North Country Funds N-CSR Certified annual shareholder report (management investment company)

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

811-10123

The North Country Funds

(Exact name of Registrant as specified in charter)

250 Glen Street, Glens Falls, NY                            12801

(Address of principal executive offices)

(Zip code)

Emile Molineaux

             c/o Gemini Fund Services, LLC., 450 Wireless Blvd., Hauppauge, NY 11788

(Name and address of agent for service)

Registrant's telephone number, including area code:

631-470-2616

Date of fiscal year end:

11/30

Date of reporting period: 11/30/06

Item 1.  Reports to Stockholders.

Investment Adviser North Country Investment Advisers, Inc. 250 Glen Street Glens Falls, NY 12801
Legal Counsel Ropes & Gray 700 12^th Street, N.W., Suite 900 Washington, D.C. 20005
Independent Auditors Cohen Fund Audit Services, Ltd. 800 Westpoint Parkway, Suite 1100 Westlake, OH 44145
Administrator and Fund Accountant Gemini Fund Services, LLC 450 Wireless Boulevard Hauppauge, NY 11788
Transfer Agent Gemini Fund Services, LLC 4020 South 147^th Street Omaha, NE 68137
Distributor Aquarius Fund Distributors, LLC 4020 South 147^th Street Omaha, NE 68137
Custodian Bank of New York 1 Wall Street, 25^th Floor New York, NY 10286


Investor Information: (888) 350-2990   The North Country Funds
Equity Growth Fund Intermediate Bond Fund



Annual Report November 30, 2006



 
This report and the financial statements contained herein are submitted for the general information of shareholders and are not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. Nothing herein contained is to be considered an offer of sale or solicitation of an offer to buy shares of the North Country Funds. Such offering is made only by prospectus, which includes details as to offering price and other material information.  

THE NORTH COUNTRY FUNDS

NOVEMBER 30, 2006

ECONOMIC SUMMARY

U.S. economic growth was revised up to a pace of 2.2% from a preliminary reading of 1.6% during the third quarter.  While better than originally reported, the annual rate marked a slowdown from the 2.6% reported in the second quarter and 5.3% reported in the first quarter.  Business investment and inventory gains were revised up, while real consumption and imports were revised down.  

The primary drag on third quarter economic activity was residential investments.  We do not believe that residential investments will be as damaging in the first quarter of 2007, primarily because of recent signs of stabilization in the housing market.  Mortgage rates are at their lowest levels of the year.  Mortgage applications are up, the Housing Market Index of the National Association of Home Builders increased in November, and sales of existing homes have risen.  However, housing starts fell in October, and previous readings on housing starts in September and August were revised down.  On a year-to-year basis, starts of new homes are down 27%, while sales of existing homes are down only 1.1%.  We are now seeing year-over-year price declines.  This may be a sign that we are nearing the bottom of the cycle and the worst part of the housing downturn may now have passed.  While this may be the case , it does not necessarily mean residential investments will reignite and drive Gross Domestic Product growth substantially higher in the near term.  

The apparent rebound in consumer spending in the fourth quarter, despite the downturn in the housing market, has been supported by a strong labor market.  Healthy growth in wages and salary income is providing support for consumer spending.  The U.S. economy added 132,000 non-farm payroll jobs in November, a much stronger number than expected.  While the unemployment rate moved up slightly to 4.5% from 4.4%, it appears that we remain in an extremely strong labor market and are close to full employment.  Generally, consumers who are employed and secure in their positions have confidence and spend.  There is no greater determinant of spending in macroeconomic activity than job creation and employment.  In addition to the job gains in November, there was a strong upward revision to previous month's payroll numbers. Average hourly earnings have risen 4.1% year-over-year, matching the fastest pace in five years.

Weakness in the manufacturing sector of the economy was evident in the November ISM Manufacturing Survey, which showed the Index falling below the critical 50 level to 49.5.  Readings below 50 denote a contraction in factory activity.  Prior to this, the Index had held above 50 for 42 months.  Indexes tracking new orders and production also fell below 50.  Immediately following the release of the ISM report, Philadelphia Federal Reserve Bank President Charles Plosser cautioned investors against over-emphasizing the dip.  "It’s very dangerous to focus in on one number", he said.  "You have to focus on context and not allow yourself to get hung up on one particular number."  He also reiterated a key notion of economy-watching:  "One number does not a trend make."  The Federal Reserve’s regional indexes of manufacturing activity were somewhat mixed during Nov ember.  

