October 11, 2007

Dear Fellow Shareholder:

The Short-Intermediate Income Fund had a good third quarter as bonds, particularly high quality bonds, enjoyed solid gains. The Fund’s total return was +2.1%, which consisted of approximately +1.0% from net interest and dividend income (after deducting fees and expenses) and +1.1% from net (unrealized and realized) appreciation of our bonds. Our primary benchmark, the Lehman Brothers Intermediate U.S. Government/Credit Index, returned +2.9%.

The table below shows the results of the Short-Intermediate Income Fund over various time periods through September 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.

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

Overview

The U.S. fixed-income market experienced tremendous turbulence in the third quarter. Stress in the U.S. residential housing market, particularly subprime, broadened out to dramatically infect other segments of the bond market. The often-described ocean of liquidity that had benefited bond and equity investors alike for a few years nearly became a desert of despair as fear displaced greed with near unprecedented speed. High profile implosions of highly leveraged bond funds at Bear Stearns, where investors lost more than $1 billion, were among a number of casualties in the quarter. Despite the market unrest, our portfolio performed well in the quarter due to its weighting in higher quality assets.

Credit spreads widened (yields rose) on nearly all types of bonds, especially those of lower quality, relative to U.S. Treasuries as investors scrambled to re-price credit risk across all asset classes. The ensuing credit crunch caused some segments of the bond market to temporarily grind to a halt as buyers became scarce. The largest bank in France, for example, froze withdrawals on three investment funds because they couldn’t find a way to value its assets. Even markets once considered high quality safe havens, like commercial paper, became ensnared in the turmoil as investors, fearful of further damage, refused to roll over these short-term IOU’s.

Reaction to this market unrest was an immense flight to the quality and liquidity of U.S. Treasury securities. Yields on Treasury bonds fell appreciably across the yield curve with the largest decline (approximately one-percent) occurring among short-term securities.

In an attempt to alleviate the disruption in the credit markets, the Federal Reserve lowered the Fed Funds rate by 50 basis points (a basis point is one one-hundredth of a percent) near the end of the quarter. This helped to loosen the noose that had gripped certain segments of the fixed-income market, particularly mortgage finance, and a semblance of normalcy has returned as of this writing.

Portfolio Review

The Fund’s largest purchase during the quarter was to increase our holdings of Treasury Inflation-Protected Securities ("TIPS"). TIPS are U.S. Government obligations that provide investors protection against inflation since returns are tied to the Consumer Price Index ("CPI"). Our return will consist of a variable return that’s tied to the CPI which will likely increase our principal value and a fixed, or "real" return we locked in at purchase. These investments have the potential to generate solid returns should either the "real" rate fall or should inflation exceed 2% over our investment horizon. Both components seem plausible especially given the Fed’s recent attempt to kick-start the economy and the unintended consequences it might have on inflation measures going forward.

We also took advantage of widening credit spreads to add to our U.S. agency-eligible mortgage-backed securities (MBS) investments (now 44.0% of our Fund). As we have in the past, we focused our incremental purchases on MBS with good cash flow characteristics and limited extension risk, such as seasoned 15-year loans to high credit quality, prime borrowers. These investments should generate reasonable-to-good returns for our Fund with little-to-no credit risk.

In the minutes of the meeting during which the Fed made the decision to lower short-term interest rates in September, the Committee expressed a desire to avoid giving the "mistaken impression" that they were "more certain about the economic outlook than was in fact the case". We concur as we have used different words to convey the same message over time. It does appear plausible, if not likely, that the ramifications from this summer’s credit crunch have yet to be fully felt. And the policy response (i.e. lower short-term rates) may be sowing the seeds of tomorrow’s inflation by accelerating the decline of the dollar exchange rate, for example. These potential challenges suggest to us that, for the time being, maintaining our mostly higher-quality, shorter average-life portfolio is the proper course of action. We believe our Fund should continue to generate reasonable returns over time and are well-positioned to take advantage of future opportunities.

The Government Money Market Fund closed the third quarter with a seven-day effective yield of 4.84%. (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.)

The disruption in the credit markets during the third quarter also found its way into the ultra-safe U.S. Treasury Bill market. As investors swarmed to the safety and liquidity of Treasury securities, trading conditions became challenging even in the Treasury Bill market. For example, investors sold short-term credit sensitive assets (like commercial paper) and bought Treasury Bills, sending yields lower by nearly 1½ percent in a single day in mid-August. This intraday move was the largest in more than a decade for the Treasury Bill market and occurred despite any action by the Fed to change short-term rates. That action by the Fed did come, but later in the quarter when the Fed Funds rate was lowered by ½ percent.

While the excitement in the Treasury Bill market has made for some interesting reading, the main message for money market fund investors (our Fund included) is that reinvestment opportunities have declined. Since our Fund must keep the weighted average life of its assets at less than 90 days (33 days at September 30), it is likely that our yield will decline as older, higher yielding investments are replaced over the course of the coming quarter.

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