Fixed Income Fund

Fixed Income

as of June 30, 2010

The economic recovery suffered a setback in the second quarter. In June, private non-farm employment increased by 83,000, a big improvement from the decline of more than 450,000 a year earlier, but not enough to make a dent in the elevated unemployment rate. The economy is now well past the point of maximum policy stimulus, illustrated by the softening of the housing market as the homebuyer tax credit expired. As the debate continued over whether inflation or deflation is more to be feared, weak economic data proved disconcerting to riskier assets and the U.S. Treasury market outperformed. Markets digested some significant negative developments as the European sovereign debt crisis raged on and the scope of damage from the Gulf of Mexico oil spill continued to expand.

For the quarter, the Fund provided a total return of 2.56%. Performance was negatively impacted by our holdings within the energy sector, which underperformed during the quarter. Historically, we have favored higher-quality, asset-heavy energy companies and we remain constructive on the long-term relative value of the energy holdings in the Fund.

Despite the negative short-term implications, we expect long-term fiscal reforms to emerge from the sovereign crisis. While market visibility is poised to deteriorate, leading us to limit exposure to individual issues, we believe a modest overweighting of credit-oriented sectors is warranted. We have maintained most of the Fund's high-yield positions as we find the relative value compelling, coupled with the probability of future upgrades.

If you're a conservative, income-oriented investor who wants higher current income than that generally offered by the U.S. Government Fund and you're willing to assume moderately more risk in exchange, you may find this Fund suitable. This Fund can also be an appropriate choice for investors who want to broaden and diversify their fixed income portfolio.

Invest primarily in investment-grade domestic debt obligations with an average maturity, under normal circumstances, between three and 15 years, but may own, to a limited extent, securities of foreign issuers and non-investment-grade debt.
Buy and sell securities using a relative value approach that employs models that analyze and compare expected returns and assumed risks.
Emphasize securities and types of securities (such as Treasury, agency, mortgage-related and corporate securities) that we believe have the potential to provide a favorable 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 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.