Fund")
are in conformity with accounting principles generally accepted in the United
States of America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other investments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees. The Fund also continues to receive
dividends on the securities loaned. The loans are secured by collateral at least
equal to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
Additionally, the Fund does not have the right to sell or repledge collateral
received in the form of securities unless the borrower goes into default. The
risks to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. As of
December 31, 2004, the Fund had securities on loan valued at $185,700 and
received U.S. Treasury securities with a value of $189,927 as collateral. It is
the Fund's policy to obtain additional collateral from or return excess
collateral to the borrower by the end of the next business day, following the
valuation date of the securities loaned. Therefore, the value of the collateral
held may be temporarily less than the value of the securities on loan.
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles
15
<Page>
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, as well as the reported amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets. Fees
provided for under the Rule 12b-1 plan of a particular class of the fund are
charged to the operations of such class. All other expenses are allocated among
the classes on relative net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004 there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the current market value of the option
written. If an option which the Fund has written either expires on its
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or a loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such options is extinguished. If a call option which
the Fund has written is assigned, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
premium originally received. If a put option which the Fund has written is
assigned, the amount of the premium originally received reduces the cost of the
security which the Fund purchased upon exercise of the option. Buying calls
increases the Fund's exposure to the underlying security to the extent of any
premium paid. Buying puts on a stock market index tends to limit the Fund's
exposure to a stock market decline. As of December 31, 2004, there were no
outstanding options.
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, directors, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred. However, the Fund has not
had prior claims or losses pursuant to these contracts.
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser. As
compensation for the advisory services rendered, facilities furnished, and
expenses borne by the Adviser, the
16
<Page>
Fund pays the Adviser a total fee, which is comprised of a Base Fee and a
Performance Adjustment. The Base Fee equals the Base Fee Rate times the average
daily net assets of the Fund. The Base Fee Rate is based on the annual rate of
0.60% of the value of the Fund's average daily net assets. The Performance
Adjustment equals 0.33% times the difference in cumulative total return between
the Fund and the Russell 2000 Value Index with dividends reinvested (hereinafter
"Index") over a rolling five-year performance period. Since the Fund does not
have a five-year operating history, the Performance Adjustment Rate will be
calculated as follows during the initial five-year period: (a) From inception
through September 30, 2004, the Performance Adjustment Rate was inoperative thus
the Advisory Fee was calculated based on the Base Advisory Fee Rate times the
average daily net assets of the Fund only; (b) From September 30, 2004 through
September 30, 2008, the Performance Adjustment Rate will be calculated based
upon a comparison of the investment performance of the Fund and the Index over
the number of quarters that have elapsed since the Fund's inception. Each time
the Performance Adjustment Rate is calculated, it will cover a longer time span,
until it can cover a running five-year period as intended. In the meantime, the
early months of the transition period will have a disproportionate effect on the
performance adjustment of the fee. The Performance Adjustment Rate varies from a
minimum of -0.05% to a maximum of +0.05% However, the Performance Adjustment
Rate is zero if the difference between the cumulative Fund performance and the
Index performance is less than or equal to 2%.
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 0.94% of the value of its average net assets for Class N
shares and 1.19% of the value of its average net assets for Class R shares for
the six months ended December 31, 2004. For the six months ended December 31,
2004, the Adviser waived fees of $43,132.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. These trades are reviewed quarterly by the Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management acts as Administrator
for the Fund. Under the terms of the agreement, Bridgeway Capital Management
provides or arranges for the provision of certain accounting and other
administrative services to the Fund that it is not required to provide under the
terms of the investment advisory agreement. As compensation under the Master
Administrative Agreement, Bridgeway Capital Management receives a monthly fee
from each Fund calculated at the annual rate of 0.05% of average daily net
assets.
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is considered
to be "affiliated" and "interested." Compensation of Mr. Montgomery is borne by
the Adviser rather than the Fund.
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004. The amount attributable to the Small-Cap Value Fund is
disclosed in the Statement of Operations.
4. DISTRIBUTION AND SHAREHOLDER SERVICING FEES:
Forum Fund Services, LLC acts as distributor of the Fund's shares pursuant to a
Distribution Agreement dated January 2, 2004. The Adviser pays all costs and
expenses associated with distribution of the Fund's Class N shares pursuant to a
protective plan adopted by shareholders pursuant to Rule 12b-1 on October 15,
1996. On October 22, 2003, shareholders of the seven investment portfolios of
the fund then existing approved an amendment to the Rule 12b-1 plan to permit
the creation of a second class of shares, Class R, that would pay distribution
and service fees to the distributor up to 0.25% of average daily net assets.
Class R shares were subsequently created for the new Small-Cap Growth Fund,
Small-Cap Value Fund, Large-Cap Growth Fund and the Large-Cap Value Fund. During
the six months ended December 31, 2004 distribution fees of $5,661 were accrued
to Small-Cap Value Class R shareholders.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Aggregate purchases and sales of investment securities, other than U.S.
government securities and cash equivalents were $14,490,283 and $10,450,907,
respectively, for the six months ended December 31, 2004.
6. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and distribute substantially all of
its net taxable
17
<Page>
income including net realized gains on investments, if any, to its shareholders
each year. The fund is not subject to income or excise taxes to the extent such
distributions are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, were as
follows:
<Table>
Gross unrealized appreciation $ 8,704,519
Gross unrealized (depreciation) (780,297)
- ----------------------------------------------------------
Net unrealized appreciation
on investments $ 7,924,222
==========================================================
Cost of investments $ 33,934,506
==========================================================
</Table>
The Fund has deferred to its fiscal year ending June 30, 2005, $1,000,982 of
losses recognized during the period November 1, 2003 to June 30, 2004.
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 0
Accumulated capital losses (1,000,982)
Unrealized appreciation 1,017,194
</Table>
The temporary differences between book and tax are primarily due to post October
losses.
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually. Distributions to shareholders
are recorded on ex-date. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America.
7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
18
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the
SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the
SEC's Public Reference Room in Washington, D.C. For more information about the
operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 47% of the Fund.
19
<Page>
This Page Intentionally Left Blank
<Page>
[BRIDGEWAY FUNDS LOGO] LARGE-CAP GROWTH FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
Dear Fellow Large-Cap Growth Shareholder,
Our Fund had a positive return of 9.85% for the December 2004 quarter, compared
to a 9.17% return for our primary market benchmark, the Russell 1000 Growth
Index, and a 9.99% return of our peer benchmark, the Lipper Large-Cap Growth
Index.
The table below presents our performance for the December quarter and 1 year,
and annualized performance since inception, followed by a graph of performance
since inception as well as a new, SEC-mandated breakdown of sector
representation in the Fund.
<Table>
<Caption>
DEC. QTR. 1 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 10/31/03 TO
12/31/04 12/31/04 12/31/04
- --------------------------------------------------------------------------------
LARGE-CAP GROWTH FUND-CLASS N 9.85% 6.77% 8.85%
LARGE-CAP GROWTH FUND-CLASS R 9.77% 6.48% 8.59%
Russell 1000 Growth Index 9.17% 6.30% 9.46%
Lipper Large-Cap Growth Index 9.99% 7.45% 9.80%
</Table>
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL
1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com.
THE RUSSELL 1000 GROWTH INDEX IS AN UNMANAGED INDEX WHICH CONSISTS OF STOCKS IN
THE RUSSELL 1000 INDEX WITH HIGHER PRICE-TO-BOOK RATIOS AND HIGHER FORECASTED
GROWTH VALUES. THE LIPPER LARGE-CAP GROWTH INDEX IS AN INDEX OF LARGE-COMPANY,
GROWTH-ORIENTED FUNDS COMPILED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED.
[CHART]
GROWTH OF $10,000 INVESTED IN LARGE-CAP GROWTH FUND AND INDEXES FROM 10/31/03
(INCEPTION) TO 12/31/04
<Table>
<Caption>
BRIDGEWAY BRIDGEWAY LIPPER
LARGE-CAP GROWTH FUND - CLASS N LARGE-CAP GROWTH FUND - CLASS R RUSSELL 1000 GROWTH INDEX LARGE-CAP GROWTH INDEX
10/03 10000 10000 10000 10000
12/03 10340 10340 10454 10380
3/04 10620 10620 10536 10506
6/04 10630 10620 10740 10606
9/04 10050 10030 10179 10140
12/04 11040 11010 11113 11153
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
<Page>
SHAREHOLDER LETTER
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
<Table>
<Caption>
SECTOR LARGE-CAP GROWTH FUND S&P 500 INDEX DIFFERENCE
- ---------------------------------------------------------------------------------------
Basic Materials 2.1% 2.9% -0.8%
Communications 29.4% 11.3% 18.1%
Consumer, Cyclical 21.6% 9.9% 11.7%
Consumer, Non-cyclical 21.4% 21.2% 0.2%
Energy 4.0% 7.2% -3.2%
Financial 5.9% 20.6% -14.7%
Industrial 6.3% 11.6% -5.3%
Technology 7.4% 12.4% -5.0%
Utilities 1.9% 2.9% -1.0%
- ---------------------------------------------------------------------------------------
Total 100.0% 100.0% 0.0%
</Table>
PERFORMANCE SUMMARY
TRANSLATION: For both the year and the December quarter, the Fund beat its
primary benchmark and slightly lagged its peer-group average.
We are not entirely happy with these results. However, it is worth noting that
after a relatively lackluster nine months, the Fund in the fourth quarter of the
year returned - in just three months - slightly more than the S&P 500 Index has
typically returned over the course of a year. We say this not to excuse our
performance, but because it offers a good reminder of the value of sticking with
investment decisions and resisting panic and the urge to sell when things look
less than great. Remember, though, that this "holding through the downturn"
strategy works best in concert with other financial principles, such as saving,
avoiding most kinds of debt, diversifying (and regularly rebalancing) your
portfolio, setting aside an emergency fund, and choosing well- managed, low-cost
funds whose investment objectives - anything from very aggressive growth to
ultra-low-risk income - matches with the time-horizons of the investments you're
making. This is a fancy way of saying that the more years you can afford to wait
before tapping a particular pile of money, the more risk you can afford to take
with it.
YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S
DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR).
TRANSLATION: Notwithstanding news events (and the commentary of many market
pundits), 2004 was a remarkably average year. The combination of rising interest
rates, a declining U.S. dollar, inflation, the presidential election, war and
natural disasters should have produced some extraordinary results, right? Not so
fast....
Let's look at the statistics purely from a market perspective. Over the 10 years
through the 31st of December, 2004, the S&P 500 Index of large companies
returned an average of 12.05% per year. (I know, that sounds unbelievable, given
how weak the past few years' performance has been, but the market of the mid-
and late 1990s really was pretty remarkable.) That's only about one and one-half
percentage points better than the Index's return for 2004. Furthermore, if we
look all the way back to 1925, we see that the market has returned an average of
10.4% per year - and that's over a 79-year period that includes the Great
Depression, World War II, the white-hot "go-go" market of the 1960s and the
brutal bear market of the early 1970s. In about two-thirds of those years, the
Index either beat or lagged that 10.4% average by more than 10 percentage
points. From that perspective, therefore, 2004's return of 10.88% was about as
average as you can get.
.. . . but wasn't this a very volatile year? No. In fact, the actual variation of
monthly returns in 2004 was about half of the average of the preceding decade.
Throughout that 10-year period, only one year - 1995 - was less volatile. In
other words, in 2004 the stock market "bounced around" a whole lot LESS than
normal. This frees up tremendous emotional energy to spend on more important
things (including actually finding the next good stock pick).
In conclusion, what is remarkable about 2004 is how average it was in terms of
returns and how "tame" it was with respect to volatility. Not what you might
conclude from reading standard financial commentaries, many of which described a
market
2
<Page>
lurching dramatically between struggle and triumph. All that drama can be very
compelling, but it doesn't necessarily lead to an accurate understanding of the
market's behavior in the long run, nor does it necessarily produce sound
investment decisions. For that reason, though I have four computer screens in my
office, none of them runs a ticker, and I frequently go home at the end of the
day without knowing whether the overall market was up or down.
All that said, the market of 2004 did exhibit some unusual characteristics, in
particular the continued - and extraordinary - performance of smaller stocks.
This was the sixth year in a row that small stocks beat large ones, the longest
period of consecutive annual small-stock dominance in the last eight decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, investment strategies - such as buying small-cap stocks or value
stocks or real-estate-oriented stocks - that have worked well in the recent past
tend to keep working, as investors get caught up in the excitement and become
increasingly confident that a given strategy is the right way to go. This is
essentially a self-fulfilling prophecy: If everyone agrees that small stocks,
for example, are going to keep going up, they will go up, because everyone buys
them. So-called momentum investing has come in for a lot of negative publicity
in the past few years, because it was investors following a momentum strategy
who both fueled the tech-stocks bubble of the late '90s and early 2000 and then
(when they switched strategies) caused it to collapse. The fact is, though, that
a momentum strategy can work for periods of time, and statistically, when small
stocks have done well relative to the overall market in one year, they are more
likely to do well in the next one. So we could conceivably see a record-setting
seventh year in a row of small-stock dominance - hardly what investors in a
large-stock fund want to hear.
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but our computer stock picking models have no such concerns, and they
are pointing to a shift toward larger stocks. Specifically, over the past 12
months or so our models began finding a larger number of "attractive" large
stocks than at any time I can remember in about five years. This is almost
certainly a function of relative valuation; i.e., based on a variety of
financial measures, and thanks to the multi-year run-up in the price of small
stocks, larger stocks in general are starting to look relatively attractive
again. At Bridgeway, we don't put much effort into trying to guess the market's
direction; we're just trying to find one good stock (of any size) at a time.
Still, I believe it's likely that the tide will turn back in favor of large
stocks at SOME point in the next couple of years. It's a good time (ok, any time
is a good time) to make sure your own portfolio is in balance with your
long-term plan.
Of course, company size is hardly the only investment variable. "Style," too,
plays a significant role, and 2004 was pretty bad for "growth"-oriented stocks,
building on a very bad five-year trend. The following bar chart shows the
relative performance of growth versus value oriented large stocks, over the past
one, three, and five years ended 12/31/04, based on data from Morningstar:
This pattern of weak growth-stock performance is exactly what one would
expect...during the bear-market phase of a stock-market cycle. But from a
historical perspective, it's distinctly unusual for the last two years of a
recovery. Our models are suggesting a shift toward growth stocks, but not as
strongly as they indicate a shift toward large stocks. My conclusion from all
this: make sure your portfolio is in balance with your target allocation and
long term plan.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL
TRANSLATION: Despite being focused on not one but TWO out-of-favor corners of
the market, our Fund was able to come up with some winners. Six of our stocks
appreciated more than 30% in the December quarter.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- ------------------------------------------------------------------------------
1 Autodesk Inc Software 56.1%
2 Monsanto Co Agriculture 52.5%
3 Apple Computer Inc Computers 44.7%
4 Career Education Corp Commercial Services 39.1%
5 Chico's FAS Inc Retail 33.1%
6 Coach Inc Apparel 33.0%
</Table>
3
<Page>
Across the range of our Funds, some of the biggest winners recently have been
companies that cater to folks without a great deal of money - a chain of
pawnshops and "payday loan" providers in the southwest, a company that finances
the purchase of timeshares, etc. So it's interesting that two of this Fund's
most impressive performers, for the quarter were retailers of women's fashion
and fashion accessories that cater to a distinctly high-end clientele.
Chico's FAS, for example, owns about 650 stores (some of them, a recently
acquired chain, targeted specifically at a young, trendy audience). While many
retailers had a disappointing holiday season, Chico's boosted sales by 41% over
last year's levels, setting a new record. But that gain came on top of a 39%
increase in earnings (and a nice bump to operating margins) in the third
quarter, a 47% increase in sales in the second quarter, and a 52% increase in
sales in the first quarter. For the right merchandise, at least, the U.S.
consumer is still willing to pay up.
Certainly that would seem to be the lesson from Coach, Inc., where the average
handbag - fine leather, beautifully made - sells for $229, according to
Forbes.com. Coach went public in a spin-off from Sara Lee in 2000, and has
increased earnings by an average of 60% a year for the past five years, thanks
in part to an intimate understanding of its customer base: The company spends
more than $4 million a year, on average, on market research. The effort pays
off: holiday sales were up by 23% over last year, allowing Coach to avoid the
frantic discounting that many retailers employed in an effort to goose the cash
register. And that was after a 62% gain in earnings for the quarter ended
October 2, 2004.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: The fourth quarter was an exceptionally strong one for the market
as a whole, and for our Fund. Only one stock declined by more than 30%.
SanDisk, down 31.8%, was our one big loser for the quarter. It was actually a
pretty good example of the quarter's being strong. How so? Well, the company
really ran into trouble in early October, when it announced its third-quarter
results. While SanDisk had more than TRIPLED earnings for the quarter, and
boosted revenues by 45%, these figures fell short of analysts' expectations, and
investors departed in droves, costing the stock 27% of its value all but
overnight. We sold this stock in the 4th quarter.
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT WORKED WELL
TRANSLATION: Our Fund definitely had an uphill battle. First, it had to fight
the market's continued aversion to growth stocks (according to Morningstar,
large-cap value funds outperformed large-cap growth funds by nearly 14
percentage points for the year). And if that weren't enough, it had to contend
with investors' continued - and powerful - preference for small stocks, even in
a value-oriented context. (Small-cap value funds beat large-cap value funds by
nearly 10 percentage points, according to Morningstar.) Given the challenges,
we're not terribly displeased with our results: Eleven stocks gained more than
40% for the year.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- -------------------------------------------------------------------------------
1 Autodesk Inc Software 115.3%
2 eBay Inc Internet 72.3%
3 Harman International Industries Inc Home Furnishings 65.8%
4 Monsanto Co Agriculture 62.1%
5 Phelps Dodge Corp Mining 58.9%
6 Coach Inc Apparel 49.0%
7 Petsmart Inc Retail 48.8%
8 UnitedHealth Group Inc Healthcare-Services 45.4%
9 Apple Computer Inc Computers 44.7%
10 Qualcomm Inc Telecommunications 43.4%
11 Adobe Systems Inc Software 40.8%
</Table>
4
<Page>
Autodesk was the biggest winner for both the quarter and the year, and I
profiled the company in our September quarterly letter. The company produces
sophisticated computer software for graphics-heavy applications -- its products
are used by architects, surveyors, designers, and engineers, among others - and
it has continued to increase both revenues and profits. The stock hit a 52-week
high in the last week of the year and was the top performer in the S&P 500, with
a gain of nearly 210%. Our position in Autodesk, which we initially established
in the second quarter, was up more than 115% in 2004.
In the fourth quarter, Coach, profiled in the section above, also did very
nicely for the year. Another strong performer was Apple Computer, the well known
computer and electronics manufacturer. Apple makes the very popular iPod digital
music player, as well as the iMac and PowerCube personal computers. The stock
had performed respectably in the first nine months of the year, but it really
took off in the fourth quarter, as strong iPod sales began prompting analysts to
raise their earnings estimates. In the holiday season just ended, major
retailers like Amazon.com (the biggest Internet retailer), and Best Buy Company
(the largest electronics retailer) ran out of or ran short of some popular iPod
models. By some estimates Apple could sell 4 million iPods in the December
quarter, compared with just over 700,000 in the previous holiday season. We
initially bought shares early in October, and watched our total position gain
nearly 45% through the end of the year.
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK
As always, this is the list we'd prefer to forget. The only good part about it
is that it's short: Just two stocks lost more than 40% for the year.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LOSS
- -------------------------------------------------------------------------
1 Red Hat Inc Software -43.3%
2 ImClone Systems Inc Pharmaceuticals -42.1%
</Table>
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE
FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS.
Our second biggest loser of the year was ImClone Systems and, like SanDisk
(profiled in the section on the fourth quarter), it is to a large extent a story
of a stock's failing in spite of itself. ImClone makes the colon-cancer drug
Erbitux, and sales were strong in the first quarter. They were strong in the
second quarter as well - at more than $71 million, strong enough to quadruple
revenues over the same period in 2003, strong enough to propel the company to
its second consecutive quarter of profitability, strong enough to produce
earnings of 29 cents per share, compared with a loss of 47 cents per share a
year earlier.
But they weren't strong enough. "Guidance" from the company had led investors to
expect sales upwards of $80 million for the quarter, and the stock dropped 19%.
It fell again when one widely followed analyst pointed out that the company's
royalty payments - for patents it had purchased in developing Erbitux - would
skyrocket if the drug, as expected, was approved by the FDA for treating
additional forms of cancer. And it fell again in November when ImClone announced
its third-quarter results. Yes, the company had increased revenues by some 300%
over the previous year. Yes, earnings had beaten analysts' expectations by about
36%. But Erbitux sales were $3 million shy of the figure that analysts had been
projecting, and so the stock tumbled, ultimately costing us a 42% loss in our
position. We sold this stock in the 4th quarter.
Our worst finisher, Red Hat Inc., was a very different story. The stock began to
slide in July, after disappointing second-quarter numbers, and went into
free-fall with the resignation of the company's CFO, the announcement that the
company was "responding to questions" from the SEC, and the further announcement
that the company was going to have to restate some earnings to make up for
various accounting errors. The 15 class-action lawsuits didn't help, either, and
we sold the position in the 4th quarter.
TOP TEN HOLDINGS
At quarter end, our largest sector weighting was in Communications, which
represented 29.7% of net assets, followed by Consumer (Cyclical) at 21.8% and
Consumer (Non-Cyclical) at 21.6%. Our top ten holdings represented 29.6% of
total net assets, indicating much broader diversification than Bridgeway's more
aggressively managed Aggressive Investors Funds.
5
<Page>
At the end of December, top ten holdings represented seven different industries.
