Short-Intermediate Tax-Exempt Fund

Short-Intermediate Tax-Exempt

as of March 31, 2013

Treasury yields moved higher in the first quarter, as improving economic conditions, coupled with continued accommodative monetary policy, enticed investors to shift their focus toward higher-risk assets and away from fixed-income investments. While the Federal Reserve has remained committed to holding the federal funds rate near zero, the markets began to factor in the possible winding down of the quantitative easing program. The impact on longer maturities was more pronounced, leading to a steepening of the yield curve.

Higher federal tax rates and continued strong cash inflows provided support for tax-exempt bonds early in the quarter. However, cash outflows and heavy supply pressured the municipal market late in the period, leading to underperformance relative to Treasuries. Issuers continued to refinance their more expensive outstanding debt, but the improved fiscal positions of states and municipalities allowed them to begin targeting much-needed capital projects. This trend led to increased new issuance. Tax-exempt yields ended the period higher than comparable Treasury yields, with the exception of the longest maturities.

The Short-Intermediate Tax-Exempt Fund returned 0.20%. While we focused on reducing the Fund’s "barbell" structure, our slightly broader maturity profile detracted from performance due to the steepening of the yield curve. A tightening of credit spreads also subtracted from relative performance due to the Fund’s overweight positions in higher-quality bonds and the more conservative sectors of the market. However, we intend to maintain a focus on top-tier, conservative credits and sectors. The Fund’s defensive duration profile enhanced performance given the increase in yields.

If you are an investor seeking higher current income, but potentially less price volatility than the Intermediate Tax-Exempt Fund, with income exempt from regular federal income tax, you may find this Fund attractive. It is well suited for income-oriented investors in higher tax brackets who are willing to accept 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.

Maintain a dollar-weighted average maturity range, under normal circumstances, between one and six 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.