N-CSR 1 coninstncsr201012.htm Sec filing

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 811-21120


Conestoga Funds

(Exact name of registrant as specified in charter)


Conestoga Capital Advisors

259 N. Radnor-Chester Road

Radnor Court, Suite 120

Radnor, PA 19087

 (Address of principal executive offices)(Zip code)


Conestoga Capital Advisors

259 N. Radnor-Chester Road

Radnor Court, Suite 120

Radnor, PA 19087

 (Name and address of agent for service)


With Copy To:

Josh Deringer, Esq.

Drinker Biddle

One Logan Square, Ste 2000

Philadelphia, PA 19103


Registrant's telephone number, including area code: (800) 320-7790


Date of fiscal year end: September 30


Date of reporting period: September 30, 2010


Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).  The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection and policymaking roles.


A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public.  A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number.  Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.  The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.


Item 1.  Reports to Stockholders.





















CONESTOGA



SMALL CAP FUND



M a n a g e d   B y


 








ANNUAL REPORT


September 30, 2010












November 23, 2010

Dear Fellow Shareholders,

When we penned our annual letter to shareholders in November 2009, the equity markets had bounced from their March 2009 lows and the US and global financial markets were breathing a sigh of relief.  Fast forward to today, the equity markets have continued that rebound and provided investors with positive returns over the past twelve months, albeit with ups and downs caused by changing sentiments of recovery or double-dip recession, as well as political and policy uncertainty related to the fall 2010 elections.  After surging higher in the fourth calendar quarter of 2009 and the first calendar quarter of 2010 on hopes of a V-shaped recovery , equity markets sold off dramatically in the second quarter of 2010.  The sell-off was prompted by concerns on European debt, specifically Greece, and the global economy falling back into a recession.  The V-shaped recovery was not materializing as most investors had hoped, and investors began to adjust to a slower global economic recovery.  Nonetheless, by the third calendar quarter of 2010, the bailouts orchestrated by the European Central Bank had at least plugged a hole in a sinking ship and gave investors confidence to focus on the strong earnings corporations were posting and the tremendous amount of cash held by corporations around the world.  Additionally, with the US Federal Reserve holding interest rates to generational lows, investors were being rewarded for taking risk as evidenced by the strong returns of junk-bonds and other risky asset classes.  Even September, usually one of the more difficult months of the year for equity returns, saw markets surge again.  Investor confidence was boosted by anticipation of a second round of quantitative easing by the Federal Reserve, and expectations that the 2010 November’s election results will increase Republican representation and restore a more typical check and balance legislative process between the parties.  

The Conestoga Small Cap Fund returns for the periods ended September 30, 2010, are provided in the table below.  Over the past twelve months, the Fund has modestly outperformed the Russell 2000 Index, while trailing the Russell 2000 Growth.  Given the market’s alternating favor between low and high quality companies, the trailing twelve month return is about in line with our expectations.  Longer term returns reflect Conestoga’s protection of capital during the 2007-08 downturn.  Importantly, the longer-term returns have been achieved with lower volatility relative to the indices.  Since the Fund’s first full quarter of operation (December 31, 2002), the Fund’s standard deviation of returns has been 16.5%, compared to the Russell 2000 Index’s standard deviation of 21.0% and the Russell 2000 Growth Index’s standard deviation of 21.6%.

Annualized Returns vs. Russell Indices

 

YTD 2010

1 Year

3 Years*

5 Years*

7 Years*

Since Inception* (10-01-02)

Conestoga Small Cap Fund

8.07%

13.95%

-0.63%

3.65%

7.60%

9.41%

Russell 2000 Index

9.12%

13.35%

-4.29%

1.60%

6.13%

9.31%

Russell 2000 Growth

10.23%

14.79%

-3.75%

2.35%

5.79%

9.54%

*Periods longer than one year are annualized.  Source: Conestoga and Russell Invesments.


We at Conestoga believe the market gyrations reflected investors’ conflicting desire to invest at what seemed to be attractive  valuations, against fears of persistent low-level (or worse) growth rates.  Investors appeared to continue their strong preference for bonds over stocks, with net inflows to bond funds at all-time highs, while flows to stocks funds have been negative since the May 6 “Flash Crash”.  Bond yields remain at very low levels, especially when compared to the earnings yield of equities.  The spread between the earnings yield on the S&P 500 and the yield on the 10-year Treasury bond (often referred to as the Fed Model) moved above 4% during the third quarter of 2010.  A spread this large is fairly rare and historically has signaled an excellent buying opportunity for long-term investors in equities relative to bonds.  Whether this indicates strong future equity returns and/or weak bond returns remains to be seen, but we at Conestoga do believe that equities are very attractively priced relative to bonds.

Another macro-level topic that piqued our interest over the past few months was the reported demise of stock-picking.  Several articles over the summer highlighted this concept, most notably the Wall Street Journal’s September 24th article entitled “Macro Forces in Market Confound Stock Pickers”.  Market strategist James Bianco’s quote, “Stock picking is a dead art form… Macro themes dominate the market now more than ever...” struck a nerve with Conestoga.  While we agree with the latter portion of this statement, that macro forces are having a strong pull on individual stocks currently, we strongly disagree that stock picking is dead.  True, correlations among daily stock movements are at all-time high levels.  However, we believe that these times are critical for investors to employ active, conviction-based investing strategies.  In a slow growth economy, not all stocks will perform equally and the strength of a company’s management team, balance sheet and business model will be vital to sustaining revenue and earnings growth.  We believe that Bianco’s quote and the forecasted “death” of stock picking will be reviewed by history as the peak of “macro-level” investing.  Paraphrasing Mark Twain, reports of stock-picking’s death are greatly exaggerated.

While intrigued by the macro-level dynamics of the equity and bond markets, the investment team at Conestoga has remained focused on the individual company research that is the core of our efforts each day.  We have continued to implement the investment process as we always have, including numerous visits with many of the companies in the portfolio, both in their offices, at conferences, and in our offices.  And while the purpose of these meetings is to determine the outlook and strategy of each individual business, we also uncover some consistent views on the overall economy.  The vast majority of our management teams report a very tame recovery in their markets, with only slowly improving demand.  Our portfolio companies’ continued level of investment in their business during the 2008-09 recession enabled them to capture market share and grow revenues and earnings.  We continue to expect that as the economy slowly recovers, high quality companies will emerge in a stronger competitive position.

The Fund’s returns relative to the indices have been negatively impacted by the Fund’s sector allocations, but have benefitted from stock selection.  The Fund’s underweight to Consumer Discretionary and Materials & Processing stocks detracted from returns, and offset the overweight to Technology stocks.  Stock selection over the past twelve months was strongest in the Energy sector, where all four of the Fund’s holdings posted very strong returns and outperformed the indices’ Energy holdings.  

Our ongoing research efforts led to the addition of eight new stocks in the Fund over the past year, and the sale of 11 stocks from the Fund.  The new companies in the portfolio represent a mix of Technology and Health Care companies that we believe offer the long-term sustainable growth characteristics that will create value for shareholders.  The sales from the portfolio included four stocks that were the targets of acquisition over the past year: Financial Federal Inc. (FIF), K-Tron Inc. (KTII), Phase Forward Inc. (PFWD) and Somanetics Corp. (SMTS).  After lower than normal merger and acquisition activity during the bear market, there appears to be an uptick in M&A as the economy recovers.  Other sales from the portfolio represented companies which we believe no longer met our investment criteria.

High quality companies enter the final calendar quarter of 2010 having trailed lower-quality companies since the market’s low in March 2009.  As we’ve discussed in prior communications, those companies that were considered most likely to fail in the recession have posted the strongest stock performance in the market rebound.  This in turn has caused the valuation of low-quality companies to achieve parity with high-quality companies, a situation we believe is untenable.  As 2010 comes to a close and we enter the New Year, we believe the Conestoga portfolio is well positioned to benefit from both a robust stock market, as well as stronger relative performance by higher quality stocks.

The Fund reached an important milestone during September 2010, surpassing $100 million in assets.  The Fund was launched in 2002 to offer individuals, institutions and defined contribution plans the same investment approach that Conestoga provides via separate account management to institutional and high net worth clients.  The assets under management of Conestoga Capital Advisors, the fund’s adviser, reached all-time peak levels on September 30, with just over $385 million in total assets.  Our more conservative approach to small cap investing, which focuses on companies with positive earnings and sustainable growth rates, is one that we believe is especially appropriate in today’s more volatile environment, and has been key to attracting investors to the Fund.  Over the past few years, the Fund has been fortunate to be recommended by a number of Registered Investment Advisors (RIAs), Wealth Advisors, Trust Departments and Institutional Consultants as the Small Cap Fund best suited for their clients.  We are grateful for the continued support of our new and long-term investors, and will continue to make every effort to deliver above market returns with lower volatility, downside protection, and tax efficiency.  As always, we appreciate the trust and confidence that you have placed in Conestoga Capital Advisors.


Sincerely,


William C. Martindale, Jr.

Robert M. Mitchell

Managing Partner - Co-Portfolio Manager

Managing Partner - Co-Portfolio Manager




Dave Lawson

Joe Monahan

Managing Partner - Senior Research Analyst

Managing Partner - Senior Research Analyst







CONESTOGA SMALL CAP FUND


Additional Comments (unaudited)


Fund Growth


The Fund continued to grow in 2010.  Total net assets increased from $65,355,684 at the end of fiscal 2009 to $103,065,768 at the end of fiscal 2010.  This $37,710,084 increase surpassed the prior year’s growth of $22,773,481.


Portfolio Turnover and Capital Gains Distributions


The Conestoga Small Cap Fund generally has a much lower turnover rate than many other small cap growth funds.  For the year ended September 30, 2010 the Fund’s turnover rate was 22.53%, compared to 13.89% from the prior year.  For the twelve month period ended September 30, 2010, the Fund did not make a capital gain or net income distribution.


Fund Expenses and Brokerage Costs


Fund Expenses


The Fund has a unified management fee.  This means that the Adviser, Conestoga Capital Advisors, LLC, pays for most of the Fund’s operating costs with the exception of Trustees’ fees and expenses, 12b-1 fees, brokerage commissions and fees, and extraordinary costs.  As of January 2007, the Adviser charges the Fund an annualized rate of 1.20% of the daily average assets for the services it provides, while the total expense ratio of the Fund is 1.10% which includes a fee waiver.  In the fiscal year ended September 30, 2010 the contractual amount the Fund owed the Adviser was $1,026,182 of which $123,727 was waived, resulting in net advisory fees of $902,455.   


The Conestoga Funds have what is called a “defensive” 12b-1 plan.  This type of plan acknowledges that the Adviser may use it assets and resources to grow the Fund.  Conestoga Capital Advisors, LLC pays all of the marketing costs for the Fund out of its own resources and, other than the annual unified management fee, does not charge the Fund any additional expenses for promoting sales of the Fund’s shares.


