July 16, 2007

Dear Fellow Shareholder:

The Short-Intermediate Income Fund’s total return for the second quarter of 2007 was +0.2%, which consisted of approximately +1.2% from net interest income (after deducting fees and expenses) and -1.0% from (unrealized) depreciation of our bonds. Our second quarter return was more than the decline of -0.1% for the Lehman Brothers Intermediate U.S. Government/Credit Index, our Fund’s primary benchmark.

The table below shows the results of the Short-Intermediate Income Fund over various time periods through June 30, 2007, along with the Lehman Brothers Intermediate U.S. Government/Credit Index and two additional Lehman Brothers Indexes with a shorter average maturity (1-3 and 1-5 year) which more closely resemble the historical average life of our Fund.

These performance numbers reflect the deduction of the Fund’s annual operating expenses which as stated in its most recent Prospectus are 0.67% of the Fund’s net assets. This information represents past performance and past performance does not guarantee future results. The investment return and the principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Current performance may be higher or lower than the performance data quoted above. Click here for performance data current to the most recent month-end.

* Source: Lehman Brothers, Inc.

** All performance numbers assume reinvestment of dividends.

# Index performance is hypothetical and is for illustrative purposes only.

The following tables show a profile of our portfolio and asset allocation as of June 30:

Overview

Rising bond yields pinched total returns for most bond investors in the second quarter as coupon income was offset by price declines from rising rates (bond prices react inversely to changes in interest rates). Yields on U.S. Treasuries, for example, increased approximately 30-40 basis points (a basis point is 1/100 of one percent) for bonds maturing two years and longer. The result was modest or negative returns for most fixed-income investors in the quarter. Our Fund was able to generate low, but positive, results in the quarter compared to the negative result for our primary benchmark (Lehman Brothers Intermediate U.S. Government/Credit Index) due largely to our decision to remain more defensively positioned through a portfolio with a shorter average life.

Rising yields were not only a U.S. phenomenon in the second quarter. Borrowing costs (or yields) climbed from Europe to Asia as strong economic growth in other parts of the world offset a slowdown in the U.S. The correlation of global bond yields was on display in early June when a decision by the Reserve Bank of New Zealand to raise rates sent the U.S. 10-year note up almost 20 basis points in a single session. Why events in New Zealand should have any effect on U.S. markets highlights the current linkages of global yield curves (a graph that plots the relationship between interest rates and the time to maturity – typically upward sloping but flat presently).

This seeming worldwide economic upturn is causing increased concern that inflation will ultimately follow. While this worry has yet to play itself out in the statistics (both overall and core CPI in the U.S. trended lower in the second quarter), financial markets decided not to await proof. Policy makers at the Federal Reserve have also been worrying out loud for almost a year now about inflation. Financial markets seem, for now, to have come around to the central bank’s view of the world. Ultimately the rise in market interest rates will be limited if it is not supported by the fundamentals and the fundamentals only reveal themselves with time.

Another key story line in the quarter and one that may play an important role in the future direction of interest rates was the continued unfolding of the subprime mortgage fiasco. Rising delinquencies and foreclosures on mortgage loans to people with poor credit histories continued to worsen in the second quarter. For example, in Nevada, lenders have foreclosed on the mortgages of one in every 175 households, according to data company RealtyTrac. And nationwide the total number of properties in foreclosure – typically those more than 90 days behind in mortgage payments – climbed 87% in June from a year ago, reaching one per 704.

Loose lending standards, shoddy sales practices and the allure of the American dream of owning one’s own home seems to have lured many unqualified borrowers into the housing market. Worse yet, the recent deterioration of loan performance precedes what is expected to be record upward resets of mortgage loan interest rates, since most subprime mortgage holders hold adjustable-rate mortgages. An economist at Moody’s has estimated that $50 billion of adjustable-rate mortgages will reset to higher levels in October alone. A borrower who received a $200,000 mortgage in 2005 at a 4% interest rate has been paying $955 a month; that may soar as much as 40% to approximately $1,300 after the reset. Delinquencies stand a good chance of getting decidedly worse.

So far many believe that the damage from the implosion in the U.S. subprime mortgage market will not spread. Time will tell whether it will have the same effect as mustard gas on the battlefield – one wrong turn of the winds and all bets are off.

