CHIEF INVESTMENT OFFICER

N O R T H E R N TA X - E X E M P T F I X E D I N C O M E F U N D S A N N UA L R E P O R T M A RC H 31, 2013

A MESSAGE FROM BOB BROWNE CHIEF INVESTMENT OFFICER The U.S. bond market returned 3.77% during the 12-month period ended March 31, 2013, as measured by the Barclays U.S. Aggregate Index. All major segments of the market U.S. Treasuries, municipal bonds, corporate issues and high yield finished the period with a gain. Federal Reserve policy remains the key factor in market performance, thus far to a positive effect. The Federal Reserve is concerned about the weakness of the U.S. economic expansion, noting the negative impact of slow growth and high unemployment. Its open-ended asset purchases of U.S. government and mortgage-backed securities are designed to put downward pressure on interest rates, support mortgage markets and make financial conditions more accommodative. However, the Federal Reserve has now made policy accommodation contingent on inflation staying below 2.5% and unemployment staying above 6.5%. While the Federal Reserve believes this is consistent with their previous forecast that rates will not rise until mid-2015, it also increases the risk of market volatility if either variable closes in on these targets. Though the markets have been debating the alternative views expressed in the minutes of the Federal Open Market Committee s meetings, we believe that the Federal Reserve is committed to accommodative monetary policy. We also do not see a material risk of inflation in the near- to intermediateterm that would upset the Federal Reserve s plans. In addition, we believe that the Federal Reserve will eventually remove its accommodation in a gradual fashion that is designed to avoid disrupting the markets. What would be the likely drivers for an increase in rates and a corresponding decline in bond prices? Developedmarket central banks clearly control short-term bonds through their ultra-low rate policies, and they continue to influence the performance of longer-term bonds through open-market operations such as quantitative easing. The most likely catalyst for a noticeable change in policy would be a positive surprise in economic growth, which could rekindle inflation concerns. For now, however, we take at face value the Federal Reserve s statement that it is using unemployment as the key measurement in determining future interest rate policy. Another factor impacting the bond market has been investors aversion to risk a legacy of the 2008 financial crisis and its subsequent fallout. This has led to steady demand for the lower-risk, yield-oriented returns of fixed income, which in turn has suppressed yields and caused the yield advantage of corporate and high yield bonds to decline. It is true that the downturn in absolute yield in spreads has reduced the cushion that yields would typically provide if rates begin to rise. However, we believe that talk of a bond bubble is mischaracterized because the bonds of creditworthy issuers are still likely to pay par value at maturity. This limits the downside risk to bond investing, which stands in contrast to the possibility of larger capital losses in higher-risk asset classes. Looking ahead, we foresee an environment of sub-par global growth that leads to restrained inflation and only moderate upward pressure on interest rates. In this environment, we do not expect that developed-economy central banks will lose control over inflation in a way that would lead to a sudden reversal of course on monetary policy. We therefore expect relatively muted performance for bonds, but we are not among those who foresee the onset of a more destructive bear market. Bob Browne Chief Investment Officer Northern Trust

TAX-EXEMPT FIXED INCOME FUNDS TABLE OF CONTENTS 2 PORTFOLIO MANAGEMENT COMMENTARY 10 STATEMENTS OF ASSETS AND LIABILITIES 12 STATEMENTS OF OPERATIONS 14 STATEMENTS OF CHANGES IN NET ASSETS The report has been prepared for the general information of Northern Funds shareholders. It is not authorized for distribution to prospective investors unless accompanied or preceded by a current Northern Funds prospectus, which contains more complete information about Northern Funds investment policies, management fees and expenses. Investors are reminded to read the prospectus carefully before investing or sending money. Performance calculations reflect fee waivers and reimbursements in effect. In the absence of fee waivers and reimbursements, total return would have