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                                 VERACITY FUNDS

                          VERACITY SMALL CAP VALUE FUND




                                 [LOGO OMITTED]
                                  ANNUAL REPORT
                                February 28, 2009



       INVESTMENT ADVISOR                                   ADMINISTRATOR
       ------------------                                   -------------
INTEGRITY ASSET MANAGEMENT, LLC                      ULTIMUS FUND SOLUTIONS, LLC
      401 West Main Street, Suite 2100                     P.O. Box 46707
   Louisville, Kentucky 40202                        Cincinnati, Ohio 45246-0707
                                                           1-866-896-9292


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                         INTEGRITY ASSET MANAGEMENT, LLC
                         -------------------------------

                                                                  April 10, 2009

Dear Fellow Shareholders,

My children received the Rockband Video game for Christmas.  If you haven't seen
one,  the  game is the  equivalent  of  karaoke  on  steroids.  You can have two
guitarists,  a drummer and a vocalist perform current and rock classics. We were
"performing"  the 1980  Southern  Rock Classic  FLIRTING WITH DISASTER by Molley
Hatchet.  It hit me as I was singing the words (a disaster in its own right) how
appropriate  the song was for  today's  times.  We are,  indeed,  flirting  with
disaster in the economy and in the market.

The last  year has seen a  career's  worth of  events  transpire.  Bear  Stearns
collapsed  and was bought by JP Morgan for $10 a share.  At the time,  the price
was shocking. In retrospect, it was a generous price given the trajectory of the
rest of the  financial  stocks.  Fannie Mae and  Freddie  Mac were  placed  into
government  conservatorship.   IndyMac  failed,  and  Countrywide  was  sold  to
BankAmerica.  Lehman  Brothers went bankrupt,  Merrill Lynch rushed to safety in
the arms of BankAmerica, and Goldman Sachs and Morgan Stanley became banks. AIG,
probably the world's most respected  insurance company,  teeters on the verge of
failure and is mostly  owned by the US  Government.  We have seen  unprecedented
assistance from the government to banks, AIG and the auto companies (also on the
verge of bankruptcy). And this was just domestically.  Internationally,  similar
story lines played out to the same conclusions.

The  indefatigable  US consumer is tapped out. To quote  FLIRTING WITH DISASTER,
"I'm out of money, I'm out of hope, it looks like self  destruction."  The binge
of debt financed buying has ended poorly for the consumer, and it has shaken the
financial system to its core. We are in the midst of a great  deleveraging  both
of the  consumer's  balance  sheet  as well as the  financial  system's.  We are
flirting with disaster.  This deleveraging  process,  which accelerated with the
bankruptcy of Lehman Brothers,  has brought about an economic  contraction,  the
rapidity  of which has not been seen  since the  great  depression.  In fact,  a
gallup  survey from  12/28/08  said that 23% of the  population  believes that a
depression  is likely  while  another 36% said that a  depression  was  somewhat
likely.

With that as the backdrop  for some of the year's  darker  events,  I am pleased
that the Veracity Small Cap Value Fund (the "Fund) outperformed the Russell 2000
Value  Index  (the  Fund's  benchmark  index)  for the year.  For the year ended
February  28,  2009,  the Fund (Class R) declined  40.91% while the Russell 2000
Value Index declined 42.38% for the same period. However, I am also disappointed
by the poor absolute returns achieved by the Fund and the market in general.  We
began the year with a thesis that  either  Financials  were cheap,  or the world
economy was in  trouble.  We chose to believe  that  Financials  were cheap.  An
outgrowth of this decision,  though,  was that global cyclicals - the Energy and
Basic  Materials  stocks that were charging higher on the thought that China and
the developing  economies were perpetual motion machines - were expensive.  This
view was  reflected in the  portfolio  by favoring  Banks and Thrifts that would
benefit 


                                       1


most from a rebound in housing  and the  economy  while  being  underweight  the
global  cyclical  groups.  For  most  of the  year,  this  was the  exact  wrong
positioning as the popular trade was to short  Financials and go long the global
cyclicals.  While we  believed,  incorrectly,  that  Financials  were cheap,  we
couldn't see how if we were wrong about  Financials that the world economy could
keep growing in a fashion that would support higher commodity prices.

We did realize  early in the year that our  positioning  in  Financials  was too
aggressive  and we  corrected  that by selling our most  exposed  companies  and
replacing them with more conservative alternatives.  We also positioned the Fund
conservatively,  expecting  a weak  economy to result  from the  problems in the
Financial  sector.  We never  could have  guessed  the extent of the  correction
coming,  but we were  positioned  well  from a sector  standpoint.  The Fund was
overweight  Utilities and Health Care, two of the best groups,  and  underweight
the more cyclical  Consumer  Discretionary  and Autos and Transports.  Given the
more defensive and consistent characteristics of Utilities and Health Care, they
outperformed  significantly.  In Autos and  Transports,  we mostly  avoided  the
carnage  created by the  potential  bankruptcy of the big three  automakers  and
dismal  demand for cars as a result of a weak  economy.  Other areas where being
more conservative helped performance  included REITs and Packaging names. Within
REITs,  some of the  portfolio's  best names were mortgage  REITs that benefited
from wider spreads and lower interest rates.  Packaging  stocks  outperformed as
they tend to have less sensitivity to the economic cycle. Our largest detractors
to performance were Energy and Technology.  In Energy, we were early in our call
to  underweight  the  group  as  commodity  prices  continued  to  increase.  In
Technology,  a couple of the Fund's  names  within the Telecom  Equipment  space
suffered.

Certainly there is a lot of bad news in the market and the economy today. We are
flirting with disaster. However, the decision to be made today by an investor is
whether we are just flirting or are we heading for a serious  relationship?  The
easy trade today is to be  negative.  There is plenty of support in the economic
data as well as in the media. I do think it is the wrong trade,  though.  Absent
the recent rally, it appears to us that the greater risk in the market is to the
upside and not to the downside. Being overly conservative today is, as my little
league coach used to say about throwing  behind a runner,  like locking the barn
door after the horse has been stolen. Our conservative  positioning has paid off
and we are  seeing  signs that it makes  sense to move the risk  profile in line
with that of the benchmark.

Some of the positive developments include the numerous programs from stimulus to
the various Treasury acronyms (TARP, TALF, PPIP) to the FED's aggressive balance
sheet  growth.  To what degree is open to some debate,  but our  government  has
taken the challenge head on and has responded like no other country.

Another  important  positive  is that  mortgage  rates and  spreads  have fallen
precipitously.  While a portion of homeowners  cannot  refinance  today,  either
because of the value of their home or their employment  situation,  many can and
are taking  advantage  of the lower  rates.  This  should put extra money in the
consumer's pocket. Lower mortgage 


                                       2


rates,  lower house prices and tax  incentives are starting to have an impact on
first-time home buyers and home sales in general, albeit from a depressingly low
level.  The first-time home buyer is the grease that the housing market needs to
get going again.  It's too early to call a bottom but we are  encouraged  by the
signs we are seeing from both the existing and new housing  market.  In fact, we
have seen two months of price INCREASES in the state of California.  A reduction
or an end to home price  deflation  would be a key  stabilizer for the financial
system.