The Index of Leading Economic Indicators (LEI) rose 0.2% in October, after an upwardly revised 0.4% gain in September.  On a year-to-year basis, the LEI indicates a significant deceleration in economic growth.  This trend suggests that economic growth should continue below potential in the near term.  

On the inflation front, the revision to Gross Domestic Product brought a touch of good news in the Core Personal Consumption Price Index, the Fed's favorite measure of inflation.  The annual rate of increase was revised down to 2.2% from 2.3%, although it is still above the Fed's perceived comfort zone of 1-2%.  

Looking to 2007, the question remains whether the economy will bounce back to trend growth or above as the decline in residential construction becomes less steep, or whether the weakness in housing will spill over to the rest of the economy and negatively affect consumer spending.  Recent leading indicators on construction, manufacturing, and durable goods orders suggest that growth will remain well below potential in 2007.  This will assist in easing pressure on core inflation, eventually providing more leeway for the Federal Reserve to lower interest rates.  Our current forecast is for the Fed to begin easing at their May meeting.  While Gross Domestic Product growth may be below potential, we believe the strength in consumer spending in the fourth quarter may lead to better than expected Gross Domestic Product growth.  The extension of the holiday shopping season to January due to gift cards may give a much need ed boost in the first quarter of 2007.

Performance data quoted herein is historical.  Past performance is no guarantee of future results.  Current performance may be higher or lower than the performance data quoted.  The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.  You can obtain performance data current to the most recent month end by calling 1-888-350-2990.  This information will be available no later than seven business days following the most recent month end.

The Equity Growth Fund

For the six months and year ended November 30, 2006 the North Country Equity Growth Fund had a total return of 9.87% and 11.37% versus the S&P 500¹ at 11.34% and 14.23%, respectively.  

The financial markets are now in the home stretch of what is turning out to be a positive year for stocks.  Year-to-date, investors have benefited from low interest rates and corporate profits that have grown sharply.  Earnings are expected to be solid through year-end.  We currently anticipate 18% earnings per share growth for 2006 with earnings per share of $91, and $98 for 2007.  On valuations, despite the move in stock prices back toward five-year highs, earnings have accelerated at a faster clip.  Thus, the P/E ratio on forward earnings is still around 14, which is in the lower half of the five-year range of 13 to 18.  We would not expect to see P/E multiple expansion until the Fed confirms its move to the sidelines or begins to cut rates.  The markets are anticipating that moderating economic growth will ease inflationary pressures.  A clear trend of slowing inflation would be positive for stoc ks.  

The risks to the equity markets are several.  The inverted yield curve indicates bond investors are calling for an economic slowdown.  If inflationary pressures do not ease, it is unlikely the Federal Reserve will lower interest rates.  The recent market rally may well be based in part on expectations of a Fed rate cut, and any disappointment may trim back recent gains.   The trend in oil prices—energy stocks have driven the market over the past two years.  Due to the benign hurricane season, the passing of the summer driving season, and as yet unusually warm winter, oil prices have fallen back to $60 from highs near $80 in the summer.  Falling oil prices are good for the domestic consumer, of course, but we will be concerned if the price of a barrel of oil falls below $40, which could be a signal that global economic growth may be beginning to stall.  S&P 500 earnings have consistently surp rised on the upside over the past few years, but this cycle will certainly not last forever.