The Fund also has the ability to pay any qualified organization a shareholder servicing fee.  This type of fee might be paid to an organization providing record keeping for Fund shareholders under its administration.  At the present time, the Fund does not pay any organization a shareholder servicing fee, although Conestoga Capital Advisors, LLC does pay certain organizations a shareholder servicing fee out of its own resources and at no additional cost to the Fund.


Securities Lending


 During fiscal year 2010, the Fund did not participate in securities lending activities.  


Trustee Fees


In addition to the fees that the Fund pays the Adviser, the Fund also pays the Trustees’ fees and expenses. During fiscal 2010 Trustee Fees amounted to  $31,250.






CONESTOGA SMALL CAP FUND


Additional Comments (unaudited)



Brokerage Costs


Direct net expenses of the Fund shown in this annual report were $940,667.  During fiscal year 2010 the Fund paid brokerage costs of $161,183.94, up from $83,986.12 in fiscal 2009.  Under current accounting standards, brokerage costs are not treated as current year expenses; rather, they are included when calculating the cost basis or proceeds from security transactions, but they are still costs paid by the shareholder.


Expenditures for brokerage were $1.88 for every $1,000 in average assets invested in the Fund for fiscal 2010, down from $1.94 in fiscal 2009.  The Fund pays brokers approximately $0.06 per share for trade execution.  The brokerage commissions are directed to firms that provide important statistical and financial information on portfolio holdings.  Additionally, brokerage commissions are paid to firms providing research to the Fund’s Portfolio Managers about current or prospective investments.  The statistical and financial information provided as well as the research offered benefit all clients of the Adviser, not just the Fund.  The Fund’s share of commissions paid is proportionate to its share of all trading in small cap stocks undertaken by Conestoga Capital Advisors.  On a quarterly basis, the Adviser reviews the Fund’s trading with the Board of Trustees.


At no time has the Fund ever used brokerage commissions to reward brokers for selling shares of the Fund.


The staff of the SEC has issued interpretive guidance relating to permissible uses of brokerage commissions, sometimes called “soft dollars.”  Based on its review of these guidelines, the Adviser believes that it is in compliance with these guidelines.  


The Regulatory Environment


Board Composition


The Conestoga Fund has six Trustees.  Four of them (66 2/3% of the Board) are Independent, and the Chair is an interested Trustee.  


Fund Information


Subject to applicable laws, the management of the Conestoga Small Cap Fund is making every effort to provide as much information as desired by the shareholders of the Fund.  In addition to information provided in the reports to shareholders and the prospectus and statement of additional information, much information is available online.  You can access Fund information by going to www.conestogacapital.com and following the links to the Conestoga Funds.  Current holdings and Fund facts are available on our website.  If you prefer, you may call us at 1-800-320-7790 and ask for the information, or you may go to the SEC website at www.sec.gov and obtain copies of almost all information submitted by the Conestoga Funds to the SEC.







CONESTOGA SMALL CAP FUND


Comparison of Changes in Value of $10,000

As of Closing Business Day Prior to Inception (September 30,2002)

[conest001.jpg]






CONESTOGA SMALL CAP FUND


Expense Example

(Unaudited)


As a shareholder of the Conestoga Small Cap Fund, you incur the following costs: management fees, trustee fees, transaction costs and certain other Fund expenses.  This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, April 1, 2010 through September 30, 2010.


Actual Expenses

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 entitled "Expenses Paid During the Period" to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

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 this Fund and other funds.  To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.


Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees.  Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.  In addition, if these transactional costs were included, your costs would have been higher.

Conestoga Small Cap Fund:

 

Beginning Account

Ending Account

Expenses Paid During the Period*

 

Value

Value

April 1, 2010 through

 

April 1, 2010

September 30, 2010

September 30, 2010

    

Actual

$1,000.00

$1,057.02

$5.67

Hypothetical

   

 (5% Annual Return before expenses)

$1,000.00

$1,019.55

$5.57

    

* Expenses are equal to the Fund's annualized expense ratio of 1.10%, multiplied by the average account value over the    period, multiplied by 183/365 (to reflect the one half year period).







CONESTOGA SMALL CAP FUND


Securities Holdings by Sector

September 30, 2010

(Unaudited)



The following chart gives a visual breakdown of the Fund by the economic sectors*.  The underlying securities represent a percentage of the total net assets.  The total net assets of the Fund on September 30, 2010 were $ 103,065,768.


[conest003.jpg]


*Russell Sectors

  Cash Equivalent and Liabilities in Excess of Other Assets are not Russell Sectors












CONESTOGA SMALL CAP FUND


Schedule of Investments

September 30, 2010



    

% of Total

 Shares

 

 

 Value

Net Assets

 COMMON STOCKS

   
     

Consumer Discretionary

   

Educational Services

   

30,250

Capella Education Company *

 

 $     2,348,005

 

Textile Apparel & Shoes

   

135,100

Iconix Brand Group, Inc. *

 

2,364,250

 
     

                                 Consumer Discretionary Sector Total

 

4,712,255

4.57%

     

Energy

    

Oil:  Crude Producers

   

29,525

SM Energy Company

 

1,106,007

 

Oil Well Equipment & Services

   

      36,551

Carbo Ceramics, Inc.

 

        2,960,631

 

      22,325

Core Laboratories NV

 

        1,965,493

 

      99,175

Tesco Corporation *

 

        1,193,075

 

      Oil Well Equipment & Services Total

6,119,199

 
     

                           Energy Sector Total

 

7,225,206

7.01%

     

Financial Services

   

Asset Management & Custodian

   

80,650

Westwood Holdings Group, Inc.

 

2,728,389

 

Financial Data & Systems

   

75,600

Advent Software, Inc. *

 

3,945,564

 

32,975

FactSet Research Systems, Inc.

 

2,675,262

 

55,450

Morningstar, Inc. *

 

2,470,852

 

       Financial Data & Systems Total

 

9,091,678

 
     

 

Financial Services Sector Total

 

11,820,067

11.47%

     

Healthcare

    

Health Care Services

   

74,150

Align Technology, Inc. *

 

1,451,857

 

45,375

Quality Systems, Inc.

 

3,008,816

 

       Health Care Services Total

 

4,460,673

 

Medical Equipment

   

95,775

Abaxis, Inc. *

 

2,212,403

 

128,950

Immucor, Inc. *

 

2,557,078

 
    

% of Total

 Shares

 

 

 Value

Net Assets

 COMMON STOCKS (continued)

   
     

       Medical Equipment Total

 

 $     4,769,481

 

Medical and Dental Instruments and Supplies

   

46,375

Integra Lifesciences Holdings Corp *

 

        1,829,957

 

42,850

Landauer, Inc.

 

2,683,696

 

150,075

Meridian Bioscience, Inc.

 

3,282,140

 

55,451

Neogen Corporation *

 

1,877,016

 

32,250

TECHNE Corporation

 

1,990,793

 

       Medical and Dental Instruments and Supplies Total

 

11,663,602

 
     

 

Healthcare Sector Total

 

20,893,756

20.27%

     

Materials and Processing

   

Building Materials

   

121,500

Simpson Manufacturing Company, Inc.

 

        3,132,270

 
     

Materials and Processing Sector Total

 

        3,132,270

3.04%

     

Producer Durables

   

Aerospace

    

60,150

Aerovironment, Inc. *

 

1,338,338

 

Commercial Services

   

75,600

Advisory Board Company *

 

3,337,740

 

93,750

Costar Group, Inc. *

 

4,566,562

 

99,300

Ritchie Bros. Auctioneers, Inc.

 

2,062,461

 

113,951

Rollins, Inc.

 

2,664,174

 

90,725

Tetra Tech, Inc. *

 

1,902,503

 

       Commercial Services Total

 

14,533,440

 

Diversified Manufacturing Operations

   

80,650

Raven Industries, Inc.

 

3,055,828

 

Scientific Instruments:  Control & Filter

   

125,435

Sun Hydraulics Corporation

 

3,536,013

 
     

Producer Durables Sector Total

 

22,463,619

21.80%

     

Technology

    

Communications Technology

   

89,225

EMS Techologies, Inc. *

 

        1,662,262

 
     
    

% of Total

 Shares

 

 

 Value

Net Assets

 COMMON STOCKS(continued)

   
     

Computer Services Software & Systems

   

26,275

Ansys, Inc. *

 

 $     1,110,119

 

108,375

Blackbaud, Inc.

 

2,605,335

 

77,625

Blackboard, Inc. *

 

2,797,605

 

55,850

Micros Systems, Inc. *

 

2,364,131

 

162,300

NIC, Inc. *

 

1,345,467

 

37,675

Pegasystems, Inc.

 

1,169,809

 

123,350

Tyler Technologies, Inc. *

 

2,486,736

 

       Computer Services Software & Systems Total

 

      13,879,202

 

Electronic Components

   

60,975

Hittite Microwave Corp. *

 

2,905,459

 

64,525

NVE Corporation *

 

2,776,511

 

       Electronic Components Total

 

5,681,970

 

Electronics

    

55,150

II-VI, Inc. *

 

2,058,749

 

Information Technology

   

222,500

Bottomline Technologies, Inc. *

 

3,417,600

 

146,175

Comscore, Inc. *

 

3,438,036

 

       Information Technology Total

 

6,855,636

 
     
     

 

Technology Sector Total

 

30,137,819

29.24%

     

TOTAL COMMON STOCKS

   

 

(Cost $81,525,616)

 

    100,384,992

97.40%

     

 SHORT-TERM INVESTMENTS  

   

 4,276,666

UMB Bank Money Market Fiduciary 0.02%**

   
 

(Cost $4,276,666)

 

4,276,666

4.15%

     

TOTAL INVESTMENTS

   

 

(Cost $85,802,282)

 

104,661,658

101.55%

  

 

  
 

Liabilities in Excess of Other Assets  

 

(1,595,890)

(1.55)%

 

 

 

 

 

 

TOTAL NET ASSETS

 

$103,065,768

100.00%

     

* Non-income producing

** Variable rate effective at September 30, 2010.


The accompanying notes are an integral part of the financial statements.







CONESTOGA SMALL CAP FUND


Statement of Assets and Liabilities

September 30, 2010


  
  

Assets:

 

     Investments at Value (Cost $85,802,282)

 $               104,661,658

     Receivables:

 

          Shareholder Subscriptions

                          28,468

          Dividends

                          87,800

          Interest

                                 67

               Total Assets

                 104,777,993

Liabilities:

 

     Accrued Investment Advisory Fees

                          73,739

     Accrued Trustees' Fees and Expenses

                            6,583

     Shareholder Redemptions Payable

                        171,907

     Payable for Securities Purchased

                     1,459,996

               Total Liabilities

                     1,712,225

Net Assets

 $               103,065,768

  

Net Assets Consist of:

 

     Beneficial Interest Paid-in

 $                 86,661,912

     Accumulated Net Realized Loss on Investments

                    (2,455,520)

     Net Unrealized Appreciation in Value of Investments

                   18,859,376

Net Assets, for 5,345,430 Shares Outstanding, Unlimited Number of

 

  Shares Authorized with a $0.001 Par Value

 $               103,065,768

Net Asset Value, Offering and Redemption Price

 

  Per Share ($103,065,768/5,345,430 shares)

 $                          19.28

The accompanying notes are an integral part of the financial statements.








