Intermediate Tax-Exempt Fund

Intermediate Tax-Exempt

as of June 30, 2010

Yields on tax-free bonds fell across the maturity spectrum during the second quarter, but the decline was substantially smaller than the decrease in the yields on U.S. Treasuries. Concern over the European debt crisis, along with signs of slowing economic growth and weakness in the housing and jobs markets, contributed to the strong rally in Treasuries.

The Intermediate Tax-Exempt Fund returned 1.75% during the quarter. The Fund's performance benefited from its longer-than-normal duration stance. We employed this strategy in anticipation of negative macroeconomic events and the positive supply/demand factors in the traditional tax-exempt market. The Build America Bonds program continued to reduce traditional tax-free municipal supply, while demand increased due to both heavy cash flows from reinvestment and new investors coming into the market. During the quarter, we maintained a broad maturity structure to capitalize on the steep yield curve. This maturity structure aims to maximize income versus risk, and it also has positive relative total return potential if the yield curve begins to flatten. Our high-quality bias was once again negative for relative performance, as lower-rated municipal bonds outperformed their higher-rated counterparts.

We continue to overweight the highest-rated investment grade bonds. We are also maintaining a focus on unlimited-tax general obligation bonds and essential-service dedicated revenue bonds, both of which offer an added degree of safety compared with other types of municipal securities.

If you are an investor who favors current income exempt from regular federal 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. 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 three and 10 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. 35.0%.

**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.