<Table>
<Caption>
PERCENT OF
RANK DESCRIPTION INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------------
1 Nextel Communications Inc Telecommunications 3.6%
2 eBay Inc Internet 3.5%
3 Home Depot Inc Retail 3.4%
4 Harman International Industries Inc Home Furnishings 3.4%
5 Nordstrom Inc Retail 3.0%
6 Qualcomm Inc Telecommunications 2.9%
7 Cisco Systems Inc Telecommunications 2.5%
8 Schlumberger Ltd Oil & Gas Services 2.5%
9 Total System Services Inc Software 2.4%
10 Patterson Companies Healthcare-Products 2.4%
- --------------------------------------------------------------------------------------
29.6%
- --------------------------------------------------------------------------------------
</Table>
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views are not meant as investment advice and should not be considered
predictive in nature. Any favorable (or unfavorable) description of a holding
applies only as of December 31, 2004, unless otherwise stated. Security
positions can and do change thereafter. Discussions of historical performance do
not guarantee and are not indicative of future performance.
THE FUND IS SUBJECT TO MARKET RISK (VOLATILITY) AND IS NOT AN APPROPRIATE
INVESTMENT FOR SHORT-TERM INVESTORS.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES,
RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S
WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND
SERVICES, LLC, DISTRIBUTOR. (02/05)
CONCLUSION
As always, we appreciate your feedback. We take your responses seriously and
discuss them at our weekly staff meetings. Please keep your ideas coming--we
read them looking for ways to improve our service.
Sincerely,
/s/ John Montgomery
John Montgomery
6
<Page>
DISCLOSURE OF FUND EXPENSES
(UNAUDITED)
As a shareholder to the Fund, you will incur no transactions costs, including
sales charges (loads) on purchases, on reinvested dividends, or on other
distributions. There are also no redemption fees or exchange fees. However, the
fund will incur ongoing costs, including management fees; distribution (12b-1)
fees; and other Fund expenses. The following examples are intended to help you
understand your ongoing costs (in dollars) of investing in a Fund and to compare
these costs with the ongoing costs of investing in other mutual funds. The
examples are based on an investment of $1,000 invested on July 1, 2004 and held
until December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY LARGE-CAP GROWTH FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSE PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- -----------------------------------------------------------------------------------------------
CLASS N Actual Fund Return $ 1,000.00 $ 1,038.57 $ 4.31
Hypothetical Fund Return $ 1,000.00 $ 1,020.97 $ 4.28
CLASS R Actual Fund Return $ 1,000.00 $ 1,036.72 $ 5.59
Hypothetical Fund Return $ 1,000.00 $ 1,019.71 $ 5.55
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 0.84% AND 1.09%
FOR CLASS N AND CLASS R, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT
VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL
HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE
HALF-YEAR PERIOD).
7
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------------
COMMON STOCKS - 101.0%
AEROSPACE/DEFENSE - 0.3%
L-3 Communications
Holdings Inc 2,000 $ 146,480
AGRICULTURE - 0.4%
Monsanto Co 3,800 211,090
APPAREL - 2.1%
Coach Inc* 17,660 996,024
AUTO MANUFACTURERS - 0.5%
Paccar Inc 3,000 241,440
BIOTECHNOLOGY - 3.9%
Amgen Inc* 9,000 577,350
Biogen Idec Inc* 3,200 213,152
Genentech Inc* 19,000 1,034,360
Millennium
Pharmaceuticals Inc* 3,500 42,420
--------------
1,867,282
CHEMICALS - 1.3%
Dow Chemical Co 12,770 632,243
COMMERCIAL SERVICES - 1.0%
Apollo Group Inc* 4,650 375,301
Career Education Corp* 2,200 88,000
--------------
463,301
COMPUTERS - 1.3%
Apple Computer Inc* 2,000 128,800
Dell Inc* 2,500 105,350
Lexmark International Inc* 1,300 110,500
NCR Corp* 2,000 138,460
Research In Motion Ltd, ADR* 1,500 123,630
--------------
606,740
COSMETIC/PERSONAL CARE - 1.8%
Avon Products Inc 1,000 38,700
Gillette Co 18,700 837,386
--------------
876,086
DISTRIBUTION/WHOLESALE - 0.6%
Fastenal Co 5,000 307,800
DIVERSIFIED FINANCIAL SERVICES - 3.2%
Franklin Resources Inc 12,200 849,730
MBNA Corp 25,520 719,409
--------------
1,569,139
ELECTRIC UTILITIES - 1.9%
Texas Utilities Corp 14,000 903,840
ELECTRICAL COMPONENTS & EQUIPMENT - 2.2%
Molex Inc 34,800 1,044,000
ELECTRONICS - 0.3%
Waters Corp* 2,800 131,012
ENTERTAINMENT - 1.6%
International Game Technology 23,020 791,427
HEALTHCARE PRODUCTS - 5.9%
Biomet Inc 6,000 $ 260,340
C.R. Bard Inc 1,800 115,164
Johnson & Johnson 2,000 126,840
Medtronic Inc 3,400 168,878
Patterson Dental Co* 26,440 1,147,232
Zimmer Holdings Inc* 13,160 1,054,379
--------------
2,872,833
HEALTHCARE SERVICES - 2.5%
Laboratory Corp of American
Holdings* 1,600 79,712
United Health Group Inc 12,858 1,131,890
WellPoint Health Networks Inc* 30 3,450
--------------
1,215,052
HOME FURNISHINGS - 3.3%
Harman International
Industries Inc 12,740 1,617,980
HOUSEHOLD PRODUCTS/WARES - 2.2%
Fortune Brands Inc 13,520 1,043,474
Insurance - 2.7%
American International Group Inc 8,400 551,628
The Progressive Corp 8,800 746,592
--------------
1,298,220
INTERNET - 7.5%
Amazon.com Inc* 12,354 547,159
eBay Inc* 14,580 1,695,362
Symantec Corp* 42,920 1,105,619
Yahoo! Inc* 7,220 272,050
--------------
3,620,190
IRON/STEEL - 0.7%
Nucor Corp 6,000 314,040
LEISURE TIME - 0.5%
Harley-Davidson Inc 3,600 218,700
LODGING - 0.3%
Marriott International Inc 2,500 157,450
MACHINERY - DIVERSIFIED - 0.5%
Deere & Co 1,750 130,200
Rockwell Automation Inc 2,400 118,920
--------------
249,120
MEDIA - 6.7%
Clear Channel
Communications Inc 24,050 805,434
Fox Entertainment Group Inc -
Class A* 20,100 628,326
Univision Communications Inc -
Class A* 29,400 860,538
Walt Disney Co 33,200 922,960
--------------
3,217,258
MINING - 0.2%
Phelps Dodge Corp 1,000 98,920
</Table>
8
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -----------------------------------------------------------------------------------------------
MISCELLANEOUS MANUFACTURING - 3.1%
3M Co 6,232 $ 511,460
Danaher Corp 14,800 849,668
General Electric Co 4,000 146,000
--------------
1,507,128
OIL & GAS - 1.2%
Burlington Resources Inc 3,600 156,600
EOG Resources Inc 2,000 142,720
Exxon Mobil Corp 2,000 102,520
XTO Energy Inc 5,300 187,514
--------------
589,354
OIL & GAS SERVICES - 2.8%
Baker Huges Inc 3,600 153,612
Schlumberger Ltd 17,700 1,185,015
--------------
1,338,627
PHARMACEUTICALS - 3.9%
Bristol-Myers Squibb Co 44,400 1,137,528
Forest Laboratories Inc* 60 2,692
Gilead Sciences Inc* 120 4,199
Pfizer Inc 28,000 752,920
--------------
1,897,339
RETAIL - 12.8%
Best Buy Co Inc 10,430 619,751
Chico's FAS Inc* 2,500 113,825
Home Depot Inc 38,960 1,665,150
Lowe's Companies Inc 10,340 595,481
McDonald's Corp 4,340 139,140
Nordstrom Inc 31,070 1,451,901
PETsMART Inc 18,850 669,740
Staples Inc 17,260 581,835
Starbucks Corp* 2,800 174,608
Walgreen Co 4,900 188,013
--------------
6,199,444
SEMICONDUCTORS - 2.9%
Freescale Semiconductor Inc* 7,121 130,741
Intel Corp 12,000 280,680
Texas Instruments Inc 39,590 974,706
--------------
1,386,127
SOFTWARE - 3.4%
Adobe Systems Inc 2,700 169,398
Autodesk Inc 7,200 273,240
BMC Software Inc* 1,136 21,130
Total System Services Inc 47,950 1,165,185
--------------
1,628,953
TELECOMMUNICATIONS - 15.5%
Avaya Inc* 48,300 830,760
Cisco Systems Inc* 61,400 1,185,020
Juniper Networks Inc* 5,700 154,983
Motorola Inc 64,500 1,109,400
Nextel Communications Inc -
Class A* 58,180 1,745,400
Qualcomm Inc 33,500 1,420,400
Scientific-Atlanta Inc 32,000 1,056,320
--------------
7,502,283
--------------
TOTAL COMMON STOCKS
(Cost $43,781,234) 48,760,396
--------------
TOTAL INVESTMENTS - 101.0%
(Cost $43,781,234) $ 48,760,396
Liabilities In Excess of Other Assets - (1.0%) (482,643)
--------------
NET ASSETS - 100.0% $ 48,277,753
==============
</Table>
* NON-INCOME PRODUCING SECURITY
ADR - AMERICAN DEPOSITARY RECEIPT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments at value (cost - $43,781,234) $ 48,760,396
Receivable for fund shares sold 71,931
Dividends receivable 50,936
Prepaid expenses 23,233
- -------------------------------------------------------------------------------------------------
Total assets 48,906,496
- -------------------------------------------------------------------------------------------------
LIABILITIES:
Overdraft 510,062
Payable for fund shares redeemed 31,808
Accrued investment adviser fee 14,087
Accrued administration fee 2,348
Accrued directors fee 326
Accrued distribution fee 7,623
Other payables 62,489
- -------------------------------------------------------------------------------------------------
Total liabilities 628,743
- -------------------------------------------------------------------------------------------------
NET ASSETS $ 48,277,753
=================================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 46,427,081
Accumulated net investment loss (49,069)
Accumulated net realized loss on investments (3,079,421)
Net unrealized appreciation of investments 4,979,162
- -------------------------------------------------------------------------------------------------
NET ASSETS $ 48,277,753
=================================================================================================
NET ASSET VALUE PER SHARE
Net assets
Class N $ 37,754,860
Class R $ 10,522,893
Shares of beneficial interest outstanding of $.001 par value
Class N, 100,000,000 shares authorized 3,419,348
Class R, 40,000,000 shares authorized 955,504
Net asset value, offering and redemption price per share
Class N $ 11.04
Class R $ 11.01
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
<Table>
INVESTMENT INCOME:
Dividends $ 165,870
Interest 398
- -------------------------------------------------------------------------------------------------
Total investment income 166,268
EXPENSES:
Investment advisory fees 120,164
Administration fees 12,016
Accounting fees 27,974
Transfer agent fees 42,603
Audit fees 4,525
Tax fees 4,830
Custody fees 7,523
Legal fees 6,648
Blue sky fees 3,864
Distribution fees - Class R 13,653
Directors fees 1,099
Registration fees 2,256
Reports to shareholders 3,000
Miscellaneous 3,015
- -------------------------------------------------------------------------------------------------
Total expenses before fees waived 253,170
Less investment advisory fees waived (37,833)
- -------------------------------------------------------------------------------------------------
Net expenses 215,337
- -------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (49,069)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment securities (2,526,045)
Net change in unrealized appreciation / depreciation on investments 4,130,638
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 1,604,593
- -------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,555,524
=================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 2004* JUNE 30, 2004**
- -------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss $ (49,069) $ (31,395)
Net realized loss on investment securities (2,526,045) (553,376)
Net change in unrealized appreciation / depreciation on investments 4,130,638 848,524
- -------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 1,555,524 263,753
- -------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares
Class N 4,168,562 44,636,671
Class R 400,633 13,565,852
Cost of shares redeemed
Class N (7,216,722) (5,380,731)
Class R (2,657,808) (1,057,981)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from share transactions (5,305,335) 51,763,811
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets (3,749,811) 52,027,564
NET ASSETS:
Beginning of period 52,027,564 0
- -------------------------------------------------------------------------------------------------------------------------
End of period *** $ 48,277,753 $ 52,027,564
=========================================================================================================================
SHARES ISSUED & REDEEMED:
Issued
Class N 411,354 4,236,848
Class R 39,819 1,277,545
Redeemed
Class N (709,673) (519,180)
Class R (260,952) (100,909)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) (519,452) 4,894,304
Outstanding at beginning of period 4,894,304 0
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 4,374,852 4,894,304
=========================================================================================================================
* Unaudited
** Commenced operations on October 31, 2003.
*** Including accumulated net investment loss of: $ (49,069) $ 0
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
CLASS N
<Table>
<Caption>
SIX MONTHS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 31, 2003 TO
2004*** JUNE 30, 2004**
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 10.63 $ 10.00
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss^ (0.01) (0.01)
Net realized and unrealized gain 0.42 0.64
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.41 0.63
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.04 $ 10.63
=========================================================================================================================
TOTAL RETURN+# 3.86% 6.30%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 37,755 $ 39,532
Ratios to average net assets:
Expenses after waivers and reimbursements* 0.84% 0.84%
Expenses before waivers and reimbursements* 1.00% 1.13%
Net investment loss after
waivers and reimbursements* (0.15%) (0.09%)
Portfolio turnover rate 14.0% 6.7%
</Table>
CLASS R
<Table>
<Caption>
SIX MONTHS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 31, 2003 TO
2004*** JUNE 30, 2004**
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 10.62 $ 10.00
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss^ (0.02) (0.08)
Net realized and unrealized gain 0.41 0.70
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.39 0.62
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.01 $ 10.62
=========================================================================================================================
TOTAL RETURN+# 3.67% 6.20%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 10,523 $ 12,495
Ratios to average net assets:
Expenses after waivers and reimbursements* 1.09% 1.09%
Expenses before waivers and reimbursements* 1.25% 1.29%
Net investment loss after
waivers and reimbursements* (0.40%) (0.34%)
Portfolio turnover rate 14.0% 6.7%
</Table>
* ANNUALIZED
** COMMENCED OPERATIONS ON OCTOBER 31, 2003.
*** UNAUDITED
+ TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING
THE PERIOD.
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<Page>
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004
(UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 100,000,000 and 40,000,000 shares have been classified into
Class N and Class R of the Large-Cap Growth Fund, respectively.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Large-Cap Growth Fund seeks to provide long-term total return of capital,
primarily through capital appreication.
Bridgeway Capital Management, Inc. (the "Adviser") is the Adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of financial statements of the Large-Cap Growth Fund (the "Fund")
are in conformity with accounting principles generally accepted in the United
States of America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other ivestments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees. The Fund also continues to receive
dividends on the securities loaned. The loans are secured by collateral at least
equal to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
Additionally, the Fund does not have the right to sell or repledge collateral
received in the form of securities unless the borrower goes into default. The
risks to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. As of
December 31, 2004, the Fund had no securities on loan. It is the Fund's policy
to obtain additional collateral from or return excess collateral to the borrower
by the end of the next business day, following the valuation date of the
securities loaned. Therefore, the value of the collateral held may be
temporarily less than the value of the securities on loan.
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles
14
<Page>
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, as well as the reported amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets. Fees
provided for under the Rule 12b-1 plan of a particular class of the fund are
charged to the operations of such class. All other expenses are allocated among
the classes on relative net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004 there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the current market value of the option
written. If an option which the Fund has written either expires on its
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or a loss if the cost of a closing
purchase tranaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such options is extinguished. If a call option which
the Fund has written is assigned, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
premium originally received. If a put option which the Fund has written is
assigned, the amount of the premium originally received reduces the cost of the
security which the Fund purchased upon exercise of the option. Buying calls
increases the Fund's exposure to the underlying security to the extent of any
premium paid. Buying puts on a stock market index tends to limit the Fund's
exposure to a stock market decline. As of December 31, 2004, there were no
outstanding options.
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, directors, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred. However, the Fund has not
had prior claims or losses pursuant to these contracts.
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser. As
compensation for the advisory services rendered, facilities furnished, and
expenses borne by the Adviser, the
15
<Page>
Fund pays the Adviser a total fee which is comprised of a Base Fee and a
Performance Adjustment. The Base Fee equals the Base Fee Rate times the average
daily net assets of the Fund. The Base Fee Rate is based on the annual rate of
0.50% of the value of the Fund's average daily net assets.
The Performance Adjustment equals 0.33% times the difference in cumulative total
return between the Fund and the Russell 1000 Growth Index with dividends
reinvested (hereinafter "Index") over a rolling five-year performance period.
Since the Fund does not have a five-year operating history, the Performance
Adjustment Rate will be calculated as follows during the initial five-year
period: (a) From inception through September 30, 2004, the Performance
Adjustment Rate was inoperative thus the Advisory Fee was calculated based on
the Base Advisory Fee Rate times the average daily net assets of the Fund only;
b) From September 30, 2004 through September 30, 2008, the Performance
Adjustment Rate will be calculated based upon a comparison of the investment
performance of the Fund and the Index over the number of quarters that have
elapsed since the Fund's inception. Each time the Performance Adjustment Rate is
calculated, it will cover a longer time span, until it can cover a running
five-year period as intended. In the meantime, the early months of the
transition period will have a disproportionate effect on the performance
adjustment of the fee. The Performance Adjustment Rate varies from a minimum of
- -0.05% to a maximum of +0.05% However, the Performance Adjustment Rate is zero
if the difference between the cumulative Fund performance and the Index
performance is less than or equal to 2%.
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 0.84% of the value of its average net assets for Class N
shares and 1.09% of the value of its average net assets for Class R shares for
the six months ended December 31, 2004. For the six months ended December 31,
2004, the Adviser waived advisory fees of $137,833.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. These trades are reviewed quarterly by the Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management acts as Administrator
for the Fund. Under the terms of the agreement, Bridgeway Capital Management
provides or arranges for the provision of certain accounting and other
administrative services to the Fund that it is not required to provide under the
terms of the investment advisory agreement. As compensation under the Master
Administrative Agreement, Bridgeway Capital Management receives a monthly fee
from each Fund calculated at the annual rate of 0.05% of average daily net
assets.
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is considered
to be "affiliated" and "interested." Compensation of Mr. Montgomery is borne by
the Adviser rather than the Fund.
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004. The amount attributable to the Large-Cap Growth Fund is
disclosed in the Statement of Operations.
4. DISTRIBUTION AND SHAREHOLDER SERVICING FEES:
Forum Fund Services, LLC acts as distributor of the Fund's shares pursuant to a
Distribution Agreement dated January 2, 2004. The Adviser pays all costs and
expenses associated with distribution of the Fund's Class N shares pursuant to a
protective plan adopted by shareholders pursuant to Rule 12b-1 on October 15,
1996. On October 22, 2003, shareholders of the seven investment portfolios of
the fund then existing approved an amendment to the Rule 12b-1 plan to permit
the creation of a second class of shares, Class R, that would pay distribution
and service fees to the distributor up to 0.25% of average daily net assets of
the Class R Shares. Class R shares were subsequently created for the new
Small-Cap Growth Fund, Small-Cap Value Fund, Large-Cap Growth Fund and the
Large-Cap Value Fund. During the six months ended December 31, 2004 distribution
fees of $13,653 were accrued to Large-Cap Growth Class R shareholders.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Aggregate purchases and sales of investment securities, other than U.S.
government securities and cash equivalents were $6,774,140 and $11,702,119,
respectively, for the six months ended December 31, 2004.
16
<Page>
6. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and distribute substantially all of
its net taxable income including net realized gains on investments, if any, to
its shareholders each year. The fund is not subject to income or excise taxes to
the extent such distributions are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, were as
follows:
<Table>
Gross unrealized appreciation $ 6,811,469
Gross unrealized (depreciation) (1,832,307)
- --------------------------------------------------------------
Net unrealized appreciation
on investments $ 4,979,162
==============================================================
Cost of investments $ 43,781,234
==============================================================
</Table>
The Fund has deferred to its fiscal year ending June 30, 2005, $553,376 of
losses recognized during the period November 1, 2003 to June 30, 2004.
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 0
Accumulated capital losses (553,376)
Unrealized appreciation 848,524
</Table>
The temporary differences between book and tax are primarily due to post October
losses.
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually. Distributions to shareholders
are recorded on ex-date. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America.
7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
17
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the
SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the
SEC's Public Reference Room in Washington, D.C. For more information about the
operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 38% of the Fund.
18
<Page>
This Page Intentionally Left Blank
<Page>
[BRIDGEWAY FUNDS LOGO] LARGE-CAP VALUE FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
Dear Fellow Large-Cap Value Shareholder,
Our Fund was up 11.11% for the December 2004 quarter, compared to a 10.38% gain
for our primary market benchmark, the Russell 1000 Value Index, and an 8.80%
return of our peer benchmark, the Lipper Large-Cap Value Index.
The table below presents our performance for the December quarter, 1 year, and
annualized performance since inception, followed by a graph of performance since
inception as well as a new, SEC-mandated breakdown of sector representation in
the Fund.
<Table>
<Caption>
DEC. QTR. 1 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 10/31/03 TO
12/31/04 12/31/04 12/31/04
- --------------------------------------------------------------------------------
LARGE-CAP VALUE FUND-CLASS N 11.11% 15.15% 19.96%
LARGE-CAP VALUE FUND-CLASS R 11.07% 14.79% 19.65%
Russell 1000 Value Index 10.38% 16.49% 21.36%
Lipper Large-Cap Value Index 8.80% 12.00% 17.18%
</Table>
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL
1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com.
THE RUSSELL 1000 VALUE INDEX IS AN UNMANAGED INDEX WHICH CONSISTS OF STOCKS IN
THE RUSSELL 1000 INDEX WITH LOWER PRICE-TO-BOOK RATIOS AND LOWER FORECASTED
GROWTH VALUES. THE LIPPER LARGE-CAP VALUE INDEX IS AN INDEX OF LARGE-COMPANY,
VALUE-ORIENTED FUNDS COMPILED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED.