been reduced. Total return is based on net change in net asset value assuming reinvestment of all dividends and distributions. Quality ratings, such as AAA, refer to the credit risk of individual securities, and not the Funds. Northern Funds performance is compared to various market indices. Unlike a mutual fund, the performance of an index assumes no transaction costs, taxes, management fees or other expenses. A direct investment in an index is not possible. This report contains certain forward-looking statements about factors that may affect the performance of Northern Funds in the future. These statements are based on Northern Funds management predictions and expectations concerning certain future events, such as performance of the economy as a whole and of specific industry sectors, changes in the levels of interest rates, the impact of developing world events, and other factors. Management believes these forwardlooking statements to be reasonable, although they are inherently uncertain and difficult to predict. Actual events may cause adjustments in Northern Funds management strategies from those currently expected to be employed. 16 FINANCIAL HIGHLIGHTS 23 SCHEDULES OF INVESTMENTS 23 ARIZONA TAX-EXEMPT FUND 27 CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND 34 CALIFORNIA TAX-EXEMPT FUND 38 HIGH YIELD MUNICIPAL FUND 44 INTERMEDIATE TAX-EXEMPT FUND 58 SHORT-INTERMEDIATE TAX-EXEMPT FUND 87 TAX-EXEMPT FUND 96 ABBREVIATIONS AND OTHER INFORMATION 97 NOTES TO THE FINANCIAL STATEMENTS 104 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 105 TAX INFORMATION 106 FUND EXPENSES 108 TRUSTEES AND OFFICERS 115 INVESTMENT CONSIDERATIONS 116 FOR MORE INFORMATION Northern Funds are distributed by Northern Funds Distributors, LLC, Three Canal Plaza, Suite 100, Portland, Maine 04101, not affiliated with Northern Trust. NOT FDIC INSURED May lose value / No bank guarantee NORTHERN FUNDS ANNUAL REPORT 1 TAX-EXEMPT FIXED INCOME FUNDS

TAX-EXEMPT FIXED INCOME FUNDS ARIZONA TAX-EXEMPT FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY Despite U.S. economic expansion and unemployment declines, the Federal Reserve initiated additional quantitative easing measures during the 12-month reporting period ended March 31, 2013 that featured open-ended purchases of longer-term debt. Concern over the sustainability of the recovery and doubts regarding the resolution of the European fiscal crisis resulted in a broad decline in interest rates. Over the reporting period, Treasury bonds rallied. Municipal bonds also posted gains but trailed their taxable counterparts, as the tax-exempt market absorbed a significant increase in supply, led by a surge in refundings of outstanding debt. In addition, the municipal yield curve flattened, with longer maturities outperforming shorter-term issues. For most of the period, taxexempts experienced robust demand from a cross section of institutional and retail investors. The Arizona Tax-Exempt Fund, with an average maturity of 11.5 years, posted a return of 5.63% for the reporting period. The Fund underperformed its benchmark, the Barclays Arizona Municipal Bond Index, which returned 5.96%, but outperformed the Fund s Lipper peer group average, the Arizona Muni Debt category, which returned 5.31% for the period. Shareholders benefited from an active trading strategy, as we capitalized on market knowledge and inefficiencies. During the reporting period, we modestly increased the Fund s duration, which enhanced total return. As the municipal yield curve flattened, the Fund s barbelled maturity structure also benefited performance, as longer-dated securities were superior performers. Our preference for high-grade Arizona securities in the current uncertain economic environment detracted from returns, as differences in yield between higher and lower quality bonds to narrow. At the period end, the Fund had less than 2% of assets in BBB-rated bonds and no exposure to below-investmentgrade credits. However, we seek to increase the Fund s returns by adding lower coupon and shorter call issues that offer enhanced yield opportunities. Going forward, we will pay close attention to the federal budget debate and its potential impact on valuations for tax-exempt bonds. At the state and local level, we plan to follow the progress of Arizona s economy and its impact on the finances of municipal bond issuers. Lastly, we will track the technical condition of the in-state market as investors search for relief from higher federal and state taxes. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2013 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION ARIZONA TAX-EXEMPT 5.63% 6.02% 4.46% 5.27% BARCLAYS ARIZONA MUNICIPAL BOND INDEX 5.96 6.36 5.02 5.60 Performance reflects voluntary and contractual fee waivers and reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northernfunds.com. GROWTH OF A $10,000 INVESTMENT $21,000 $19,000 $17,000 $15,000 $13,000 $11,000 $9,000 10/1/99 ARIZONA TAX-EXEMPT FUND BARCLAYS ARIZONA MUNICIPAL BOND INDEX $19,993 $20,872 3/31/13 The Barclays Arizona Municipal Bond Index is an unmanaged index of investment grade (Baa3 or better) tax-exempt Arizona bonds with a remaining maturity of at least one year. The Fund is non-diversified under the Investment Company Act of 1940, and may invest more of its assets in fewer issuers than diversified mutual funds. Income from the Fund may be subject to federal alternative minimum tax (AMT) and state and local taxes. Information about Investment Considerations can be found on page 115. ERIC V. BOECKMANN With Northern Trust since 1985 FUND FACTS (as of 3/31/13) TICKER SYMBOL NOAZX INCEPTION DATE 10/01/99 NET ASSETS $121 MILLION NETASSET $11.03 DIVIDEND SCHEDULE MONTHLY GROSS EXPENSE RATIO (1) 0.95% NET EXPENSE RATIO 0.45% (1) The Gross Expense Ratio presented is based on the gross expense ratio as reported in the Fund s current prospectus, which may differ from the gross expense ratio presented in the Fund s financial highlights. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. TAX-EXEMPT FIXED INCOME FUNDS 2 NORTHERN FUNDS ANNUAL REPORT

TAX-EXEMPT FIXED INCOME FUNDS CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY In spite of U.S. economic expansion and unemployment declines, the Federal Reserve initiated additional quantitative easing measures during the 12-month reporting period ended March 31, 2013 that featured open-ended purchases of longer-term debt. Concern over the sustainability of the recovery and doubts regarding the resolution of the European fiscal crisis resulted in a broad decline in interest rates. Over the reporting period, Treasury bonds rallied. Municipal bonds also posted gains but trailed their taxable counterparts, as the tax-exempt market absorbed a significant increase in supply, led by a surge in refundings of outstanding debt. In addition, the municipal yield curve flattened, with longer maturities outperforming shorter-term issues. For most of the period, taxexempts experienced robust demand from a cross section of institutional and retail investors. The California Intermediate Tax-Exempt Fund, with an average maturity of 10.6 years, posted a return of 5.17% for the reporting period. The Fund outperformed its benchmark, the Barclays California Intermediate Municipal Bond Index, which returned 5.11%, and outperformed the Fund s Lipper peer group average, the California Intermediate Muni Debt category, which returned 4.28% for the period. Shareholders benefited from an active trading strategy, as we capitalized on market knowledge and inefficiencies. During the period, we modestly increased the Fund s duration, which enhanced total return. As the municipal yield curve flattened, the Fund s barbelled maturity structure also benefited performance, as longer-dated securities were superior performers. Our preference for high-grade California securities in the current uncertain economic environment detracted from returns, as differences in yield between higher and lower quality bonds to narrow. At the period end, the Fund had less than 2% of assets in BBB-rated bonds and no exposure to below-investment-grade credits. However, we seek to increase the Fund s returns by adding lower coupon and shorter call issues that offer enhanced yield opportunities. Looking ahead, we will pay close attention to the federal budget debate and its potential impact on valuations for tax-exempt bonds. At the state and local level, we plan to follow the progress of California s economy and its impact on the finances of municipal bond issuers. Lastly, we will track the technical condition of the in-state market as investors search for relief from higher federal and state taxes. