Ultra-Short Fixed Income Fund

Ultra-Short Fixed Income

as of June 30, 2010

Fixed income markets performed well, albeit with heightened volatility, during the second quarter. Continued uncertainty regarding sovereign risk in Europe, along with growing concern over a slowdown in global economic growth, fueled a flight to quality into Treasuries. Federal Reserve policy also was favorable for the market. At its June 2010 meeting, the Federal Open Market Committee noted that financial conditions had become less supportive of economic growth. In addition, the Fed acknowledged that labor market weakness and low inflation should enable it to keep the federal funds rate at an exceptionally low level for an extended period.

The Ultra-Short Fixed Income Fund posted a 0.34% total return during the quarter. The Fund's one-year total return was 2.30%, outpacing the 0.99% total return of its benchmark, the Merrill Lynch 1-Year U.S. Treasury Note Index, during the same period. Despite the broader market volatility, the low interest rate environment allowed the Fund to benefit from its positions in corporate bonds and asset-backed securities. We intend to maintain the Fund's position in corporate bonds, which provide strong relative value and diversification.

During the second quarter, our primary strategy was to increase the Fund's allocation to both fixed- and floating-rate corporate bonds. We also continued to make selective purchases of new-issue consumer asset-backed securities. The Fund's duration was slightly higher than that of the benchmark at the end of the quarter. We expect to maintain this positioning based on our view that the Fed will keep rates at their current low levels until late 2011.

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 yield more than a money market fund with potential for capital appreciation.
Strive to maintain a 6-18 month average maturity, under normal circumstances, with a maximum security maturity of three years.
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.