High Yield Municipal Fund

High Yield Municipal

as of June 30, 2010

U.S. Treasury yields moved lower during the quarter as a flight to quality was spurred by credit concerns regarding sovereign risk in the euro region, financial regulatory reform and the oil spill in the Gulf of Mexico. As a result, credit spreads for lower-quality investment-grade and below-investment grade credits widened in comparison to U.S. Treasuries. While municipal yields moved lower, higher-quality municipal bonds underperformed U.S. Treasuries as headlines that trumpeted state and local budget woes, including large unfunded pension liabilities, were the focus of market participants.

The High Yield Municipal Fund slightly underperformed the benchmark index during the quarter with a return of 2.29%. The new issue calendar for high-yield municipal debt remained fairly muted, with most new issues outperforming the less-liquid secondary market. Lower-quality sectors such as tobacco and some BBB healthcare credits saw credit spreads widen in relationship to other high-yield sectors. Our lack of exposure to airline debt, which continued to have strong positive returns, detracted from performance.

During the quarter, we focused on becoming fully invested as the heavy cash inflows experienced in the first quarter of the year abated. This was a positive for performance as cash was deployed in higher-yielding securities. We have held a position in high-investment-grade bonds in eight- to 10-year maturities as a temporary parking place until we are able find attractive high-yield issues. This position aided performance in the latter part of the quarter as the flight to quality in the shorter part of the yield curve moved prices higher.

If you are an aggressive investor seeking a high level of current income that is largely free from federal income tax, you may find this Fund provides an attractive complement to a well-diversified portfolio. The Fund is best suited for long-term higher income investors willing to assume the additional risks associated with investing in high yield securities including above-average share price fluctuations. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.

Concentrate primarily on municipalities that issue medium (rated A and BBB) and lower-quality debt (rated BBB and below). Lower-quality debt or high-yield securities are also commonly referred to as "non-investment grade" or "junk bonds."
Manage to a benchmark index of 65% investment grade and 35% non-investment grade bonds.
Select investments on the basis of their relative value with a focus on total return.

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.