We took advantage of rising yields in the quarter and modestly extended the portfolio’s average life and duration. We concentrated our investments in U.S. agency-eligible mortgage-backed securities (MBS) with good cash flow characteristics, limited extension risk and at meaningful return premiums to comparable U.S. Treasuries. These high-quality additions to our portfolio have none of the investment concerns plaguing the subprime mortgage market – and they should generate reasonable-to-good returns for our Fund. Our MBS investments are all fixed interest-rate, fully amortizing (monthly payments include both interest and principal) loans to prime (high credit quality) borrowers that meet certain U.S. agency standards.

We continue to have a historically low exposure to more credit-sensitive fixed-income investments (less than 5% below investment grade). Low credit spreads coupled with weak covenant protections make the risk/reward tradeoff extremely unfavorable in our view. We will continue to exercise patience in this area and await more attractive opportunities.

We also made two small equity investments during the quarter (less than 1%) – Redwood Trust and Newcastle Investment Corporation. We have owned both companies in the past and are glad to have the opportunity to invest at prices that afford us, we believe, very favorable return potential. Both companies are mortgage REITs (Real Estate Investment Trusts) run by seasoned management teams whose interests are well aligned with shareholders. They are both experts at prudently pricing, financing and managing credit risk. Our investments should generate high, recurring dividends (10% yields or better) with the potential for business value and stock price appreciation. High dividend-paying common and convertible preferred stocks and bonds have historically been a small component of our Fund (and will never exceed 20%). However, they have enhanced our historical results. We will remain focused on identifying those investments that have the potential to increase our Fund’s yield and overall return without incurring undue, or uncompensated, risks.

Overall, the recent rise in rates seems to be creating a favorable investing climate in higher-quality bonds. Fears of increasing inflation appear reasonably offset by concerns that the fallout from the softening housing market may be more broadly felt in the U.S. economy than just the subprime segment. Should rates continue to move higher, we expect to continue extending the average life of our portfolio in order to lock in today’s higher yields.

The Government Money Market Fund closed the second quarter with a 7-day effective yield of 5.07%. (An investment in the Fund is neither insured nor guaranteed by the U.S. Government. There can be no assurance that the Fund will be able to maintain a stable net asset value. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.)

Even though the Federal Reserve made no changes to short-term interest rates, a peculiar development unfolded in the U.S. Treasury Bill market (maturities up to one year) in the second quarter. Short-term interest rates declined, as did our reinvestment opportunities, despite a rising expectation by investors that the Federal Reserve’s next move would be to raise rates. Since the Federal Reserve’s monetary policy changes, or expected changes, tend to have a strong influence on the direction of short-term interest rates, the second quarter’s decline in rates was noteworthy. A reason cited for this apparent disconnect was heavy foreign central bank (particularly China) purchases of Treasury Bills using a larger percentage of recycled trade dollars.

We focused our reinvestment activities during the quarter in government agency discount notes as they did not experience the same yield decline as Treasury Bills. This allowed us to keep our 7-day effective yield from declining far from last quarter’s level.

Since we invest in ultra high-quality short-term instruments (e.g. U.S. Treasury Bills and government agency discount notes) that have a weighted average maturity of less than ninety days, our yield will invariably follow the path dictated by the Federal Reserve’s monetary policy in spite of last quarter’s modest (and likely temporary) aberrations.

The Fed has left short-term interest rates unchanged for a year now and given what appears to be a balanced economic outlook (higher growth expectations and inflation fears offset by a continued housing market correction), more of the same appears in order. Therefore we expect to maintain an average portfolio maturity closer to our limit (ninety days) whenever we can invest at rates close to today’s Fed Funds rate (5.25%).

If you have any questions about the mechanics of either Fund or our investment strategy, please call. As always, we welcome your comments and questions.

Best Regards,

Thomas D. Carney
Portfolio Manager

Investors should consider carefully the investment objectives, risks, and charges and expenses of the Funds before investing. The Funds’ Prospectus contains this and other information about the Funds. The Prospectus should be read carefully before investing. Portfolio composition is subject to change at any time and references to specific securities, industries, and sectors referenced in this letter are not recommendations to purchase or sell any particular security. See the Schedules of Investments in Securities included in the Funds’ quarterly report for the percent of assets of each Fund invested in particular industries or sectors.