CONESTOGA SMALL CAP FUND


Statement of Operations

For the Year Ended September 30, 2010


  
  
  

Investment Income:

 

     Dividends (net of foreign taxes withheld of $5,661)

 $                      724,173

     Interest  

                            1,211

          Total investment income

                        725,384

Expenses:

 

     Investment advisory fees

                     1,026,182

     Trustees' fees and expenses

                          38,212

          Total expenses

                     1,064,394

               Less: Advisory fees waived

                       (123,727)

          Net expenses

                        940,667

  

Net Investment Loss

                       (215,283)

  

Realized and unrealized gain on investments:

 

     Net realized gain on investments

                        335,003

     Net change in unrealized appreciation on investments

                   11,567,079

Net realized and unrealized gain on investments

                   11,902,082

  

Net increase in net assets resulting from operations

 $                 11,686,799

The accompanying notes are an integral part of the financial statements.








CONESTOGA SMALL CAP FUND


Statement of Changes in Net Assets


   
 

For the

For the

 

Year Ended

Year Ended

 

9/30/2010

9/30/2009

Increase/(Decrease) In Net Assets

  

From Operations:

 

 

     Net investment income (loss)

 $           (215,283)

 $          4,318

     Net realized gain (loss) on investments

               335,003

    (1,463,349)

     Net change in unrealized appreciation on investments

          11,567,079

     4,735,660

     Net increase in net assets resulting from operations

          11,686,799

     3,276,629

Distributions to shareholders from:

  

      Net investment income

 −

         (65,193)

      Net realized gain on investments

 −

         (11,136)

      Distributions in excess of net investment income

 −

         (65,269)

      Total Distributions

 −

       (141,598)

From Fund share transactions:

  

     Proceeds from sale of shares

          39,424,582

   31,012,667

     Shares issued on reinvestment of distributions

 −

          63,196

     Cost of shares redeemed

         (13,401,297)

  (11,437,413)

Total increase in net assets from Fund share transactions

          26,023,285

   19,638,450

   

Total increase in net assets

          37,710,084

   22,773,481

   

Net Assets at Beginning of Year

          65,355,684

   42,582,203

Net Assets at End of Year ( Includes undistributed net

 $     103,065,768

 $ 65,355,684

      investment income of $0  and $0, respectively)

  

The accompanying notes are an integral part of the financial statements.







CONESTOGA SMALL CAP FUND


Financial Highlights


Selected data for a share outstanding throughout each year:

   
      
      
 

For the

For the

For the

For the

For the

 

Year Ended

Year Ended

Year Ended

Year Ended

Year Ended

 

9/30/2010

9/30/2009

9/30/2008

9/30/2007

9/30/2006

      

Net asset value - beginning of year

$16.92

$17.68

 $      20.27

 $      17.75

 $      16.85

      

Net investment income (loss) (a)

                  (0.04)

  −(b)

          0.07

  −(b)

(0.05)

Net realized and unrealized gain (loss) on investments

                   2.40

         (0.70)

         (2.14)

          2.59

          1.12

Total from investment operations

                   2.36

         (0.70)

         (2.07)

          2.59

          1.07

      

Distributions from net investment income

 −

         (0.03)

         (0.03)

  −

  −

Distributions from net realized capital gains

 −

 −

         (0.49)

         (0.07)

         (0.17)

Distributions in excess of net investment income

 −

         (0.03)

 −

 −

 −

    Total distributions

 −

         (0.06)

         (0.52)

         (0.07)

         (0.17)

      

Net asset value - end of year

$19.28

$16.92

$17.68

$20.27

$17.75

      

Total return

13.95 %

(3.87)%

(10.43)%

14.61 %

6.40 %

Ratios/supplemental data

     

Net Assets - end of year (thousands)

 $           103,066

 $    65,356

 $    42,582

 $    29,281

 $    18,432

      

Before waivers

     

    Ratio of expenses to average net assets

1.24%

1.29%

1.30%

1.31%

1.35%

    Ratio of net investment income / (loss) to average net assets

(0.40)%

(0.18)%

0.19%

(0.17)%

(0.26)%

      

After waivers

     

    Ratio of expenses to average net assets

1.10%

1.10%

1.10%

1.15%

1.35%

    Ratio of net investment income /(loss) to average net assets

(0.26)%

0.01%

0.39%

(0.01)%

(0.26)%

      

Portfolio turnover rate

22.53%

13.89%

23.12%

13.51%

19.02%

      
      

(a) Per share net investment loss has been determined on the basis of average number of shares outstanding during the year.

   

(b) Represents less than $0.01 per share

     

The accompanying notes are an integral part of the financial statements.







CONESTOGA SMALL CAP FUND


Notes to Financial Statements

September 30, 2010


Note 1. Organization


Conestoga Funds (the "Trust") was organized as a Delaware statutory trust on February 5, 2002.  The Trust consists of two series, the Conestoga Small Cap Fund (the “Fund”) and the Institutional Advisors LargeCap Fund.  The Trust is registered as an open-end diversified management investment company of the series type under the Investment Company Act of 1940 (the "1940 Act").  The Fund's investment strategy is to achieve long-term growth of capital.  The Fund's registration statement became effective with the SEC and the Fund commenced operations on October 1, 2002.  The Fund’s investment advisor is Conestoga Capital Advisors, LLC. (the “Adviser”).


Note 2.  Summary of Significant Accounting Policies


The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements.  These policies are in conformity with accounting principles generally accepted in the United States of America.

 

Security Valuation - Securities that are traded on any exchange are valued at the last quoted sale price.  Securities which are quoted by NASDAQ are valued at the NASDAQ Official Closing Price.  Lacking a last sale price, a security is valued at its last bid price except when, in the opinion of the Fund’s Adviser, the last bid price does not accurately reflect the current value of the security.  All other securities for which over-the-counter market quotations are readily available are valued at their last bid price.  When market quotations are not readily available, when the Adviser determines the last bid price does not accurately reflect the current value or when restricted securities are being valued, such securities are valued as determined in good faith by the Adviser, in conformity with guidelines adopted by and subject to review of the Board of Trustees of the Trust.   


Short-term investments in fixed income securities with maturities of less than 60 days when acquired, or which subsequently are within 60 days of maturity, are valued by using the amortized cost method of valuation, which the Board has determined will represent fair value.


Accounting principles generally accepted in the United States of America define fair value as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date and also establishes a framework for measuring fair value, and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability.  The three-tier hierarchy seeks to maximize the use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the Fund’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The three-tier hierarchy of inputs is summarized below:




CONESTOGA SMALL CAP FUND


Notes to Financial Statements (continued)  

September 30, 2010



Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities. Valuation adjustments and block discounts are not applied to Level 1 securities.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.


Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.


Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.


The following table presents information about the Fund’s assets measured at fair value as of September 30, 2010 by major security type:


 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Balance as of September 30, 2010

Assets

    

Money Market

     $  4,276,666

$   -

$   -

     $  4,276,666

Common Stocks

100,384,992

$   -

$   -

100,384,992

Total

$ 104,661,658

$   -

$   -

$ 104,661,658


Federal Income Taxes - The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its net investment income and any realized capital gain.  Therefore, no federal income or excise tax provision is required.


Accounting principles generally accepted in the United States of America provide guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements and require the evaluation of tax positions taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be booked as a tax expense in the current year and recognized as: a liability for unrecognized tax benefits; a reduction of an income tax refund receivable; a reduction of deferred tax asset; an increase in deferred tax liability; or a combination thereof.  Management has evaluated the Fund’s tax positions as of September 30, 2010, and has determined that none of them are uncertain.


The Fund has reviewed all taxable years that are open for examination (i.e., not barred by the applicable statute of limitations) by taxing authorities of all major jurisdictions, including the Internal Revenue Service. Tax returns filed within the three years ended September 30, 2010, are open for examination. No examination of any of the Fund’s tax returns is currently in progress.





CONESTOGA SMALL CAP FUND


Notes to Financial Statements (continued)  

September 30, 2010


Dividends and Distributions - The Fund intends to distribute substantially all of its net investment income and capital gains to its shareholders on an annual basis.  Income and capital gain distributions to shareholders are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America.  Those differences are primarily due to differing treatments for net investment losses and deferral of wash sale losses and post-October losses.  Distributions to shareholders are recorded on the ex-dividend date.


Security Transactions and Investment Income - The Fund follows GAAP and records security transactions on the trade date.  The specific identification method is used for determining gains or losses for financial statements and income tax purposes.  Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis.


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


Other - Accounting principles generally accepted in the United States of America require that permanent book/tax differences be reclassified among the components of capital.


Reclassification – As of September 30, 2010, the Fund recorded permanent book/tax differences of $215,283 from net investment loss to paid-in capital.  This reclassification has no impact on the net asset value of the Fund and is designed generally to present undistributed income and net realized gains on a tax basis, which is considered to be more informative to shareholders.


Subsequent Event - Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.


Note 3. Investment Advisory Agreement and Other Related Party Transactions


The Fund has entered into an Advisory Agreement with the Adviser to provide supervision and assistance in overall management services to the Fund.  Under the terms of the Advisory Agreement, the Adviser pays all Fund expenses except Rule 12b-1 fees, fees and expenses of the unaffiliated trustees, taxes, interest and extraordinary expenses.  Pursuant to the Advisory Agreement the Fund pays the Adviser a fee, calculated daily and payable monthly, equal to an annual rate of 1.20% of average daily net assets of the Fund.  For the year ended September 30, 2010, the Adviser earned advisory fees of $1,026,182.  The Adviser has contractually agreed to limit the Fund’s net annual operating expenses to 1.10% of the Fund’s average daily net assets until at least January 29, 2011.  For the year ended September 30, 2010, the Adviser waived $123,727 of its fees under this arrangement.




CONESTOGA SMALL CAP FUND


Notes to Financial Statements (continued)  

September 30, 2010



The Trust, on behalf of the Fund, has adopted a distribution plan (the "Distribution Plan"), pursuant to Rule 12b-1 under the 1940 Act which permits the Fund to pay certain expenses associated with the distribution of its shares, including, but not limited to, advertising, printing of prospectuses and reports for other than existing shareholders, preparation and distribution of advertising material and sales literature, and payments to dealers and shareholder servicing agents who enter into agreements with the Fund.  The Plan provides that the Fund will reimburse the Adviser for actual distribution and shareholder servicing expenses incurred by the Adviser not exceeding, on an annual basis, 0.25% of the Fund's average daily net assets. The Distribution Plan is currently inactive and the Fund did not accrue any 12b-1 fees under this plan during the year ended September 30, 2010.  