The  nascent  recovery/stabilization  signs we are seeing in housing  along with
mortgage rates and spreads, combined with the various stimulus/programs from the
government  give us  confidence  that we are just flirting with disaster and not
heading for a serious relationship.  Although near term earnings may result in a
rocky  market,  we  continue  to believe  that the market has more  upside  than
downside. We would be further encouraged should the market start to look through
strained earnings reports.

The biggest  concern  related to the outlook is the  growing  protectionist  and
anti-foreign sentiment in the country. Our trading partners, particularly China,
have raised concern  regarding  protectionist  policies and the stability of the
US. For better or worse,  we have chosen a path out of this crisis that  entails
large deficit  spending on top of existing large debt loads.  We need foreigners
to buy that debt. If we upset them or lose their confidence and they stop buying
or,  worse,  start  selling  Treasuries  we are  in  serious  economic  trouble.
Fortunately,  they need us as much as we need them. We believe that  rationality
will prevail.  With that in mind, the Fund will continue to incrementally remove
its conservative bias to be better positioned for the revaluation opportunity we
see in today's market.

I would like to thank you for the trust you have placed in us.


Sincerely,

/s/ Daniel G. Bandi

Daniel G. Bandi, CFA

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RESULTS AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED,  MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL  COST.  CURRENT  PERFORMANCE  MAY BE HIGHER OR LOWER
THAN THE PERFORMANCE  DATA QUOTED.  PERFORMANCE  DATA CURRENT TO THE MOST RECENT
MONTH-END, ARE AVAILABLE BY CALLING 1-866-896-9292.

An investor  should  consider  the  investment  objectives,  risks,  charges and
expenses of the Fund carefully before investing.  The Fund's prospectus contains
this and other important information.  To obtain a copy of the Fund's prospectus
please call 1-866-896-9292 and a copy will be sent to you free of charge. Please
read the prospectus  carefully  before you invest.  The Veracity Small Cap Value
Fund is distributed by Ultimus Fund Distributors, LLC.

The Letter to  Shareholders  seeks to  describe  some of the  Advisor's  current
opinions and views of the financial  markets.  Although the Advisor  believes it
has a reasonable basis for any opinions or views  expressed,  actual results may
differ, sometimes significantly so, from those expected or expressed.



                                       3


                          VERACITY SMALL CAP VALUE FUND

Comparison of the Change in Value of a $10,000 Investment in the Veracity Small
              Cap Value Fund (a) and the Russell 2000 Value Index

