Bond Index Fund

Bond Index

as of June 30, 2010

Volatility in the markets increased dramatically during the second quarter. This was caused by sovereign credit worries in Europe and weaker-than-expected economic numbers in the United States. Uncertainty surrounding the impact of financial regulatory reform added to market volatility.

The Federal Reserve kept its target for the benchmark federal funds rate unchanged at between 0% and 0.25% during the quarter. Yields fell along the U.S. Treasury yield curve for the three months. The yield curve flattened by 48 basis points (0.48%) between two and 10 years during the second quarter, as the yield on the two-year note fell by 41 basis points (0.41%) while the 10-year yield fell by 90 basis points (0.90%). Between 10 and 30 years, the curve steepened by 7 basis points (0.07%), as the yield on the 30-year bond fell 82 basis points (0.82%) during the quarter.

For the quarter, the total return of 3.49% for the Barclays Capital U.S. Aggregate Bond Index underperformed duration-equivalent U.S. Treasury securities. Investment-grade corporate bonds were the biggest laggards relative to Treasuries, followed by commercial mortgage-backed securities. The 3.56% return of the Fund for the quarter was slightly ahead of the benchmark, due primarily to positive tracking from the sample portfolio. We will continue to invest in a sampling of securities that are representative of the Index in an effort to provide returns that closely approximate those of the Index.

If you are a long-term, income-oriented investor who is looking to diversify your investments by gaining broad exposure to the U.S. bond market, then this Fund may be right for you. It offers a diversified portfolio of bond securities approximating the Lehman Brothers U.S. Aggregate Index.

Passively managed in an effort to replicate the performance and composition of the Barclays Capital U.S. Aggregate Bond Index.
Gain broad exposure to the U.S. Treasury, government agency, investment-grade corporate bond, mortgage- and asset-backed sectors of the fixed income markets.
Provide investors with a way to gain broad exposure to U.S. bond market.

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 July 26 with a record date of July 23. The amount shown represents dividends paid for net investment income and excludes distributions from capital gain income.

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