The Trust, on behalf of the Fund, has adopted a Shareholder Servicing Plan, under which the Fund may enter into agreements with various shareholder servicing agents, including financial institutions and securities brokers (agents).  The Fund may pay a fee at an annual rate of up to 0.25% of the average daily net assets of the shares serviced by a particular agent.  The Fund presently does not have any such shareholder servicing agreements in effect and is not accruing fees under the Shareholder Servicing Plan.


Certain directors and officers of the Adviser are trustees, officers or shareholders of the Fund.  These individuals receive benefits from the Adviser resulting from the fees paid to the Adviser by the Fund.


There were no shareholder votes held between October 1, 2009 and September 30, 2010.


On November 19th 2009, the Board of Trustees approved the continuation of the Investment Advisory Agreement between the Trust, on behalf of the Fund and Conestoga Capital Advisors dated January 2nd 2008, through January 2nd 2011.


Note 4. Investments


Investment transactions, excluding short term investments, for the year ended September 30, 2010, were as follows:


Purchases……………………………………………..………….…$  44,105,704

Sales……………………………………………………………….….$  18,333,014


For Federal Income Tax purposes, the cost of investments owned at September 30, 2010 is $85,848,790.  As of September 30, 2010, the gross unrealized appreciation on a tax basis totaled $20,471,762 and the gross unrealized depreciation totaled $1,658,894 for a net unrealized appreciation of $18,812,868.


As of September 30, 2010 the components of accumulated earnings on a tax basis were as follows:


Net unrealized appreciation                  $18,812,868

Capital loss carryforwards                      (1,869,460)

Post October losses                                 (539,552)

Total

          16,403,856



CONESTOGA SMALL CAP FUND


Notes to Financial Statements (continued)  

September 30, 2010

                                                                 

As of September 30, 2010 the Fund had net capital loss carry-forwards of $1,869,460, of which $1,043,730 expires 9/30/2017 and $825,730 expires 9/30/2018.  To the extent the carry-forwards are used to offset future gains, the amount offset will not be distributed to shareholders.    


The difference between the sum of the capital loss carry-forwards and post October losses for tax purposes and the accumulated net realized losses reported in the Statement of Assets and Liabilities is due to wash sale losses, which are required to be deferred for tax purposes. Net unrealized appreciation on a tax basis and the net unrealized appreciation on investments reported in the Statement of Assets and Liabilities differ by this same wash sale loss figure.


Net capital losses incurred after October 31st within the current fiscal year are deemed to arise on the first business day of the following fiscal year. The Fund incurred and elected to defer such capital losses and they are included under the caption “Post October Losses” in the components of accumulated earnings on a tax basis shown above.


The tax character of distributions paid during the year ended September 30, 2010 and the year ended September 30, 2009 were as follows:


 

September 30, 2010

September 30, 2009

Ordinary income

$ -

$ 130,451

Long Term Capital Gain

         -

           11,147

          Total

$-

$141,598


Note 5. Beneficial Interest


The following table summarizing the activity in shares of the Fund:


                               For the Year Ended 9/30/2010                 For the Year Ended 9/30/2009


 

Shares

Value

Shares

Value

Issued

            2,231,038

$  39,424,582

            2,598,100

$  31,012,667

Reinvested

-

                  -

4,817

               63,196

Redeemed

             (748,634)

             (13,401,297)

             (1,148,423)

      (11,437,413)

Total

  1,482,404

$  26,023,285

  1,454,494

$  19,638,450


Note 6. Contingencies and Commitments


The Fund indemnifies the Trust’s officers and trustees for certain liabilities that might arise from their performance of their duties to the Fund.  Additionally, in the normal course of business the Fund enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. 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, based on experience, the Fund expects the risk of loss to be remote.



CONESTOGA SMALL CAP FUND


Notes to Financial Statements (continued)  

September 30, 2010


Note 7. New Accounting Pronouncements


In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about Fair Value Measurements.”  ASU No. 2010-06 amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements.  Certain disclosures required by ASU No. 2010-06 are effective for interim and annual report periods beginning after December 31, 2009 and others for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.  Management is currently evaluating the impact ASU No. 2010-06 will have on the Fund’s financial statement disclosures.             










[conest004.jpg]








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Trustees of Conestoga Funds and

the Shareholders of the Conestoga Small Cap Fund



We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of the Conestoga Small Cap Fund, a series of shares of beneficial interest of the Conestoga Funds, as of September 30, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended.  These financial statements and financial highlights are the responsibility of the Fund’s management.  Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  Our procedures included confirmation of securities owned as of September 30, 2010, by correspondence with the custodian and brokers.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Conestoga Small Cap Fund, as of September 30, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.







BBD, LLP



Philadelphia, Pennsylvania

December 2, 2010




CONESTOGA SMALL CAP FUND


Trustees and Officers



The business and affairs of the Fund are managed under the direction of the Fund's Board of Trustees.  Information pertaining to the Trustees and Officers of the Fund are set forth below.  The Fund's Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request by calling toll free 1-800-320-7790.



Name & Year of Birth

Position(s) Held with the Fund

Term of Office and

Length of

Time Served2

Principal Occupation

During Past Five Years

Number of

Portfolios in

Fund Complex

Overseen by

Trustee or Officer

Other Directorships

Held by Trustee3

or Officer

Disinterested Trusteesi:

     

Michael R. Walker,

1948

Trustee

Since 2002

Partner of Key Real Estate LLC, since 2004; Chairman of ElderTrust, 1998-2004;

2

None

Nicholas J. Kovich,

1956

Trustee

Since 2002

President and CEO of Kovich Capital Management (Private Asset Management), since 2001;

2

Trustee, the Milestone Funds             (1 portfolio)

William B. Blundin,

1939

Trustee

Since 2002

CEO of Bransford Investment Partners, LLC, since 1997;

2

Trustee, the

Saratoga Funds           (12 portfolios)

Richard E. Ten Haken,

1934

Trustee

Since 2002

Chairman and President of Ten Haken & Associates, Inc., since 1992;

2

None

Interested Trustees4:

     

W. Christopher Maxwell,

1943

Chairman &

Trustee

Since 2002

Managing Partner of Conestoga Capital Advisors LLC, 2001-2008; Maxwell Associates LLC President & CEO, since 1997;

2

None

William C. Martindale, Jr.,

1942

 CEO, &

Trustee

Since 2002

Managing Partner and Chief Investment Officer of Conestoga Capital Advisors LLC, since 2001; Co-Portfolio Manager of the Fund since 2002;

2



None

Officers:

     

Duane R. D’Orazio,

1972

Secretary, Chief Compliance Officer &

Anti-Money Laundering Officer

Since 2002

Managing Partner, Head Trader and Chief Compliance Officer of Conestoga Capital Advisors LLC, since 2001;

1

None

Name & Year of Birth

Position(s) Held with the Fund

Term of Office and

Length of

Time Served2

Principal Occupation

During Past Five Years

Number of

Portfolios in

Fund Complex

Overseen by

Trustee or Officer

Other Directorships

Held by Trustee3

or Officer

Robert M. Mitchell,

1969

Treasurer

Since 2002

Managing Partner, Portfolio Manager and Research Analyst of Conestoga Capital Advisors LLC, since 2001; Co-Portfolio Manager of the Fund since 2002;

2

None

Gregory Getts,

1957

Assistant Treasurer

Since 2004

President and Owner of Mutual Shareholder Services, LLC since 1999;

2

None

Mark S. Clewett,

1968

Senior V.P.

Since 2006

Senior V.P. of Consultant Relations, Delaware Investments, 1996- 2005; Managing Partner, Director of Institutional Sales and Client Service of Conestoga Capital Advisors LLC, since 2006;

1

None

Joseph F. Monahan,

1959

Senior V.P.

Since 2009

Senior V.P. and CFO of McHugh Associates 2001 -2008; Managing Director, Portfolio Manager, Research Analyst of Conestoga Capital Advisors LLC, since December 2008;

1

None

David M. Lawson,

1951

Senior V.P.

Since 2009

President and Chief Operating Officer of McHugh Associates 1995 -2008; Managing Director, Portfolio Manager, Research Analyst, Conestoga Capital Advisors LLC, since December 2008;

1

None

Michelle L. Patterson,

1976

Vice President

Since  2004

Operations and Client Service Coordinator of Conestoga Capital Advisors LLC, since 2001;

1

None

M. Lorri McQuade,

1950

Vice President

Since 2004

Office Manager and Client Service Representative of Conestoga Capital Advisors LLC, since 2001;

1

None



Notes:

1

Each Trustee may be contacted by writing to the trustee, c/o Conestoga Funds, 259 N. Radnor-Chester Road, Radnor Court, Suite 120, Radnor, PA 19087.

2

There is no defined term of office for service as a Trustee.  Each Trustee serves until the earlier of resignation, retirement, removal, death, or the election of a qualified successor.

3   Directorships of companies required to report to the Securities and Exchange Commission under the Securities Exchange Act of 1934 (i.e., “public companies") or other investment companies registered under the 1940 Act.

4

Mr. Maxwell and Mr. Martindale each have ownership interest in Conestoga Capital Advisors.  Each of these persons are considered to be an “interested person” of the Fund and “Interested Person” within the meaning of the Investment Company Act of 1940.


CONESTOGA SMALL CAP FUND


Additional Information

September 30, 2010

(Unaudited)



Availability of Quarterly Portfolio Schedule


The Fund files its complete schedule of investments with the SEC for the first and third quarters of each fiscal year on Form N-Q no later than 60 days following the close of the quarter.  You can obtain a copy, available without charge, on the SEC’s website at http://www.sec.gov beginning with the filing for the period ended December 31, 2004.  The Fund’s Forms N-Q may also be reviewed and copied at the SEC’s public Reference Room in Washington, DC, and that information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.


Proxy Voting Policy


A description of the policies and procedures that the Trust uses to determine how to vote proxies related to portfolio securities and the Fund’s portfolio securities voting record for the 12-month period ended June 30 is available (i) without charge, upon request, by calling 1-800-320-7790 and (ii) from Form N-PX filed by the Fund with the Securities and Exchange Commission’s website at http://www.sec.gov.


Statement of Additional Information


The Fund's Statement of Additional Information ("SAI") includes additional information about the trustees and is available, without charge, upon request.  You may call toll-free (800) 320-7790 to request a copy of the SAI or to make shareholder inquiries.


Tax Information (Unaudited)


During the year ended September 30, 2010, the Fund did not pay any distributions.


































Board of Trustees

W. Christopher Maxwell, Chairman

William B. Blundin

Nicholas J. Kovich

William C. Martindale, Jr.