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2013 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION CALIFORNIA INTERMEDIATE TAX-EXEMPT 5.17% 5.35% 4.00% 4.67% BARCLAYS CALIFORNIA INTERMEDIATE MUNICIPAL BOND INDEX 5.11 6.24 5.07 5.53 Performance reflects voluntary and contractual fee waivers and reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northernfunds.com. GROWTH OF A $10,000 INVESTMENT $21,000 $19,000 $17,000 $15,000 $13,000 $11,000 $9,000 10/1/99 $18,523 $20,680 CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND BARCLAYS CALIFORNIA INTERMEDIATE MUNICIPAL BOND INDEX 3/31/13 The Barclays California Intermediate Municipal Bond Index is an unmanaged index of investment grade (Baa3 or better) tax-exempt California bonds with maturities of five to ten years. The Fund is non-diversified under the Investment Company Act of 1940, and may invest more of its assets in fewer issuers than diversified mutual funds. Income from the Fund may be subject to federal alternative minimum tax (AMT) and state and local taxes. Information about Investment Considerations can be found on page 115. ERIC V. BOECKMANN With Northern Trust since 1985 FUND FACTS (as of 3/31/13) TICKER SYMBOL NCITX INCEPTION DATE 10/01/99 NET ASSETS $412 MILLION NETASSET $10.84 DIVIDEND SCHEDULE MONTHLY GROSS EXPENSE RATIO (1) 0.86% NET EXPENSE RATIO 0.45% (1) The Gross Expense Ratio presented is based on the gross expense ratio as reported in the Fund s current prospectus, which may differ from the gross expense ratio presented in the Fund s financial highlights. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. NORTHERN FUNDS ANNUAL REPORT 3 TAX-EXEMPT FIXED INCOME FUNDS

TAX-EXEMPT FIXED INCOME FUNDS CALIFORNIA TAX-EXEMPT FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY Despite U.S. economic expansion and unemployment declines, the Federal Reserve initiated additional quantitative easing measures during the 12-month reporting period ended March 31, 2013 that featured open-ended purchases of longer-term debt. Concern over the sustainability of the recovery and doubts regarding the resolution of the European fiscal crisis resulted in a broad decline in interest rates. Over the reporting period, Treasury bonds rallied. Municipal bonds also posted gains but trailed their taxable counterparts, as the tax-exempt market absorbed a significant increase in supply, led by a surge in refundings of outstanding debt. In addition, the municipal yield curve flattened, with longer maturities outperforming shorter-term issues. For most of the period, taxexempts experienced robust demand from a cross section of institutional and retail investors. The California Tax-Exempt Fund, with an average maturity of 15.8 years, posted a return of 7.73% for the reporting period. The Fund outperformed its benchmark, the Barclays California Municipal Bond Index, which gained 6.20%, and performed in line with its Lipper peer group average, the California Muni Debt category, which returned 7.30% for the period. Shareholders benefited from an active trading strategy, as we capitalized on market knowledge and inefficiencies. During the period, we modestly increased the Fund s duration, which enhanced total return. As the municipal yield curve flattened, the Fund s barbelled maturity structure also benefited performance, as longer-dated securities were superior performers. Our preference for high-grade California securities in the current uncertain economic environment detracted from returns, as differences in yield between higher and lower quality bonds to narrow. At the period end, the Fund had no exposure to BBB-rated or below-investment-grade credits. However, we seek to increase the Fund s returns by adding lower coupon and shorter call issues that offer enhanced yield opportunities. Going forward, we will pay close attention to the federal budget debate and its potential impact on valuations for tax-exempt bonds. At the state and local level, we plan to follow the progress of California s economy and its impact on the finances of municipal bond issuers. Lastly, we will track the technical condition of the in-state market as investors search for relief from higher federal and state taxes. