Arizona Tax-Exempt Fund

Arizona Tax-Exempt

as of June 30, 2010

Markets were rattled during the quarter by fears of sovereign debt restructuring by weaker European countries, particularly Greece. Bailouts by foreign central banks failed to instill confidence, and riskier assets, such as equities, were sold. In addition, doubts about the strength and sustainability of the U.S. economic recovery rose, as job growth stalled and the housing market softened. Treasury yields plummeted, with 10-year yields dropping 90 basis points (0.90%), as investors sought the safe haven of U.S. government bonds. Municipal bonds rallied, but gains significantly lagged those of their taxable counterparts, as yields on 10-year high-grade municipals fell by roughly 30 basis points (0.30%).

The Arizona Tax-Exempt Fund gained 2.07% during the quarter, which brought the total return for the first six months of 2010 to 2.77%. Performance benefited from the Fund's relatively long duration during a period of declining yields and rising prices. In addition, we rebalanced maturities by reducing exposure to shorter-maturity positions and adding to longer-intermediate bonds, allowing us to capture most of the steepness of the Arizona yield curve. The Fund continues to own higher-quality securities on a relative basis, with just over 3% exposure to the BBB-rated category. Within sectors, we boosted our holdings of highly liquid, revenue-backed securities that have grown in popularity.

Looking ahead, we will track in-state demand for tax-exempts as Arizona residents anticipate higher federal tax rates. Also, we will closely focus on actions by state and local legislatures to resolve budget imbalances. Moreover, we will be wary for any signs of inflationary pressure.

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 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.