Richard E. Ten Haken

Michael R. Walker


Investment Adviser

Conestoga Capital Advisors, LLC

259 N. Radnor-Chester Road

Radnor Court, Suite 120

Radnor, PA 19087


Dividend Paying Agent,

Shareholders’ Servicing Agent,

Transfer Agent

Mutual Shareholder Services, LLC

8000 Towne Centre Drive, Suite 400

Broadview Heights, OH  44147


Custodian

UMB Bank , NA

928 Grand Blvd.

Kansas City, MO 64106


Independent Registered Public Accounting Firm
BBD, LLP
1835 Market Street 26th Floor

Philadelphia, PA 19103



Conestoga Small Cap Fund Officers

W. Christopher Maxwell, Chairman  

William C. Martindale, Jr., CEO

Duane R. D’Orazio, Secretary, Chief Compliance Officer, Anti-Money Laundering Officer

Robert M. Mitchell, Treasurer

Gregory Getts, Assistant Treasurer

Mark S. Clewett, Senior Vice President

Joseph F. Monahan, Senior Vice President

David M. Lawson, Senior Vice President

Michelle L. Patterson, Vice President

M. Lorri McQuade, Vice President






This report is provided for the general information of the shareholders of the Conestoga Small Cap Fund. This report is not intended for distribution to prospective investors in the Fund, unless preceded or accompanied by an effective prospectus.


















Institutional Advisors


LargeCap Fund





M a n a g e d   B y


Institutional Advisors LLC


 



ANNUAL REPORT


September 30, 2010






                                                                 Manager’s Letter

As of September 30, 2010 - Unaudited



Dear Fellow Shareholders,


Market Overview

The recession has been over for more than a year! According to the Business Cycle Dating Committee of the National Bureau of Economic Research, the longest U.S. recession since WWII ended in June 2009 after 18 months.  While this is technically accurate, in many ways the “feel” of recession lingers on, as continued unemployment near double digit levels and a lackluster housing market have conspired to mute the recovery.

The U.S. needs to make strides in both of these areas in order to increase the magnitude and sustainability of economic progress.  Nonfarm Payroll grew by an average of 90,000 additional jobs each month in the third quarter, yet the Unemployment Rate still finished at 9.6%.  The rate of job growth must increase significantly before a material decline in the Unemployment Rate can be expected, given the number of individuals joining the labor force.  Despite intermittent signs of improved construction and sales activity, broad housing market data revealed other signs of further deterioration.  The housing market weakness will continue until supply is absorbed and confidence brings homebuyers back into the market, changes that we now do not expect before mid 2011.  The U.S. economy is consumer driven, and the dual issues of high unemployment and lackluster housing continue to impede consumer spending.  

Current monetary and fiscal stimuli have yielded favorable economic results, yet more actions may be required to prevent economic contraction.  The Federal Reserve is preparing for further quantitative easing, a process that includes buying fixed-income securities to drive interest rates lower and spur economic expansion.  The Fed continues to focus on non-traditional tools, since the benefits of reducing the Federal Funds Target rate, now 0.25% at the end of the third quarter, have largely been exhausted.  Finally, due to the U.S. Government’s mid-term elections scheduled for early November, any meaningful economic agenda will be difficult to execute in the 4th quarter.

Given the ongoing, difficult environment described above, equity and fixed-income securities markets were surprisingly strong in the most recent quarter.  Equity investors appeared to be buyers with an optimistic view that the next round of monetary stimulus will be successful, while bond investors braced for continued low inflation and sluggish growth.  We continue to expect, however, that as more stimulus is injected into the economy, securities with longer maturities will initially bear the brunt of increased inflation expectations.

NPITC’s economic outlook continues to be for sluggish economic growth driven by a reluctant and passive consumer.  Collectively, consumers have become more frugal in their spending, buying only the necessary items on their shopping lists.  That practice will likely continue until unemployment abates and the consumer’s financial position is fully healed.  In spite of this modest outlook, we are maintaining our commitment to equities, because we are optimistic that the U.S. Economy is on the path to recovery, albeit a long and challenging one.  Through all the ongoing challenges, we continue to seek strong returns, with our risk-control measures firmly in place.

Equities

The third quarter began with hints of an economic slowdown, and the words “double dip recession” became a common phrase in the media.  Soon, however, investors realized that these concerns would likely lead to continued accommodation by the Federal Reserve.  Termed “quantitative easing,” such accommodations call for efforts to 1) increase growth in business activity, 2) decrease deflationary fears by encouraging benign inflation, and 3) increase monetary velocity and liquidity.  Quantitative easing by the Fed almost always leads to good stock performance.  This time proved to be no different; as investor sentiment shifted from pessimism to optimism, the equity markets began to respond and finished the quarter with the best September returns since 1939.

Still, for most investors it has been difficult to be optimistic.  Investor confidence has been tempered by an unemployment rate and housing prices that have not shown any meaningful improvement in more than a year.  Sustainable economic growth seems illusive, with slow consumer spending, high unemployment, lower housing wealth, and tight credit.

For the Third quarter, the S&P 500 index increased 11.29%, and the Fund outperformed the index return, rising 12.39%.  The leading economic sectors were Telecommunication Services (up 19.11%) and Materials (up 17.25%), while the lagging sectors were Financials (up just 4.06%) and Health Care (rising 8.22%).

The September surge in stock prices carried portfolio returns well into the black for the year, as the Fund is now up 4.59% to date for calendar year 2010, versus the S&P 500 index return of 3.89%.  Shareholders were notably rewarded by our decision to overweight both Information Technology and Materials, while underweighting Financials.

As has been our consistent philosophy, we continue to accumulate quality companies at reasonable prices and invest for above average, risk adjusted returns.  This approach has provided solid long-term results, with above market returns and below market volatility.

Sincerely,


Terry L. Morris

Senior Equity Manager









INSTITUTIONAL ADVISORS LARGECAP FUND


Additional Comments - Unaudited

Fund Growth


The Fund continued slow growth in 2010.  Total net assets increased from $19,858,795 at the end of fiscal 2009 to $21,847,843 at the end of fiscal 2010.  This represents a $1,989,048 increase during the Fund’s first full year of operation.


Portfolio Turnover and Capital Gains Distributions


The Institutional Advisors LargeCap Fund historically has a much lower turnover rate than other comparable funds. For the year ended September 30, 2010 the Fund’s turnover rate was 24.96%, compared to 8.99% from the prior period.  For the twelve month period ended September 30, 2010, the Fund did not make a capital gain distribution, but the Fund did pay a net income distribution of $.045 per share to holders of record on December 29, 2009.


Fund Expenses and Brokerage Costs


Fund Expenses


The Fund has a unified management fee.  This means that the adviser, Institutional Advisors, LLC, pays for most of the Fund’s operating costs with the exception of Trustees’ fees and expenses, 12b-1 fees, brokerage commissions and fees, and extraordinary costs.  Effective March 2010, the Adviser charges the Fund an annualized rate of 1.70% of the daily average assets for the services it provides, while the total expense ratio of the Fund is 1.35% which includes a fee waiver.  In the fiscal year ended September 30, 2010 the contractual amount the Fund owed the Adviser was $351,128 of which $111,152 was waived, resulting in net advisory fees of $239,976.   


The Fund has adopted a distribution plan in accordance with Rule 12b-1 under the 1940 Act.  Distribution and selling services as permitted under the distribution plan are provided to the Fund by Rafferty Capital Markets, LLC (the “Distributor”) or by agents of the Distributor and include those services intended to result in the sale of the Fund's shares.  During the current fiscal year, the Fund paid $2,065 in 12b-1 fees.


The Fund also has the ability to pay any qualified organization a shareholder servicing fee.  This type of fee might be paid to an organization providing record keeping for Fund shareholders under its administration.  During the current fiscal year, the Fund did not pay any organization a shareholder servicing fee.


Securities Lending


 During fiscal year 2010, the Fund did not participate in securities lending activities.  


Trustee Fees


In addition to the fees that the Fund pays the Adviser, the Fund also pays the Trustees’ fees and expenses. During fiscal 2010, Trustee Fees amounted to $36,063.  

 











INSTITUTIONAL ADVISORS LARGECAP FUND


Additional Comments - Unaudited



Brokerage Costs


Direct net expenses of the Fund shown in this annual report were $278,104.  During fiscal year 2010, the Fund paid brokerage costs of $15,803, down from $22,170 in fiscal 2009.  Under current accounting standards, brokerage costs are not treated as current year expenses; rather, they are included when calculating the cost basis or proceeds from security transactions, but they are still costs paid by the shareholder.


Expenditures for brokerage were $0.71 for every $1,000 in average assets invested in the Fund for fiscal 2010, down from $1.12 in fiscal 2009.  The Fund pays brokers approximately $0.06 per share for trade execution.  The brokerage commissions are directed to firms that provide important statistical and financial information on portfolio holdings.  Additionally, brokerage commissions are paid to firms providing research to the Fund’s Portfolio Managers about current or prospective investments.  The statistical and financial information provided as well as the research offered benefit all clients of the Adviser, not just the Fund.  The Fund’s share of commissions paid is proportionate to its share of all trading in small cap stocks undertaken by Institutional Advisors LLC.  On a quarterly basis, the Adviser reviews the Fund’s trading with the Board of Trustees.


At no time has the Fund ever used brokerage commissions to reward brokers for selling shares of the Fund.


The staff of the SEC has issued interpretive guidance relating to permissible uses of brokerage commissions, sometimes called “soft dollars.”  Based on its review of these guidelines, the Adviser believes that it is in compliance with these guidelines.  


The Regulatory Environment


Board Composition


The Conestoga Fund has six Trustees.  Four of them (66 2/3% of the Board) are Independent, and the Chair is an interested Trustee.


Fund Information


Subject to applicable laws, the management of the Institutional Advisors LargeCap Fund is making every effort to provide as much information as desired by the shareholders of the Fund.  In addition to information provided in the reports to shareholders and the prospectus and statement of additional information, much information is available online.  You can access Fund information by going to www.ialfx.com.  Current holdings and Fund facts are available on our website.  If you prefer, you may call us at 1-800-292-2660 and ask for the information, or you may go to the SEC website at www.sec.gov and obtain copies of almost all information submitted by the Institutional Advisors LargeCap Fund (part of Conestoga Family of Funds) to the SEC.










INSTITUTIONAL ADVISORS LARGE CAP FUND


Comparison of Changes in Value of $10,000

As of Closing Business Day Prior to Inception (March 31,2009)

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INSTITUTIONAL ADVISORS LARGECAP FUND


Expense Example (Unaudited)


As a shareholder of the Institutional Advisors LargeCap Fund, you incur the following costs: management fees, trustee fees, load, transaction costs, and certain other Fund expenses.  This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, April 1, 2010 through September 30, 2010.

Actual Expenses

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 entitled "Expenses Paid During the Period" to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratios 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 this Fund and other funds.  To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees.  Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.  In addition, if these transactional costs were included, your costs would have been higher.

 

Beginning Account

Ending Account

Expenses Paid During the Period*

 

Value

Value

April 1, 2010 through

 

April 1, 2010

September 30, 2010

September 30, 2010

    

Actual

$1,000.00

$1,004.27

$8.09

Hypothetical

   

 (5% Annual Return before expenses)

$1,000.00

$1,018.30

$8.14

    

* Expenses are equal to the Fund's annualized expense ratio of 1.35%, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one half year period).

