High Yield Fixed Income Fund

High Yield Fixed Income

as of June 30, 2010

The high-yield market posted weak performance for the quarter. After a strong start, concern about sovereign risk, financial regulation and the Gulf of Mexico oil spill resulted in greater uncertainty about the global economic recovery. This led to a material downturn during the middle of the quarter. As financial markets weakened, cash that had come into the market during the first quarter of 2010 departed. Market activity slowed as participants ceased buying, but were not aggressive sellers. The quarter ended with a better tone, but economic uncertainty has left financial markets without clear direction.

The High Yield Fixed Income Fund's return of -0.94% for the three month period underperformed the return of its benchmark. The Fund was positioned going into the quarter to benefit from an improving market. This aided performance at the beginning and end of the quarter, but detracted during the weak market in the middle of the period. An overweighting of securities rated single B benefited performance. However, an underweight to BB securities detracted from performance. Above-benchmark positions in the gaming, wireless and automotive sectors contributed to performance, while positions within insurance, wireline communications and technology detracted.

Looking ahead, we believe stable to improving fundamentals will support the high-yield market. Federal Reserve monetary policy remains accommodative, corporate earnings have been relatively positive and the default rate on high-yield bonds is expected to decline materially. In addition, valuations remain attractive relative to other asset classes, which should draw assets to the high-yield market.

If you are an aggressive investor seeking high current income and the potential for capital appreciation for a portion of your assets, you may find this Fund provides an attractive complement to a well-diversified portfolio. It is best suited for long-term investors willing to assume the additional risks associated with investing in high yield securities including above-average share price fluctuations.

Invest primarily in high-yielding, lower-rated corporate debt. Lower-rated debt is commonly referred to as "junk bonds."
Take steps to properly manage downside risk by maintaining a broadly diversified portfolio.
Rely on our extensive credit research capabilities in an effort to manage risk and minimize defaults.

Not FDIC insured | May lose value | No bank guarantee

†Northern tax-exempt fixed income funds' Average Duration is calculated using the modified duration formula. Other Northern fixed income funds show the option-adjusted duration. Duration is a measure of a bond fund's sensitivity to changes in interest rates.

*Distribution rate and tax-equivalent distribution rate represent the annualization of the Fund's distributions for the prior month ending on the date shown, including capital gain distributions. The 30-day SEC yield and tax-equivalent 30-day SEC yield represent the annualization of the Fund's net investment income, excluding capital gain income. The tax-equivalent distribution rate and tax-equivalent 30-day SEC yield are based on an assumed tax rate of 38.0% for Arizona, 41.0% for California and 35.0% for national municipal funds.

**Per share paid out June 24 with a record date of June 23. The amount shown represents dividends paid for net investment income and excludes distributions from capital gain income.

Please carefully read the prospectus and consider the investment objectives, risks, charges and expenses of Northern Funds before investing. Call 800-595-9111 to obtain a prospectus, which contains this and other information about the funds.