                              [LINE GRAPH OMITTED]
Veracity Small Cap Value Fund - Class R Russell 2000 Value Index --------------------- ------------------------ Date Value Date Value ---- ------- ---- ------- 3/30/2004 $10,000 3/30/2004 $10,000 8/31/2004 9,640 8/31/2004 9,745 2/28/2005 11,495 2/28/2005 11,244 8/31/2005 12,145 8/31/2005 11,949 2/28/2006 13,447 2/28/2006 13,000 8/31/2006 13,571 8/31/2006 13,469 2/28/2007 14,585 2/28/2007 14,865 8/31/2007 14,465 8/31/2007 14,363 2/29/2008 12,279 2/29/2008 12,319 8/31/2008 12,414 8/31/2008 13,282 2/28/2009 7,256 2/28/2009 7,018 Past performance is not predictive of future performance. -------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS (b) (for periods ended February 28, 2009) 1 Year Since Inception (c) ------ ------------------- Class R -40.91% -6.31% Class I -40.79% -12.08% -------------------------------------------------------------------- (a) The line graph above represents performance of Class R shares only, which will vary from the performance of Class I shares to the extent the Classes do not have the same expenses or inception dates. (b) The returns shown do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares. (c) Initial public offering of Class R shares and Class I shares commenced on March 30, 2004 and July 7, 2005, respectively. 4 VERACITY SMALL CAP VALUE FUND SECTOR DIVERSIFICATION (% OF NET ASSETS) AS OF FEBRUARY 28, 2009 (UNAUDITED) [BAR CHART OMITTED] Consumer Discretionary 10.2% Consumer Staples 4.5% Energy 2.4% Financials 31.4% Health Care 9.9% Industrials 10.3% Information Technology 11.9% Materials 6.5% Telecommunication Services 1.3% Utilities 10.0% Money Market Funds 1.4% TOP TEN EQUITY HOLDINGS AS OF FEBRUARY 28, 2009 (UNAUDITED) --------------------------------------------------------------------------------------------------------------------- % OF NET COMPANY PRIMARY BUSINESS SECTOR CLASSIFICATION ASSETS --------------------------------------------------------------------------------------------------------------------- Cleco Corp. Electric Utilities Utilities 1.9% --------------------------------------------------------------------------------------------------------------------- Hanover Insurance Group, Inc. (The) Insurance Financials 1.9% --------------------------------------------------------------------------------------------------------------------- Silgan Holdings, Inc. Containers & Packaging Materials 1.8% --------------------------------------------------------------------------------------------------------------------- Northwest Natural Gas Co. Gas Utilities Utilities 1.7% --------------------------------------------------------------------------------------------------------------------- Vectren Corp. Multi-Utilities Utilities 1.6% --------------------------------------------------------------------------------------------------------------------- IDACORP, Inc. Electric Utilities Utilities 1.6% --------------------------------------------------------------------------------------------------------------------- Anworth Mortgage Asset Corp. Real Estate Investment Trusts (REITs) Financials 1.6% --------------------------------------------------------------------------------------------------------------------- Ruddick Corp. Food & Staples Retailing Consumer Staples 1.4% --------------------------------------------------------------------------------------------------------------------- Lance, Inc. Food Products Consumer Staples 1.4% --------------------------------------------------------------------------------------------------------------------- STERIS Corp. Health Care Equipment & Supplies Health Care 1.3% --------------------------------------------------------------------------------------------------------------------- 5 VERACITY SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS FEBRUARY 28, 2009 ================================================================================ COMMON STOCKS - 98.4% SHARES VALUE -------------------------------------------------------------------------------- CONSUMER DISCRETIONARY - 10.2% Abercrombie & Fitch Co. - Class A 9,893 $ 217,547 Ameristar Casinos, Inc. 29,400 289,296 Brown Shoe Co., Inc. 87,206 311,325 Callaway Golf Co. 62,680 424,344 CEC Entertainment, Inc. (a) 30,372 709,186 Chico's FAS, Inc. (a) 85,641 387,954 Cinemark Holdings, Inc. 49,852 383,362 Cooper Tire & Rubber Co. 16,431 74,761 Cracker Barrel Old Country Store, Inc. 33,977 760,405 Entercom Communications Corp. 85,294 87,853 Ethan Allen Interiors, Inc. 34,240 326,649 Foot Locker, Inc. 37,052 307,902 Jones Apparel Group, Inc. 160,589 431,985 Media General, Inc. - Class A 32,109 49,448 Penn National Gaming, Inc. (a) 32,193 614,564 Phillips-Van Heusen Corp. 27,732 459,519 RC2 Corp. (a) 47,062 220,721 Royal Caribbean Cruises Ltd. 49,200 295,200 Ryland Group, Inc. (The) 41,232 582,608 Stage Stores, Inc. 100,149 719,070 Standard Pacific Corp. (a) 91,566 86,988 ------------ 7,740,687 ------------ CONSUMER STAPLES - 4.5% Fresh Del Monte Produce, Inc. (a) 23,342 438,363 Lance, Inc. 47,545 1,036,956 Ralcorp Holdings, Inc. (a) 14,372 870,943 Ruddick Corp. 49,096 1,064,402 ------------ 3,410,664 ------------ ENERGY - 2.4% Carrizo Oil & Gas, Inc. (a) 32,165 342,235 Encore Aquisition Co. (a) 20,239 406,399 Hornbeck Offshore Services, Inc. (a) 30,127 394,965 T-3 Energy Services, Inc. (a) 17,245 189,868 Whiting Petroleum Corp. (a) 14,623 340,716 Willbros Group, Inc. (a) 21,854 156,912 ------------ 1,831,095 ------------ FINANCIALS - 31.4% Abington Bancorp, Inc. 26,000 188,500 Alexandria Real Estate Equities, Inc. - REIT 13,028 520,599 Ambac Financial Group, Inc. 45,449 26,815 American Campus Communities, Inc. - REIT 23,354 399,820 American Equity Investment Life Holding Co. 36,951 141,892 AmTrust Financial Services, Inc. - REIT 51,156 428,687 Anworth Mortgage Asset Corp. 198,145 1,194,814 Aspen Insurance Holdings Ltd. 19,620 427,520 Associated Estates Realty Corp. 28,330 156,382 BGC Partners, Inc. - Class A 119,876 204,988 See accompanying notes to financial statements. 6 VERACITY SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS (CONTINUED) ================================================================================ COMMON STOCKS - 98.4% (CONTINUED) SHARES VALUE -------------------------------------------------------------------------------- FINANCIALS - 31.4% (CONTINUED) BioMed Realty Trust, Inc. - REIT 29,938 $ 255,371 Calamos Asset Management, Inc. - Class A 67,150 231,667 Cardinal Financial Corp. 55,110 314,127 Central Pacific Financial Corp. 69,954 277,717 Dime Community Bancshares 55,075 543,039 Entertainment Properties Trust - REIT 340 5,069 First Financial Bancorp 35,797 275,279 First Horizon National Corp. 83,424 764,998 First Midwest Bancorp, Inc. 55,667 418,616 First Potomac Realty Trust - REIT 56,680 413,197 FirstMerit Corp. 66,122 972,655 FPIC Insurance Group, Inc. (a) 20,094 745,487 Fulton Financial Corp. 52,065 323,844 Hancock Holding Co. 21,663 614,363 Hanover Insurance Group, Inc. (The) 40,788 1,434,514 Health Care REIT, Inc. - REIT 15,172 466,842 Healthcare Realty Trust, Inc. - REIT 12,421 179,980 International Bancshares Corp. 24,711 247,357 Investment Technology Group, Inc. (a) 37,194 724,167 KBW, Inc. (a) 24,855 353,190 Knight Capital Group, Inc. - Class A (a) 45,040 792,254 MFA Financial, Inc. - REIT 150,661 864,794 National Retail Properties, Inc. - REIT 29,503 423,958 Navigators Group, Inc. (The) (a) 13,703 715,708 Old National Bancorp 58,024 677,140 PacWest Bancorp 32,926 450,428 Penson Worldwide, Inc. (a) 47,250 226,800 ProAssurance Corp. (a) 19,587 936,063 Realty Income Corp. - REIT 43,739 766,745 RLI Corp. 15,885 778,047 Selective Insurance Group, Inc. 29,161 350,807 Senior Housing Properties Trust - REIT 33,230 419,363 StellarOne Corp. 29,471 367,503 Sunstone Hotel Investors, Inc. - REIT 80,361 175,991 Susquehanna Bancshares, Inc. 37,624 329,962 Trustmark Corp. 12,773 227,232 Washington Federal, Inc. 43,568 496,240 Washington Real Estate Investment Trust - REIT 32,199 552,213 Webster Financial Corp. 20,050 77,794 Whitney Holding Corp. 28,350 313,268 World Acceptance Corp. (a) 29,792 436,751 Zions Bancorp. 25,974 243,376 ------------ 23,873,933 ------------ HEALTH CARE - 9.9% AMERIGROUP Corp. (a) 25,738 637,788 AmSurg Corp. (a) 40,770 636,827 Endo Pharmaceuticals Holdings, Inc. (a) 24,162 458,594 Invacare Corp. 30,764 493,454 See accompanying notes to financial statements. 