Tax-Advantaged Ultra-Short Fixed Income Fund

Tax-Advantaged Ultra-Short Fixed Income

as of June 30, 2010

Headlines regarding state budget crises and rising perceptions of credit risk dominated the municipal market during the second quarter. Nevertheless, short-duration municipals rallied based on broader factors such as growing sovereign risk in Europe and the potential for a slowdown in economic growth. At its June meeting, the FOMC noted that current financial conditions had become less supportive of growth.

The Fund returned 0.43% in the quarter. Its one-year total return of 2.02% compared favorably with the 1.44% return of its benchmark, the Merrill Lynch Blend Index, during the same period.

For the period, the Federal Reserve continued its policy of keeping the fed funds rate between 0% and 0.25%. This low rate has, in turn, kept yields on money market securities very low, so our focus for new purchases in the portfolio has been on two- and three-year maturities. This strategy has been effective in establishing a yield advantage compared with money market funds. In addition, the Fund has maintained duration, or interest rate sensitivity, of approximately one year. During the quarter, Fund assets under management grew to $411 million, and its net asset value increased from $10.10 to $10.12 per share based on a general decline in interest rates. Municipal bond prices also rose as the quarter progressed. The Fund currently holds a combination of approximately 25% taxable and 75% tax-exempt securities, pursuing maximum yield after taxes are considered.

If you're seeking an investment that may generate higher yields than money market funds with less volatility than short duration bond funds, this Fund may be appropriate for you. The Fund, which has a $1 million initial investment minimum, is intended for investors with an investment horizon of at least one year who are seeking to move a portion of their money market fund assets.

The Fund is not a money market fund, which maintains a $1.00 NAV, and the Fund's share price will fluctuate with its returns.

Seek to provide investors in higher tax brackets more after-tax yield than a money market fund with potential for capital appreciation.
Strive to maximize after-tax return by pursuing best net after-tax yield and total return opportunities in both taxable and tax-exempt securities.
Strive to maintain a 6-18 month average maturity, under normal circumstances, with a maximum security maturity of three years. And manage Fund in an effort to have an average portfolio quality of A or better, with all securities to be investment grade.

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.