Sector allocations - We continue to overweight the financial services sector as earnings from these companies have generally exceeded expectations and valuations remain quite low relative to other sectors.  Also, an end to the Fed rate hikes, and an eventual steepening of the yield curve, could add momentum to this group.  Our overweight in healthcare is supported by expectations of a better pipeline for pharmaceutical stocks, restructuring news, demographics, developing markets overseas, and above average dividend yields.  We are marketweight the consumer staples sector.  The stocks in this sector exhibit generally steady earnings growth that may attract interest if economic growth slows.  We like this sector due to the potential for global growth, but are concerned about the increase in costs of input to production and the high valuation measures.  The energy sector's earnings growth rates have started to tr end lower, as energy prices have dropped from the summer levels.  The energy companies must continue to invest tremendous capital in long-term projects, which may negatively impact earnings.  We continue to feel that higher energy prices are demand driven and consider the energy sector a core holding in the portfolio, and remain marketweight at this time.  The industrial sector was recently reduced from an overweight to a marketweight in response to an expectation of a wind down of defense spending.  A continued slowdown in the automotive sector was also cited as a risk.  In the information technology sector, growth expectations and earnings are trending lower, and key industry companies have been plagued by accounting scandals related to stock option policies.  Attractive valuations and tremendous cash levels are positives that are offset by capital spending growth that remains well below levels of several years ago.  We continue with a marketweighting.  We remain mar ketweight in the materials sector as earnings growth may be peaking.  Commodity prices have fallen recently, but strong demand continues for many industrial commodities.  Valuations are far from rock bottom.  Recently we made a minor change in the consumer discretionary sector.  While we kept it at an underweight, the weighting was moved closer to a marketweight as lower gas and heating oil prices, positive wage growth, and strong employment were expected to support spending.  However, the underweight was maintained as the sector offers limited opportunities outside of retail.  Similarly, the telecommunication sector was kept at an underweight, but the weighting was raised closer to a marketweight.  Stock prices in this sector have fallen dramatically over the past several years, but risks remain as competition is fierce.  Substantial capital spending is expected to upgrade infrastructure to compete with satellite, cable, and internet firms.  Utilities remain unde rweight as user demand is outpacing supply, which will likely lead to a long-term capital investment cycle for this sector.  Dividend yields are not as attractive as they once were due to higher interest rates and valuations are high for the sector's earnings growth rates.

¹ The S&P 500 is an unmanaged market capitalization-weighted index of common stocks.  You cannot invest directly in an index.

The Fed has dominated the equity markets this year, as returns have swung wildly over speculation of the FOMC's next move.  A strong first quarter in equity returns was followed by a sell off as it was perceived that the Fed would continue raising the Target Fed Funds Rate.  The combination of a pause in hiking the Target Rate and easing energy prices raised hopes for better than expected consumer spending.  Equity returns rebounded in the second half of 2006 as earnings growth continued to surge at a double digit pace.    

We made changes to the portfolio throughout the year in response to economic events and individual sector conditions.  In February we decided to reduce the overweight in consumer staples, but remain an overweight.  This reduction was due to the potential impact on earnings from higher input costs and valuations, which historically had been at the higher end of the range.  We further decided to take healthcare and industrials to slight overweights.  For healthcare, stocks looked attractive based on valuations, as well as what appeared to be a better pipeline coupled with above average dividend yields and restructuring news.  In the industrial area, we felt that 2006 capital spending may take the baton from consumer spending.  Corporate balance sheets were healthy and momentum was strong heading into 2006.  We believed spending would be strong for international infrastructure growth and to rep lenish defense.  We continued to avoid the automotive sector and manufacturing companies with potential legacy costs.  

In April we made the decision to take the materials sector to an overweight from a marketweight due to persistently higher commodity prices, continued emerging market growth, and global infrastructure growth.  

In May we made several minor changes to our sector weightings.  The weighting for consumer discretionary was increased to a marketweight from an underweight.  Overall earning expectations for consumer discretionary stocks appeared low.  The energy sector was reduced to a marketweight from an overweight as we thought these companies could face increases in capital spending and continued scrutiny over their earnings.  In the financial sector, we raised the weighting to a marketweight from an underweight, with our focus on those companies involved in merger activity and asset management.  Lastly, we reduced the sector weight in utilities from a marketweight to an underweight, as we thought the rising 10-Year U.S. Treasury yield may put pressure on the attractiveness of dividend yields.  Also, P/E ratios in this sector appeared significantly higher than the underlying earnings growth rates.

In October we made three minor changes to the sector weightings recommendations.  The consumer staples sector was reduced from an overweight to a marketweight as valuations appeared far from attractive.  The information technology sector was increased to a marketweight from an underweight as valuations appeared attractive when compared to other sectors as significantly lowered earnings expectations, coming out of the second quarter, resulted in weakness in tech stocks during the summer.  It was our expectation that companies would increase their spending on productivity enhancing technology to offset peaking profit margins.  In the materials sector, we reduced the weighting to a marketweight from an overweight as we believed earnings growth may have been peaking and commodity prices would remain extremely volatile.  Strong demand continues for many industrial commodities but input costs continue to rise and valuati ons are far from rock bottom.

The Intermediate Bond Fund

On August 8, 2006, the Federal Reserve Open Market Committee (FOMC) left its Federal Funds Target Rate unchanged at 5.25%, thereby ending the series of seventeen consecutive increases in the Federal Funds Target Rate that began in June 2004 when the Federal Funds Target Rate stood at 1.00%.