Institutional Advisors LargeCap Fund:

INSTITUTIONAL ADVISORS LARGECAP FUND


Portfolio Holdings

September 30, 2010

(Unaudited)


The following chart gives a visual breakdown of the Fund by the sectors as defined by the Global Industry Classification Standard (“GICS”) developed by Morgan Stanley in collaboration with Standard and Poor’s.  The underlying securities represent a percentage of the total net assets.  The total net assets of the Fund on September 30, 2010 were $21,847,843.


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Schedule of Investments

September 30, 2010

     
    

% of Total

 Shares

 

 

 Value

Net Assets

 COMMON STOCKS

   

Consumer Discretionary

   
     

 Hotels, Restaurants & Leisure

   

17,360

Darden Restaurants, Inc.

 $

742,661

 

 Media

    

11,113

McGraw-Hill Companies, Inc.

 

367,396

 

 Specialty Retail

   

22,383

Staples, Inc.

 

468,252

 

 Textiles, Apparel & Luxury Goods

   

5,180

VF Corp.

 

419,684

 
     

                           Consumer Discretionary Sector Total

 

1,997,993

9.15%

     

Consumer Staples

   
     

Beverages

    

13,624

Pepsi Co.

 

905,178

 

Food Products

   

13,310

General Mills, Inc.

 

486,347

 

21,472

McCormick & Co.

 

902,683

 

       Food Products Total

 

1,389,030

 

Food & Staples Retailing

   

26,526

Walgreen Co.

 

888,621

 
     

Consumer Staples Sector Total

 

3,182,829

14.57%

     

Energy

    
     

Crude Petroleum & Natural Gas

   

10,736

Murphy Oil Corp.

 

664,773

 

Oil, Gas & Consumable Fuels

   

7,096

Chevron Corp.

 

575,131

 

10,391

Exxon Mobil Corp.

 

642,060

 

       Oil, Gas & Consumable Fuels Total

 

1,217,191

 
     

Energy Sector Total

 

      1,881,964

8.61%

     

Financials

 

 

  
  

   

  

Insurance

    

10,956

Aflac, Inc.

 

566,535

 

20,844

Progressive Corp.

 

435,014

 

       Insurance Total

 

1,001,549

 

Investment Advice

   

24,580

Federated Investors, Inc.

 

559,441

 
     

Financials Sector Total

 

1,560,990

7.14%

     

 Schedule of Investments (Continued)

September 30, 2010

     

 COMMON STOCKS (Continued)

   
    

% of Total

 Shares

 

 

 Value

Net Assets

Health Care

   
     

Biotechnology

   

12,337

Amgen, Inc. *

 $

         679,892

 

Health Care Equipment & Supplies

   

8,225

McKesson Corp.

 

508,140

 

12,055

Stryker Corp.

 

603,353

 

       Health Care Equipment & Supplies Total

 

1,111,493

 

Health Care Providers & Services

   

4,803

Laboratory Corp. of America Holdings *

 

376,699

 

Pharmaceuticals

   

13,342

Johnson & Johnson

 

826,670

 

12,745

Pfizer, Inc.

 

218,832

 

       Pharmaceuticals Total

 

1,045,502

 
     

Health Care Sector Total

 

3,213,586

14.71%

     

Industrials

    
     

Aerospace & Defense

   

11,301

United Technologies Corp.

 

804,970

 

Air Freight & Logistics

   

7,628

C.H. Robinson Worldwide, Inc.

 

533,350

 

Industrial Conglomerates

   

16,763

General Electric Co.

 

272,399

 

Machinery

    

16,293

Danaher Corp.

 

         661,659

 
     

Industrials Sector Total

 

      2,272,378

10.40%

     

Information Technology

   
     

Communications Equipment

   

9,951

Qualcom, Inc

 

         449,113

 

Computers & Peripherals

   

3,579

Apple, Inc. *

 

1,015,541

 

16,136

Hewlett-Packard Co.

 

678,841

 

4,991

International Business Machines, Inc.

 

669,493

 

      Computers & Peripherals Total

 

2,363,875

 

Semiconductors

   

20,185

Altera Corp.

 

608,780

 

 Schedule of Investments (Continued)

September 30, 2010

     

 COMMON STOCKS (Continued)

   

Information Technology (Continued)

   
    

% of Total

 Shares

 

 

 Value

Net Assets

 Software

    

12,086

Intuit, Inc. *

 $

529,488

 

22,853

Microsoft Corp.

 

559,670

 

27,186

Oracle Corp.

 

729,944

 

       Software Total

 

      1,819,102

 
     

Information Technology Sector Total

 

5,240,870

23.99%

     

Materials

    
     

Chemicals

    

12,620

Sigma Aldrich Corp.

 

         761,996

 
     

Materials Sector Total

 

761,996

3.49%

     

Telecommunications Services

   
     

Diversified Telecommunication

   

25,931

AT&T, Inc.

 

         741,626

 
     

Telecommunications Services Sector Total

 

741,626

3.39%

     

Utilities

    
     

Utilities

    

15,068

Nicor, Inc.

 

690,416

 
     

Utilities Sector Total

 

690,416

3.16%

     

TOTAL COMMON STOCKS

   

 

(Cost $17,442,592)

 

    21,544,648

98.61%

     

 SHORT-TERM INVESTMENTS  

   

232,953

UMB Bank Money Market Fiduciary 0.02% **

232,953

1.07%

 

(Cost $232,953)

 

 

 
     

TOTAL INVESTMENTS

   

 

(Cost $17,675,545)

 

21,777,601

99.68%

  

 

  
 

Other Assets Less Liabilities    

 

70,242

0.32%

 

 

 

 

 
 

TOTAL NET ASSETS

$

21,847,843

100.00%

     

* Non-income producing securities during the period.

   

** Variable rate security; the money market rate shown represents the yield at September 30, 2010.


The accompanying notes are an integral part of the financial statements.









INSTITUTIONAL ADVISORS LARGE CAP FUND


Statement of Assets and Liabilities

September 30, 2010



   

Assets:

  

     Investments, at Value  (Cost $17,675,545)

$

                  21,777,601

Receivables:

  

     Securities Sold

 

                       408,245

     Shareholder Subscriptions

 

                         38,190

     Dividends & Interest

 

                         18,130

     Other Assets

 

                           3,114

               Total Assets

 

                  22,245,280

Liabilities:

  

     Accrued Investment Advisory Fees Payable

 

                         20,896

     Distribution Fees Payable

 

                              490

     Shareholder Redemptions Payable

 

                       376,051

               Total Liabilities

 

                       397,437

   

Net Assets

$

                  21,847,843

   

Net Assets Consist of:

  

     Beneficial Interest Paid-In

$

                  17,480,418

     Accumulated Undistributed Net Investment Income

 

                         77,093

     Accumulated Net Realized Gain on Investments

 

                       188,276

     Net Unrealized Appreciation in Value of Investments

 

                    4,102,056

Net Assets, for 1,547,766 Shares of Beneficial Interest Outstanding,  

  

Unlimited Number of Shares Authorized with a $0.001 Par Value

$

                  21,847,843

Net Asset Value and Redemption Price (1)

  

     Per Share  ($21,847,843/1,547,766 shares)

$

14.12

   

Offering Price per share ($14.12/.945 sales charge as a percentage of the investment)

$

14.94

   
   
   
   

(1) A deferred sales charge of up to 0.75% may be imposed on redemptions of shares representing original

purchase of $1,000,000 or more that occur in the first year after purchase.  The deferred sales charge

is imposed on the lower of the original cost of the shares or the value of shares at the time of redemption.

The accompanying notes are an integral part of the financial statements.









INSTITUTIONAL ADVISORS LARGE CAP FUND


Statement of Operations

For the Year Ended September 30, 2009


   

Investment Income:

  

     Dividends  

$

           378,340

     Interest

 

                  129

          Total investment income

 

           378,469

Expenses:

  

     Investment advisory fees

 

           351,128

     Distribution fees

 

               2,065

     Trustees' fees and expenses

 

             36,063

          Total expenses

 

           389,256

               Less: Advisory fees waived

 

          (111,152)

          Net expenses

 

           278,104

   

Net Investment Income

 

           100,365

   

Realized & Unrealized Gain on Investments:

  

     Net realized gain on investments

 

           299,755

     Net change in unrealized appreciation on investments

 

        1,771,663

Net realized & unrealized gain on investments

 

        2,071,418

   

Net increase in net assets resulting from operations

$

        2,171,783

The accompanying notes are an integral part of the financial statements.










INSTITUTIONAL ADVISORS LARGE CAP FUND


Statement of Changes in Net Assets


     
  

For the Year

 

For the Period

  

 Ended

 

 Ended

  

9/30/2010

 

9/30/2009*

Increase In Net Assets

    

From Operations:

    

     Net investment income

$

              100,365

$

                45,052

     Net realized gain (loss) on investments

 

              299,755

 

             (111,480)

     Net change in unrealized appreciation on investments

 

           1,771,663

 

           3,082,370

     Net increase in net assets resulting from operations

 

           2,171,783

 

           3,015,942

Distributions to shareholders from:

    

      Net investment income

 

               (68,324)

 

 -

      Total Distributions

 

               (68,324)

 

 -

From shares of beneficial interest transactions:

    

     Proceeds from sale of shares

 

           5,310,143

 

         24,248,023

     Shares issued on reinvestment of distribution

 

                25,454

 

 -

     Cost of shares redeemed

 

          (5,450,008)

 

          (7,405,170)

Total increase (decrease) in net assets from Fund share transactions

 

             (114,411)

 

         16,842,853

     

Total increase in net assets

 

           1,989,048

 

         19,858,795

     

Net Assets at Beginning of Period  

 

19,858,795

 

                        -   

Net Assets at End of Period (Includes undistributed net

$

21,847,843

$

19,858,795

    investment income of $77,093 and $45,052, respectively)

    
     

* The Institutional Advisors LargeCap Fund Commenced Operations March 31, 2009.

  

The accompanying notes are an integral part of the financial statements.









INSTITUTIONAL ADVISORS LARGE CAP FUND


Financial Highlights


Selected data for a share outstanding throughout each period:

   
    
    
 

For the

For the

 
 

Year Ended

Period Ended

 
 

September 30, 2010

September 30, 2009 *

 
    

Net asset value - beginning of period

$12.76

$10.00

 
    

Net investment income

                       0.07

                          0.03

 

Net realized and unrealized gains on investments

                       1.34

                          2.73

 

    Total from investment operations

                       1.41

                          2.76

 
    

Distributions from net investment income

                      (0.05)

  −

 
    

    Total distributions

                      (0.05)

  −

 
    

Net asset value - end of period

$14.12

$12.76

 
    

Total return

11.02%

27.60%

***

Ratios/supplemental data

   

Net Assets - end of period (thousands)

21,848

19,859

 
    

Before waivers

   

    Ratio of expenses to average net assets

1.88%

1.85%

**

    Ratio of net investment income to average net assets

(0.05)%

0.15%

**

    

After waivers

   

    Ratio of expenses to average net assets

1.35%

1.35%

**

    Ratio of net investment income to average net assets

0.48%

0.65%

**

    

Portfolio turnover rate

24.96%

8.99%

***

    
    
    

*  The Institutional Advisors LargeCap Fund Commenced Operations March 31, 2009.