[CHART]
GROWTH OF $10,000 INVESTED IN LARGE-CAP VALUE FUND AND INDEXES FROM 10/31/03
(INCEPTION) TO 12/31/04
<Table>
<Caption>
BRIDGEWAY BRIDGEWAY LIPPER
LARGE-CAP VALUE FUND - CLASS N LARGE-CAP VALUE FUND - CLASS R RUSSELL 1000 VALUE INDEX LARGE-CAP VALUE INDEX
10/03 10000 10000 10000 10000
12/03 10740 10740 10760 10744
3/04 11310 11300 11086 11003
6/04 11110 11090 11184 11119
9/04 11130 11100 11357 11059
12/04 12367 12329 12535 12033
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
<Page>
SHAREHOLDER LETTER
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
<Table>
<Caption>
SECTOR LARGE-CAP VALUE FUND S&P 500 INDEX DIFFERENCE
- -----------------------------------------------------------------------------------------------------------
Basic Materials 3.8% 2.9% 0.9%
Communications 14.6% 11.3% 3.3%
Consumer, Cyclical 14.2% 9.9% 4.3%
Consumer, Non-cyclical 8.8% 21.2% -12.4%
Energy 10.6% 7.2% 3.4%
Financial 27.2% 20.6% 6.6%
Industrial 10.6% 11.6% -1.0%
Technology 2.3% 12.4% -10.1%
Utility 7.9% 2.9% 5.0%
- -----------------------------------------------------------------------------------------------------------
TOTAL 100.0% 100.0% 0.0%
</Table>
PERFORMANCE SUMMARY
TRANSLATION: For the December quarter, both share classes of the Fund beat both
the Russell 1000 Value Index of large, value-oriented stocks and the peer-group
average. For the year, both share classes of the Fund beat their peer-group
average but slightly lagged the Index.
We are not entirely happy with these results. However, it is worth noting that
after a relatively lackluster nine months, the Fund in the fourth quarter of the
year returned - in just three months - slightly more than the S&P 500 Index has
typically returned over the course of a year. We say this not to excuse our
performance, but because it offers a good reminder of the value of sticking with
investment decisions and resisting panic and the urge to sell when things look
less than great. Remember, though, that this "holding through the downturn"
strategy works best in concert with other financial principles, such as saving,
avoiding most kinds of debt, diversifying (and regularly rebalancing) your
portfolio, setting aside an emergency fund, and choosing well- managed, low-cost
funds whose investment objectives - anything from very aggressive growth to
ultra-low-risk income - matches with the time-horizons of the investments you're
making. This is a fancy way of saying that the more years you can afford to wait
before tapping a particular pile of money, the more risk you can afford to take
with it.
YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S
DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR).
TRANSLATION: Notwithstanding news events (and the commentary of many market
pundits), 2004 was a remarkably average year. The combination of rising interest
rates, a declining U.S. dollar, inflation, the presidential election, war and
natural disasters should have produced some extraordinary results, right? Not so
fast....
Let's look at the statistics purely from a market perspective. Over the 10 years
through the 31st of December, 2004, the S&P 500 Index of large companies
returned an average of 12.05% per year. (I know, that sounds unbelievable, given
how weak the past few years' performance has been, but the market of the mid-
and late 1990s really was pretty remarkable.) That's only about one and one-half
percentage points better than the Index's return for 2004. Furthermore, if we
look all the way back to 1925, we see that the market has returned an average of
10.4% per year - and that's over a 79-year period that includes the Great
Depression, World War II, the white-hot "go-go" market of the 1960s and the
brutal bear market of the early 1970s. In about two-thirds of those years, the
Index either beat or lagged that 10.4% average by more than 10 percentage
points. From that perspective, therefore, 2004's return of 10.88% was about as
average as you can get.
.. . . but wasn't this a very volatile year? No. In fact, the actual variation of
monthly returns in 2004 was about half of the average of the preceding decade.
Throughout that 10-year period, only one year - 1995 - was less volatile. In
other words, in 2004 the stock market "bounced around" a whole lot LESS than
normal. This frees up tremendous emotional energy to spend on more important
things (including actually finding the next good stock pick).
2
<Page>
In conclusion, what is remarkable about 2004 is how average it was in terms of
returns and how "tame" it was with respect to volatility. Not what you might
conclude from reading standard financial commentaries, many of which described a
market lurching dramatically between struggle and triumph. All that drama can be
very compelling, but it doesn't necessarily lead to an accurate understanding of
the market's behavior in the long run, nor does it necessarily produce sound
investment decisions. For that reason, though I have four computer screens in my
office, none of them runs a ticker, and I frequently go home at the end of the
day without knowing whether the overall market was up or down.
All that said, the market of 2004 did exhibit some unusual characteristics, in
particular the continued - and extraordinary - performance of smaller stocks.
This was the sixth year in a row that small stocks beat large ones, the longest
period of consecutive annual small-stock dominance in the last eight decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, investment strategies - such as buying small-cap stocks or value
stocks or real-estate-oriented stocks - that have worked well in the recent past
tend to keep working, as investors get caught up in the excitement and become
increasingly confident that a given strategy is the right way to go. This is
essentially a self-fulfilling prophecy: If everyone agrees that small stocks,
for example, are going to keep going up, they will go up, because everyone buys
them. So-called momentum investing has come in for a lot of negative publicity
in the past few years, because it was investors following a momentum strategy
who both fueled the tech-stocks bubble of the late '90s and early 2000 and then
(when they switched strategies) caused it to collapse. The fact is, though, that
a momentum strategy can work for periods of time, and statistically, when small
stocks have done well relative to the overall market in one year, they are more
likely to do well in the next one. So we could conceivably see a record-setting
seventh year in a row of small-stock dominance - hardly what investors in a
large-stock fund want to hear.
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but our computer stock picking models have no such concerns, and they
are pointing to a shift toward larger stocks. Specifically, over the past 12
months or so our models began finding a larger number of "attractive" large
stocks than at any time I can remember in about five years. This is almost
certainly a function of relative valuation; i.e., based on a variety of
financial measures, and thanks to the multi-year run-up in the price of small
stocks, larger stocks in general are starting to look relatively attractive
again. At Bridgeway, we don't put much effort into trying to guess the market's
direction; we're just trying to find one good stock (of any size) at a time.
Still, I believe it's likely that the tide will turn back in favor of large
stocks at SOME point in the next couple of years. It's a good time (ok, any time
is a good time) to make sure your own portfolio is in balance with your
long-term plan.
Of course, company size is hardly the only investment variable. "Style," too,
plays a significant role, and 2004 was pretty bad for "growth"-oriented stocks,
building on a very bad five-year trend. The following bar chart shows the
relative performance of growth versus value oriented large stocks, over the past
one, three, and five years ended 12/31/04, based on data from Morningstar:
[CHART]
<Table>
<Caption>
VALUE GROWTH
1 Year 14.05% 0.19%
3 Year 6.95% -4.35%
5 Year 4.54% -16.22%
</Table>
3
<Page>
This pattern of weak growth-stock performance is exactly what one would
expect...during the bear-market phase of a stock-market cycle. But from a
historical perspective, it's distinctly unusual for the last two years of a
recovery. Our models are suggesting a shift toward growth stocks, but not as
strongly as they indicate a shift toward large stocks. My conclusion from all
this: make sure your portfolio is in balance with your target allocation and
long term plan.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL
TRANSLATION: What a difference a day makes - or, more accurately, a handful of
years. Not so long ago, technology stocks, cable-TV companies and "telecoms"
were situated about as firmly in the growth camp as it's possible to get. But
when the tech-stock bubble burst in early 2000, and the rest of the market -
particularly the growth-oriented names - followed it down, those stocks got a
heaping helping of humility. Beaten down, their newly attractive valuations
(based on a variety of financial measures) locate them pretty firmly on the
value side of the equation, and several former high-flyers were among this
Fund's best performers for the December quarter, during which six of our stocks
gained more than 30%.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- ---------------------------------------------------------------------------------
1 Advanced Micro Devices Inc Semiconductors 69.4%
2 NCR Corp Computers 39.6%
3 Liberty Media International Inc Media 38.6%
4 AT&T Corp Telecommunications 33.1%
5 Archer-Daniels-Midland Co Food 31.4%
6 E*TRADE Financial Corp Diversified Financial Svcs 30.9%
</Table>
Leading the pack, with a gain nearly twice what its nearest rival achieved, was
Advanced Micro Devices, a long-beleaguered chip-maker based in Sunnyvale, CA.
After treading water for much of the year, the stock began to surge in
September, mostly because of perceived missteps on the part of primary rival
Intel. AMD's third-quarter results further fueled the stock: Revenues were up
30% over the same period the previous year, thanks in large part to strong sales
of the company's 64-bit processors. And in November the stock got another boost
as rumors began circulating that PC-giant Dell Computer would join IBM, Sun
Microsystems, and Hewlett-Packard in producing servers based around AMD's
"Opteron" chip. AMD is still a good 50% below the peak share-price it achieved
in early 2000, but after gaining more than 69% in the December quarter, it may
not be a value stock for too much longer.
Third-place finisher Liberty Media International is very much a new kid on the
block, spun off in June from former parent company Liberty Media. It is now one
of the largest (arguably THE largest, depending on how you measure) cable-TV
operators outside the United States. The stock opened limp and traded down from
there, but it began picking up steam around the end of the third quarter, with
the announcement of a partnership with Japan's Sumitomo Corp., followed by the
announcement that the stock had been added to the Nasdaq-100 Index.
In sixth place, online brokerage E*TRADE Financial had spent much of the year in
a holding pattern. Online brokerages have been suffering a lot, thanks in part
to weak trading volume (when you don't trade, they don't make money) and
pressure to cut commissions. And though E*TRADE's stock had held up better than
most, it certainly wasn't setting any records. In October, however, the company
released its third-quarter numbers, which easily beat analysts' estimates. And
in November, E*TRADE announced that trading volume in October had climbed by 26%
from September levels, which was enough to push the stock onto our Fund's list
of winners for the quarter.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: Happily, there was nothing that didn't work - or, at least, nothing
that lost more than 30% for the quarter. We're very happy about this.
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT WORKED
TRANSLATION: An insurance firm, a chip-maker, a chicken-processor, a
homebuilder...the companies on the list of top performers for the year don't
have a lot in common. They didn't even have their runs at the same time: While
some saw their stock
4
<Page>
prices take off in the fourth quarter - as was the case for much of the market -
others turned in 12 months of steady upticks. Regardless, eleven stocks in our
Fund gained more than 30% for the year.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- -------------------------------------------------------------------------------
1 Aetna Inc Healthcare Services 53.4%
2 Amerada Hess Corp Oil & Gas 49.0%
3 NCR Corp Computers 46.5%
4 Countrywide Financial Corp Diversified Financial Svcs. 46.3%
5 DR Horton Inc Home Builders 41.1%
6 Parker Hannifin Corp Electronics 40.7%
7 Tyson Foods Inc Food 39.0%
8 Norfolk Southern Corp Transportation 36.6%
9 Occidental Petroleum Corp Oil & Gas 33.2%
10 Advanced Micro Devices Inc Semiconductors 32.7%
11 Textron Inc Misc. Manufacturers 30.9%
</Table>
For both Aetna, the Hartford insurance firm, and D.R. Horton, a Fort Worth-based
homebuilder, the last two months of the year were key to the return for the
entire year. Both stocks had spent the previous 10 months making moderate gains
followed by moderate losses, but the release of strong third-quarter numbers
produced returns of more than 30%, for both stocks, in the last two months of
the year.
By contrast, Dayton-based computer systems company NCR began its run in
mid-July, with an announcement that earnings for the second quarter - soon to be
released - would double analysts' expectations. And top-place finisher Advanced
Micro Devices, as noted in the section on December-quarter results, didn't do
much of anything until September, whereas industrial conglomerate Textron (maker
of Cessna airplanes, among other things) began moving slowly upward in May. It
would be nice to find a pattern among these powerful performers - nice because
patterns offer potential predictability. But in the absence of a pattern, we're
glad to take the returns.
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: I'm delighted to report that no stocks in the Fund's portfolio lost
more than 30% for the year.
TOP TEN HOLDINGS
At quarter end, Financials were our biggest sector weighting, at 27.1% of net
assets, followed by Communications, at 14.5%, and Consumer (Cyclical), at 14.1%.
Our top ten holdings represented 25.4% of total net assets, indicating much
broader diversification than is the case in Bridgeway's more aggressively
managed Aggressive Investors funds. At the end of December, our top ten holdings
represented ten different industries.
<Table>
<Caption>
PERCENT OF
RANK DESCRIPTION INDUSTRY NET ASSETS
- -------------------------------------------------------------------------------
1 ChevronTexaco Corp Oil & Gas 3.1%
2 Textron Inc Misc. Manufacturers 2.8%
3 Aetna Inc Healthcare Services 2.7%
4 Duke Energy Corp Electric 2.6%
5 Juniper Networks Inc Telecommunications 2.4%
6 Berkshire Hathaway Inc Insurance 2.4%
7 Phelps Dodge Corp Mining 2.4%
8 Ford Motor Co Auto Manufacturers 2.4%
9 E*TRADE Group Inc Diversified Financial Svcs. 2.3%
10 Archer-Daniels-Midland Co Food 2.3%
- -------------------------------------------------------------------------------
25.4%
</Table>
5
<Page>
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views are not meant as investment advice and should not be considered
predictive in nature. Any favorable (or unfavorable) description of a holding
applies only as of December 31, 2004, unless otherwise stated. Security
positions can and do change thereafter. Discussions of historical performance do
not guarantee and are not indicative of future performance.
THE FUND IS SUBJECT TO MARKET RISK (VOLATILITY) AND IS NOT AN APPROPRIATE
INVESTMENT FOR SHORT-TERM INVESTORS.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES,
RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-611-3550 OR VISITING THE FUND'S
WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND
SERVICES, LLC, DISTRIBUTOR. (02/05)
CONCLUSION
As always, we appreciate your feedback. We take your responses seriously and
discuss them at our weekly staff meetings. Please keep your ideas coming--we
read them looking for ways to improve our service.
Sincerely,
/s/ John Montgomery
John Montgomery
6
<Page>
DISCLOSURE OF FUND EXPENSES
(UNAUDITED)
As a shareholder to the Fund, you will incur no transactions costs, including
sales charges (loads) on purchases, on reinvested dividends, or on other
distributions. There are also no redemption fees or exchange fees. However, the
fund will incur ongoing costs, including management fees; distribution (12b-1)
fees; and other Fund expenses. The following examples are intended to help you
understand your ongoing costs (in dollars) of investing in a Fund and to compare
these costs with the ongoing costs of investing in other mutual funds. The
examples are based on an investment of $1,000 invested on July 1, 2004 and held
until December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY LARGE-CAP VALUE FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSE PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- -----------------------------------------------------------------------------------------------------
CLASS N Actual Fund Return $ 1,000.00 $ 1,113.15 $ 4.47
Hypothetical Fund Return $ 1,000.00 $ 1,020.97 $ 4.28
CLASS R Actual Fund Return $ 1,000.00 $ 1,111.69 $ 5.80
Hypothetical Fund Return $ 1,000.00 $ 1,019.71 $ 5.55
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 0.84% AND
1.09% FOR CLASS N AND CLASS R, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER
THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR
DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR
PERIOD).
7
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -------------------------------------------------------------------------------------------
COMMON STOCKS - 99.6%
AEROSPACE/DEFENSE - 1.4%
Northrop Grumman Corp 6,800 $ 369,648
AGRICULTURE - 0.2%
Bunge Ltd 1,000 57,010
AUTO MANUFACTURERS - 3.8%
Ford Motor Co 41,500 607,560
General Motors Corp 9,540 382,172
---------------
989,732
BANKS - 4.1%
AmSouth Bancorp 5,000 129,500
Bank of America Corp 9,008 423,286
KeyCorp 13,000 440,700
US Bancorp 2,000 62,640
---------------
1,056,126
BUILDING MATERIALS - 1.5%
Eagle Materials Inc 133 11,485
Eagle Materials Inc - Class B 450 37,935
Vulcan Materials Co 6,300 344,043
---------------
393,463
COMPUTERS - 0.9%
NCR Corp* 3,300 228,459
DIVERSIFIED FINANCIAL SERVICES - 13.7%
Bear Stearns Companies Inc 4,534 463,874
Citigroup Inc 10,040 483,727
Countrywide Financial Corp 7,778 287,864
E*TRADE Group Inc* 39,600 592,020
FHLMC 2,500 184,250
Goldman Sachs Group Inc 5,600 582,624
JP Morgan Chase & Co 10,850 423,259
Lehman Brothers Holdings Inc 2,070 181,084
Morgan Stanley & Co 6,200 344,224
---------------
3,542,926
ELECTRIC - 6.5%
American Electric Power Inc 5,500 188,870
Duke Energy Corp 26,100 661,113
Edison International 10,000 320,300
Southern Co 15,050 504,476
---------------
1,674,759
ELECTRONICS - 0.3%
Parker Hannifin Corp 1,000 75,740
FOOD - 3.0%
Archer-Daniels-Midland Co 26,354 587,958
Tyson Foods Inc 10,420 191,728
---------------
779,686
FOREST PRODUCTS & PAPER - 0.8%
Georgia-Pacific Corp 5,500 206,140
GAS - 1.4%
KeySpan Corp 8,300 327,435
Sempra Energy 900 33,012
---------------
360,447
HAND/MACHINE TOOLS - 0.7%
Black & Decker Corp 2,000 176,660
HEALTHCARE PRODUCTS - 1.6%
Zimmer Holdings Inc* 5,000 $ 400,600
HEALTHCARE SERVICES - 3.9%
Aetna Inc 5,650 704,837
WellPoint Health Networks Inc* 2,700 310,500
---------------
1,015,337
HOME BUILDERS - 6.3%
Centex Corp 7,840 467,107
DR Horton Inc 12,720 512,743
Lennar Corp 8,260 468,177
Pulte Homes Inc 2,560 163,328
---------------
1,611,355
INSURANCE - 8.5%
Allstate Corp 3,760 194,467
American International Group Inc 7,700 505,659
Berkshire Hathaway Inc* 210 616,560
Cigna Corp 2,600 212,082
Fidelity National Financial Inc 8,502 388,286
Safeco Corp 5,264 274,991
---------------
2,192,045
INTERNET - 0.0%^
Amazon.com Inc* 120 5,315
IRON/STEEL - 0.6%
United States Steel Corp 3,000 153,750
MEDIA - 3.9%
Liberty Media Corp - Class A* 29,400 322,812
Liberty Media International Inc* 1,470 67,958
Time Warner Inc* 26,900 522,936
Walt Disney Co 3,000 83,400
---------------
997,106
MINING - 2.4%
Phelps Dodge Corp 6,200 613,304
MISCELLANEOUS MANUFACTURING - 4.8%
Eastman Kodak Co 13,600 438,600
Eaton Corp 1,000 72,360
Textron Inc 9,700 715,860
---------------
1,226,820
OFFICE/BUSINESS EQUIPMENT - 0.0%^
Xerox Corp* 300 5,103
OIL & GAS - 10.6%
Amerada Hess Corp 4,780 393,776
Chesapeake Energy Corp 5,000 82,500
Chevron Texaco Corp 15,000 787,650
Conoco Phillips 5,800 503,614
Kerr-McGee Corp 3,000 173,370
Occidental Petroleum Corp 9,600 560,256
Unocal Corp 2,000 86,480
Valero Energy Corp 3,000 136,200
---------------
2,723,846
PHARMACEUTICALS - 0.0%^
Bristol-Myers Squibb Co 400 10,248
</Table>
8
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -------------------------------------------------------------------------------------------
RETAIL - 4.0%
Costco Wholesale Corp 3,000 $ 145,230
CVS Corp 5,740 258,702
Federated Department Stores 2,400 138,696
JC Penny Co Inc 3,000 124,200
Kmart Corp* 2,000 197,900
May Department Stores Co 1,000 29,400
Nordstrom Inc 3,000 140,190
---------------
1,034,318
SAVINGS AND LOANS - 0.8%
Golden West Financial Corp 3,200 196,544
SEMICONDUCTORS - 1.4%
Advanced Micro Devices Inc* 16,300 358,926
TELECOMMUNICATIONS - 10.6%
AT&T Corp 26,700 508,902
Corning Inc* 22,600 266,002
Juniper Networks Inc* 22,775 619,252
Lucent Technologies Inc* 107,300 403,448
SBC Communications Inc 9,400 242,238
Sprint Corp 5,000 124,250
Verizon Communications Inc 14,030 568,355
---------------
2,732,447
TRANSPORTATION - 1.9%
Burlington Northern
Santa Fe Corp 2,000 94,620
FedEx Corp 2,000 196,980
Norfolk Southern Corp 5,150 186,379
---------------
477,979
TOTAL COMMON STOCKS
(Cost $22,200,841) 25,665,839
---------------
MONEY MARKET MUTUAL FUNDS - 0.0%^
First American Treasury
Obligations Fund - Class S 3,084 3,084
---------------
TOTAL MONEY MARKET MUTUAL FUNDS
(Cost $3,084) 3,084
---------------
TOTAL INVESTMENTS - 99.6%
(Cost $22,203,925) 25,668,923
Other Assets In Excess of Liabilities - 0.4% 94,836
---------------
NET ASSETS - 100.0% $ 25,763,759
===============
</Table>
* NON-INCOME PRODUCING SECURITY
^ LESS THAN 0.05% OF NET ASSETS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments at value (cost - $22,203,925) $ 25,668,923
Receivable for investments sold 213,391
Receivable for fund shares sold 58,121
Dividends receivable 20,905
Interest receivable 98
Prepaid expenses 17,590
- -----------------------------------------------------------------------------------
Total assets 25,979,028
- -----------------------------------------------------------------------------------
LIABILITIES:
Payable for fund shares redeemed 11,599
Payable for investments purchased 130,661
Accrued investment adviser fee 2,306
Accrued administration fee 2,462
Accrued directors fee 781
Accrued distribution fee 2,050
Other payables 65,410
- -----------------------------------------------------------------------------------
Total liabilities 215,269
- -----------------------------------------------------------------------------------
NET ASSETS $ 25,763,759
===================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 22,878,597
Overdistributed net investment income (3,536)
Accumulated net realized loss on investments (576,300)
Net unrealized appreciation of investments 3,464,998
- -----------------------------------------------------------------------------------
NET ASSETS $ 25,763,759
===================================================================================
NET ASSET VALUE PER SHARE
Net assets
Class N $ 22,727,684
Class R $ 3,036,075
Shares of beneficial interest outstanding of $.001 par value
Class N, 100,000,000 shares authorized 1,852,914
Class R, 40,000,000 shares authorized 247,684
Net asset value, offering and redemption price per share
Class N $ 12.27
Class R $ 12.26
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
<Table>
INVESTMENT INCOME:
Dividends $ 207,859
Interest 189
- --------------------------------------------------------------------------------------------------
Total investment income 208,048
EXPENSES:
Investment advisory fees 58,634
Administration fees 5,864
Accounting fees 28,471
Transfer agent fees 25,682
Audit fees 7,025
Tax fees 5,830
Custody fees 5,144
Legal fees 3,233
Blue sky fees 3,864
Distribution fees - Class R 3,753
Directors fees 1,050
Registration fees 1,034
Reports to shareholders 3,000
Miscellaneous 915
- --------------------------------------------------------------------------------------------------
Total expenses before fees waived 153,499
Less investment advisory fees waived (51,241)
- --------------------------------------------------------------------------------------------------
Net expenses 102,258
- --------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 105,790
- --------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment securities (552,674)
Net change in unrealized appreciation / depreciation on investments 2,964,893
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 2,412,219
- --------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,518,009
==================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED PERIOD ENDED
DECEMBER 31, 2004* JUNE 30, 2004**
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 105,790 $ 85,674
Net realized loss on investment securities (552,674) (23,626)
Net change in unrealized appreciation / depreciation on investments 2,964,893 500,105
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 2,518,009 562,153
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income
Class N (178,133) 0
Class R (16,867) 0
- --------------------------------------------------------------------------------------------------------------------
Net decrease in net assets from distributions (195,000) 0
- --------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares
Class N 3,825,721 25,134,529
Class R 162,317 3,617,947
Reinvestment of distributions
Class N 176,052 0
Class R 16,867 0
Cost of shares redeemed
Class N (3,910,202) (5,075,457)
Class R (657,969) (411,208)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from share transactions (387,214) 23,265,811
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets 1,935,795 23,827,964
NET ASSETS:
Beginning of period 23,827,964 0
- --------------------------------------------------------------------------------------------------------------------
End of period *** $ 25,763,759 $ 23,827,964
====================================================================================================================
SHARES ISSUED & REDEEMED:
Issued
Class N 337,086 2,323,344
Class R 14,480 328,292
Distributions reinvested
Class N 14,337 0
Class R 1,375 0
Redeemed
Class N (352,620) (469,233)
Class R (59,393) (37,070)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) (44,735) 2,145,333
Outstanding at beginning of period 2,145,333 0
- --------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 2,100,598 2,145,333
====================================================================================================================
* Unaudited
** Commenced operations on October 31, 2003
*** Including (over) undistributed net investment income of: $ (3,536) $ 85,674
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
CLASS N
<Table>
<Caption>
SIX MONTHS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 31, 2003 TO
2004*** JUNE 30, 2004**
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 11.11 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income^ 0.05 0.03
Net realized and unrealized gain 1.21 1.08
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.26 1.11
- -----------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders:
Net investment income (0.10) 0.00
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (0.10) 0.00
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.27 $ 11.11
=======================================================================================================================
TOTAL RETURN+# 11.31% 11.10%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 22,728 $ 20,598
Ratios to average net assets:
Expenses after waivers and reimbursements* 0.84% 0.84%
Expenses before waivers and reimbursements* 1.28% 1.52%
Net investment income after
waivers and reimbursements* 0.93% 0.86%
Portfolio turnover rate 14.1% 11.3%
</Table>
CLASS R
<Table>
<Caption>
SIX MONTHS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 31, 2003 TO
2004*** JUNE 30, 2004**
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 11.09 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income^ 0.04 0.01
Net realized and unrealized gain 1.20 1.08
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.24 1.09
- -----------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders:
Net investment income (0.07) 0.00
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (0.07) 0.00
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.26 $ 11.09
=======================================================================================================================
TOTAL RETURN+# 11.17% 10.90%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 3,036 $ 3,230
Ratios to average net assets:
