Arizona Tax-Exempt Fund

Arizona Tax-Exempt

as of March 31, 2013

Treasury yields rose during the first quarter as increased hiring suggested an improving economy and led to debate regarding whether the Federal Reserve would curtail its accommodative stance. Investors rotated out of fixed-income assets as stock markets posted solid returns. Municipal yields for tax-exempt bonds with maturities longer than five years rose to an even greater extent, as the market struggled to absorb periods of heavy new issuance. Municipal underperformance was reflected in a steepening tax-exempt yield curve.

For the three-month period, the Arizona Tax-Exempt Fund returned a positive 0.23%. We maintained our duration overweight versus the benchmark, as the Fund retained exposure to longer-dated Arizona securities. Quality spreads continue to be stubbornly narrow, as bond buyers focus on adding tax-exempt yield via lower-quality credits. Amid uncertain economic conditions, we continue to prefer higher-rated credits. However, we are looking to increase returns in the Fund by adding bond structures — i.e., lower coupons and shorter calls — that offer enhanced yield opportunities. As of March 31, the Fund held less than 2% of portfolio assets in BBB-rated municipals.

The municipal market is currently focused on the federal budget debate and its potential impact on demand for tax-exempt bonds. Within Arizona, we plan to track the technical condition of the state’s municipal market as investors search for relief in a higher tax-rate environment.

If you are an investor who favors high current income exempt from federal income tax and who is looking for an investment intended to be exempt from Arizona state personal income tax, this Fund may be ideal for you. It is particularly well suited for income-oriented investors in higher tax brackets willing to assume some risk of principal in exchange for higher yield potential. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.

Concentrate on investments in Arizona state-specific, investment-grade municipal bonds which are exempt from federal income tax and Arizona state personal income tax while maintaining an average maturity, under normal circumstances, between 10 and 30 years.
Invest in high-quality securities, primarily investment-grade debt.
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 47.9% for Arizona, 53.7% for California and 43.4% for national municipal funds.

**Per share paid out March 25 with a record date of March 22. 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.