  

** Annualized

   

*** Not Annualized

   

The accompanying notes are an integral part of the financial statements.









INSTITUTIONAL ADVISORS LARGECAP FUND


Notes to Financial Statements

September 30, 2010


Note 1. Organization


Conestoga Funds (the ”Trust”) was organized as a Delaware statutory trust on February 5, 2002.  The Trust consists of two series, the Institutional Advisors LargeCap Fund (the “Fund”) and the Conestoga Small Cap Fund.  The Trust is registered as an open-end diversified management investment company of the series type under the Investment Company Act of 1940 (the “1940 Act”).  The Fund’s investment strategy is to provide long-term growth of capital.  The Fund's registration statement became effective with the SEC, and the Fund commenced operations on March 31, 2009.  The Fund’s investment adviser is Institutional Advisors LLC (the”Adviser”).  Effective March 31, 2009 (commencement of operations), certain shareholders contributed cash and investment securities to the Fund in a tax-free exchange for 567,157 shares of beneficial interest.  The net assets received were valued at $5,671,571 in accordance with the Fund's stated valuation policies and included unrealized depreciation of $751,977.


Note 2.  Summary of Significant Accounting Policies


The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements.  These policies are in conformity with accounting principles generally accepted in the United States of America.

 

Security Valuation- Securities that are traded on any exchange are valued at the last quoted sale price.  Securities which are quoted by NASDAQ are valued at the NASDAQ Official Closing Price. Lacking a last sale price, a security is valued at its last bid price except when, in the opinion of the Fund’s Adviser, the last bid price does not accurately reflect the current value of the security.  All other securities for which over-the-counter market quotations are readily available are valued at their last bid price.  When market quotations are not readily available, when the Adviser determines the last bid price does not accurately reflect the current value or when restricted securities are being valued, such securities are valued as determined in good faith by the Adviser, in conformity with guidelines adopted by and subject to review of the Board of Trustees of the Trust.   


Short term investments in fixed income securities with maturities of less than 60 days when acquired, or which subsequently are within 60 days of maturity, are valued by using the amortized cost method of valuation, which the Board has determined will represent fair value.


Accounting principles generally accepted in the United States of America define fair value as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date and also establish a framework for measuring fair value, and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability.  The three-tier hierarchy seeks to maximize the use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the Fund’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The three-tier hierarchy of inputs is summarized below:



Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities. Valuation adjustments and block discounts are not applied to Level 1 securities.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.










Notes to Financial Statements (Continued)

September 30, 2010



Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.


Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.


The following table presents information about the Fund’s assets measured at fair value as of September 30, 2010 by major security type:


                                          Quoted Prices in 

                                         Active Markets for     Significant Other             Significant           Balance as of

                                           Identical Assets      Observable Inputs     Unobservable Inputs    September 30,

                                                 (Level 1)                  (Level 2)                      (Level 3)                     2010        

        Assets

Short-Term Investments       $      232,953                       $   -                             $   -               $      232,953        

Common Stocks                   $ 21,544,648                       $   -                             $   -               $ 21,544,648

               Total                      $ 21,777,601                       $   -                             $   -               $ 21,777,601

                                                                  

Federal Income Taxes- The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its net investment income and any realized capital gain.  Therefore, no federal income or excise tax provision is required.


Accounting principles generally accepted in the United States of America provide guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements and require the evaluation of tax positions taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be booked as a tax expense in the current year and recognized as: a liability for unrecognized tax benefits; a reduction of an income tax refund receivable; a reduction of deferred tax asset; an increase in deferred tax liability; or a combination thereof.  Management has evaluated the Fund’s tax positions as of September 30, 2010, and has determined that none of them are uncertain.


Dividends and Distributions- The Fund intends to distribute substantially all of its net investment income and capital gains to its shareholders on an annual basis.  Income and capital gain distributions to shareholders are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America.  Those differences are primarily due to differing treatments for net investment losses and deferral of wash sale losses and post-October losses.  Distributions to shareholders are recorded on the ex-dividend date.


Security Transactions and Investment Income- The Fund follows accounting principles generally accepted in the United States of America and records security transactions on the trade date.  The specific identification method is used for determining gains or losses for financial statements and income tax purposes.  Dividend income is recorded on the ex-dividend date and interest income is recorded on an accrual basis.


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


Other- Accounting principles generally accepted in the United States of America require that permanent book/tax differences be reclassified to paid in capital.


Notes to Financial Statements (Continued)

September 30, 2010



Subsequent Event - Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were available to be issued, and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.


Note 3. Investment Advisory Agreement and Other Related Party Transactions


The Fund has entered into an Advisory Agreement with the Adviser to provide supervision, and assistance in the overall management services to the Fund.  Under the terms of the Advisory Agreement, the Adviser pays all Fund expenses except Rule 12b-1 fees, shareholder servicing fees, fees and expenses of the unaffiliated Trustees, taxes, interest and extraordinary expenses.  The Advisory Agreement also provides that the Adviser supervises and assists in the overall management of the Fund’s affairs subject to the authority of the Board.  Pursuant to the Advisory Agreement, the Fund pays the Adviser a monthly fee calculated at an annual rate of 1.70% of the Fund’s average daily net assets.  For the year ended September 30, 2010, the Adviser earned advisory fees of $351,128.

 

The Adviser has contractually agreed to limit the Fund’s expense ratio to 1.35% of the Fund’s average daily net assets until at least January 29, 2011.  The Adviser may not recoup any of the fees waived pursuant to this contractual waiver.  For the year ended September 30, 2010, the Adviser waived $111,152 under this arrangement.

 

The Trust, on behalf of the Fund, has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act (the “Distribution Plan”).  Rule 12b-1 provides in substance that a mutual fund may not engage directly or indirectly in financing any activity that is primarily intended to result in the sale of shares of such mutual fund except pursuant to a plan adopted by the fund under Rule 12b-1.  The Distribution Plan provides that the Fund may incur distribution expenses related to the sale of shares of up to 0.25% per annum of the Fund’s average daily net assets.  During the year ended September 30, 2010 the Fund accrued $2,065 under the Distribution Plan.  

 

The Distribution Plan provides that the Fund may finance activities that are primarily intended to result in the sale of the Fund’s shares, including, but not limited to, advertising, printing of prospectuses and reports for other than existing shareholders, preparation and distribution of advertising material and sales literature and payments to dealers and shareholder servicing agents who enter into agreements with the Fund.

 

The Trust, on behalf of the Fund, adopted a shareholder servicing plan (“Shareholder Servicing Plan”).  Payments made under the Shareholder Servicing Plan to shareholder servicing agents (which may include affiliates of the Adviser) are for administrative support services to customers who may from time to time beneficially own shares and may be up to 0.25% per annum of the Fund’s average daily net assets.  These services may include: (i) establishing and maintaining accounts and records relating to shareholders; (ii) processing dividend and distribution payments from the Fund on behalf of shareholders; (iii) providing information periodically to shareholders showing their positions in shares and integrating such statements with those of other transactions and balances in shareholders’ other accounts serviced by such financial institution; (iv) arranging for bank wires; (v) responding to shareholder inquiries relating to the services performed; (vi) responding to routine inquiries from shareholders concerning their investments; (vii) providing subaccounting with respect to shares beneficially owned by shareholders, or the information to the Fund necessary for subaccounting; (viii) if required by law, forwarding shareholder communications from the Fund (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to shareholders; (ix) assisting in processing purchase, exchange and redemption requests from shareholders and in placing such orders with the Trust’s service contractors; (x) assisting shareholders in changing dividend options, account designations and addresses; (xi) providing shareholders with a service that invests the assets of their accounts in shares pursuant to specific or pre-authorized instructions; and (xii) providing such other similar services as the Fund may reasonably request to the extent that the agent is permitted to do so under applicable statutes, rules and regulations.  The Fund presently does not have any such shareholder agreements in effect and is not accruing fees under the Shareholder Servicing Plan.


Notes to Financial Statements (Continued)

September 30, 2010



Certain directors and officers of the Adviser are trustees, officers or shareholders of the Fund.  These individuals receive benefits from the Adviser resulting from the fees paid to the Adviser by the Fund.


Note 4. Beneficial Interest


As of September 30, 2010, there were an unlimited number of shares of beneficial interest with a $0.001 par value authorized.  The following table summaries the activity in shares of the Fund:


                         For the Year Ended 9/30/2010

 

Shares

Value

Issued

395,837

$5,310,143

Reinvested

1,863

25,454

Redeemed

  (406,338)

(5,450,008)

Total

    (8,638)

     $   (114,411)


                                    For the Period Ended 9/30/2009


 

Shares

Value

Issued

2,205,033

$24,248,023

Redeemed

(648,629)

(7,405,170)

Total

1,556,404

$16,842,853

               


Note 5.  Investments


Investment transactions, excluding short term investments, for the year ended September 30, 2010, were as follows:


Purchases……………………………………………..………….…$   5,017,559

Sales……………………………………………………………….….$   5,136,451


For Federal Income Tax purposes, the cost of investments owned at September 30, 2010 is $17,764,988.  As of September 30, 2010, the gross unrealized appreciation on a tax basis totaled $4,141,060 and the gross unrealized depreciation totaled $128,447 for a net unrealized appreciation of $4,102,613.


As of September 30, 2010 the components of accumulated income/(losses) on a tax basis were as follows:


Net unrealized appreciation                   $4,012,613

Accumulated net realized gain                    213,950

Undistributed ordinary income                  140,862

                 Total                                     $4,367,425

                                  

As of September 30, 2010 the Fund did not have any unused capital loss carryforward remaining.  To the extent the carryforwards are used to offset future gains, the amount offset will not be distributed to shareholders.    


The difference between the accumulated net realized gains for tax purposes and the accumulated net realized gains on investments reported in the Statement of Assets and Liabilities is due to differing treatment of short-term gains and wash sale losses, which are required to be deferred for tax purposes. Net unrealized appreciation on a tax basis and the net unrealized appreciation on investments reported in the Statement of Assets and Liabilities differ by this same wash sale loss figure.










Notes to Financial Statements (Continued)

September 30, 2010



Note 6.  Accounting Pronouncements


In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about Fair Value Measurements.”  ASU No. 2010-06 amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements.  Certain disclosures required by ASU No. 2010-06 are effective for interim and annual report periods beginning after December 15, 2009 and others for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.  Management is currently evaluating the impact ASU No. 2010-06 will have on the Fund’s financial statement disclosures.             