Expenses after waivers and reimbursements* 1.09% 1.09%
Expenses before waivers and reimbursements* 1.53% 1.74%
Net investment income after
waivers and reimbursements* 0.68% 0.55%
Portfolio turnover rate 14.1% 11.3%
</Table>
* ANNUALIZED
** COMMENCED OPERATIONS ON OCTOBER 31, 2003.
*** UNAUDITED
+ TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING
THE PERIOD.
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 (UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 100,000,000 and 40,000,000 shares have been classified into
Class N and Class R of the Large-Cap Value Fund, respectively.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Large-Cap Value Fund seeks to provide long-term total return of capital,
primarily through capital appreication and some income.
Bridgeway Capital Management, Inc. (the "Adviser") is the adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of financial statements of the Large-Cap Value Fund (the "Fund") are
in conformity with accounting principles generally accepted in the United States
of America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other investments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees. The Fund also continues to receive
dividends on the securities loaned. The loans are secured by collateral at least
equal to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
Additionally, the Fund does not have the right to sell or repledge collateral
received in the form of securities unless the borrower goes into default. The
risks to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. As of
December 31, 2004, the Fund had no securities on loan. It is the Fund's policy
to obtain additional collateral from or return excess collateral to the borrower
by the end of the next business day, following the valuation date of the
securities loaned. Therefore, the value of the collateral held may be
temporarily less than the value of the securities on loan.
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America,
14
<Page>
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets. Fees
provided for under the Rule 12b-1 plan of a particular class of the fund are
charged to the operations of such class. All other expenses are allocated among
the classes on relative net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004, there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the current market value of the option
written. If an option which the Fund has written either expires on its
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or a loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such options is extinguished. If a call option which
the Fund has written is assigned, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
premium originally received. If a put option which the Fund has written is
assigned, the amount of the premium originally received reduces the cost of the
security which the Fund purchased upon exercise of the option. Buying calls
increases the Fund's exposure to the underlying security to the extent of any
premium paid. Buying puts on a stock market index tends to limit the Fund's
exposure to a stock market decline. As of December 31, 2004, there were no
outstanding options.
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, directors, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred. However, the Fund has not
had prior claims or losses pursuant to these contracts.
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser, a shareholder
of the Fund. As compensation for the advisory services rendered, facilities
furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total
fee,
15
<Page>
which is comprised of a Base Fee and a Performance adjustment. The Base Fee
equals the Base Fee Rate times the average daily net assets of the Fund. The
Base Fee Rate is based on the annual rate of 0.50% of the value of the Fund's
average daily net assets. The Performance Adjustment equals 0.33% times the
difference in cumulative total return between the Fund and the Russell 1000
Value Index with dividends reinvested (hereinafter "Index") over a rolling
five-year performance period. Since the Fund does not have a five-year operating
history, the Performance Adjustment Rate will be calculated as follows during
the initial five-year period: (a) From inception through September 30, 2004, the
Performance Adjustment Rate was inoperative thus the Advisory Fee was calculated
based on the Base Advisory Fee Rate times the average daily net assets of the
Fund only; (b) From September 30, 2004 through September 30, 2008, the
Performance Adjustment Rate will be calculated based upon a comparison of the
investment performance of the Fund and the Index over the number of quarters
that have elapsed since the Fund's inception. Each time the Performance
Adjustment Rate is calculated, it will cover a longer time span, until it can
cover a running five-year period as intended. In the meantime, the early months
of the transition period will have a disproportionate effect on the performance
adjustment of the fee. The Performance Adjustment Rate varies from a minimum of
- -0.05% to a maximum of +0.05% However, the Performance Adjustment Rate is zero
if the difference between the cumulative Fund performance and the Index
performance is less than or equal to 2%.
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 0.84% of the value of its average net assets for Class N
shares and 1.09% of the value of its average net assets for Class R shares for
the six months ended December 31, 2004. For the six months ended December 31,
2004, the Adviser waived Advisory fees of $51,241.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. These trades are reviewed quarterly by the Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management will act as
Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital
Management provides or arranges for the provision of certain accounting and
other administrative services to the Fund that it is not required to provide
under the terms of the investment advisory agreement. As compensation under the
Master Administrative Agreement, Bridgeway Capital Management receives a monthly
fee from each Fund calculated at the annual rate of 0.05% of average daily net
assets. One director of the Fund, John Montgomery, is an owner and director of
the Adviser. Under the Investment Company Act of 1940 definitions, he is
considered to be "affiliated" and "interested." Compensation of Mr. Montgomery
is borne by the Adviser rather than the Fund.
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004. The amount attributable to the Large-Cap Value Fund is
disclosed in the Statement of Operations.
4. DISTRIBUTION AND SHAREHOLDER SERVICING FEES:
Forum Fund Services, LLC acts as distributor of the Fund's shares pursuant to a
Distribution Agreement dated January 2, 2004. The Adviser pays all costs and
expenses associated with distribution of the Fund's Class N shares pursuant to a
protective plan adopted by shareholders pursuant to Rule 12b-1 on October 15,
1996. On October 22, 2003, shareholders of the seven investment portfolios of
the fund then existing approved an amendment to the Rule 12b-1 plan to permit
the creation of a second class of shares, Class R, that would pay distribution
and service fees to the distributor up to 0.25% of average daily net assets of
the Class R Shares. Class R shares were subsequently created for the new
Small-Cap Growth Fund, Small-Cap Value Fund, Large-Cap Growth Fund and the
Large-Cap Value Fund. During the six months ended December 31, 2004 distribution
fees of $3,753 were accrued to Large-Cap Value Class R shareholders.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Aggregate purchases and sales of investment securities, other than U.S.
government securities and cash equivalents were $3,320,525 and $3,921,640,
respectively, for the six months ended December 31, 2004.
6. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment
16
<Page>
companies and distribute substantially all of its net taxable income including
net realized gains on investments, if any, to its shareholders each year. The
fund is not subject to income or excise taxes to the extent such distributions
are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, were as
follows:
<Table>
Gross unrealized appreciation $ 3,709,779
Gross unrealized (depreciation) (252,002)
- ----------------------------------------------------------
Net unrealized appreciation
on investments $ 3,457,777
==========================================================
Cost of investments $ 22,211,146
==========================================================
</Table>
The difference between book and tax net unrealized appreciation is wash sale
loss deferrals.
The Fund has deferred to its fiscal year ending June 30, 2005, $16,405 of losses
recognized during the period November 1, 2003 to June 30, 2004.
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 85,867
Accumulated capital losses (16,405)
Unrealized appreciation 492,884
</Table>
The temporary differences between book and tax are primarily due to wash sales
and post October losses.
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually. Distributions to shareholders
are recorded on ex-date. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America.
7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
17
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge , upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on
the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at
the SEC's Public Reference Room in Washington, D.C. For more information about
the operation of the Public Reference Room, please call the SEC at
1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 31% of the Fund.
18
<Page>
This Page Intentionally Left Blank
<Page>
[BRIDGEWAY FUNDS LOGO] BLUE CHIP 35 INDEX FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
Dear Blue Chip 35 Index Fund Shareholder,
The Fund appreciated 8.20% for the December 2004 quarter, compared with a 9.23%
increase of our primary benchmark, the S&P 500 Index, and an 8.95% increase for
our peer group, the Lipper Growth and Income Fund Index. On the bright side, we
slightly beat Bridgeway's index of ultra-large companies, a positive result for
an index fund. Overall, results were strong on an absolute basis, but mixed on a
relative basis.
The table below presents our December quarter, one-year, five-year and
life-to-date financial results according to the formula required by the SEC.
<Table>
<Caption>
DEC. QTR 1 YEAR 5 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 1/1/00 TO 7/31/97 TO
12/31/04 12/31/04 12/31/04 12/31/04
- -------------------------------------------------------------------------------------
BLUE CHIP 35 INDEX FUND 8.20% 4.79% -3.10% 6.08%
S&P 500 Index (1) 9.23% 10.88% -2.30% 4.82%
Bridgeway Ultra-Large 35 Index (2) 7.97% 4.29% -2.66% 6.22%
Lipper Growth and Income Funds (3) 8.95% 11.72% 1.65% 4.72%
</Table>
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL
1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com.
(1) THE S&P 500 INDEX IS A BROAD-BASED, UNMANAGED MEASUREMENT OF CHANGES IN
STOCK MARKET CONDITIONS BASED ON THE AVERAGE OF 500 WIDELY HELD COMMON STOCKS.
(2) THE BRIDGEWAY ULTRA-LARGE 35 INDEX IS AN INDEX COMPRISED OF VERY LARGE,
"BLUE CHIP" U.S. STOCKS, EXCLUDING TOBACCO; IT IS COMPILED BY THE ADVISER OF THE
FUND. (3) THE LIPPER GROWTH AND INCOME FUNDS REFLECT THE AGGREGATE RECORD OF
DOMESTIC GROWTH AND INCOME MUTUAL FUNDS AS REPORTED BY LIPPER, INC. IT IS NOT
POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR
ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED.
For the full calendar year our Fund was up 4.79%, compared to a gain of 10.88%
for the S&P 500 Index and a gain of 11.72% for the Lipper Growth and Income
Funds Index. According to data from Lipper, Inc., our Fund ranked 1,197th of
1,248 growth and income funds for the past year, 640th of 799 such funds over
the past five years and 154th of 543 since inception. In the environment of a
small-cap dominated market over the last five years, our ultra-large stock fund
has lagged our peer group of funds. The reverse is true for the full period
since inception, however, which includes (only) two years of a large-company
dominated market environment. Lipper, Inc. is an independent mutual fund rating
service that ranks funds in various categories by making comparative
calculations using total returns. On the next page is a graph of the Fund's
performance since inception.
<Page>
SHAREHOLDER LETTER
[CHART]
GROWTH OF $10,000 INVESTED IN BLUE CHIP 35 INDEX FUND AND INDEXES FROM 7/31/97
(INCEPTION) TO 12/31/04
<Table>
<Caption>
BRIDGEWAY BRIDGEWAY
BLUE CHIP 35 INDEX FUND S&P 500 INDEX ULTRA-LARGE 35 INDEX LIPPER GROWTH & INCOME FUNDS
7/97 10000 10000 10000 10000
9/97 9860 9957 9860 10111
12/97 10000 10242 10000 10210
3/98 11700 11667 11700 11374
6/98 12200 12051 12204 11396
9/98 11100 10855 11060 9975
12/98 13911 13163 13740 11596
3/99 15138 13817 14742 11842
6/99 15902 14790 15616 12941
9/99 15178 13868 14945 11905
12/99 18133 15932 17910 12972
3/00 18761 16297 18664 13190
6/00 17768 15864 17587 12859
9/00 17099 15710 16864 13238
12/00 15391 14481 15041 13023
3/01 13956 12764 13952 11999
6/01 14817 13511 14743 12650
9/01 12973 11528 13018 10998
12/01 13997 12760 14235 12056
3/02 14017 12795 14166 12265
6/02 12296 11081 12376 11017
9/02 10409 9167 10489 9204
12/02 11474 9940 11596 9899
3/03 11137 9627 11265 9488
6/03 12927 11109 13106 10945
9/03 13095 11403 13289 11208
12/03 14786 12791 15006 12602
3/04 14702 13008 14888 12890
6/04 14892 13232 15098 12983
9/04 14320 12984 14495 12923
12/04 15495 14183 15651 14079
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
PERFORMANCE SUMMARY IN A SMALL COMPANY DOMINATED MARKET
TRANSLATION: We underperformed the S&P 500 Index for the quarter and the full
calendar year ended December 31, 2004. The primary culprit for both these
periods was a market environment which strongly favored small stocks and most
strongly DISFAVORED the largest companies - our bread and butter.
The primary culprit in lagging recent performance relative to the S&P 500 Index
has been the extreme lagging of the largest companies, especially over the last
one and five year periods. Calendar year 2004 presents the sixth year in a row,
the longest running period over the last eight decades, that small stocks have
beaten large ones. Consider this data from the Center for Research in Security
Prices:
<Table>
<Caption>
CRSP (1) SINCE 12/98
DECILE QTR YR (AVG. ANNUAL)
- -----------------------------------------------------
1 7.9% 7.9% -0.7%
2 12.8% 20.2% 6.9%
3 13.5% 17.8% 8.2%
4 14.8% 18.7% 8.7%
5 12.8% 17.5% 7.6%
6 12.8% 22.0% 11.0%
7 15.3% 18.9% 9.7%
8 15.9% 21.9% 14.7%
9 16.5% 15.1% 15.9%
10 16.4% 18.7% 21.7%
</Table>
(1) THE CRSP CAP-BASED PORTFOLIO INDEXES ARE UNMANAGED INDEXES OF PUBLICLY
TRADED U.S. STOCKS WITH DIVIDENDS REINVESTED, GROUPED BY THE MARKET
CAPITALIZATION, AS REPORTED BY THE CENTER FOR RESEARCH ON SECURITY PRICES. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The smallest companies (decile 10) beat the largest companies (decile 1) by more
than 10% over the last year. Even more remarkable is the fact that decile 2
(very large) companies also beat the decile 1 (ultra-large) ones by more than
twelve percentage points. On a relative basis, ultra-large companies, including
the ones in our Fund, were in the doghouse over the last year. Over the last six
years, the smallest companies beat the largest ones by a whopping 22+% per year.
Historically, small companies have beaten large ones only half the time. While
the future always looks somewhat different than the past, I do not expect small
company dominance to continue unabated.
2
<Page>
This is not the environment in which I would expect our Fund to shine. On an
absolute basis, however, it is worth noting that in the last quarter of the
calendar year, the Fund made up much of the ground it had lost earlier in 2004.
This serves as a reminder of the value of sticking with investment decisions and
resisting panic and the urge to sell when things look bad. Remember, though,
that this "holding through the downturn" strategy works best in concert with
other financial principles, such as saving, avoiding most kinds of debt,
diversifying (and regularly rebalancing) your portfolio, setting aside an
emergency fund, and choosing well managed, low-cost funds whose investment
objectives - anything from very aggressive growth to ultra-low-risk income -
matches with the time-horizons of the investments you're making. This is a fancy
way of saying that the more years you can afford to wait before tapping a
particular pile of money, the more risk you can afford to take with it.
YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S
DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR).
TRANSLATION: Notwithstanding news events (and the commentary of many market
pundits), 2004 was a remarkably average year. The combination of rising interest
rates, a declining U.S. dollar, inflation, the presidential election, war and
natural disasters should have produced some extraordinary results, right? Not so
fast . . .
Let's look at the statistics purely from a market perspective. Over the 10 years
through December 31, 2004, the S&P 500 Index of large companies returned an
average of 12.05% per year. (I know, that sounds unbelievable, given how weak
the past few years' performance has been, but the market of the mid- and late
1990s really was pretty remarkable.) That's only about one and one-half
percentage points better than the Index's return for 2004. Furthermore, if we
look all the way back to 1925, we see that the market has returned an average of
10.4% per year - and that's over a 79-year period that includes the Great
Depression, World War II, the white-hot "go-go" market of the 1960s and the
brutal bear market of the early 1970s. In about two-thirds of those years, the
Index either beat or lagged that 10.4% average by more than 10 percentage
points. From that perspective, therefore, 2004's return of 10.88% was about as
average as you can get.
.. . . but wasn't this a very volatile year? No. In fact, the actual variation of
monthly returns in 2004 was about half of the average of the preceding decade.
Throughout that 10-year period, only one year - 1995 - was less volatile. In
other words, in 2004 the stock market "bounced around" a whole lot LESS than
normal.
In conclusion, what IS remarkable about 2004 is how average it was in terms of
returns and how "tame" it was with respect to volatility. Not what you might
conclude from reading standard financial commentaries, many of which described a
market lurching dramatically between struggle and triumph. All that drama can be
very compelling, but it doesn't necessarily lead to an accurate understanding of
the market's behavior in the long run, nor does it necessarily produce sound
investment decisions. For that reason, though I have four computer screens in my
office, none of them runs a ticker, and I frequently go home at the end of the
day without knowing whether the overall market was up or down. This frees up
tremendous emotional energy to spend on more important things.
All that said, the market of 2004 did exhibit some unusual characteristics, in
particular the continued - and extraordinary - performance of smaller stocks.
This was the sixth year in a row that small stocks beat large ones, the longest
period of consecutive annual small-stock dominance in the last eight decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, some investment strategies - such as buying small-cap stocks or
value stocks or real-estate-oriented stocks - that have worked well in the
recent past tend to keep working, as investors get caught up in the excitement
and become increasingly confident that a given strategy is the right way to go.
This is essentially a self-fulfilling prophecy: If everyone agrees that small
stocks, for example, are going to keep going up, they will go up, because
everyone buys them. So-called momentum investing has come in for a lot of
negative publicity in the past few years, because it was investors following a
momentum strategy who both fueled the tech-stocks bubble of the late '90s and
early 2000 and then (when they switched strategies) caused it to collapse. The
fact is, though, that a momentum strategy can work FOR PERIODS OF TIME, and
based on more than seven decades of history, when small stocks have done well
relative to the overall market in one year, they are more likely to do well in
the next one. So we could conceivably see a record-setting seventh year in a row
of small-stock dominance, which would not bode as well for this Fund.
3
<Page>
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but our computer models of our aggressive investors funds have no such
concerns, and they are pointing to a shift toward larger stocks. Specifically,
over the past 12 months or so these models began finding a larger number of
"attractive" large stocks than at any time we can remember in about five years.
This is almost certainly a function of relative valuation; i.e., based on a
variety of financial measures, and thanks to the multi-year run-up in the price
of small stocks, larger stocks in general are starting to look relatively
attractive again. At Bridgeway, I don't put much effort into trying to guess the
market's direction; we just stick to the discipline of our investment process.
Still, we believe it's likely that the tide will turn back in favor of large
stocks at SOME point in the next couple of years. It's a good time (ok, any time
is a good time) to make sure your own portfolio is in balance with your
long-term plan, including appropriate exposure to large stocks.
DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT WORKED WELL
TRANSLATION: Four companies in the Fund gained more than 20% for the year.
For a passively managed Fund such as this one, one quarter is generally too
short a period of time to discuss details of performance. Let me focus, rather,
on the full calendar year.
Of the four top gainers, two are in consumer-oriented businesses (and a third,
Dell Computer, has a strong consumer angle, in that it sells its products,
admittedly, technology products, to individuals). That's not really a surprise.
The consumer sector in general (encompassing both consumer services and consumer
goods) was a strong performer for the year. But while sector-analysis can be
interesting and often valuable in explaining performance, it's far from the last
word. For proof, take a look at the bottom of list, where the double-digit
losers live; several of them are also in the consumer sector.
Top performer McDonald's earned its spot by being a comeback kid. After giving
ground again and again to rivals in the Burger Wars - and seeing its stock pay
the price - McDonald's staged a turnaround beginning in August. The company
announced that its second-quarter operating profit margins had risen by 6% over
the previous year, thanks in part to the rollout of pricier salads. The rally
strengthened in September, when McDonald's raised its annual dividend by 38%
(off a level that itself represented a 70% increase from the dividend offered in
2002). And it picked up further steam in October, with the announcement that
third-quarter earnings were up 42% from 2003, substantially beating analysts'
estimates. Much of the credit goes to late CEO James Cantalupo, who trimmed the
company's expansion plans, sold off underperforming locations, and refocused the
company on improving sales and profits at its existing stores.
Meanwhile, third-place finisher Dell Computer owed its place on the list almost
entirely to the second half of the fourth quarter. After more than ten months of
meandering around in a tight, not-very-interesting trading range, the stock
jumped nearly 9% overnight, to its highest level in four years, when the company
announced that increased U.S. business spending and strong growth in Europe and
Asia had boosted second-quarter earnings by 27% over the previous year.
DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: Only one stock lost more than 20% for the year, but nearly half the
stocks in the portfolio were in the red.
The Fund was certainly hurt by the market's continued bias toward smaller
stocks. For the year, for example, small-cap value stocks were up an average of
24%, according to Morningstar, compared with a gain of about 14% for the typical
large-cap value stock. In addition, we paid a heavy price for our significant
position in pharmaceuticals. At more than 10% of assets, as of December 31,
2004, pharmaceuticals represent the largest sector weighting in the portfolio -
and, unfortunately, pharmaceutical companies were among the biggest losers for
the year, losing an average of more than 1%.
As holders of pharmaceutical companies such as Merck and Pfizer, however, we
could only wish they had been down 1% for the year. Pfizer, in fact, was in a
downward spiral for nearly the entire 12 months, but Merck's troubles only
really began at the end of September, with the recall of arthritis drug Vioxx on
concerns that it increased the risk of stroke and heart attack in habitual
users. Not only did the recall cost Merck's stock some 40% of its value, it also
led to investigations of the company by both the SEC and the Department of
Justice, which hardly inspired investors to climb back in. A few months later,
Pfizer's Celebrex - formulaically related to Vioxx - was also recalled, and Eli
Lilly, while stopping short of recalling its Strattera, used in the treatment of
ADHD, did announced that the drug should not be used by patients with liver
damage.
4
<Page>
The result of the recalls and warnings and probes has been a crisis of
confidence in "big pharma," as investors wait for the next shoe to drop.
Of course, the pharmaceutical sector didn't have a lock on scandal for the year.
Mortgage-finance giant Fannie Mae, for example, joined the ranks of the fallen
when it missed the deadline for filing its third-quarter financial results and
acknowledged that it would have to restate billions of dollars worth of past
years' earnings in order to recognize an estimated $9 billion in investment
losses. Given the government investigations and class-action lawsuits that
inevitably followed, the real surprise may be that the stock was only down about
4% for the year.
And unfortunately, a company didn't have to be embroiled in scandal to make our
losers' list. Coca-Cola didn't trigger any government probes or lawsuits, but
the stock nevertheless hit the skids in early September when the company warned
that weak sales in some of its key markets (North America, Germany) and the need
for a steep increase in advertising expenditures would knock revenues and
earnings in the second half of the year to levels well below analysts'
estimates. It will take more than a sip of something sweet to help us swallow
the resulting 15% loss.
TOTAL RETURN FOR BLUE CHIP 35 INDEX FUND STOCKS FOR THE CALENDAR YEAR 2004
<Table>
<Caption>
RANK COMPANY INDUSTRY % CHANGE
- -----------------------------------------------------------------------------------------
1 McDonald's Corp Retail 25.9%
2 Exxon Mobil Corp Oil & Gas 22.5%
3 Dell Inc Computers 22.4%
4 Johnson & Johnson Healthcare Products 21.1%
5 ChevronTexaco Corp Oil & Gas 19.1%
6 Home Depot Inc Retail 18.7%
7 General Electric Co Miscellaneous Manufacturing 16.6%
8 Bank of America Corp Banks 16.2%
9 United Parcel Service Inc Transportation 16.0%
10 Verizon Communications Inc Telecommunications 13.7%
11 PepsiCo Inc Beverages 10.1%
12 Oracle Corp Software 9.2%
13 EI Du Pont de Nemours & Co Chemicals 9.2%
14 Procter & Gamble Co Cosmetics/Personal Care 8.7%
15 Time Warner Inc Media 8.4%
16 International Business Machines Corp Computers 7.3%
17 Wells Fargo & Co Banks 6.5%
18 Comcast Corp Media 4.3%
19 Berkshire Hathaway Inc Insurance 2.6%
20 SBC Communications Inc Telecommunications 1.4%
21 Citigroup Inc Diversified Financial Services -0.9%
22 Wal-Mart Stores Inc Retail -0.9%
23 American International Group Inc Insurance -1.1%
24 3M Co Miscellaneous Manufacturing -1.7%
25 Microsoft Corp Software -2.0%
26 Ford Motor Co Auto Manufacturers -4.1%
27 Fannie Mae Diversified Financial Services -4.2%
28 Hewlett-Packard Co Computers -4.4%
29 Bristol-Myers Squibb Co Pharmaceuticals -5.3%
30 Texas Instruments Inc Semiconductors -8.9%
31 Coca-Cola Co/The Beverages -15.3%
32 Cisco Systems Inc Telecommunications -15.8%
33 Merck & Co Inc Pharmaceuticals -17.7%
34 Eli Lilly & Co Pharmaceuticals -17.8%
</Table>
5
<Page>
<Table>
<Caption>
RANK COMPANY INDUSTRY % CHANGE
- -----------------------------------------------------------------------------------------
35 Intel Corp Semiconductors -18.7%
36 Pfizer Inc Pharmaceuticals -23.4%
</Table>
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE
FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS.
<Table>
Dormant companies(1)
1) Zimmer Holdings Inc Healthcare - Products 5.7%
2) Medco Health Solutions Pharmaceuticals -1.8%
</Table>
(1) DORMANT COMPANIES ARE SMALL POSITIONS TYPICALLY ACQUIRED AS SPIN-OFFS. WE DO
NOT INVEST NEW MONEY IN THEM AND WILL EITHER HOLD OR SELL THEM DEPENDING ON TAX
CONSEQUENCES. RETURNS OF THESE TWO DORMANT COMPANIES AR SHOWN SEPARATELY BECAUSE
THEY WERE IN THE BLUE CHIP INDEX FUND ON DECEMBER 31, 2003. BOTH WERE SOLD IN
THE CALENDER YEAR 2004.
SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
As of December 31, 2004, relative to the S&P 500 Index, we are "heavy" on
technology and somewhat "light" on financial and utility stocks. Technology
stocks did well in 2004, so this is not the reason we underperformed the S&P 500
Index. The primary reason relates to company size, as discussed above. The
following table presents the percentage of our Fund's stocks by sector of the
economy relative to that of our primary market benchmark.
<Table>
<Caption>
BLUE CHIP 35
INDEX FUND S&P 500 INDEX DIFFERENCE
- ---------------------------------------------------------------------
Basic Materials 3.0% 2.9% 0.1%
Communications 14.0% 11.3% 2.7%
Consumer, Cyclical 11.3% 9.9% 1.4%
Consumer, Non-cyclical 20.9% 21.2% -0.3%
Energy 5.7% 7.2% -1.5%
Financial 16.0% 20.6% -4.6%
Industrial 8.6% 11.6% -3.0%
Technology 20.5% 12.4% 8.1%
Utilities 0.0% 2.9% -2.9%
- ---------------------------------------------------------------------
TOTAL 100.0% 100.0% 0.0%
</Table>
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views, including those of market sectors or individual stocks, are not
meant as investment advice and should not be considered predictive in nature.
Any favorable (or unfavorable) description of a holding applies only as of the
quarter end, December 31, 2004, unless otherwise stated. Security positions can
and do change thereafter. Discussions of historical performance do not guarantee
and are not indicative of future performance.
The Fund is subject to above average market risk (volatility) and is not an
appropriate investment for short-term investors.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES,
RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S
WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND
SERVICES, LLC, DISTRIBUTOR. (02/05).
CONCLUSION
As always, we appreciate your feedback. We take your responses seriously and
discuss them at our weekly staff meetings. Please keep your ideas coming--we
continually look for ways to improve our service.
Sincerely,
/s/ John Montgomery
John Montgomery
6
<Page>
DISCLOSURE OF FUND EXPENSES
(UNAUDITED)
DISCLOSURE OF FUND EXPENSES (UNAUDITED)
As a shareholder to the Fund, you will incur no transactions costs, including
sales charges (loads) on purchases, on reinvested dividends, or on other
distributions. There are also no redemption fees or exchange fees. However, the
fund will incur ongoing costs, including management fees and other Fund
expenses. The following examples are intended to help you understand your
ongoing costs (in dollars) of investing in a Fund and to compare these costs
with the ongoing costs of investing in other mutual funds. The examples are
based on an investment of $1,000 invested on July 1, 2004 and held until
December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY BLUE CHIP 35 INDEX FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSE PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- ----------------------------------------------------------------------------------------------
Actual Fund Return $ 1,000.00 $ 1,040.43 $ 0.77
Hypothetical Fund Return $ 1,000.00 $ 1,024.45 $ 0.77
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.15%
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE
NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE
CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD).
7
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- -------------------------------------------------------------------------------------------
COMMON STOCKS - 100.1%
AUTO MANUFACTURERS - 2.6%
Ford Motor Co 70,282 $ 1,028,928
BANKS - 5.5%
Bank of America Corp 23,628 1,110,280
Wells Fargo & Co 16,760 1,041,634
---------------
2,151,914
BEVERAGES - 5.0%
The Coca-Cola Co 21,257 884,929
PepsiCo Inc 20,405 1,065,141
---------------
1,950,070
CHEMICALS - 3.0%
El Du Pont de Nemours & Co 24,052 1,179,751
COMPUTERS - 9.4%
Dell Inc* 31,844 1,341,906
Hewlett-Packard Co 57,593 1,207,725
International Business
Machines Corp 11,572 1,140,768
---------------
3,690,399
COSMETICS/PERSONAL CARE - 2.8%
Procter & Gamble Co 19,736 1,087,059
DIVERSIFIED FINANCIAL SERVICES - 5.1%
Citigroup Inc 23,014 1,108,815
Fannie Mae 12,338 878,589
---------------
1,987,404
HEALTHCARE PRODUCTS - 3.1%
Johnson & Johnson 19,012 1,205,741
INSURANCE - 5.5%
American International Group Inc 17,591 1,155,201
Berkshire Hathaway Inc* 345 1,012,920
---------------
2,168,121
MEDIA - 6.1%
Comcast Corp, Class A* 36,748 1,222,973
Time Warner Inc* 60,789 1,181,738
---------------
2,404,711
MISCELLANEOUS MANUFACTURING - 5.6%
3M Co 12,753 1,046,639
General Electric Co 31,928 1,165,372
---------------
2,212,011
OIL & GAS - 5.7%
ChevronTexaco Corp 21,250 1,115,837
Exxon Mobil Corp 21,727 1,113,726
---------------
2,229,563
PHARMACEUTICALS - 10.1%
Bristol-Myers Squibb Co 38,859 995,568
Eli Lilly & Co 15,280 867,140
Merck & Co Inc 38,746 1,245,296
Pfizer Inc 31,623 850,342
---------------
3,958,346
RETAIL - 8.7%
Home Depot Inc 28,415 1,214,457
McDonald's Corp 35,971 1,153,230
Wal-Mart Stores Inc 20,019 1,057,404
---------------
3,425,091
SEMICONDUCTORS - 5.8%
Intel Corp 46,733 1,093,085
Texas Instruments Inc 47,680 1,173,882
---------------
2,266,967
SOFTWARE - 5.3%
Microsoft Corp 30,340 $ 810,381
Oracle Corp* 93,148 1,277,991
---------------
2,088,372
TELECOMMUNICATIONS - 7.8%
Cisco Systems Inc* 52,174 1,006,958
SBC Communications Inc 38,994 1,004,875
Verizon Communications Inc 26,439 1,071,044
---------------
3,082,877
TRANSPORTATION - 3.0%
United Parcel Service Inc 13,703 1,171,058
TOTAL COMMON STOCKS
(Cost $35,692,273) 39,288,383
---------------
MONEY MARKET MUTUAL FUNDS - 0.0%^
First American Treasury
Obligations Fund - Class S 668 668
---------------
TOTAL MONEY MARKET MUTUAL FUNDS
(Cost $668) 668
---------------
TOTAL INVESTMENTS - 100.1%
(Cost $35,692,941) 39,289,051
Liabilities in Excess of Other Assets -(0.1%) (28,132)
---------------
NET ASSETS - 100.0% $ 39,260,919
===============
</Table>
* NON-INCOME PRODUCING SECURITY
^ LESS THEN 0.05% OF NET ASSETS
ALL SHARES OF SECURITIES ARE PLEDGED AS COLLATERAL FOR THE BORROWINGS UNDER THE
SECURITY AGREEMENT FOR THE FUND'S LINE OF CREDIT.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments at value (cost - $35,692,941) $ 39,289,051
Receivable for investments sold 414,330
Receivable for fund shares sold 93,264
Dividends receivable 36,768
Interest receivable 21
Receivable from investment adviser 9,002
Prepaid expenses 22,550
- ------------------------------------------------------------------------------------------------------------
Total assets 39,864,986
- ------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for fund shares redeemed 151,120
Loan payable to bank 406,000
Interest on loan payable to bank 589
Accrued administration fee 1,678
Accrued directors fee 654
Other payables 44,026
- ------------------------------------------------------------------------------------------------------------
Total liabilities 604,067
- ------------------------------------------------------------------------------------------------------------
NET ASSETS $ 39,260,919
============================================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 37,446,946
Undistributed net investment income 9,267
Accumulated net realized loss on investments (1,791,404)
Net unrealized appreciation of investments 3,596,110
- ------------------------------------------------------------------------------------------------------------
NET ASSETS $ 39,260,919
============================================================================================================
Shares of common stock outstanding of $.001 par value,
130,000,000 shares authorized 5,470,450
- ------------------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share $ 7.18
============================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
<Table>
INVESTMENT INCOME:
Dividends $ 450,520
Interest 748
- --------------------------------------------------------------------------------------------------
Total investment income 451,268
EXPENSES:
Investment advisory fees 15,041
Administration fees 9,401
Accounting fees 25,175
Transfer agent fees 23,320
Audit fees 4,463
Tax fees 5,830
Custody fees 3,853
Legal fees 2,602
Blue sky fees 8,823
Directors fees 733
Registration fees 1,128
Reports to shareholders 1,000
Interest on outstanding loan payable 1,316
Miscellaneous 2,965
- --------------------------------------------------------------------------------------------------
Total expenses before waiver & reimbursements 105,650
Less investment advisory fees waived (15,041)
Less expenses reimbursed by investment adviser (62,334)
- --------------------------------------------------------------------------------------------------
Net expenses 28,275
- --------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 422,993
- --------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment securities (243,654)
Net change in unrealized appreciation / depreciation on investments 1,451,671
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 1,208,017
- --------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,631,010
==================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 2004* JUNE 30, 2004
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 422,993 $ 381,770
Net realized loss on investment securities (243,654) (218,728)
Net change in unrealized appreciation / depreciation on investments 1,451,671 2,003,255
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 1,631,010 2,166,297
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income (675,002) (169,895)
- --------------------------------------------------------------------------------------------------------------------
Net decrease in net assets from distributions (675,002) (169,895)
- --------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares 8,492,359 35,070,449
Reinvestment of distributions 650,127 164,179
Cost of shares redeemed (6,797,274) (9,034,667)
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets from share transactions 2,345,212 26,199,961
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets 3,301,220 28,196,363
NET ASSETS:
Beginning of period 35,959,699 7,763,336
- --------------------------------------------------------------------------------------------------------------------
End of period ** $ 39,260,919 $ 35,959,699
====================================================================================================================
SHARES ISSUED & REDEEMED:
Issued 1,237,600 5,144,761
Distributions reinvested 90,295 23,589
Redeemed (978,067) (1,312,195)
- --------------------------------------------------------------------------------------------------------------------
Net increase 349,828 3,856,155
Outstanding at beginning of period 5,120,622 1,264,467
- --------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 5,470,450 5,120,622
====================================================================================================================
* Unaudited
** Including undistributed net investment income of: $ 9,267 $ 261,276
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
<Table>
<Caption>
SIX MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDED JUNE 30,
2004** 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 7.02 $ 6.14 $ 5.93 $ 7.23 $ 8.77 $ 7.91
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income^ 0.08 0.10 0.09 0.09 0.09 0.08
Net realized and unrealized gain (loss) 0.20 0.83 0.21 (1.31) (1.54) 0.85
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.28 0.93 0.30 (1.22) (1.45) 0.93
- ----------------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders:
Net investment income (0.12) (0.05) (0.09) (0.08) (0.09) (0.07)
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.12) (0.05) (0.09) (0.08) (0.09) (0.07)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.18 $ 7.02 $ 6.14 $ 5.93 $ 7.23 $ 8.77
==================================================================================================================================
TOTAL RETURN+ 4.04%# 15.20% 5.13% (17.01%) (16.61%) 11.74%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 39,261 $ 35,960 $ 7,763 $ 5,532 $ 5,975 $ 7,365
Ratios to average net assets:
Expenses after waivers and
reimbursements 0.15%* 0.15% 0.15% 0.15% 0.15% 0.15%
Expenses before waivers and
reimbursements 0.56%* 0.58% 1.07% 0.93% 0.68% 0.47%
Net investment income after
waivers and reimbursements 2.25%* 1.64% 1.65% 1.35% 1.15% 0.98%
Portfolio turnover rate 7.1% 5.3% 24.9% 40.8% 24.0% 25.9%
</Table>
* ANNUALIZED
** UNAUDITED
+ TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING
THE PERIOD.
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 (UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 130,000,000 shares have been classified into the Blue-Chip
35 Index Fund.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Blue Chip 35 Index Fund seeks to provide a long-term total return of
capital, primarily through capital appreciation but also some income.
Bridgeway Capital Management, Inc. (the "Adviser") is the Adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of the financial statements of the Blue Chip 35 Index Fund (the
"Fund") are in conformity with accounting principles generally accepted in the
United States of America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other investments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees. The Fund also continues to receive
dividends on the securities loaned. The loans are secured by collateral at least
equal to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
Additionally, the Fund does not have the right to sell or repledge collateral
received in the form of securities unless the borrower goes into default. The
risks to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. As of
December 31, 2004, the Fund had no securities on loan. It is the Fund's policy
to obtain additional collateral from or return excess collateral to the borrower
by the end of the next business day, following the valuation date of the
securities loaned. Therefore, the value of the collateral held may be
temporarily less than the value of the securities on loan.
13
<Page>
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, as
well as the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on
October 15, 1996 and amended on October 22, 2003, that permits the Adviser to
pay up to 0.25% of the Fund's average daily assets for sales and distribution of
Fund shares. Since the cost of distributing Fund shares is borne by the Adviser,
the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's
distributor. Prior to January 2, 2004, the Fund acted as its own distributor.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004 there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the current market value of the option
written. If an option which the Fund has written either expires on its
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or a loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such options is extinguished. If a call option which
the Fund has written is assigned, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
premium originally received. If a put option which the Fund has written is
assigned, the amount of the premium originally received reduces the cost of the
security which the Fund purchased upon exercise of the option. Buying calls
increases the Fund's exposure to the underlying security to the extent of any
premium paid. Buying puts on a stock market index tends to limit the Fund's
exposure to a stock market decline. As of December 31, 2004, there were no
outstanding options.
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, directors, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future
14
<Page>
claims that may be made against the Fund that have not yet occurred. However,
the Fund has not had prior claims or losses pursuant to these contracts.
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser. As
compensation for the advisory services rendered, facilities furnished, and
expenses borne by the Adviser, the Fund pays the Adviser a total fee, which is
computed and paid monthly. The Fund pays a flat 0.08% annual management fee,
computed daily and payable monthly, subject to a maximum expense ratio of 0.15%.
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 0.15% of the value of its average net assets for the six
months ended December 31, 2004. During the period, the Adviser reimbursed
expenses of $62,334 and waived Advisory fees of $15,041.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. These trades are reviewed quarterly by the Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management acts as Administrator
for the Fund. Under the terms of the agreement, Bridgeway Capital Management
provides or arranges for the provision of certain accounting and other
administrative services to the Fund that it is not required to provide under the
terms of the investment advisory agreement. As compensation under the Master
Administrative Agreement, Bridgeway Capital Management receives a monthly fee
from each Fund calculated at the annual rate of 0.05% of average daily net
assets.
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is considered
to be "affiliated" and "interested." Compensation of Mr. Montgomery is borne by
the Adviser rather than the Fund.
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004. The amount attributable to the Blue-Chip 35 Index Fund is
disclosed in the Statement of Operations.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Aggregate purchases and sales of investment securities, other than U.S.
government securities and cash equivalents were $4,989,696 and $2,633,489,
respectively, for the six months ended December 31, 2004.
5. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and distribute substantially all of
its net taxable income including net realized gains on investments, if any, to
its shareholders each year. The fund is not subject to income or excise taxes to
the extent such distributions are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, were as
follows:
<Table>
Gross unrealized appreciation $ 4,772,427
Gross unrealized (depreciation) (1,312,585)
- --------------------------------------------------------------------
Net unrealized appreciation
on investments $ 3,459,842
====================================================================
Cost of investments $ 35,829,209
====================================================================
</Table>
The difference between book and tax unrealized appreciation is wash sale loss
deferrals.
As of June 30, 2004, the Fund had capital loss carryovers of $885, $25,756,
$106,811, $100,306, $429,064, $337,509, and $327,296 available to offset capital
gains to the extent provided in regulations, which will expire on June 30, 2006,
2007, 2008, 2009, 2010, 2011, and 2012, respectively. The Fund has deferred to
its fiscal year ending June 30, 2005, $70,680 of losses recognized during the
period November 1, 2003 to June 30, 2004.
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 261,276
Accumulated capital losses (1,327,627)
Unrealized appreciation 1,995,016
Cumulative Effect of other timing differences (70,680)
</Table>
15
<Page>
The temporary differences between book and tax are primarily due to wash sales
and post October losses.
As of June 30, 2004, the tax character of the distributions paid were:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
- -----------------------------------------------------------------
Ordinary income $ 169,895 $ 85,747
Long-term capital gains - -
</Table>
During the year ended June 30, 2004, the Fund paid a dividend from net
investment income of $0.0531 per share to shareholders of record. Dividends from
net investment income and distributions of net realized gains, if any, will be
declared and paid at least annually.
Distributions to shareholders are recorded on ex-date. The amount and character
of income and gains to be distributed are determined in accordance with income
tax regulations, which may differ from accounting principles generally accepted
in the United States of America.
6. LINE OF CREDIT:
The Fund has established a line of credit agreement ("LOC") with U.S. Bank, N.A.
(the "Bank" or "Lender") which matures on June 1, 2005 and is renewable annually
at the Bank's option, to be used for temporary or emergency purposes, primarily
for financing redemption payments. Any and all advances under this Facility
would be for a maximum of fifteen (15) business days and are at the sole
discretion of the Lender based on the merits of the specific transaction.
Advances under the Facility are limited to the lesser of $1,650,000 or 33 1/3%
of the Fund's net assets. Borrowings under the line of credit bear interest
based on the Lender's Prime Rate. Principal is due fifteen days after each
advance and at the Maturity. Interest is payable monthly in arrears. The minimum
advance is $1,000. As of December 31, 2004, the Fund had a $406,000 balance with
its secured line of credit. During the six months ended December 31, 2004, the
average borrowing was $49,929 with an average rate on borrowings of 4.80%.
7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
16
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the
SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the
SEC's Public Reference Room in Washington, D.C. For more information about the
operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 64% of the Fund.
17
<Page>
This Page Intentionally Left Blank
<Page>
[BRIDGEWAY FUNDS LOGO] BALANCED FUND
SEMI-ANNUAL REPORT
DECEMBER 31, 2004
February 25, 2005
Dear Fellow Balanced Fund Shareholders:
Our Fund appreciated 4.83% in the December quarter compared to a 0.03% return
for the Bloomberg/EFFAS U.S. Government 1-3 year Total Return Bond Index, a
6.40% return for the Lipper Balanced Fund Index and a 3.35% return for the
Balanced Benchmark. The results are good on an absolute basis, but mixed on a
relative basis.
The table below presents our December quarter, one year and life-to-date
financial results according to the formula required by the SEC.
<Table>
<Caption>
DEC. QTR. 1 YEAR LIFE-TO-DATE
10/1/04 TO 1/1/04 TO 7/1/01 TO
12/31/04 12/31/04 12/31/04
- --------------------------------------------------------------------------------
Balanced Portfolio 4.83% 7.61% 5.22%
Bloomberg/ EFFAS U.S. Government
1-3 year Total Return Bond Index 0.03% 0.87% 3.70%
Lipper Balanced Fund Index 6.40% 8.99% 4.04%
S&P 500 Index 9.23% 10.88% 1.39%
Balanced Benchmark 3.35% 4.47% 2.79%
</Table>
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE
FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL
1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com.
THE LIPPER BALANCED FUNDS IS AN INDEX OF BALANCED FUNDS COMPILED BY LIPPER, INC.
BALANCED BENCHMARK IS A COMBINED INDEX OF WHICH 40% REFLECTS THE S&P 500 INDEX
(AN UNMANAGED INDEX OF LARGE COMPANIES WITH DIVIDENDS REINVESTED) AND 60%
REFLECTS THE BLOOMBERG/EFFAS U.S. GOVERNMENT 1-3 YEAR TOTAL RETURN BOND INDEX
(TRANSPARENT BENCHMARK FOR THE TOTAL RETURN OF THE 1-3 YEAR U.S. GOVERNMENT BOND
MARKET). IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS
LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE
ANNUALIZED.
For the calendar year 2004 the Balanced Fund returned 7.61% compared to an 0.87%
return for the Bloomberg/EFFAS U.S. Government 1-3 year Total Return Bond Index,
a 8.99% return for the Lipper Balanced Fund Index and a 4.47% return for the
Balanced Benchmark.
According to data from Lipper, Inc., the Balanced Fund ranked 337th of 576
balanced funds for the calendar year 2004 and 73rd of 424 funds since inception.
Lipper, Inc. is an independent mutual fund rating service that ranks funds in
various fund categories by making comparative calculations using total returns.
According to data from Morningstar, the Balanced Fund ranked 85th of 394
Conservative Allocation funds for the 12-month period ending December 31, 2004
and 39th out of 228 funds for three years.
[CHART]
GROWTH OF $10,000 INVESTED IN BALANCED FUNDAND INDEXES FROM 6/30/01 (INCEPTION)
TO 12/31/04
<Table>
<Caption>
BRIDGEWAY
BALANCED FUND LIPPER BALANCED FUND S&P 500 INDEX BLOOMBERG/EFFAS BOND INDEX BALANCED BENCHMARK
6/01 10000 10000 10000 10000 10000
9/01 9230 9242 8532 10342 9618
12/01 9771 9841 9444 10425 10033
3/02 10083 9900 9470 10416 10038
6/02 9922 9246 8201 10671 9683
9/02 9339 8333 6784 10932 9273
12/02 9428 8789 7357 11029 9560
3/03 9397 8628 7125 11106 9514
6/03 10177 9569 8222 11195 10006
9/03 10440 9765 8440 11242 10121
12/03 11107 10541 9467 11258 10542
3/04 11453 10793 9628 11371 10673
6/04 11494 10779 9793 11252 10668
9/04 11402 10798 9610 11353 10656
12/04 11953 11489 10497 11356 11013
</Table>
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY
ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS.
<Page>
SHAREHOLDER LETTER
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE
TRANSLATION: We beat our "balanced" market benchmark for the year by a pretty
broad margin, but lagged our peer group. Relatively speaking, this is better
than it could have been, but not as good as we'd like.
In evaluating the Fund's performance, it may be useful to note that we opened
the Fund with the goal of capturing as much of the stock market's gains as
possible while using bonds and stock derivative instruments to minimize losses.
Specifically, we wanted to expose shareholders to no more than 40% of the
market's "downside," to lose no more than 40% of what the broad market lost. In
the three and a half years since inception we have achieved that goal (actually,
we've done just a hair better), and since we at Bridgeway take risk at least as
seriously as we take returns, that's something we're pretty proud of. It's a
result we hope you're happy with too.
To calculate this risk-ratio, we went back to the Fund's inception date. For
every month since that date, we compared the Fund's performance with that of the
S&P 500 Index. If the Index lost money - as it did in 16 of those months - our
goal was for the Fund to lose only 40% as much. Averaged over the three and a
half years that the Fund has been in existence, we have met that goal with the
exact number coming in at 39.7%.
At the same time - and this is something we're also pretty proud of - we have
captured nearly 60% of the market's "upside." Of course, risk and reward are
always a trade-off: By and large, any steps you take to minimize the risk in a
portfolio also minimize the potential for gain. As our results suggest, though,
the trade-off has not been even-steven over the first three and a half years of
our Fund. We were able to do better in an up market than what our down market
results would have suggested. In an upcoming shareholder letter, we intend to
talk about risk, the various ways in which it's measured, and how we like to
think about it and deal with it. But for now, we hope you're as pleased as we
are with the Fund's risk record.
YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S
DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR).
TRANSLATION: Notwithstanding news events (and the commentary of many market
pundits), 2004 was a remarkably average year. The combination of rising interest
rates, a declining U.S. dollar, inflation, the presidential election, war and
natural disasters should have produced some extraordinary results, right? Not so
fast....
Let's look at the statistics purely from a market perspective. Over the 10 years
through the 31st of December, 2004, the S&P 500 Index returned an average of
12.05% per year. (I know, that sounds unbelievable, given how weak the past few
years' performance has been, but the market of the mid- and late 1990s really
was pretty remarkable.) That's only about one and one-half percentage points
better than the Index's return for 2004. Furthermore, if we look all the way
back to 1925, we see that the market has returned an average of 10.4% per year -
and that's over a 79-year period that includes the Great Depression, World War
II, the white-hot "go-go" market of the 1960s and the brutal bear market of the
early 1970s. In about two-thirds of those years, the Index beat or lagged that
10.4% average by more than 10 percentage points. From that perspective,
therefore, 2004's return of 10.88% was about as average as you can get.
.. . . but wasn't this a very volatile year? No. In fact, the actual variation of
monthly returns in 2004 was about half of the average of the preceding decade.
Throughout that 10-year period, only one year - 1995 - was less volatile. In
other words, in 2004 the stock market "bounced around" a whole lot LESS than
normal.
In conclusion, what IS remarkable about 2004 is how average it was in terms of
returns and how "tame" it was with respect to volatility. Not what you might
conclude from reading standard financial commentaries, many of which described a
market lurching dramatically between struggle and triumph. All that drama can be
very compelling, but it doesn't necessarily lead to an accurate understanding of
the market's behavior in the long run, nor does it necessarily produce sound
investment decisions. For that reason, though I have four computer screens in my
office, none of them runs a ticker, and I frequently go home at the end of the
day without knowing whether the overall market was up or down. This frees up
tremendous emotional energy to spend on more important things (including
actually finding the next good stock pick).
2
<Page>
All that said, the market of 2004 did exhibit some unusual characteristics, in
particular the continued - and extraordinary - performance of smaller stocks.
This was the sixth year in a row that small stocks beat large ones, the longest
period of consecutive annual small-stock dominance in the last eight decades.
What does this imply for the future? History suggests two possible responses. On
the one hand, some investment strategies - such as buying small-cap stocks or
value stocks or real-estate-oriented stocks - that have worked well in the
recent past tend to keep working, as investors get caught up in the excitement
and become increasingly confident that a given strategy is the right way to go.
This is essentially a self-fulfilling prophecy: If everyone agrees that small
stocks, for example, are going to keep going up, they will go up, because
everyone buys them. So-called momentum investing has come in for a lot of
negative publicity in the past few years, because it was investors following a
momentum strategy who both fueled the tech-stocks bubble of the late '90s and
early 2000 and then (when they switched strategies) caused it to collapse. The
fact is, though, that a momentum strategy can work FOR PERIODS OF TIME, and
based on more than seven decades of history, when small stocks have done well
relative to the overall market in one year, they are more likely to do well in
the next one. So we could conceivably see a record-setting seventh year in a row
of small-stock dominance. Since this Fund focuses more heavily on large stocks,
this would not help our performance.
On the other hand, we could see the exact opposite. For investment managers,
making predictions is often the surest way to get your head handed to you on a
platter, but our computer stock picking models have no such concerns, and they
are pointing to a shift toward larger stocks. Specifically, over the past 12
months or so our models began finding a larger number of "attractive" large
stocks than at any time I can remember in about five years. This is almost
certainly a function of relative valuation; i.e., based on a variety of
financial measures, and thanks to the multi-year run-up in the price of small
stocks, larger stocks in general are starting to look relatively attractive
again. At Bridgeway, we don't put much effort into trying to guess the market's
direction; we're just trying to find one good stock at a time in the actively
managed portion of this Fund. Still, I believe it's likely that the tide will
turn back in favor of large stocks at SOME point in the next couple of years.
It's a good time (ok, any time is a good time) to make sure your own portfolio
is in balance with your long-term plan.
DETAILED EXPLANATION OF QUARTERLY PERFORMANCE
TRANSLATION: Three stocks in our portfolio gained more than 50% in the December
quarter. None declined by this amount.
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- ------------------------------------------------------------------------------
1 Apple Computer Inc Computers 66.2%
2 Autodesk Inc Software 56.1%
3 Monsanto Co Agriculture 52.5%
</Table>
Apple Computer was our top performer for the quarter. A well known computer and
electronics manufacturer, Apple Computer makes the very popular iPod digital
music player, as well as the iMac and PowerCube personal computers. The stock
has done well on surging sales of iPods and the growth of the digital
music-player industry. In the holiday season just ended, major retailers like
Amazon.com (the biggest Internet retailer), and Best Buy Company (the largest
electronics retailer) ran out of or ran short of some popular iPod models. By
some estimates Apple could sell 4 million iPods in the December quarter,
compared with just over 700,000 in the previous holiday season.
Number Two for the quarter was Autodesk. The company produces sophisticated
computer software for graphics-heavy applications -- its products are used by
architects, surveyors, designers, and engineers, among others - and it has
continued to increase both revenues and profits. The stock hit a 52-week high in
the last week of the year, and was 2004's top performer in the S&P 500, with a
gain of 210%.
DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT WORKED WELL
TRANSLATION: To a certain extent, the December quarter really carried the year,
so the good news for the quarter and the year are largely the same. Over the
course of the calendar year, 14 companies gained more than 40%.
3
<Page>
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % GAIN
- ------------------------------------------------------------------------------
1 Autodesk Inc Software 167.8%
2 Apple Computer Inc Computers 130.5%
3 Monsanto Co Agriculture 93.0%
4 NCR Corp Computers 67.9%
5 KB Homes Home Builders 65.4%
6 Adobe Systems Inc Software 62.2%
7 Qualcomm Inc Telecommunications 57.2%
8 United States Steel Corp Iron/Steel 52.7%
9 Norfolk Southern Corp Transportation 49.6%
10 Brunswick Corp Leisure Time 49.1%
11 Aetna Inc Healthcare Services 48.1%
12 FedEx Corp Transportation 45.9%
13 Edison International Electric 43.9%
14 WW Grainger Inc Distribution/Wholesale 40.6%
</Table>
Given the strength of the fourth quarter, it's not surprising that many of the
companies on the list above earned their place on that list in the last three
months of the year. Apple Computer and Autodesk, certainly, made the majority of
their gains for the year late in 2004, as did Aetna, the Hartford, CT-based
insurance firm. Aetna's stock spent the first ten months of the year essentially
treading water, making moderate advances followed by moderate declines. But in
November, the company released impressive third-quarter results, and the stock
gained more than 30% in about eight weeks alone.
But not every stock was a fourth-quarter player. For example, Dayton-based
computer systems company NCR began its run in mid-July, with an announcement
that earnings for the second quarter - soon to be released - would double
analysts' expectations. And FedEx stock spent the entire year on an upward trek.
The company profited very handsomely off the pick-up in the global economy, with
shipments from Asia particularly strong. Investors loved FedEx's impressive
earnings growth (up 157% in the first fiscal quarter, and 283% in the second),
doubled operating margins, and acquisition of the Kinko's chain of shops
providing copying and computer services.
DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK
TRANSLATION: The list of big losers for the year is happily short but, as
always, it's painful. Five companies in the Fund's portfolio lost more than 40%
of their value in 2004.
Here is the list of companies that declined more than 40% last year:
<Table>
<Caption>
RANK DESCRIPTION INDUSTRY % LESS
- ------------------------------------------------------------------------------
1 Novell Inc Software -53.8%
2 Nortel Networks Corp Telecommunications -49.1%
3 QLogic Corp Semiconductors -48.0%
4 Teradyne Inc Semiconductors -42.4%
5 Watson Pharmaceuticals Inc Pharmaceuticals -40.2%
</Table>
The worst performer of the year was software-vendor Novell. In theory, the
company should have done well: The Linux operating system is gaining in
popularity, and Novell stands to benefit. But instead, the stock headed nowhere
but down, crushed by a series of quarterly results that failed to meet analysts'
estimates, by software giant Microsoft's attack on the company's market share
lead, and by the departure of Novell's second-highest-ranking executive. Our
Fund lost more than 53% on Novell in calendar 2004, which is pretty ugly.
4
<Page>
Like Novell, Teradyne turned in some appealing numbers that nevertheless lagged
what analysts were expecting...and the stock went down. Meanwhile, Watson
Pharmaceuticals produced almost nothing that anyone wanted to hear, at least in
the first half of the year or so. Hamstrung by pricing pressures on its generic
drugs, the company underperformed the estimates and the stock was soundly
punished. Things picked up a bit in the second half of the year, with some
excitement surrounding the company's skin-patch to treat female sexual
dysfunction. However, Watson couldn't get much traction; investors were troubled
by the turnover in senior management and by the company's announced intention of
a fairly radical restructuring of its business model.
TOP TEN HOLDINGS
Here are the top ten holdings at the end of December. Please note that the
option positions included here are short puts. The percentages are based on a
theoretical stock position, that is, as if we owned the underlying stock. We are
obligated to buy the underlying stock at a specific strike price for a specific
period of time.
<Table>
<Caption>
PERCENT OF
RANK DESCRIPTION INDUSTRY NET ASSETS
- ------------------------------------------------------------------------------------------------------
1 Autodesk Inc, incl January $32.5 & $30 puts Software 2.0%
2 Bristol-Myers Squibb Co, incl January $25 & $22.5 puts Pharmaceuticals 2.0%
3 CIGNA Corp, incl January $65 & $70 put Insurance 1.9%
4 SBC Communications Inc, incl January $25 & April $25 puts Telecommunications 1.8%
5 Apple Computer Inc, incl January $65, $60 & $55 puts Computers 1.8%
6 Eastman Chemical Co, incl January $55 puts Chemicals 1.7%
7 General Motors Corp, incl January $37.5 puts Auto Manufacturers 1.7%
8 Ford Motor Co, incl February $15 & March $12.5 puts Auto Manufacturers 1.6%
9 Texas Utilities, incl January $60 & $65 puts Electric 1.4%
10 Carpenter Technology Corp, incl January $50 & $55 puts Iron/Steel 1.3%
- ------------------------------------------------------------------------------------------------------
17.2%
</Table>
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
<Table>
COMMON STOCK 52.3%
Basic Materials 1.4%
Communications 6.9%
Consumer, Cyclical 6.4%
Consumer, Non-Cyclical 11.1%
Energy 3.4%
Financial 10.2%
Industrial 5.4%
Technology 6.0%
Utilities 1.5%
U. S. GOVERNMENT OBLIGATIONS 43.2%
CORPORATE NOTES 3.5%
COVERED CALL OPTIONS WRITTEN (0.5%)
PUT OPTIONS WRITTEN (0.3%)
MONEY MARKET FUNDS 0.9%
OTHER ASSETS IN EXCESS OF LIABILITIES 0.9%
--------------------------------------------------------------------
TOTAL 100.0%
</Table>
5
<Page>
DISCLAIMER
The following is a reminder from the friendly folks at your Fund who worry about
liability. The views expressed here are exclusively those of Fund management.
These views, including those of market sectors or individual stocks, are not
meant as investment advice and should not be considered predictive in nature.
Any favorable (or unfavorable) description of a holding applies only as of the
quarter end, December 31, 2004, unless otherwise stated. Security positions can
and do change thereafter. Discussions of historical performance do not guarantee
and are not indicative of future performance.
The Fund is subject to market risk (volatility) and is not an appropriate
investment for short-term investors. The Fund uses an option writing strategy in
which the Fund may sell covered calls or secured put options. Up to 75% of Fund
assets may be invested in option writing. Options are subject to special risks
and may not fully protect the Fund against declines in the value of its stocks.
In addition, an option writing strategy limits the upside profit potential
normally associated with stocks. While the Adviser seeks to decrease the Fund's
exposure to market risk through use of fixed income and derivative instruments
(especially options writing), there is no guarantee these strategies will work
in all market environments.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES,
RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S
WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND
SERVICES, LLC, DISTRIBUTOR. (02/05).
CONCLUSION
In closing, we would like to thank all shareholders for their support. We
appreciate your feedback, so please call or write us with any questions or
comments. We work for you and value your input.
Sincerely,
/s/ Richard P. Cancelmo
Richard P. Cancelmo, Jr.
6
<Page>
DISCLOSURE OF FUND EXPENSES
(UNAUDITED)
As a shareholder to the Fund, you will incur no transactions costs, including
sales charges (loads) on purchases, on reinvested dividends, or on other
distributions. There are also no redemption fees or exchange fees. However, the
fund will incur ongoing costs, including management fees and other Fund
expenses. The following examples are intended to help you understand your
ongoing costs (in dollars) of investing in a Fund and to compare these costs
with the ongoing costs of investing in other mutual funds. The examples are
based on an investment of $1,000 invested on July 1, 2004 and held until
December 31, 2004.
ACTUAL RETURN. The first line of the table below provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. 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 in the first line under the heading "Expense Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL 5% RETURN. The second line of the table below provides information
about hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in a Fund and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of the other funds.
The expenses shown in the table are meant to highlight ongoing Fund costs only
and do not reflect transaction fees, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and may not
help you determine the relative total costs of owning different funds.
BRIDGEWAY BALANCED FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSE PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
7/1/04 12/31/04 7/1/04 - 12/31/04
- ----------------------------------------------------------------------------------
Actual Fund Return $ 1,000.00 $ 1,040.02 $ 4.83
Hypothetical Fund Return $ 1,000.00 $ 1,020.47 $ 4.78
</Table>
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.94%
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE
NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE
CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD).