In the last twelve months, we have witnessed significant changes in the shape of the yield curve as the once steep front-end of the yield curve has now become inverted, and the long-end of the yield curve has fallen modestly.  These developments indicate a market consensus that the U.S. Economy will slow, that the FOMC will begin to cut its Federal Funds Target Rate in 2007, and that the FOMC will succeed in its efforts to contain inflation.

We expect that the FOMC will retain its watchful stance and remain on hold due to a strong labor market, rising labor costs and diminishing labor productivity gains.  We are of the opinion that the FOMC will hold its Federal Funds Target Rate at 5.25% until at least March 2007 and more likely May 2007.

We expect that the yield curve will remain relatively flat compared to historical norms as we anticipate that economic conditions, in particular in the housing sector, will soften as a consequence of prior FOMC rate hikes and we expect inflation to moderate over time due to a relief of demand pressures and diminishing risk of pass-through inflation arising from energy costs.

Over the course of the last twelve months, we selectively utilized lower credit quality investment grade bonds in an effort to enhance yields as well as callable U.S. Government Agency Bonds which we believe offered attractive spreads over Treasuries.  

Our general approach has been to limit interest rate risk by maintaining the Fund’s duration at or less than that of our benchmark, the Merrill Lynch Corporate/Government “A” rated or better 1-10 Year Index, and by limiting our exposure to bonds with maturities of 10 years.

The North Country Intermediate Bond Fund has underperformed its benchmark, the Merrill Lynch Corporate/Government “A” rated or better 1-10 Year Index, in the 3-Month, 6-Month, 1-Year and 3-Year periods ending November 30, 2006 due primarily to the Fund’s lower than benchmark duration, the aforementioned changes in the shape of the yield curve and our determination to limit interest rate risk.

² The Merrill Lynch Corporate/Government “A” rated or better 1-10 year index is based upon publicly issued intermediate corporate and government debt securities with maturities ranging between 1 and 10 years.  You cannot invest directly in an index.

Performance data quoted above is historical.  Past performance is no guarantee of future results.  Current performance may be higher or lower than the performance data quoted.  The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.  You can obtain performance data current to the most recent month end by calling 1-888-350-2990.  This information will be available no later than seven business days following the most recent month end.  

Investors should carefully consider the investment objectives, risks, charges and expenses of The North Country Funds. Other fees and expenses do apply to a continued investment in the fund. This and other information about The North Country Funds is contained in the prospectus, which can be obtained by calling 1-888-350-2990. The prospectus should be read carefully before investing. The North Country Funds are distributed by Aquarius Fund Distributors, LLC Member NASD/SIPC.

The views expressed are as of November 30, 2006 and are those of the adviser, North Country Investment Advisers, Inc.  The views are subject to change at any time in response to changing circumstances in the markets and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally, or the North Country Funds.

Not FDIC insured.  Not obligations of or guaranteed by the bank.  May involve investment risks, including possible loss of the principal invested.

North Country Equity Growth Fund

Growth of $10,000 Investment

This chart illustrates the comparison of a hypothetical investment of $10,000 in the North Country Equity Growth Fund (assuming reinvestment of all dividends and distributions) versus the Fund’s benchmark index.

Average Annual Total Returns as of November 30, 2006

	1 Year	5 Years	10 Years
North Country Equity Growth Fund	11.37%	4.63%	8.90%

The quoted performance data for the Fund includes the performance of its predecessor Collective Investment Trust for periods prior to the Fund’s commencement of operations on 3/1/01, as adjusted to reflect expenses of the respective successor Fund of the Trust, without giving effect to fee waivers.  The Collective Investment Trust was not registered under the Investment Company Act of 1940 (the “1940 Act”) and therefore was not subject to certain investment restrictions that are imposed by the 1940 Act.  If the Collective Investment Trust had been registered under the 1940 Act, the Performance of such Collective Investment Trust may have been lower.  

The S&P 500 is a market capitalization-weighted index of 500 widely held common stocks.  Lipper Large Cap Growth is a benchmark of large-company, growth oriented funds.  Indexes and benchmarks are unmanaged and do not reflect the deduction of expenses associated with a mutual fund, such as investment management and fund accounting fees.  Investors cannot invest directly in an index or benchmark, although they can invest in its underlying securities or funds.

Past performance is not indicative of future results.  The investment return and NAV will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost.  Total returns are calculated assuming reinvestment of all dividends and capital gains distributions.

The returns do not reflect the deductions of taxes a shareholder would pay on the redemption of fund shares or fund distributions.