7 VERACITY SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS (CONTINUED) ================================================================================ COMMON STOCKS - 98.4% (CONTINUED) SHARES VALUE -------------------------------------------------------------------------------- HEALTH CARE - 9.9% (CONTINUED) Kindred Healthcare, Inc. (a) 18,440 $ 265,351 King Pharmaceuticals, Inc. (a) 46,773 343,314 LifePoint Hospitals, Inc. (a) 42,334 889,861 Magellan Health Services, Inc. (a) 19,929 660,846 Owens & Minor, Inc. 14,184 478,143 Perrigo Co. 30,399 610,716 Sepracor, Inc. (a) 33,400 500,332 STERIS Corp. 42,511 980,304 Varian, Inc. (a) 24,059 544,455 ------------ 7,499,985 ------------ INDUSTRIALS - 10.3% A.O. Smith Corp. 14,670 374,525 Baldor Electric Co. 27,250 332,722 BE Aerospace, Inc. (a) 56,068 418,267 Belden, Inc. 30,804 328,679 CBIZ, Inc. (a) 56,988 390,938 Consolidated Graphics, Inc. (a) 32,315 435,930 Continental Airlines, Inc. - Class B (a) 52,578 526,832 Dycom Industries, Inc. (a) 74,669 344,971 Genesee & Wyoming, Inc. - Class A (a) 26,375 550,974 Granite Construction, Inc. 10,890 387,466 Hexcel Corp. (a) 61,462 381,679 Kennametal, Inc. 21,268 347,094 Manitowoc Co., Inc. (The) 81,261 333,170 Mueller Water Products, Inc. - Class A 191,151 410,974 Old Dominion Freight Line, Inc. (a) 22,656 493,674 Regal-Beloit Corp. 9,350 268,158 Robbins & Myers, Inc. 26,560 428,413 SkyWest, Inc. 24,527 251,156 Terex Corp. (a) 44,600 397,832 Werner Enterprises, Inc. 30,818 419,741 ------------ 7,823,195 ------------ INFORMATION TECHNOLOGY - 11.9% ADC Telecommunications, Inc. (a) 194,749 553,087 Advanced Energy Industries, Inc. (a) 86,766 586,538 Arris Group, Inc. (a) 115,133 704,614 Arrow Electronics, Inc. (a) 11,071 184,111 Atmel Corp. (a) 116,390 415,512 Benchmark Electronics, Inc. (a) 41,666 407,077 Brooks Automation, Inc. (a) 30,013 128,456 CommScope, Inc. (a) 36,554 326,427 Diodes, Inc. (a) 74,664 580,886 Electronics for Imaging, Inc. (a) 21,471 191,092 Fairchild Semiconductor International, Inc. (a) 135,141 472,994 Harris Stratex Networks, Inc. - Class A (a) 66,362 260,803 Integrated Device Technology, Inc. (a) 155,221 695,390 Jabil Circuit, Inc. 59,594 246,719 Mentor Graphics Corp. (a) 100,728 446,225 Novell, Inc. (a) 102,720 324,595 See accompanying notes to financial statements. 8 VERACITY SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS (CONTINUED) ================================================================================ COMMON STOCKS - 98.4% (CONTINUED) SHARES VALUE -------------------------------------------------------------------------------- INFORMATION TECHNOLOGY - 11.9% (CONTINUED) MKS Instruments, Inc. (a) 18,702 $ 235,458 Parametric Technology Corp. (a) 71,962 585,771 Plexus Corp. (a) 56,318 723,686 SYNNEX Corp. (a) 22,361 331,390 Tellabs, Inc. (a) 77,292 293,710 Veeco Instruments, Inc. (a) 87,763 373,870 ------------ 9,068,411 ------------ MATERIALS - 6.5% Albemarle Corp. 30,281 585,937 Celanese Corporation - Series A 67,223 574,085 H.B. Fuller Co. 6,893 78,580 Huntsman Corp. 72,908 192,477 Innophos Holdings, Inc. 34,094 362,078 Intrepid Potash, Inc. (a) 13,256 297,465 Myers Industries, Inc. 64,988 256,703 Rockwood Holdings, Inc. (a) 63,088 371,588 Silgan Holdings, Inc. 27,334 1,341,006 Solutia, Inc. (a) 82,576 309,660 Steel Dynamics, Inc. 66,452 554,874 ------------ 4,924,453 ------------ TELECOMMUNICATION SERVICES - 1.3% Cincinnati Bell, Inc. (a) 292,986 486,357 Syniverse Holdings, Inc. (a) 35,625 539,006 ------------ 1,025,363 ------------ UTILITIES - 10.0% ALLETE, Inc. 17,233 459,087 Cleco Corp. 70,597 1,448,650 IDACORP, Inc. 50,282 1,223,864 New Jersey Resources Corp. 24,157 847,186 Northwest Natural Gas Co. 31,906 1,306,551 PNM Resources, Inc. 57,777 444,305 Portland General Electric Co. 39,913 655,372 Vectren Corp. 60,063 1,252,914 ------------ 7,637,929 ------------ TOTAL COMMON STOCKS (Cost $124,536,206) $ 74,835,715 ------------ See accompanying notes to financial statements. 9 VERACITY SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS (CONTINUED) ================================================================================ MONEY MARKET FUNDS - 1.4% SHARES VALUE -------------------------------------------------------------------------------- First American Treasury Obligations Fund - Class Y, 0.26% (b) (Cost $1,099,126) 1,099,126 $ 1,099,126 ------------ TOTAL INVESTMENTS AT VALUE - 99.8% (Cost $125,635,332) $ 75,934,841 OTHER ASSETS IN EXCESS OF LIABILITIES - 0.2% 153,059 ------------ NET ASSETS - 100.0% $ 76,087,900 ============ REIT - Real Estate Investment Trust. (a) Non-income producing security. (b) Variable rate security. The rate shown is the 7-day effective yield as of February 28, 2009. See accompanying notes to financial statements. 10 VERACITY SMALL CAP VALUE FUND STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 28, 2009 ================================================================================ ASSETS Investments in securities: At acquisition cost $125,635,332 ============ At value (Note 1) $ 75,934,841 Cash 2,943 Receivable for investment securities sold 2,212,376 Receivable for capital shares sold 270,803 Dividends receivable 127,691 Other assets 25,472 ------------ TOTAL ASSETS 78,574,126 ------------ LIABILITIES Payable for investment securities purchased 2,309,705 Payable for capital shares redeemed 87,286 Payable to Advisor (Note 3) 54,230 Payable to Administrator (Note 3) 9,870 Accrued distribution and service plan fees (Note 3) 9,735 Other accrued expenses 15,400 ------------ TOTAL LIABILITIES 2,486,226 ------------ NET ASSETS $ 76,087,900 ============ NET ASSETS CONSIST OF: Paid-in capital $160,032,210 Accumulated net realized losses from security transactions (34,243,819) Net unrealized depreciation on investments (49,700,491) ------------ NET ASSETS $ 76,087,900 ============ PRICING OF CLASS R SHARES Net assets applicable to Class R shares $ 48,509,708 ============ Shares of beneficial interest outstanding (unlimited number of shares authorized, no par value) 3,957,733 ============ Net asset value and offering price per share (a) (Note 1) $ 12.26 ============ PRICING OF CLASS I SHARES Net assets applicable to Class I shares $ 27,578,192 ============ Shares of beneficial interest outstanding (unlimited number of shares authorized, no par value) 2,247,341 ============ Net asset value and offering price per share (a) (Note 1) $ 12.27 ============ (a) Redemption price varies based on length of time held (Note 1). See accompanying notes to financial statements. 11 VERACITY SMALL CAP VALUE FUND STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 28, 2009 ================================================================================ INVESTMENT INCOME Dividends $ 2,636,149 Interest 671 ------------ TOTAL INVESTMENT INCOME 2,636,820 ------------ EXPENSES Investment advisory fees (Note 3) 1,199,795 Distribution and service plan expense - Class R (Note 3) 193,365 Mutual fund services fees (Note 3) 180,287 Custodian and bank service fees 38,529 Registration fees - Common 18,981 Registration fees - Class R 10,071 Registration fees - Class I 1,886 Trustees' fees and expenses 25,794 Compliance service fees and expenses (Note 3) 24,411 Professional fees 20,883 Insurance expense 14,502 Other expenses 29,382 ------------ TOTAL EXPENSES 1,757,886 Fees reduced and expenses reimbursed by the Advisor (Note 3): Common (64,816) Class R (2,337) ------------ NET EXPENSES 1,690,733 ------------ NET INVESTMENT INCOME 946,087 ------------ REALIZED AND UNREALIZED LOSSES ON INVESTMENTS Net realized losses from security transactions (25,061,041) Net change in unrealized appreciation/ depreciation on investments (30,107,115) ------------ NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS (55,168,156) ------------ NET DECREASE IN NET ASSETS FROM OPERATIONS $(54,222,069) ============ See accompanying notes to financial statements. 