Tax-Exempt Fund

Tax-Exempt

as of June 30, 2010

The Tax-Exempt Fund returned 1.47% during the second quarter, as yields declined across the maturity spectrum. However, municipal yields did not fall nearly as much as the yields on U.S. Treasuries, which benefited from a global flight to quality. The Fund nonetheless performed well as the supply/demand picture for municipals remained favorable, the Federal Reserve maintained its low interest rate policy and economic fundamentals were bond-friendly.

The Fund benefited from a slightly longer-than-normal duration during the period. Our decision to extend duration stems from the Build America Bonds, or BAB program, which has helped to support municipal bond prices by reducing the supply of longer-dated, tax-free municipal bonds. The BAB program is scheduled to run through the end of 2010, but Congressional legislation may extend the program beyond that date. We continue to favor longer-dated high-coupon bonds with shorter call features. These holdings can benefit from the steep yield curve by generating attractive income flow. At the same time, their shorter call dates help to limit the risk of an adverse change in interest rates.

The Fund's high level of credit quality detracted from quarterly return as lower-rated investment-grade bonds outperformed higher-rated issues. During the period, we maintained a high-quality profile and focused on bonds with a greater margin of safety, such as unlimited-tax general obligation bonds and essential-service dedicated revenue bonds.

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 10 and 30 years. This segment of the municipal market, while potentially more volatile, also may provide higher yields than shorter-term securities.
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 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.