7
<Page>
SCHEDULE OF INVESTMENTS
SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
INDUSTRY COMPANY PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 43.2%
U.S. TREASURY BILLS - 24.8%
01/13/05 1.63%** $ 900,000 $ 899,511
01/27/05 1.85%** 500,000 499,391
02/03/05 1.74%** 800,000 798,726
03/24/05 1.87%** 500,000 497,600
04/07/05 1.99%** 500,000 497,073
04/28/05 2.04%** 500,000 496,247
05/12/05 2.25%** 500,000 495,700
05/19/05 2.28%** 900,000 891,786
05/26/05 2.36%** 900,000 891,355
06/23/05 2.47%** 900,000 889,387
------------------
6,856,776
U.S. TREASURY NOTES - 18.4%
01/31/05 1.63% 200,000 199,969
09/30/05 1.63% 300,000 297,785
10/31/05 1.63% 200,000 198,289
11/30/05 1.88% 200,000 198,438
12/31/05 1.88% 300,000 297,398
01/31/06 1.88% 300,000 297,117
04/30/06 2.25% 500,000 495,859
05/15/06 2.00% 200,000 197,641
05/31/06 2.50% 300,000 298,277
11/15/06 3.50% 200,000 201,688
08/15/07 2.75% 300,000 296,707
11/15/07 3.00% 200,000 198,766
10/15/08 3.13% 200,000 197,867
11/15/08 3.38% 200,000 199,461
04/15/09 3.13% 300,000 295,453
06/15/09 4.00% 300,000 305,707
08/15/09 3.50% 200,000 199,453
10/15/09 3.38% 300,000 297,047
11/15/09 3.50% 200,000 199,062
11/15/13 4.25% 200,000 201,258
------------------
5,073,242
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $11,947,907) 11,930,018
------------------
<Caption>
INDUSTRY COMPANY SHARES VALUE
- ----------------------------------------------------------------------------------------------
COMMON STOCKS - 52.3%
ADVERTISING - 0.1%
Interpublic Group of Cos Inc* 1,400 18,760
AEROSPACE/DEFENSE - 0.8%
Boeing Co 700 36,239
General Dynamics Corp 600 62,760
Lockheed Martin Corp 270 14,999
Northrop Grumman Corp 1,200 65,232
United Technologies Corp 370 38,240
------------------
217,470
AGRICULTURE - 0.8%
Monsanto Co 4,100 227,755
AIRLINES - 0.1%
Southwest Airlines Co 1,600 26,048
APPAREL - 0.2%
Liz Claiborne Inc 1,200 50,652
AUTO MANUFACTURERS - 2.0%
Ford Motor Co 17,500 $ 256,200
General Motors Corp 6,600 264,396
Paccar Inc 400 32,192
------------------
552,788
AUTO PARTS & Equipment - 0.1%
Johnson Controls Inc 480 30,451
BANKS - 3.1%
AmSouth Bancorp 2,540 65,786
Bank of New York Co Inc 2,500 83,550
First Horizon National Corp 1,800 77,598
KeyCorp 2,600 88,140
Marshall & Ilsley Corp 2,000 88,400
National City Corp 2,900 108,895
Regions Financial Corp 2,100 74,739
Synovus Financial Corp 3,500 100,030
Wachovia Corp 1,557 81,898
Wells Fargo & Co 1,000 62,150
Zions Bancorporation 300 20,409
------------------
851,595
BEVERAGES - 1.0%
Anheuser-Busch Cos Inc 1,200 60,876
Brown-Forman Corp 1,400 68,152
Pepsi Bottling Group Inc 2,400 64,896
PepsiCo Inc 1,300 67,860
------------------
261,784
BIOTECHNOLOGY - 0.5%
Genzyme Corp* 1,600 92,912
Millipore Corp* 1,000 49,810
------------------
142,722
BUILDING MATERIALS - 0.1%
Masco Corp 800 29,224
CHEMICALS - 0.9%
Eastman Chemical Co 400 23,092
Hercules Inc* 3,300 49,005
Sherwin-Williams Co 1,500 66,945
Sigma-Aldrich Corp 1,600 96,736
------------------
235,778
COMMERCIAL SERVICES - 0.3%
H&R Block Inc 700 34,300
Robert Half International Inc 1,900 55,917
------------------
90,217
COMPUTERS - 2.1%
Affiliated Computer Services Inc* 400 24,076
Apple Computer Inc* 2,000 128,800
Computer Sciences Corp* 1,900 107,103
EMC Corp* 2,500 37,175
Hewlet-Packard Co 2,700 56,619
Lexmark International Group Inc* 630 53,550
NCR Corp* 1,300 89,999
SunGard Data Systems Inc* 2,400 67,992
------------------
565,314
</Table>
8
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- ----------------------------------------------------------------------------------------------
COSMETICS/PERSONAL CARE - 1.1%
Alberto-Culver Co 1,100 $ 53,427
Avon Products Inc 2,600 100,620
Kimberly-Clark Corp 600 39,486
Procter & Gamble Co 2,000 110,160
------------------
303,693
DISTRIBUTION/WHOLESALE - 0.1%
WW Grainger Inc 500 33,310
DIVERSIFIED FINANCIAL SERVICE - 4.4%
American Express Co 1,900 107,103
Bear Stearns Cos Inc 1,000 102,310
Capital One Financial Corp 1,100 92,631
Countrywide Financial Corp 2,300 85,123
Franklin Resources Inc 1,300 90,545
Goldman Sachs Group Inc 1,100 114,444
JP Morgan Chase & Co 2,000 78,020
Lehman Brothers Holdings Inc 1,400 122,472
MBNA Corp 3,400 95,846
Merrill Lynch & Co Inc 1,600 95,632
Morgan Stanley & Co Inc 1,800 99,936
SLM Corp 1,810 96,636
T Rowe Price Group Inc 700 43,540
------------------
1,224,238
ELECTRIC - 1.4%
American Electric Power Co Inc 1,035 35,542
Dominion Resources Inc 760 51,482
Duke Energy Corp 1,900 48,127
Edison International 1,800 57,654
Entergy Corp 600 40,554
Exelon Corp 1,200 52,884
Southern Co 1,250 41,900
Texas Utilities 800 51,648
------------------
379,791
ELECTRICAL COMPONENTS & EQUIPMENT - 0.2%
Power-One Inc* 5,000 44,600
ELECTRONICS - 0.5%
Parker Hannifin Corp* 500 37,870
Thermo Electron Corp* 1,700 51,323
Waters Corp 900 42,111
------------------
131,304
ENTERTAINMENT - 0.0%^
International Game Technology 300 10,314
ENVIRONMENTAL CONTROL - 0.1%
Waste Management Inc 1,300 38,922
FOOD - 0.9%
Archer-Daniels-Midland Co 1,800 40,158
Campbell Soup Co 600 17,934
Kellogg Co 1,600 71,456
Sysco Corp 1,100 41,987
Winn Dixie Stores Inc 3,700 16,835
WM Wrigley Jr Co 1,000 69,190
------------------
257,560
FOREST PRODUCTS & PAPER - 0.2%
Georgia-Pacific Corp 1,670 $ 62,592
Neenah Paper Inc* 18 587
------------------
63,179
GAS - 0.1%
Nicor Inc 200 7,388
Peoples Energy Corp 400 17,580
------------------
24,968
HEALTHCARE PRODUCTS - 1.7%
Bausch & Lomb Inc 1,000 64,460
Becton Dickinson & Co 1,220 69,296
Biomet Inc 1,300 56,407
C.R. Bard Inc 700 44,786
St Jude Medical Inc* 1,880 78,828
Stryker Corp 1,960 94,570
Zimmer Holdings Inc* 900 72,108
------------------
480,455
HEALTHCARE SERVICES - 0.7%
Aetna Inc 600 74,850
Quest Diagnostics Inc 600 57,330
United Health Group Inc 800 70,424
------------------
202,604
HOME BUILDERS - 0.2%
Centex Corp 400 23,832
KB Homes 200 20,880
------------------
44,712
HOUSEHOLD PRODUCTS/WARES - 0.3%
Clorox Co 830 48,912
Fortune Brands Inc 400 30,872
------------------
79,784
INSURANCE - 2.4%
ACE Ltd 1,400 59,850
Allstate Corp 1,800 93,096
AMBAC Financial Group Inc 1,000 82,130
American International Group Inc 800 52,536
CIGNA Corp 1,000 81,570
Metlife Inc 1,900 76,969
Principal Financial Group Inc 1,000 40,940
Progressive Corp 1,380 117,079
Safeco Corp 1,320 68,957
------------------
673,127
INTERNET - 0.6%
eBay Inc* 600 69,768
Symantec Corp* 2,000 51,520
Yahoo! Inc* 1,500 56,520
------------------
177,808
IRON/STEEL - 0.1%
United States Steel Corp 500 25,625
LEISURE TIME - 0.2%
Brunswick Corp 1,270 62,865
LODGING - 0.1%
Marriott International Inc 600 37,788
</Table>
9
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- ----------------------------------------------------------------------------------------------
MACHINERY-CONSTRUCTION & MINING - 0.1%
Caterpillar Inc 400 $ 39,004
MACHINERY-DIVERSIFIED - 0.2%
Cummins Inc 400 33,516
Deere & Co 300 22,320
------------------
55,836
MEDIA - 1.7%
Comcast Corp* 2,900 96,512
Knight-Ridder Inc 700 46,858
McGraw-Hill Cos Inc 770 70,486
Meredith Corp 1,330 72,086
Time Warner Inc* 4,700 91,368
Viacom Inc 1,500 54,585
Walt Disney Co 900 25,020
------------------
456,915
MINING - 0.3%
Freeport-McMoRan Copper &
Gold Inc 1,200 45,876
Newmont Mining Corp 800 35,528
------------------
81,404
MISCELLANEOUS MANUFACTURING - 2.6%
3M Co 680 55,808
Cooper Industries Ltd 1,900 128,991
Crane Co 3,600 103,824
Danaher Corp 1,900 109,079
Eaton Corp 1,500 108,540
ITT Industries Inc 800 67,560
Pall Corp 1,900 55,005
Textron Inc 1,100 81,180
------------------
709,987
OFFICE/BUSINESS EQUIPMENT - 0.1%
Pitney Bowes Inc 600 27,768
OIL & GAS - 2.9%
Amerada Hess Corp 1,020 84,028
Anadarko Petroleum Corp 1,400 90,734
Apache Corp 1,100 55,627
Burlington Resources Inc 1,600 69,600
ConocoPhillips 1,200 104,196
EOG Resources Inc 1,000 71,360
Exxon Mobile Corp 2,000 102,520
Nabors Industries Ltd* 1,100 56,419
Occidental Petroleum Corp 800 46,688
Royal Dutch Petroleum Co, ADR 600 34,428
Unocal Corp 400 17,296
Valero Energy Corp 1,600 72,640
------------------
805,536
OIL & GAS SERVICES - 0.4%
Baker Hughes Inc 900 38,403
Halliburton Co 750 29,430
Schlumberger Ltd 600 40,170
------------------
108,003
PACKAGING & CONTAINERS - 0.0%^
Bemis Co 400 11,636
PHARMACEUTICALS - 3.7%
Allergan Inc 900 72,963
AmerisourceBergen Corp 1,300 $ 76,284
Bristol-Myers Squibb Co 11,600 297,192
Cardinal Health Inc 990 57,569
Caremark RX Inc* 2,000 78,860
Forest Laboratories Inc* 1,362 61,099
Gilead Sciences Inc* 2,000 69,980
Hospira Inc* 2,060 69,010
Medco Health Solutions Inc* 2,900 120,640
Pfizer Inc 1,642 44,153
Wyeth 1,600 68,144
------------------
1,015,894
PIPELINES - 0.1%
El Paso Corp 3,500 36,400
RETAIL - 3.2%
Autonation Inc* 4,100 78,761
Bed Bath & Beyond Inc* 1,820 72,491
Best Buy Co Inc 1,100 65,362
Costco Wholesale Corp 2,100 101,661
CVS Corp 1,800 81,126
Dillard's Inc - Class A 1,100 29,557
Dollar General Corp 3,600 74,772
Federated Department Stores Inc 900 52,011
J.C. Penney Co Inc 1,500 62,100
Lowe's Cos Inc 640 36,858
Nordstrom Inc 2,000 93,460
Office Max Inc 200 6,276
Staples Inc 1,900 64,049
Starbucks Corp* 700 43,652
Yum! Brands Inc 450 21,231
------------------
883,367
SAVINGS & LOANS - 0.3%
Golden West Financial Corp 1,234 75,792
SEMICONDUCTORS - 1.3%
Altera Corp* 2,600 53,820
Analog Devices Inc 1,500 55,380
Applied Materials Inc* 4,400 75,240
Freescale Semiconductor Inc* 276 5,067
Linear Technology Corp 1,200 46,512
Maxim Integrated Products Inc 1,900 80,541
Texas Instruments Inc 1,470 36,191
------------------
352,751
SOFTWARE - 2.6%
Adobe Systems Inc 1,800 112,932
Autodesk Inc 4,600 174,570
Automatic Data Processing Inc 1,000 44,350
BMC Software Inc* 2,820 52,452
Citrix Systems Inc* 4,100 100,573
Compuware Corp* 5,400 34,938
Electronic Arts Inc* 1,000 61,680
First Data Corp 700 29,778
IMS Health Inc 1,780 41,314
Novell Inc* 5,400 36,450
Oracle Corp* 1,560 21,403
------------------
710,440
TELECOMMUNICATIONS - 4.5%
ALLTEL Corp 1,100 64,636
AT&T Corp 4,800 91,488
Avaya Inc* 6,500 111,800
Cisco Systems Inc* 3,200 61,760
</Table>
10
<Page>
<Table>
<Caption>
INDUSTRY COMPANY SHARES VALUE
- ----------------------------------------------------------------------------------------------