12 VERACITY SMALL CAP VALUE FUND STATEMENTS OF CHANGES IN NET ASSETS ================================================================================================= Year Year Ended Ended February 28, February 29, 2009 2008 ------------------------------------------------------------------------------------------------- FROM OPERATIONS Net investment income $ 946,087 $ 267,222 Net realized gains (losses) from security transactions (25,061,041) 500,524 Net change in unrealized appreciation/depreciation on investments (30,107,115) (28,781,545) ------------ ------------ Net decrease in net assets from operations (54,222,069) (28,013,799) ------------ ------------ FROM DISTRIBUTIONS TO SHAREHOLDERS From net investment income, Class R (492,197) (97,196) From net investment income, Class I (453,890) (170,027) From net realized gains on investments, Class R -- (8,140,822) From net realized gains on investments, Class I -- (4,379,330) Return of capital, Class R (13,579) (63,830) Return of capital, Class I (12,523) (97,469) ------------ ------------ Decrease in net assets from distributions to shareholders (972,189) (12,948,674) ------------ ------------ FROM CAPITAL SHARE TRANSACTIONS CLASS R Proceeds from shares sold 17,232,862 32,454,999 Reinvestment of distributions to shareholders 505,751 8,301,828 Proceeds from redemption fees collected (Note 1) 1,331 11,939 Payments for shares redeemed (25,452,196) (39,284,170) ------------ ------------ Net increase (decrease) in net assets from Class R capital share transactions (7,712,252) 1,484,596 ------------ ------------ CLASS I Proceeds from shares sold 12,477,731 3,405,660 Reinvestment of distributions to shareholders 318,040 3,729,195 Proceeds from redemption fees collected (Note 1) -- 30 Payments for shares redeemed (15,988,361) (16,935,528) ------------ ------------ Net decrease in net assets from Class I capital share transactions (3,192,590) (9,800,643) ------------ ------------ TOTAL DECREASE IN NET ASSETS (66,099,100) (49,278,520) NET ASSETS Beginning of year 142,187,000 191,465,520 ------------ ------------ End of year $ 76,087,900 $142,187,000 ============ ============ UNDISTRIBUTED NET INVESTMENT INCOME $ -- $ -- ============ ============ SUMMARY OF CAPITAL SHARE ACTIVITY CLASS R Shares sold 973,001 1,221,303 Shares issued in reinvestment of distributions to shareholders 31,949 349,870 Shares redeemed (1,431,782) (1,548,797) ------------ ------------ Net increase (decrease) in shares outstanding (426,832) 22,376 Shares outstanding, beginning of year 4,384,565 4,362,189 ------------ ------------ Shares outstanding, end of year 3,957,733 4,384,565 ============ ============ CLASS I Shares sold 711,479 127,111 Shares issued in reinvestment of distributions to shareholders 20,078 156,650 Shares redeemed (890,624) (654,603) ------------ ------------ Net decrease in shares outstanding (159,067) (370,842) Shares outstanding, beginning of year 2,406,408 2,777,250 ------------ ------------ Shares outstanding, end of year 2,247,341 2,406,408 ============ ============ See accompanying notes to financial statements. 13 VERACITY SMALL CAP VALUE FUND - CLASS R FINANCIAL HIGHLIGHTS ================================================================================================================================== PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD: ---------------------------------------------------------------------------------------------------------------------------------- YEAR YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED ENDED FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2009 2008 2007 2006 2005 (a) ---------------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period $ 20.92 $ 26.79 $ 26.01 $ 22.99 $ 20.00 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income (loss) 0.13 0.03 0.03 (0.02) (0.04) Net realized and unrealized gains (losses) on investments (8.66) (4.05) 2.18 3.84 3.03 ---------- ---------- ---------- ---------- ---------- Total from investment operations (8.53) (4.02) 2.21 3.82 2.99 ---------- ---------- ---------- ---------- ---------- Less distributions: From net investment income (0.13) (0.03) (0.03) -- -- From net realized gains on investments -- (1.81) (1.40) (0.80) -- Return of capital (0.00)(b) (0.01) -- -- -- ---------- ---------- ---------- ---------- ---------- Total distributions (0.13) (1.85) (1.43) (0.80) -- ---------- ---------- ---------- ---------- ---------- Proceeds from redemption fees collected (Note 1) 0.00(b) 0.00(b) 0.00(b) 0.00(b) 0.00(b) ---------- ---------- ---------- ---------- ---------- Net asset value at end of period $ 12.26 $ 20.92 $ 26.79 $ 26.01 $ 22.99 ========== ========== ========== ========== ========== Total return (c) (40.91%) (15.81%) 8.46% 16.98% 14.95%(d) ========== ========== ========== ========== ========== Net assets at end of period (000's) $ 48,510 $ 91,731 $ 116,883 $ 44,708 $ 15,887 ========== ========== ========== ========== ========== Ratio of net expenses to average net assets 1.50%(e) 1.50%(g) 1.50%(e) 1.49%(e) 1.49%(e)(f) Ratio of net investment income (loss) to average net assets 0.70% 0.06%(g) 0.08% (0.13%) (0.33%)(f) Portfolio turnover rate 86% 92% 106% 140% 187%(f) ---------------------------------------------------------------------------------------------------------------------------------- (a) Represents the period from the commencement of operations (March 30, 2004) through February 28, 2005. (b) Amount rounds to less than $0.01 per share. (c) Total return is a measure of the change in value of an investment in the Fund over the periods covered, which assumes any dividends or capital gains distributions are reinvested in shares of the Fund. Returns shown do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares. (d) Not annualized. (e) Absent fee reductions and expense reimbursements by the Advisor, the ratio of expenses to average net assets would have been 1.56%, 1.56%, 1.82% and 2.08%(f) for the periods ended February 28, 2009, 2007, 2006 and 2005, respectively. (f) Annualized. (g) Absent the recoupment of fees previously reduced and reimbursed by the Advisor, the ratio of expenses to average net assets would have been 1.49% and the ratio of net investment income to average net assets would have been 0.07% for the year ended February 29, 2008. See accompanying notes to financial statements. 14 VERACITY SMALL CAP VALUE FUND - CLASS I FINANCIAL HIGHLIGHTS =============================================================================================================================== PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD ------------------------------------------------------------------------------------------------------------------------------- YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, 2009 2008 2007 2006 (a) ------------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period $ 20.97 $ 26.85 $ 26.04 $ 23.42 ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.18 0.07 0.08 0.02 Net realized and unrealized gains (losses) on investments (8.69) (4.03) 2.20 3.42 ---------- ---------- ---------- ---------- Total from investment operations (8.51) (3.96) 2.28 3.44 ---------- ---------- ---------- ---------- Less distributions: From net investment income (0.18) (0.07) (0.07) (0.02) From net realized gains on investments -- (1.81) (1.40) (0.80) Return of capital (0.01) (0.04) -- -- ---------- ---------- ---------- ---------- Total distributions (0.19) (1.92) (1.47) (0.82) ---------- ---------- ---------- ---------- Proceeds from redemption fees collected (Note 1) -- 0.00(b) -- -- ---------- ---------- ---------- ---------- Net asset value at end of period $ 12.27 $ 20.97 $ 26.85 $ 26.04 ========== ========== ========== ========== Total return (c) (40.79%) (15.57%) 8.72% 15.03%(d) ========== ========== ========== ========== Net assets at end of period (000's) $ 27,578 $ 50,456 $ 74,583 $ 29,328 ========== ========== ========== ========== Ratio of net expenses to average net assets 1.24%(e) 1.25%(g) 1.25%(e) 1.25%(e)(f) Ratio of net investment income to average net assets 0.95% 0.31%(g) 0.33% 0.12%(f) Portfolio turnover rate 86% 92% 106% 140% ------------------------------------------------------------------------------------------------------------------------------- (a) Represents the period from the commencement of operations (July 7, 2005) through February 28, 2006. (b) Amount rounds to less than $0.01 per share. (c) Total return is a measure of the change in value of an investment in the Fund over the periods covered, which assumes any dividends or capital gains distributions are reinvested in shares of the Fund. Returns shown do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares. (d) Not annualized. (e) Absent fee reductions and expense reimbursements by the Advisor, the ratio of expenses to average net assets would have been 1.30%, 1.31% and 1.58%(f) for the periods ended February 28, 2009, 2007 and 2006, respectively. (f) Annualized. (g) Absent the recoupment of fees previously reduced and reimbursed by the Advisor, the ratio of expenses to average net assets would have been 1.24% and the ratio of net investment income to average net assets would have been 0.32% for the year ended February 29, 2008. See accompanying notes to financial statements. 