Northern High Yield Municipal Fund

The second quarter of 2007 was volatile for the fixed income markets as a consensus emerged that the Federal Reserve would be on hold for the near future given a rebound in economic growth and subdued inflation. Additional momentum to this shift in investor psychology came from a round of interest rate hikes by central banks outside the United States to restrain inflationary pressures globally. The municipal market underperformed the taxable market during the period as new issue supply continued to overwhelm demand.

The high-yield municipal market posted its first negative performance in 20 months during June, but continued to outperform the investment-grade market as investors pursued additional yield. The healthcare, tobacco, housing and special tax sectors of the market posted the weakest performance for the quarter. Fund performance was aided by the advance refunding of several issues held in the portfolio. During the quarter we focused on increasing our holdings in the corporate-backed, higher education, tobacco, healthcare and continuing care sectors. For the quarter, the Fund's return of -0.46% slightly underperformed the Lehman Brothers Municipal Bond 65-35 Investment Grade/High Yield Index's return of -0.31%.

With continued expectations for moderate growth and a focus on inflation by the Federal Reserve we expect healthy demand for high-yield municipal securities. In the coming months we will look for opportunities to selectively add to the portfolio during periods of market volatility.