Citizens Communications Co 4,800 $ 66,192
Corning Inc* 6,400 75,328
Motorola Inc 2,500 43,000
Qualcomm Inc 1,700 72,080
SBC Communications Inc 12,000 309,240
Scientific-Atlanta Inc 2,500 82,525
Sprint Corp-FON Group 3,800 94,430
Tellabs Inc* 6,700 57,553
Western Wireless Corp* 4,000 117,200
------------------
1,247,232
TOYS, GAMES & HOBBIES - 0.1%
Hasbro Inc 1,300 25,194
TRANSPORTATION - 0.8%
FedEx Corp 700 68,943
Norfolk Southern Corp 2,700 97,713
Ryder Systems Inc 300 14,331
United Parcel Services Inc 300 25,638
------------------
206,625
TOTAL COMMON STOCKS
(Cost $11,962,877) 14,446,989
------------------
<Caption>
PRINCIPAL
AMOUNT
---------------
CORPORATE NOTES - 3.5%
Leucadia National
Corp, 7.75%
Senior Notes 08/15/13 $ 775,000 837,000
Sea Containers Ltd,
Class A, 7.88%
Series B 02/15/08 120,000 121,800
------------------
TOTAL CORPORATE NOTES
(Cost $930,173) 958,800
------------------
<Caption>
SHARES
---------------
PURCHASED CALL OPTIONS - LONG - 0.0%^
Bristol-Myers Squibb Co
expiring Jan 06 at $25.00 50,000 11,875
------------------
TOTAL PURCHASED CALL OPTIONS
(Cost $10,300) 11,875
------------------
MONEY MARKET MUTUAL FUNDS - 0.9%
First American Treasury
Obligations Fund - Class S 246,498 246,498
------------------
TOTAL MONEY MARKET MUTUAL FUNDS
(Cost $246,498) 246,498
------------------
TOTAL INVESTMENTS - 99.9%
(Cost $25,097,755) 27,594,180
Other Assets In Excess of Liabilities - 0.1% 15,614
------------------
NET ASSETS - 100.0% $ 27,609,794
==================
</Table>
* NON-INCOME PRODUCING SECURITY
** RATE DISCLOSED REPRESENTS DISCOUNT RATE.
^ LESS THAN 0.05% OF NET ASSETS
ADR - AMERICAN DEPOSITARY RECEIPT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<Page>
SCHEDULE OF OPTIONS WRITTEN
DECEMBER 31, 2004 (UNAUDITED)
<Table>
<Caption>
COMPANY SHARES VALUE
- ----------------------------------------------------------------------------------------------
COVERED CALL OPTIONS WRITTEN
ADOBE SYSTEMS INC
expiring Jan 05 at $60.00 1,400 $ (4,760)
AETNA INC
expiring Apr 05 at $130.00 600 (3,030)
ALTERA CORP
expiring Mar 05 at $25.00 1,000 (250)
ANADARKO PETROLEUM CORP
expiring Jan 05 at $70.00 1,000 (100)
APACHE CORP
expiring Jan 05 at $55.00 1,100 (138)
APPLE COMPUTER INC
expiring Jan 05 at $60.00 1,000 (5,950)
AUTODESK INC
expiring Jan 05 at $35.00 3,000 (10,050)
BED BATH & BEYOND INC
expiring Feb 05 at $42.50 900 (315)
BEMIS INC
expiring Jan 05 at $27.50 400 (710)
BEST BUY INC
expiring Jan 05 at $65.00 800 (120)
BMC SOFTWARE INC
expiring Feb 05 at $20.00 1,400 (735)
BRISTOL-MYERS SQUIBB CO
expiring Jan 05 at $25.00 4,800 (3,600)
BURLINGTON RESOURCES INC
expiring Jan 05 at $42.50 800 (1,380)
CARDINAL HEALTH INC
expiring Jan 05 at $55.00 900 (3,330)
CAREMARK RX INC
expiring Mar 05 at $40.00 700 (1,365)
CIGNA CORP
expiring Jan 05 at $80.00 1,000 (3,200)
CITRIX SYSTEMS INC
expiring Mar 05 at $25.00 1,500 (2,175)
COMPUTER SCIENCES CORP
expiring Jan 05 at $55.00 1,400 (2,940)
CONOCOPHILLIPS
expiring Jan 05 at $90.00 900 (382)
CORNING INC
expiring Jan 05 at $12.50 4,900 (613)
CVS CORP
expiring Feb 05 at $47.50 900 (405)
ELECTRONIC ARTS INC
expiring Mar 05 at $55.00 500 (4,100)
FORD MOTOR CO
expiring Jan 05 at $15.00 3,200 (560)
expiring Feb 05 at $15.00 7,000 (2,625)
GENERAL MOTORS CORP
expiring Jan 05 at $40.00 3,000 (2,775)
expiring Feb 05 at $40.00 3,000 (3,825)
GENZYME CORP
expiring Jan 05 at $60.00 600 (390)
HALLIBURTON CO
expiring Jan 05 at $40.00 700 (437)
JOHNSON CONTROLS INC
expiring Jan 05 at $60.00 400 (1,480)
JP MORGAN CHASE & CO
expiring Jan 05 at $37.50 2,000 (3,150)
MAXIM INTEGRATED PRODUCTS INC
expiring Jan 05 at $50.00 800 (40)
MEDCO HEALTH SOLUTIONS INC
expiring Jan 05 at $35.00 1,000 (6,700)
MONSANTO CO
expiring Jan 05 at $40.00 2,000 $ (31,200)
NABORS INDUSTRIES LTD
expiring Jan 05 at $55.00 800 (280)
NCR CORP
expiring Jan 05 at $60.00 1,300 (12,090)
NORDSTROM INC
expiring Apr 05 at $50.00 1,000 (1,475)
NORFOLK SOUTHERN CORP
expiring Jan 05 at $35.00 2,000 (3,100)
ORACLE CORP
expiring Mar 05 at $15.00 1,500 (413)
PEPSICO INC
expiring Jan 05 at $50.00 1,300 (3,055)
POWER-ONE INC
expiring Jan 05 at $7.50 2,500 (3,875)
PROGRESSIVE CORP
expiring Jan 05 at $95.00 700 (18)
QUALCOMM INC
expiring Jan 05 at $45.00 900 (337)
SAFECO CORP
expiring Feb 05 at $50.00 700 (1,908)
SCIENTIFIC-ATLANTA INC
expiring Mar 05 at $35.00 1,800 (2,430)
SPRINT CORP - FON GROUP
expiring Jan 05 at $22.50 2,500 (5,938)
ST. JUDE MEDICAL INC
expiring Jan 05 at $42.50 900 (653)
STAPLES INC
expiring Mar 05 at $35.00 1,000 (1,050)
STRYKER CORP
expiring Mar 05 at $45.00 1,000 (4,350)
SYMANTEC CORP
expiring Jan 05 at $35.00 1,000 (25)
TEXAS INSTRUMENTS INC
expiring Apr 05 at $27.50 700 (437)
TEXAS UTILITIES
expiring Jan 05 at $65.00 800 (1,100)
W.W. GRAINGER INC
expiring Jan 05 at $60.00 500 (3,325)
WATERS CORP
expiring Feb 05 at $50.00 500 (237)
WESTERN WIRELESS CORP
expiring Jan 05 at $30.00 500 (275)
WRIGLEY (WM) JR CO
expiring Mar 05 at $70.00 500 (837)
------------------
TOTAL COVERED CALL OPTIONS WRITTEN
(Premiums Received -$88,892) $ (150,038)
==================
PUT OPTIONS WRITTEN
AK STL HOLDING CORP
expiring Jan 05 at $10.00 5,000 $ (250)
expiring Jan 05 at $12.50 20,000 (4,500)
APPLE COMPUTER INC
expiring Jan 05 at $55.00 2,500 (1,313)
expiring Jan 05 at $60.00 1,200 (1,800)
expiring Jan 05 at $65.00 2,000 (7,400)
AT&T CORP
expiring Jan 05 at $12.50 5,000 (125)
expiring Jan 05 at $15.00 3,500 (88)
expiring Jan 05 at $17.50 5,000 (625)
</Table>
12
<Page>
<Table>
<Caption>
COMPANY SHARES VALUE
- ----------------------------------------------------------------------------------------------
AUTODESK INC
expiring Jan 05 at $30.00 5,000 $ (125)
expiring Jan 05 at $32.50 5,000 (500)
BELLSOUTH CORP
expiring Jan 05 at $27.50 5,000 (1,875)
expiring Feb 05 at $27.50 5,000 (3,375)
BRISTOL-MYERS SQUIBB CO
expiring Jan 05 at $25.00 5,000 (1,625)
expiring Jan 05 at $22.50 5,000 (125)
BUILDING MATERIAL HOLDING CORP
expiring Jan 05 at $35.00 2,500 (938)
CARPENTER TECHNOLOGY CORP
expiring Jan 05 at $50.00 2,500 (625)
CARPENTER TECHNOLOGY CORP
expiring Jan 05 at $55.00 4,000 (4,200)
CIGNA CORP
expiring Jan 05 at $65.00 3,500 (175)
expiring Jan 05 at $70.00 2,000 (300)
EASTMAN CHEMICAL CO
expiring Jan 05 at $55.00 8,000 (1,200)
EDISON INTERNATIONAL
expiring Jan 05 at $25.00 2,500 (62)
FHLMC
expiring Jan 05 at $65.00 2,000 (150)
FORD MOTOR CO
expiring March 05 at $12.50 5,000 (625)
expiring Feb 05 at $15.00 7,000 (5,775)
GENERAL MOTORS CORP
expiring Jan 05 at $37.50 5,000 (875)
LYONDELL CHEMICAL CO
expiring Jan 05 at $25.00 10,000 (750)
MARATHON OIL GROUP
expiring Feb 05 at $35.00 3,500 (1,575)
MAY DEPARTMENT STORES CO
expiring Jan 05 at $27.50 7,000 (1,575)
METLIFE INC
expiring Feb 05 at $40.00 4,000 (3,800)
OMI CORP
expiring Jan 05 at $20.00 5,000 (16,000)
RESEARCH IN MOTION LTD
expiring Jan 05 at $70.00 1,500 (412)
expiring Jan 05 at $80.00 2,000 (3,800)
SBC COMMUNICATIONS INC
expiring Jan 05 at $25.00 2,500 (500)
expiring Apr 05 at $25.00 5,000 (4,250)
SOUTHWESTERN ENERGY CO
expiring Jan 05 at $50.00 3,000 (4,950)
TEXAS UTILITIES
expiring Jan 05 at $60.00 3,000 (975)
expiring Jan 05 at $65.00 2,000 (3,350)
URBAN OUTFITTERS INC
expiring Jan 05 at $40.00 2,500 (500)
VALERO ENERGY CORP
expiring Feb 05 at $40.00 6,000 (3,300)
VERIZON COMMUNICATIONS INC
expiring Jan 05 at $40.00 5,000 (3,000)
expiring Feb 05 at $40.00 2,500 (2,437)
WESTERN WIRELESS CORP
expiring Jan 05 at $25.00 6,000 (300)
------------------
TOTAL PUT OPTIONS WRITTEN
(Premiums Received -$176,644) $ (90,125)
==================
TOTAL OPTIONS WRITTEN
(Total Premiums Received - 265,536) $ (240,163)
==================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments at value (cost - $25,097,755) $ 27,594,180
Receivable for investments sold 115,477
Receivable for fund shares sold 99,420
Dividends receivable 13,077
Interest receivable 54,037
Prepaid expenses 26,022
- --------------------------------------------------------------------------------------------------
Total assets 27,902,213
- --------------------------------------------------------------------------------------------------
LIABILITIES:
Accrued investment adviser fee 9,285
Accrued administration fee 1,196
Accrued directors fee 613
Other payables 41,110
Futures variation margin 52
Call options written at value (premiums received $88,892) 150,038
Put options written at value (premiums received $176,644) 90,125
- --------------------------------------------------------------------------------------------------
Total liabilities 292,419
- --------------------------------------------------------------------------------------------------
NET ASSETS $ 27,609,794
==================================================================================================
NET ASSETS REPRESENT:
Paid-in capital $ 25,212,245
Undistributed net investment income 206
Accumulated net realized loss on investments (124,455)
Net unrealized appreciation of investments 2,521,798
- --------------------------------------------------------------------------------------------------
NET ASSETS $ 27,609,794
==================================================================================================
Shares of common stock outstanding of $.001 par value, 50,000,000
shares authorized 2,385,495
- --------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share $ 11.57
==================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<Page>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
<Table>
INVESTMENT INCOME:
Dividends (net of withholding tax of $81) $ 105,941
Interest 137,541
- --------------------------------------------------------------------------------------------------
Total investment income 243,482
EXPENSES:
Investment advisory fees 75,443
Administration fees 6,287
Accounting fees 28,914
Transfer agent fees 14,823
Audit fees 3,944
Tax fees 6,013
Custody fees 11,016
Legal fees 1,732
Directors fees 866
Registration fees 564
Reports to shareholders 500
Miscellaneous 2,115
- --------------------------------------------------------------------------------------------------
Total expenses before fees advisory fees waived 152,217
Less investment advisory fees waived (34,023)
- --------------------------------------------------------------------------------------------------
Net expenses 118,194
- --------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 125,288
- --------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment securities (125,206)
Net realized gain on options 306,681
Net realized loss on futures contracts (244,860)
Net change in unrealized appreciation / depreciation on investments 1,012,849
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 949,464
- --------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,074,752
==================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 2004* JUNE 30, 2004
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 125,288 $ 87,559
Net realized loss on investment securities (125,206) (190,689)
Net realized gain on options 306,681 511,403
Net realized loss on futures contracts (244,860) (41,706)
Net change in unrealized appreciation / depreciation on investments 1,012,849 1,200,151
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 1,074,752 1,566,718
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income (179,999) (61,044)
From net realized gains (243,673) 0
- --------------------------------------------------------------------------------------------------------------------
Net decrease in net assets from distributions (423,672) (61,044)
- --------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from sale of shares 9,565,036 15,549,707
Reinvestment of distributions 415,022 59,369
Cost of shares redeemed (6,233,095) (2,246,830)
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets from share transactions 3,746,963 13,362,246
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets 4,398,043 14,867,920
NET ASSETS:
Beginning of period 23,211,751 8,343,831
- --------------------------------------------------------------------------------------------------------------------
End of period ** $ 27,609,794 $ 23,211,751
====================================================================================================================
SHARES ISSUED & REDEEMED:
Issued 847,240 1,421,691
Distributions reinvested 35,871 5,437
Redeemed (551,326) (203,741)
- --------------------------------------------------------------------------------------------------------------------
Net increase 331,785 1,223,387
Outstanding at beginning of period 2,053,710 830,323
- --------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 2,385,495 2,053,710
====================================================================================================================
* Unaudited
** Including undistributed net investment income of: $ 206 $ 54,917
</Table>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
16
<Page>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
<Table>
<Caption>
SIX MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDED JUNE 30,
2004*** 2004 2003 2002 2001**
- --------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $ 11.30 $ 10.05 $ 9.87 $ 10.00 $ 10.00
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income^ 0.06 0.06 0.10 0.04 0.00
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) 0.39 1.24 0.15 (0.12) 0.00
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.45 1.30 0.25 (0.08) 0.00
- --------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders:
Net investment income (0.08) (0.05) (0.06) (0.05) 0.00
Net realized gain (0.10) 0.00 (0.01) 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------
Total distributions (0.18) (0.05) (0.07) (0.05) 0.00
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.57 $ 11.30 $ 10.05 $ 9.87 $ 10.00
====================================================================================================================
TOTAL RETURN+ 4.00%# 12.94% 2.57% (0.80%) 0.00%#
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period ('000's) $ 27,610 $ 23,212 $ 8,344 $ 4,960 $ 370
Ratios to average net assets:
Expenses after waivers and
reimbursements 0.94%* 0.94% 0.94% 0.94% 0.00%
Expenses before waivers and
reimbursements 1.21%* 1.51% 1.66% 2.07% 0.00%
Net investment income after
waivers and reimbursements 1.00%* 0.60% 1.06% 0.49% 0.00%
Portfolio turnover rate 9.0% 123.7% 98.2% 112.5% 0.0%
</Table>
* ANNUALIZED
** COMMENCED OPERATIONS ON JUNE 30, 2001.
*** UNAUDITED
+ TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING
THE PERIOD.
# TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING
DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
17
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 (UNAUDITED)
1. ORGANIZATION:
Bridgeway Funds, Inc. ("Bridgeway") was organized as a Maryland corporation on
October 19, 1993, and is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company.
Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001
per share, of which 50,000,000 shares have been classified into the Balanced
Fund.
Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven
funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company,
Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced,
Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds.
On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors.
On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On
July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15,
2003, the Ultra-Small Company Market Fund closed to new investors. The initial
public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the
Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003.
The Balanced Fund seeks to provide a high current return with short-term risk
less than or equal to 40% of the stock market.
Bridgeway Capital Management, Inc. (the "Adviser") is the Adviser.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies followed in the
preparation of the financial statements of the Balanced Fund (the "Fund") are in
conformity with accounting principles generally accepted in the United States of
America.
SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options,
portfolio securities (including futures contracts) that are principally traded
on a national securities exchange are valued at their last sale on the exchange
on which they are principally traded prior to the close of the New York Stock
Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio
securities other than options that are principally traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") are
valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded
sales on their home exchange or NOCP in the case of NASDAQ traded securities,
the security will be valued according to the following priority: Bid prices for
long positions and ask prices for short positions.
Fixed income securities having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Options are valued at
the average of the best bid and best asked quotations. Other investments for
which no sales are reported are valued at the latest bid price in accordance
with the pricing policy established by the Board of Directors.
Investments in open-end registered investment companies and closed-end
registered investment companies that do not trade on an exchange are valued at
the end of day net asset value per share.
Investments in closed-end registered investment companies that trade on an
exchange are valued at the last sales price as of the close of the customary
trading session on the exchange where the security is principally traded.
When market quotations are not readily available or when events occur that make
established valuation methods unreliable, securities of the Fund may be valued
at fair value as determined in good faith by or under the direction of the Board
of Directors.
SECURITIES LENDING Upon lending its securities to third parties, the Fund
receives compensation in the form of fees. The Fund also continues to receive
dividends on the securities loaned. The loans are secured by collateral at least
equal to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
Additionally, the Fund does not have the right to sell or repledge collateral
received in the form of securities unless the borrower goes into default. The
risks to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. As of
December 31, 2004, the Fund had no securities on loan. It is the Fund's policy
to obtain additional collateral from or return excess collateral to the borrower
by the end of the next business day, following the valuation date of the
securities loaned. Therefore, the value of the collateral held may be
temporarily less than the value of the securities on loan.
USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America,
18
<Page>
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
RISKS AND UNCERTAINTIES The Fund provides for various investment options,
including stocks and call and put options. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on
October 15, 1996 and amended on October 22, 2003, that permits the Adviser to
pay up to 0.25% of the Fund's average daily assets for sales and distribution of
Fund shares. Since the cost of distributing Fund shares is borne by the Adviser,
the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's
distributor. Prior to January 2, 2004, the Fund acted as its own distributor.
SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway
expenses that are not series fund specific are allocated to each series based
upon its relative proportion of net assets to Bridgeway's total net assets.
Security transactions are accounted for as of the trade date, the date the order
to buy or sell is executed. Realized gains and losses are computed on the
identified cost basis. Dividend income is recorded on the ex-dividend date, and
interest income is recorded on the accrual basis from settlement date. Discounts
and premiums are accreted / amortized on the interest method.
FUTURES CONTRACTS A futures contract is an agreement between two parties to buy
or sell a financial instrument at a set price on a future date. Upon entering
into such a contract the Fund is required to pledge to the broker an amount of
cash or U.S. government securities equal to the minimum "initial margin"
requirements of the exchange on which the futures contract is traded. The
contract amount reflects the extent of a Fund's exposure in these financial
instruments. The Fund's participation in the futures markets involves certain
risks, including imperfect correlation between movements in the price of futures
contracts and movements in the price of the securities hedged or used for cover.
The Fund's activities in the futures contracts are conducted through regulated
exchanges that do not result in counterparty credit risks on a periodic basis.
Pursuant to a contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the fluctuation in value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the Fund as
unrealized appreciation or depreciation. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed. As
of December 31, 2004 there were no outstanding futures contracts.
OPTIONS An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. The premium paid by
the Fund for the purchase of a call or a put option is included in the Fund's
Schedule of Investments as an investment and subsequently marked to market to
reflect the current market value of the option. When the Fund writes a call or a
put option, an amount equal to the premium received by the Fund is included in
the Fund's Statement of Assets and Liabilities as a liability and is
subsequently marked to market to reflect the current market value of the option
written.
If an option that the Fund has written either expires on its stipulated
expiration date, or if the Fund enters into a closing purchase transaction, the
Fund realizes a gain (or a loss if the cost of a closing purchase transaction
exceeds the premium received when the option was written) without regard to any
unrealized gain or loss on the underlying security, and the liability related to
such options is extinguished. If a call option that the Fund has written is
assigned, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received. If a put option that the Fund has written is assigned, the amount of
the premium originally received reduces the cost of the security which the Fund
purchased upon exercise of the option. As of December 31, 2004, the Fund held
$150,038 of call options written, $90,125 of put options written, and $11,875 in
purchased call options.
COVERED CALL OPTIONS AND SECURED PUTS The Fund may write call options on a
covered basis, that is, the Fund will own the underlying security, or the Fund
may write secured puts. The principal reason for writing covered calls and
secured puts on a security is to attempt to realize income, through the receipt
of premiums. The option writer has, in return for the premium, given up the
opportunity for profit from a substantial price increase in the underlying
security so long as the obligation as a writer continues, but has retained the
risk of loss should the price of the security decline. All options were listed
on exchanges and considered liquid positions with readily available market
quotes.
19
<Page>
A SUMMARY OF THE OPTION TRANSACTIONS WRITTEN BY THE BALANCED FUND FOLLOWS:
<Table>
<Caption>
WRITTEN CALL OPTIONS
CONTRACTS PREMIUMS
- -----------------------------------------------------------------------
Outstanding, June 30, 2004 1,174 $ 131,987
Positions Opened 3,732 389,067
Exercised (1,077) (116,875)
Expired (2,179) (208,767)
Closed (875) (106,520)
Split 15 -
- -----------------------------------------------------------------------
Outstanding, December 31, 2004 790 $ 88,892
Market Value, December 31, 2004 - $ (150,038)
<Caption>
WRITTEN PUT OPTIONS
CONTRACTS PREMIUMS
- -----------------------------------------------------------------------
Outstanding, June 30, 2004 1,415 $ 140,591
Positions Opened 5,330 546,452
Exercised (408) (59,808)
Expired (3,885) (394,555)
Closed (615) (56,036)
Split 50 -
- -----------------------------------------------------------------------
Outstanding, December 31, 2004 1,887 $ 176,644
Market Value, December 31, 2004 - $ (90,125)
</Table>
INDEMNIFICATION Under the Company's organizational documents, the Fund's
officers, directors, employees and agents are indemnified against certain
liabilities that may arise out of performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred. However, the Fund has not
had prior claims or losses pursuant to these contracts.
3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES:
The Fund has entered into a management contract with the Adviser, a shareholder
of the Fund. As compensation for the advisory services rendered, facilities
furnished, and expenses borne by the Adviser, the Fund pays the Adviser, a flat
0.6% annual management fee, computed daily and payable monthly, subject to a
maximum expense ratio of 0.94%.
The Adviser has agreed to reimburse the Fund for operating expenses and
management fees above 0.94% of the value of its average net assets for the six
months ended December 31, 2004. For the six months ended December 31, 2004, the
Adviser waived fees in the amount of $34,023. The Adviser expects to continue
this contractual level of reimbursement, for the foreseeable future.
On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to
the benefit of both parties. These trades are reviewed quarterly by the Board of
Directors. No inter-portfolio purchases or sales were entered into during the
six months ended December 31, 2004.
On July 1, 2004, the Adviser entered into a Master Administrative Agreement with
the Fund pursuant to which Bridgeway Capital Management acts as Administrator
for the Fund. Under the terms of the agreement, Bridgeway Capital Management
provides or arranges for the provision of certain accounting and other
administrative services to the Fund that it is not required to provide under the
terms of the investment advisory agreement. As compensation under the Master
Administrative Agreement, Bridgeway Capital Management receives a monthly fee
from each Fund calculated at the annual rate of 0.05% of average daily net
assets.
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is considered
to be "affiliated" and "interested." Compensation of Mr. Montgomery is borne by
the Adviser rather than the Fund
BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and
fees of $2,000 per meeting to each Independent Director. The Independent
Directors receive this compensation in the form of shares of Bridgeway Funds,
credited to his or her account. Such Directors are reimbursed for any expenses
incurred in attending meetings and conferences and expenses for subscriptions or
printed materials. No such reimbursements were made during the six months ended
December 31, 2004. The amount attributable to the Balanced Fund is disclosed in
the Statement of Operations.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Purchases and sales of securities, other than cash equivalents, for the six
months ended December 31, 2004, aggregated $5,367,785 and $1,719,349,
respectively. Purchases and sales of U.S. government securities, other than cash
equivalents, for the six months ended December 31, 2004, aggregated $1,196,856
and $100,000, respectively.
5. FEDERAL INCOME TAXES AND DISTRIBUTIONS:
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment
20
<Page>
companies and distribute substantially all of its net taxable income including
net realized gains on investments, if any, to its shareholders each year. The
Fund is not subject to income or excise taxes to the extent such distributions
are made.
The amount of net unrealized appreciation and the cost of investment securities
for tax purposes, including short-term securities at December 31, 2004, were as
follows:
<Table>
Gross unrealized appreciation $ 2,623,844
Gross unrealized (depreciation) (122,047)
- -----------------------------------------------------------------
Net unrealized appreciation
on investments $ 2,501,797
=================================================================
Cost of investments $ 24,852,220
=================================================================
</Table>
The difference between book and tax net unrealized appreciation is wash sale
loss deferrals.
The Fund used $96,405 of capital loss carryovers for the year ended June 30,
2004 to offset net realized gains for federal income tax purposes.
As of June 30, 2004, the components of net assets on a tax basis were:
<Table>
Undistributed ordinary income $ 0
Accumulated capital losses (553,376)
</Table>
The temporary differences between book and tax are primarily due to wash sales
and post October losses.
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually. Distributions to shareholders
are recorded on ex-date. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America.
6. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the
independent registered public accounting firm for Bridgeway Funds.
PricewaterhouseCoopers LLP was previously engaged as the independent registered
public accounting firm to audit the Funds' financial statements.
PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as
of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to remove
PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and
ratified by the Funds' Board of Directors. At no time during the period
immediately preceding the dismissal of PricewaterhouseCoopers LLP through June
30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. At no time during the period immediately preceding the dismissal of
PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating
to management's representations, an expansion of the scope of audit work or
discovery information impacting the fairness or reliability of Bridgeway Funds'
financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item
304(a) of Regulation S-K occur. With respect to internal control matters
described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during
the years ended June 30, 2004 and 2003, daily cash reconciliations were not
performed in accordance with the Fund's procedures. With respect to the Funds'
Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended
November 30, 2003 there was a lack of segregation of duties surrounding access
to the Returned by Post Office ("RPO") function and over the monitoring of
shareholder accounts placed on RPO status. These matters were considered to be a
material weakness in control procedure and its operation. The audit committee of
the Funds discussed these matters with PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of
the successor independent registered public accounting firm. The Funds engaged
Briggs Bunting & Dougherty, LLP as its new independent registered public
accounting firm on November 10, 2004.
21
<Page>
OTHER INFORMATION
(UNAUDITED)
1. PROXY VOTING:
Fund policies and procedures used in determining how to vote proxies relating to
fund securities and a summary of proxies voted by the Fund for the period ended
June 30, 2004 are available without a charge, upon request, by contacting
Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's
("SEC") website at http:/www.sec.gov.
2. FUND HOLDINGS:
The Bridgeway Funds file complete schedules of Fund holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q within 60 days
after the end of the period. Copies of the Fund's Form N-Q are available without
charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the
SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the
SEC's Public Reference Room in Washington, D.C. For more information about the
operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330.
3. OTHER
Shareholders individually holding more than 5% of the Fund's outstanding shares
as of December 31, 2004, constituted 60% of the Fund.
22
<Page>
This Page Intentionally Left Blank
<Page>
Item 2. CODE OF ETHICS.
Not applicable to semi-annual report.
Item 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable to semi-annual report.
Item 4. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Not applicable to semi-annual report.
Item 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
Item 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of the Report to Stockholders 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
COMPANIES.
Not applicable.
Item 10. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
On September 22, 2004, the Board of Directors of Bridgeway Funds, Inc. adopted
procedures by which shareholders may recommend nominees to the Board of
Directors. The Board of Directors will consider director candidates that are
recommended by shareholders of the Funds. Such recommendations should be
submitted to the Secretary of the Funds, who will forward the recommendation to
the Board of Directors for consideration. Prior to this meeting, the Funds did
not have procedures by which shareholders could recommend nominees to the Board
of
2
<Page>
Directors.
Item 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer 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) are effective based on their evaluation of
these controls and procedures as of a date within 90 days of the
filing date of this document.
(b) There was no change in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Investment
Company Act of 1940, as amended) during the 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) Not applicable to semi-annual report.
(a)(2) The certifications required by Rule 30a-2(a) of the Investment
Company Act of 1940, as amended, and Section 302 of the Sarbanes-Oxley Act
of 2002 is attached hereto as Ex99.Cert.
(a)(3) Not applicable.
(b) A certification for the registrant's Principal Executive Officer and
Principal Financial Officer, as required by Rule 30a-2(b) of the Investment
Company Act of 1940, as amended, and Section 906 of the Sarbanes-Oxley Act
of 2002 is attached hereto as Ex99.906Cert.
3
<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.
BRIDGEWAY FUNDS, INC.
By: /s/ John N.R. Montgomery
-----------------------
John N.R. Montgomery
President and Principal Executive
Officer
Date: March 9, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ John N.R. Montgomery
------------------------
John N.R. Montgomery
President and Principal Executive
Officer
Date: March 9, 2005
By: /s/ Linda Giuffre
-----------------
Linda Giuffre
Treasurer and Principal Financial
Officer
Date: March 9, 2005
4