15 VERACITY SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2009 ================================================================================ 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES The Veracity Small Cap Value Fund (the "Fund") is a diversified series of Veracity Funds (the "Trust"), an open-end management investment company established under the laws of Delaware by the filing of a Certificate of Trust dated December 29, 2003. The public offering of Class R shares and Class I shares commenced on March 30, 2004 and July 7, 2005, respectively. The investment objective of the Fund is long-term capital growth. The Fund's two classes of shares, Class R and Class I, represent interests in the same portfolio of investments and have the same rights, but differ primarily in the expenses to which they are subject and required investment minimums. Class R shares are subject to a distribution (12b-1) fee at the annual rate of 0.25% of the Fund's average daily net assets allocable to Class R shares and require a $25,000 initial investment, whereas Class I shares are not subject to any distribution fees and require a $250,000 initial investment. SECURITIES VALUATION - Securities that are traded on any stock exchange are generally valued at the last quoted sale price. Lacking a last sale price, an exchange traded security is generally valued at its last bid price. Securities traded on NASDAQ are valued at the NASDAQ Official Closing Price. When market quotations are not readily available, when Integrity Asset Management, LLC (the "Advisor") determines that the market quotation or the price provided by the pricing service does not accurately reflect the current market value or when restricted securities are being valued, such securities are valued as determined in good faith by the Advisor, in conformity with guidelines adopted by and subject to review of the Board of Trustees of the Trust. The Financial Accounting Standards Board's ("FASB") Statement on Financial Accounting Standard ("SFAS") No. 157 "Fair Value Measurements" establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. The Fund adopted SFAS No. 157 on March 1, 2008. Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below: o Level 1 - quoted prices in active markets for identical securities o Level 2 - other significant observable inputs o Level 3 - significant unobservable inputs The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. As of February 28, 2009, all the inputs used to value the Fund's investments were Level 1; therefore, the Fund did not hold any Level 2 or Level 3 securities. In addition, the Fund did not hold any Level 3 securities during the fiscal year ended February 28, 2009. SHARE VALUATION - The net asset value per share of each class of shares of the Fund is calculated as of the close of trading on the New York Stock Exchange (normally 4:00 p.m., Eastern time) on each day that the Exchange is open for business. The net asset value per share of each class of shares of 16 VERACITY SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ the Fund is calculated by dividing the total value of the Fund's assets attributable to that class, minus liabilities attributable to that class, by the number of shares of that class outstanding. The offering price and redemption price per share is equal to the net asset value per share, except that shares of each class are subject to a redemption fee of 2% if redeemed within 30 days of purchase. During the years ended February 28, 2009 and February 29, 2008, proceeds from redemption fees totaled $1,331 and $11,939, respectively, for Class R shares and $0 and $30, respectively, for Class I shares. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are accounted for on trade date. Cost of securities sold is determined on a specific identification basis. Dividend income is recorded on the ex-dividend date. Interest income is accrued as earned. DISTRIBUTIONS TO SHAREHOLDERS - Dividends arising from net investment income and net capital gains, if any, are declared and paid annually in December. The amount of distributions from net investment income and net realized gains are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. Dividends and distributions to shareholders are recorded on the ex-dividend date. The tax character of distributions paid during the years ended February 28, 2009 and February 29, 2008 was as follows: ORDINARY LONG-TERM RETURN OF TOTAL YEARS ENDED INCOME CAPITAL GAINS CAPITAL DISTRIBUTIONS ----------------- ---------- ------------- ---------- ------------- CLASS R February 28, 2009 $ 492,197 $ -- $ 13,579 $ 505,776 February 29, 2008 $7,084,700 $1,153,318 $ 63,830 $8,301,848 CLASS I February 28, 2009 $ 453,890 $ -- $ 12,523 $ 466,413 February 29, 2008 $3,928,933 $ 620,424 $ 97,469 $4,646,826 ALLOCATION BETWEEN CLASSES - Investment income earned, realized capital gains and losses, and unrealized appreciation and depreciation are allocated daily to each class of shares based upon its proportionate share of total net assets of the Fund. Class specific expenses are charged directly to the class incurring the expense. Common expenses which are not attributable to a specific class are allocated daily to each class of shares based upon its proportionate share of total net assets of the Fund. REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements (agreements to purchase securities subject to the seller's agreement to repurchase them at a specified time and price) with well-established registered securities dealers or banks. Repurchase agreements may be deemed to be loans by the Fund. The Fund's policy is to take possession of U.S. Government obligations as collateral under a repurchase agreement and, on a daily basis, mark-to-market such obligations to ensure that their value, including accrued interest, is at least equal to the amount to be repaid to the 17 VERACITY SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ Fund under the repurchase agreement. If the seller defaults, and the fair value of the collateral declines then realization of the collateral by the Fund may be delayed or limited. ESTIMATES - The preparation of financial statements in conformity 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 income and expenses during the reporting period. Actual results could differ from those estimates. FEDERAL INCOME TAX - It is the Fund's policy to comply with the special provisions of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. As provided therein, in any fiscal year in which the Fund so qualifies and distributes at least 90% of its taxable net income, the Fund (but not the shareholders) will be relieved of federal income tax on the income distributed. Accordingly, no provision for income taxes has been made. In order to avoid imposition of the excise tax applicable to regulated investment companies, it is also the Fund's intention to declare as dividends in each calendar year at least 98% of its net investment income (earned during the calendar year) and 98% of its net realized capital gains (earned during the twelve months ended October 31) plus undistributed amounts from prior years. The following information is computed on a tax basis for each item as of February 28, 2009: Cost of portfolio investments $ 129,098,858 ============= Gross unrealized appreciation $ 1,256,478 Gross unrealized depreciation (54,420,495) ------------- Net unrealized depreciation $ (53,164,017) Capital loss carryforward (19,242,509) Post-October losses (11,537,784) ------------- Accumulated deficit $ (83,944,310) ============= The difference between the federal income tax cost of portfolio investments and the financial statement cost for the Fund is due to timing differences in the recognition of capital gains or losses under income tax regulations and accounting principles generally accepted in the United States of America. These "book/tax" differences are either temporary or permanent in nature and are due to the tax deferral of losses on wash sales. As of February 28, 2009, the Fund had a capital loss carryforward of $19,242,509, which expires February 28, 2017. In addition, the Fund had net realized capital losses of $11,537,784 during the period November 1, 2008 through February 28, 2009, which are treated for federal income tax purposes as arising during the Fund's tax year ending February 28, 2010. The capital loss carryforward and "post-October" losses may be utilized in future years to offset net realized capital gains, if any, prior to distributing such gains to shareholders. 18 VERACITY SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ For the year ended February 28, 2009, the Fund reclassified return of capital distributions of $26,102 against paid-in capital on the Statement of Assets and Liabilities. Such reclassification, the result of permanent differences between the financial statement and income tax reporting requirements, has no effect on the Fund's net assets or net asset value per share. As of and during the year ended February 28, 2009, the Fund did not have a liability for unrecognized tax benefits. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statements of operations. During the year, the Fund did not incur any interest or penalties. The statute of limitations on the Fund's tax returns remains open for the years ended February 28, 2006 through February 28, 2009. 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, the Fund expects the risk of loss to be remote. 2. INVESTMENT TRANSACTIONS During the year ended February 28, 2009, cost of purchases and proceeds from sales of investment securities, other than short-term investments, amounted to $100,351,631 and $107,128,317, respectively. 