Note 7. Contingencies & Commitments  


The Fund indemnifies the Trust’s officers and trustees for certain liabilities that might arise from the performance of their duties to the Fund.  Additionally, in the normal course of business, the Fund enters into contracts that contain various representations and warranties and provide general indemnifications.  The Fund’s maximum exposure under these arrangements is dependent on future claims against the Fund and is presently unknown.  However, the Fund considers the risk of loss from such potential claims to be remote.


Note 8. Control and Ownership of Shares


The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates a presumption of control of the fund, under Section 2(a)(9) of the Investment Company Act of 1940, as amended. As of September 30, 2010, NFS LLC, in aggregate, owned approximately 95% of the Fund’s shares and may be deemed to control the Fund.  


















INSTITUTIONAL ADVISORS LARGECAP FUND

September 30, 2010

Trustees and Officers

(Unaudited)


The business and affairs of the Fund are managed under the direction of the Trust's Board of Trustees.  Information pertaining to the Trustees and Officers of the Trust are set forth below.  The Fund's Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request by calling toll free 1-800-292-2660.


Name & Year of Birth

Position(s) Held with the Fund

Term of Office and

Length of

Time Served2

Principal Occupation

During Past Five Years

Number of

Portfolios in

Fund Complex

Overseen by

Trustee or Officer

Other Directorships

Held by Trustee3

or Officer

Disinterested Trusteesi

i

:

     

Michael R. Walker,

1948

Trustee

Since 2002

Partner of Key Real Estate LLC, since 2004; Chairman of ElderTrust, 1998-2004;

2

None

Nicholas J. Kovich,

1956

Trustee

Since 2002

President and CEO of Kovich Capital Management (Private Asset Management), since 2001;

2

Trustee, the Milestone Funds             (1 portfolio)

William B. Blundin,

1939

Trustee

Since 2002

CEO of Bransford Investment Partners, LLC, since 1997;

2

Trustee, the

Saratoga Funds           (12 portfolios)

Richard E. Ten Haken,

1934

Trustee

Since 2002

Chairman and President of Ten Haken & Associates, Inc., since 1992;

2

None

Interested Trustees4:

     

W. Christopher Maxwell,

1943

Chairman &

Trustee

Since 2002

Managing Partner of Conestoga Capital Advisors LLC, 2001-2008; Maxwell Associates LLC President & CEO, since 1997;

2

None

William C. Martindale, Jr.,

1942

 CEO, &

Trustee

Since 2002

Managing Partner and Chief Investment Officer of Conestoga Capital Advisors LLC, since 2001; Co-Portfolio Manager of the Fund since 2002;

2


Director of the Adondo Corporation








Officers:

   

Duane R. D’Orazio

Secretary, since July 2002

Chief Compliance Officer (Conestoga Small Cap Fund), since August 2004

 

Head Trader and Managing Partner of CCA.

Mark S. Clewett

Senior Vice President

Since 2006

Since 2006, Director of Institutional Sales and Client Service for CCA; from 1997 to 2005, Senior Vice President—Consultant Relationships for Delaware Investments.

Joseph F. Monahan  

Senior Vice President

Since 2009

Senior Vice President and Chief Financial Officer of McHugh Associates (2001- December 2008).

David M. Lawson 

Senior Vice President

Since 2009

President and Chief Operating  Officer of McHugh Associates (1995- December 2008).

M. Lorri McQuade

Vice President

Since 2003

Partner (since 2003) and Administrative Manager (since 2001) of CCA.

Michelle L. Patterson

Vice President

Since 2003

Partner (since 2003) and Operations and Marketing Analyst (since 2001) of CCA.

Gregory B. Getts

Assistant Treasurer

Since 2006

President of Mutual Shareholder Services, LLC, the Fund’s transfer, shareholder servicing, dividend disbursing and accounting servicing agent (“MSS”).



Notes:

1

Each Trustee may be contacted by writing to the trustee, c/o Conestoga Funds, 259 N. Radnor-Chester Road, Radnor Court, Suite 120, Radnor, PA 19087.

2

There is no defined term of office for service as a Trustee.  Each Trustee serves until the earlier of resignation, retirement, removal, death, or the election of a qualified successor.

3   Directorships of companies required to report to the Securities and Exchange Commission under the Securities Exchange Act of 1934 (i.e., “public companies") or other investment companies registered under the 1940 Act.

4

Mr. Maxwell and Mr. Martindale each have ownership interest in Conestoga Capital Advisors.  Each of these persons are considered to be an “interested person” of the Fund and “Interested Person” within the meaning of the Investment Company Act of 1940.


Availability of Quarterly Portfolio Schedule


The Fund files its complete schedule of investments with the SEC for the first and third quarters of each fiscal year on Form N-Q no later than 60 days following the close of the quarter.  You can obtain a copy, available without charge, on the SEC’s website at http://www.sec.gov beginning with the filing for the period ended June 30, 2009 (the Fund commenced operations on March 31, 2009).  The Fund’s Forms N-Q may also be reviewed and copied at the SEC’s public Reference Room in Washington, DC, and that information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.


Proxy Voting Policy


A description of the policies and procedures that the Trust uses to determine how to vote proxies related to portfolio securities and the Fund’s portfolio securities voting record for the 12-month period ended June 30 is available (i) without charge, upon request, by calling 1-800-292-2660 and (ii) on the Securities and Exchange Commission’s website at http://www.sec.gov.







Statement of Additional Information


The Fund's Statement of Additional Information ("SAI") includes additional information about the Trustees and is available, without charge, upon request.  You may call toll-free 1-800-292-2660 to request a copy of the SAI or to make shareholder inquiries.


Tax Information (Unaudited)


During the year ended September 30, 2010, the Fund paid an income distribution of $0.045 per share, for a total distribution of $68,324.













INSTITUTIONAL ADVISORS LARGECAP FUND




Board of Trustees

W. Christopher Maxwell, Chairman

William B. Blundin

Nicholas J. Kovich

William C. Martindale, Jr.

Richard E. Ten Haken

Michael R. Walker


Investment Adviser

Institutional Advisors LLC

2201 Ridgewood Road #180

Wyomissing, PA 19610



Dividend Paying Agent,

Shareholders’ Servicing Agent,

Transfer Agent

Mutual Shareholder Services

8000 Towne Centre Drive, Suite 400

Broadview Heights, OH  44147


Custodian

UMB Bank , NA

928 Grand Blvd.

Kansas City, MO 64106


Independent Registered Public Accounting Firm
BBD, LLP
1835 Market Street 26th Floor

Philadelphia, PA 19103


Officers of Institutional Advisors LargeCap Fund

James D. King, President

Karen L. Kleffel, Chief Compliance Officer

Richard A. Lord, Jr., Chief Financial Officer

Michelle H. Debkowski, Secretary






This report is provided for the general information of the shareholders of the Institutional Advisors LargeCap Fund. This report is not intended for distribution to prospective investors in the Fund, unless preceded or accompanied by an effective prospectus.




















Item 2. Code of Ethics.


(a)

As of the end of the period covered by this report, the registrant has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party.


(b)

For purposes of this item, “code of ethics” means written standards that are reasonably designed to deter wrongdoing and to promote:


(1)

Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;


(2)

Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the Commission and in other public communications made by the registrant;


(3)

Compliance with applicable governmental laws, rules, and regulations;

(4)

The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and

(5)

Accountability for adherence to the code.


(c)

Amendments:  


During the period covered by the report, there have not been any amendments to the provisions of the code of ethics.


(d)

Waivers:  


During the period covered by the report, the registrant has not granted any express or implicit waivers from the provisions of the code of ethics.


Item 3. Audit Committee Financial Expert.


(a)

The registrant’s board of trustees has determined that Michael W. Walker and Nicholas J. Kovich are independent audit committee financial experts.


Michael W. Walker acquired his attributes through:

Experience as Chairman and President of Eldertrust ( A healthcare REIT)


Nicholas J. Kovich acquired his attributes through:

Experience as Managing Director, Domestic Equity Portfolio Manager for Morgan Stanley 1996-2001


Item 4. Principal Accountant Fees and Services.


(a)

Audit Fees



FY 2010

$ 24,000

FY 2009

$ 24,000


(b)

Audit-Related Fees


Registrant

Adviser


FY 2010

None

$ 0

FY 2009

None

$ 0


Nature of the fees:

Post effective consent.


(c)

Tax Fees


Registrant

Adviser


FY 2010

None

$ 4,000

FY 2009

None

$ 4,000


Nature of the fees:

Preparation of Excise Tax and Form 1120RIC


(d)

All Other Fees


Registrant

Adviser


FY 2010

$ N/A

$N/A

FY 2009

$ N/A

$N/A


Nature of the fees:

N/A


(e)

(1)

Audit Committee’s Pre-Approval Policies


The audit committee has adopted pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.


(2)

Percentages of Services Approved by the Audit Committee


Registrant

Adviser


Audit-Related Fees:

0  %

100%

Tax Fees:

0  %

100%

All Other Fees:

0  %

100%


(f)



During audit of registrant's financial statements for the most recent fiscal year, less than 50 percent of the hours expended on the principal accountant's engagement were attributed to work performed by persons other than the principal accountant's full-time, permanent employees.


(g)

The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant:


Registrant


FY 2010

$ 0

FY 2009

$ 0


(h)

The registrant's audit committee has considered whether the provision of non-audit services to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant, that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, is compatible with maintaining the principal accountant's independence.


Item 5. Audit Committee of Listed Companies.  Not applicable.


Item 6.  Schedule of Investments.


Not applicable – schedule filed with Item 1.


Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Funds.  Not applicable.


Item 8.  Portfolio Managers of Closed-End Funds.  Not applicable.


Item 9.  Purchases of Equity Securities by Closed-End Funds.  Not applicable.


Item 10.  Submission of Matters to a Vote of Security Holders.  


The registrant has not adopted procedures by which shareholders may recommend nominees to the registrant's board of trustees.


Item 11.  Controls and Procedures.  


(a)

Based on an evaluation of the registrant’s disclosure controls and procedures as of September 29, 2010, the disclosure controls and procedures are reasonably designed to ensure that the information required in filings on Forms N-CSR is recorded, processed, summarized, and reported on a timely basis.


(b)

There were no significant changes in the registrant’s internal control over financial reporting that occurred during the registrant’s second fiscal half-year that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.


Item 12.  Exhibits.  



(a)(1)

EX-99.CODE ETH.  Filed herewith.


(a)(2)

EX-99.CERT.  Filed herewith.


(a)(3)

Any written solicitation to purchase securities under Rule 23c-1 under the Act (17 CFR 270.23c-1) sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons.  Not applicable.


(b)

EX-99.906CERT.  Filed herewith.


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Conestoga Funds


By /s/William C. Martindale Jr.

* William C. Martindale Jr.

   Chief Executive Officer


Date December 7, 2010


Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


By /s/ William C. Martindale Jr.

* William C. Martindale Jr.

   Chief Executive Officer


Date December 7, 2010


By /s/Robert M. Mitchell

* Robert M. Mitchell

  Treasurer and Chief Financial Officer


Date December 7, 2010


* Print the name and title of each signing officer under his or her signature.