3. TRANSACTIONS WITH AFFILIATES Certain Trustees and officers of the Trust are affiliated with the Advisor, or with Ultimus Fund Solutions, LLC ("Ultimus"), the Fund's administrator, transfer agent and fund accounting agent, and Ultimus Fund Distributors, LLC ("UFD"), the Fund's principal underwriter. INVESTMENT ADVISORY AGREEMENT Under the terms of the Investment Advisory Agreement between the Trust and the Advisor, the Advisor serves as the investment advisor to the Fund. For its services, the Fund pays the Advisor an investment advisory fee at the annual rate of 1.00% of the Fund's average daily net assets. The Advisor has agreed to reduce its advisory fees and/or reimburse expenses of the Fund to the extent necessary to maintain the Fund's total annual expense ratio at no greater than 1.50% for Class R shares and 1.25% for Class I shares. This contractual obligation expires on June 30, 2010. For the year ended February 28, 2009, the Advisor reduced its advisory fees by $64,816 and reimbursed $2,337 of Class R expenses. As of February 28, 2009, the amount of advisory fees payable to the Advisor is $54,230. The Advisor may recover advisory fee reductions and/or expense reimbursements on behalf of the Fund, but only for a period of three years after the fee reduction and/or expense reimbursement, and only if such recovery will not cause the Fund's expense ratio with respect to Class R and Class I shares to exceed 1.50% and 1.25%, respectively. As of February 28, 2009, the amount available for recovery by the Advisor is $157,244 and the Advisor may recover a portion of such amounts no later than the dates as stated below: February 28, 2010 February 28, 2012 $ 90,091 $ 67,153 19 VERACITY SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) ================================================================================ Trustees who are not affiliated with the Advisor receive compensation from the Funds. Trustees who are affiliated with the Advisor receive no compensation from the Funds. MUTUAL FUND SERVICES AGREEMENT Under the terms of a Mutual Fund Services Agreement, Ultimus provides administrative, fund accounting and pricing, and transfer agent and shareholder services to the Fund. For these services, Ultimus receives a monthly fee from the Fund at an annual rate of 0.15% of the Fund's average daily net assets, subject to a minimum monthly fee of $6,500. In addition, the Fund pays out-of-pocket expenses including, but not limited to, postage, supplies and costs of pricing the Fund's portfolio securities. SERVICE PLAN AND AGREEMENT The Trust has adopted a Service Plan and Agreement (the "Plan") for Class R shares, pursuant to which the Fund pays the Advisor a monthly fee for distribution and/or shareholder servicing expenses not to exceed 0.25% per annum of the Fund's average daily net assets allocable to Class R shares. The Advisor, in turn, pays such fees to third parties for eligible services provided by those parties to Class R shareholders. DISTRIBUTION AGREEMENT Under the terms of a Distribution Agreement, UFD provides distribution services to the Trust and serves as principal underwriter to the Fund. For the year ended February 28, 2009, UFD received $6,000 for its services under the Distribution Agreement. COMPLIANCE CONSULTING AGREEMENT Under the terms of a Compliance Consulting Agreement, Drake Compliance, LLC ("Drake") provides ongoing regulatory compliance consulting, monitoring and reporting services for the Trust. In addition, a principal of Drake serves as the Trust's Chief Compliance Officer as required by Rule 38a-1 under the Investment Company Act of 1940. For these services, Drake receives $2,000 per month from the Fund. In addition, the Fund reimburses certain out-of-pocket expenses incurred by Drake including, but not limited to, postage and supplies and travel expenses. PRINCIPAL HOLDERS OF FUND SHARES As of February 28, 2009, AST Capital Trust Company, P.O. Box 52129, Phoenix, AZ 85072 owned of record 33% of the Fund's outstanding Class R shares. 20 COHEN Cohen Fund Audit Services, Ltd. 440.835.8500 FUND AUDIT SERVICES 800 Westpoint Pkwy., Suite 1100 440.835.1093 fax Westlake, OH 44145-1524 www.cohenfund.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- To the Shareholders and Board of Trustees Veracity Funds We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Veracity Funds, comprising Veracity Small Cap Value Fund (the "Fund") as of February 28,2009, 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 periods 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 audit 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 February 28, 2009 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 Veracity Small Cap Value Fund as of February 28, 2009, 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 the financial highlights for each of the five periods in the period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Cohen Fund Audit Services COHEN FUND AUDIT SERVICES, LTD. Westlake, Ohio April 13, 2009 an independent member of SQ BAKER TILLY Registered with the Public Company Accounting Oversight Board Service IF INTERNATIONAL Quality Innovation and Fun 21 VERACITY SMALL CAP VALUE FUND ABOUT YOUR FUND'S EXPENSES (UNAUDITED) -------------------------------------------------------------------------------- We believe it is important for you to understand the impact of costs on your investment. All mutual funds have operating expenses. As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs, including management fees, distribution (12b-1) fees and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. A mutual fund's ongoing costs are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The expenses in the tables are based on an investment of $1,000 made at the beginning of the most recent semi-annual period (September 1, 2008) and held until the end of the period (February 28, 2009). The tables that follow illustrate the Fund's costs in two ways: ACTUAL FUND RETURN - This section helps you to estimate the actual expenses that you paid over the period. The "Ending Account Value" shown is derived from the Fund's actual return, and the third column shows the dollar amount of operating expenses that would have been paid by an investor who started with $1,000 in the Fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for the Fund under the heading "Expenses Paid During Period." HYPOTHETICAL 5% RETURN - This section is intended to help you compare the Fund's costs with those of other mutual funds. It assumes that the Fund had an annual return of 5% before expenses during the period shown, but that the expense ratio is unchanged. In this case, because the return used is not the Fund's actual return, the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess the Fund's costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds. Note that expenses shown in the table are meant to highlight and help you compare ongoing costs only. The Fund does not impose any sales loads. However, a redemption fee of 2% is applied on the sale of shares (sold within 30 days of the date of their purchase) and does not apply to the redemption of shares acquired through reinvestment of dividends and other distributions. The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions. 22 VERACITY SMALL CAP VALUE FUND ABOUT YOUR FUND'S EXPENSES (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- More information about the Fund's expenses, including annualized expense ratios, can be found in this report. For additional information on operating expenses and other shareholder costs, please refer to the Fund's prospectus. CLASS R --------------------------------------------------------------------------------------------- Beginning Ending Account Value Account Value Expenses Paid Sept. 1, 2008 Feb. 28, 2009 During Period* --------------------------------------------------------------------------------------------- Based on Actual Fund Return $1,000.00 $ 584.50 $5.89 --------------------------------------------------------------------------------------------- Based on Hypothetical 5% Return (before expenses) $1,000.00 $1,017.36 $7.50 --------------------------------------------------------------------------------------------- * Expenses are equal to Class R's annualized expense ratio of 1.50% for the period, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). CLASS I --------------------------------------------------------------------------------------------- Beginning Ending Account Value Account Value Expenses Paid Sept. 1, 2008 Feb. 28, 2009 During Period* --------------------------------------------------------------------------------------------- Based on Actual Fund Return $1,000.00 $ 584.90 $4.91 --------------------------------------------------------------------------------------------- Based on Hypothetical 5% Return (before expenses) $1,000.00 $1,018.60 $6.26 --------------------------------------------------------------------------------------------- * Expenses are equal to Class I's annualized expense ratio of 1.25% for the period, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). OTHER INFORMATION (UNAUDITED) -------------------------------------------------------------------------------- The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission ("SEC") as of the end of the first and third quarters of each fiscal year on Form N-Q. The filings are available free of charge, upon request, by calling 1-866-896-9292. Furthermore, you may obtain a copy of these filings on the SEC's website at http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC, and information on the operation of the Public Reference Room may be obtained by calling 1-(800) SEC-0330. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge upon request by calling toll-free 1-866-896-9292, or on the SEC's website at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is also available without charge upon request by calling toll-free 1-866-896-9292, or on the SEC's website at http://www.sec.gov. 23 VERACITY SMALL CAP VALUE FUND BOARD OF TRUSTEES AND EXECUTIVE OFFICERS (UNAUDITED) -------------------------------------------------------------------------------- The Board of Trustees has overall responsibility for management of the Trust's affairs. The Trustees serve during the lifetime of the Trust and until its termination, or until death, resignation, retirement or removal. The Trustees, in turn, elect the officers of the Trust to actively supervise its day-to-day operations. The officers have been elected for an annual term. The following are the Trustees and executive officers of the Trust: ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEES ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF POSITION(S) TERM OF OFFICE & FUNDS DIRECTORSHIPS OF HELD WITH THE LENGTH OF TIME PRINCIPAL OCCUPATION(S) DURING PAST 5 OVERSEEN PUBLIC COMPANIES NAME, AGE & ADDRESS TRUST SERVED YEARS BY TRUSTEE HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------------ MATTHEW G. BEVIN* Trustee, Indefinite Chief Executive Officer and Principal, 1 None President Integrity Asset Management, LLC, 401 West Main Street, Since December, investment Advisor to the Trust, since Suite 2100 2003 2003. BA degree from Washington & Lee Louisville, KY 40202 University (1989). Age: 42 ------------------------------------------------------------------------------------------------------------------------------------ WILLIAM H. MCNETT, Trustee, Indefinite Senior Portfolio Manager, Integrity 1 None III, CFA* Vice President Asset Management, LLC, since June, Since March, 2004 2003. BA in accounting from 401 West Main Street, Bloomsburg University, Bloomsburg, PA Suite 2100 (1982). Chartered Financial Analyst. Louisville, KY 40202 Age: 49 ------------------------------------------------------------------------------------------------------------------------------------ * Mr. Bevin and Mr. McNett are considered "Interested" Trustees of the Trust because of their affiliation with the Advisor. 24 VERACITY SMALL CAP VALUE FUND BOARD OF TRUSTEES AND EXECUTIVE OFFICERS (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED (INDEPENDENT) TRUSTEES ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF DIRECTORSHIPS OF POSITION(S) TERM OF OFFICE & FUNDS PUBLIC COMPANIES HELD WITH THE LENGTH OF TIME PRINCIPAL OCCUPATION(S) DURING PAST 5 OVERSEEN HELD BY TRUSTEE NAME, AGE & ADDRESS TRUST SERVED YEARS BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------------ DAVID L. EAGER Trustee Indefinite Partner with Eager, Davis & Holmes 1 The Caldwell & LLC, since January 2003. Partner with Orkin Funds, Inc. 4404 Rivermist Way Since March, 2004 Parks & Eager Mountain Properties (registered Louisville, KY 40222 (home builders and developers). BA in management economics from The Ohio State investment Age: 66 University (1964). MBA from Western company) Michigan University (1974). ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL J. MINNAUGH Trustee Indefinite From October 2008 to present, Partner 1 None with Tatum LLC (executive services 9344 White Oak Road Since March, 2004 firm). From April 2007 to October Kirtland, OH 2008, Consultant with The Financial 44094 Group (insurance company). Formerly Treasurer of The Cleveland Clinic Age: 49 Foundation, a non-profit foundation, from October, 2002 through January, 2007. BS/BA degree from John Carroll University (1982). Certified Public Accountant, Ohio (1984) (inactive). ------------------------------------------------------------------------------------------------------------------------------------ DARLENE V. PINNOCK Trustee Indefinite Director of Investments for the 1 None National Geographic Society, a 1145 17th Street NW Since March, 2004 non-profit science and educational Washington, DC 20036 organization, since November, 1997. BS degree from Drexel University, Age: 48 Philadelphia, PA (1982). MBA from Howard University, Washington, DC (1991). ------------------------------------------------------------------------------------------------------------------------------------ 25 VERACITY SMALL CAP VALUE FUND BOARD OF TRUSTEES AND EXECUTIVE OFFICERS (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- EXECUTIVE OFFICERS ---------------------------------------------------------------------------------------------------- POSITION(S) LENGTH OF TIME HELD WITH SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 NAME, AGE & ADDRESS THE TRUST YEARS ---------------------------------------------------------------------------------------------------- MARK J. SEGER Treasurer, Since March, 2004 Managing Director, Ultimus Fund Chief Solutions, LLC, Cincinnati, OH, 225 Pictoria Drive, Financial transfer agent, fund accountant and Suite 450 Officer administrator to the Trust; Managing Cincinnati, OH Director, Ultimus Fund Distributors, 45246 LLC, principal underwriter to the Trust. Age: 47 ---------------------------------------------------------------------------------------------------- JOHN F. SPLAIN Secretary Since March, 2004 Managing Director, Ultimus Fund Solutions, LLC, Cincinnati, OH, 225 Pictoria Drive, transfer agent, fund accountant and Suite 450 administrator to the Trust; Managing Cincinnati, OH Director, Ultimus Fund Distributors, 45246 LLC, principal underwriter to the Trust. Age: 52 ---------------------------------------------------------------------------------------------------- DANIEL G. BANDI Vice Since March, 2004 Chief Investment Officer, Value President Equities and Principal, Integrity 401 West Main Street, Asset Management, LLC since June, 2003. Suite 2100 BA Economics from University of Louisville, KY 40202 Pittsburgh (1987). MBA East Texas State University (1990). Age: 44 Chartered Financial Analyst (1994). ---------------------------------------------------------------------------------------------------- ROBERT G. DORSEY Vice Since March, 2004 Managing Director, Ultimus Fund President Solutions, LLC, Cincinnati, OH, 225 Pictoria Drive, transfer agent, fund accountant and Suite 450 administrator to the Trust; Managing Cincinnati, OH Director, Ultimus Fund Distributors, 45246 LLC, principal underwriter to the Trust. Age: 52 ---------------------------------------------------------------------------------------------------- DAVID D. JONES Chief Since March, 2004 Managing member of Drake Compliance, Compliance LLC (a compliance consulting firm) 719 Sawdust Road, Officer since January, 2004. Attorney, David Suite 113 Jones & Associates, P.C. (a law firm) The Woodlands, TX since January, 1998. 77380 Age: 51 ---------------------------------------------------------------------------------------------------- 26 VERACITY SMALL CAP VALUE FUND BOARD OF TRUSTEES AND EXECUTIVE OFFICERS (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- Additional information about members of the Board of Trustees and executive officers is available in the Statement of Additional Information ("SAI"). To obtain a free copy of the SAI, please call 1-866-896-9292. FEDERAL TAX INFORMATION (UNAUDITED) -------------------------------------------------------------------------------- In accordance with federal tax requirements, the following provides shareholders with information concerning distributions from ordinary income and net realized gains made by the Fund during the fiscal year ended February 28, 2009. Certain dividends paid by the Fund may be subject to a maximum tax rate of 15%, as provided by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate up to a maximum amount of $946,087 as taxed at a maximum rate of 15%. 27