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2013 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION CALIFORNIA TAX-EXEMPT 7.73% 7.25% 5.30% 5.91% BARCLAYS CALIFORNIA MUNICIPAL BOND INDEX 6.20 6.39 5.22 5.82 Performance reflects voluntary and contractual fee waivers and reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northernfunds.com. GROWTH OF A $10,000 INVESTMENT $26,000 $24,000 $22,000 $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 4/8/97 $25,040 $24,712 CALIFORNIA TAX-EXEMPT FUND BARCLAYS CALIFORNIA MUNICIPAL BOND INDEX 3/31/13 The Barclays California Municipal Bond Index is an unmanaged index of investment grade (Baa3 or better) tax-exempt California bonds with a remaining maturity of at least one year. The Fund is non-diversified under the Investment Company Act of 1940, and may invest more of its assets in fewer issuers than diversified mutual funds. Income from the Fund may be subject to federal alternative minimum tax (AMT) and state and local taxes. Information about Investment Considerations can be found on page 115. ERIC V. BOECKMANN With Northern Trust since 1985 FUND FACTS (as of 3/31/13) TICKER SYMBOL NCATX INCEPTION DATE 04/08/97 NET ASSETS $164 MILLION NETASSET $11.78 DIVIDEND SCHEDULE MONTHLY GROSS EXPENSE RATIO (1) 1.01% NET EXPENSE RATIO 0.45% (1) The Gross Expense Ratio presented is based on the gross expense ratio as reported in the Fund s current prospectus, which may differ from the gross expense ratio presented in the Fund s financial highlights. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. TAX-EXEMPT FIXED INCOME FUNDS 4 NORTHERN FUNDS ANNUAL REPORT

TAX-EXEMPT FIXED INCOME FUNDS HIGH YIELD MUNICIPAL FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY Financial markets remained volatile in reaction to geopolitical and economic factors during the 12-month reporting period ended March 31, 2013. The economic slowdown in Europe, which resulted in part from the austerity programs of the region s governments, contributed to weak growth in the United States, China, Brazil and India. The Federal Reserve did its part via increased policy accommodation designed to support the U.S. economy. Although U.S. Treasury rates ended lower than the beginning of the period, the low in interest rates was reached in mid-july. The municipal bond market posted another period of robust gains, though with lower returns than the previous period s stellar performance. Most of the strong performance was registered in the first half of the reporting period, with cash flowing into the market as investors search for income drove demand. As the reporting period progressed, the market s fear of the fiscal cliff and possible changes to the tax-exemption for municipal bonds weighed heavily on market performance. While there has been a steady improvement in state finances, credit concerns arose due to highly publicized developments in some troubled municipalities. This, along with seasonally weak demand, resulted in outflows from the municipal market in the second half of the reporting period. Yields on municipal bonds ended the period lower as compared to where they stood a year earlier, though the low in yields was reached at the end of November. High-yield municipals outperformed investment-grade municipals. The Fund returned 9.10% for the reporting period, outpacing the 8.34% return of its benchmark, the Barclays Municipal Bond 65-35 Investment Grade/High Yield Index. The top-performing sectors in the portfolio were tobacco, higher education and healthcare. We increased our holdings of BBB-rated credits during the period at the expense of higher-rated holdings, as we felt that lower-quality municipals would outperform. Our concentration in higher-coupon bonds helped performance in the second half of the period, as higher income cushioned the Fund from interest rate risk. However, the Fund s more conservative stance and underweight in holdings rated below investment grade, including those in the tobacco sector, hampered relative performance. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2013 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION HIGH YIELD MUNICIPAL 9.10% 4.98% 4.22% 3.98% BARCLAYS MUNICIPAL BOND 65-35 INVESTMENT GRADE/HIGH YIELD INDEX 8.34 6.57 5.91 5.51 Performance reflects voluntary and contractual fee waivers and reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northernfunds.com. GROWTH OF A $10,000 INVESTMENT $22,000 $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 12/31/98 $17,441 $21,476 HIGH YIELD MUNICIPAL FUND BARCLAYS MUNICIPAL BOND 65-35 INVESTMENT GRADE/HIGH YIELD INDEX 3/31/13 The Barclays Municipal Bond 65-35 Investment Grade/High Yield Index is an unmanaged index of investment and noninvestment grade bonds with a 65% weighting in the Barclays Municipal Bond Index and a 35% allocation to the Barclays Municipal Non-Investment Grade Bond Index. The Fund invests in below investment-grade debt obligations, commonly known as junk bonds. While offering higher current yields, these securities generally are considered speculative and are subject to greater risks than higher-rated bonds. Income from the Fund may be subject to federal alternative minimum tax (AMT) and state and local taxes. Information about Investment Considerations can be found on page 115. M. JANE MCCART With Northern Trust since 1998 FUND FACTS (as of 3/31/13) TICKER SYMBOL NHYMX INCEPTION DATE 12/31/98 NET ASSETS $327 MILLION NETASSET $9.04 DIVIDEND SCHEDULE MONTHLY GROSS EXPENSE RATIO (1) 0.95% NET EXPENSE RATIO 0.80% (1) The Gross Expense Ratio presented is based on the gross expense ratio as reported in the Fund s current prospectus, which may differ from the gross expense ratio presented in the Fund s financial highlights. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. NORTHERN FUNDS ANNUAL REPORT 5 TAX-EXEMPT FIXED INCOME FUNDS

TAX-EXEMPT FIXED INCOME FUNDS INTERMEDIATE TAX-EXEMPT FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY During the 12-month reporting period ended March 31, 2013, the U.S. Federal Reserve its easy monetary policy, with the federal funds rate targeted at 0.00% to 0.25%, along with a monthly bond purchase program. The domestic economy reflected moderate growth with low inflation, while global economic concerns remained. Combined, these factors created a bond-friendly scenario and interest rates declined. In this environment, the Fund benefited by maintaining a modified duration between 4.75 and 5.25 years. The municipal yield curve flattened during the period, as yields of bonds with maturities longer than 10 years declined more than yields of shorter-term issues. The narrowing of the yield differential between higher- and lower-rated municipal securities during the period a major event caused the lowest rated investment-grade bonds to outperform higher-investment-grade securities. As an example, A-rated bonds returned 6.26% and BBB-rated bonds returned 6.53%, compared with returns of 3.70% and 4.79% for AAA and AA bonds, respectively. The Fund s broad and barbelled maturity structure helped performance. Duration, yield curve and specific security selection also contributed to returns, and the Fund held 90% of portfolio assets in AAA and AA credits on average. For the reporting period, the Fund generated a return of 4.33%, slightly behind its benchmark, the Barclays Intermediate Municipal Bond Index, which returned 4.52%. On a fundamental basis, the Fund maintains its high credit quality profile. In particular, the strong liquidity characteristics of higherrated credits help us to take advantage of market volatility and tax-exempt market inefficiencies. Going forward, we will continue to focus on the macroeconomic rate environment, federal budget negotiations and seasonal supply/demand patterns within the taxexempt market. Additionally, the Fund will continue its relative value management style as we seek to capitalize on market opportunities. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2013 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION INTERMEDIATE TAX-EXEMPT 4.33% 5.06% 4.09% 4.67% BARCLAYS INTERMEDIATE MUNICIPAL BOND INDEX 4.52 6.03 4.96 5.70 Performance reflects voluntary and contractual fee waivers and reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northernfunds.com. GROWTH OF A $10,000 INVESTMENT $30,000 $27,000 $24,000 $21,000 $18,000 $15,000 $12,000 $9,000 4/1/94 $23,814 $28,647 INTERMEDIATE TAX-EXEMPT FUND BARCLAYS INTERMEDIATE MUNICIPAL BOND INDEX 3/31/13 The Barclays Intermediate Municipal Bond Index is an unmanaged index of investment grade (Baa3 or better) tax-exempt bonds with maturities of five to ten years. Income from the Fund may be subject to federal alternative minimum tax (AMT) and state and local taxes. Information about Investment Considerations can be found on page 115. TIMOTHY T.A. MCGREGOR With Northern Trust since 1989 FUND FACTS (as of 3/31/13) TICKER SYMBOL NOITX INCEPTION DATE 04/01/94 NET ASSETS $2.5 BILLION NETASSET $10.70 DIVIDEND SCHEDULE MONTHLY GROSS EXPENSE RATIO (1) 0.88% NET EXPENSE RATIO 0.43% (1) The Gross Expense Ratio presented is based on the gross expense ratio as reported in the Fund s current prospectus, which may differ from the gross expense ratio presented in the Fund s financial highlights. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. TAX-EXEMPT FIXED INCOME FUNDS 6 NORTHERN FUNDS ANNUAL REPORT

TAX-EXEMPT FIXED INCOME FUNDS SHORT-INTERMEDIATE TAX-EXEMPT FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY During the 12-month reporting period ended March 31, 2013, the U.S. Federal Reserve maintained an accommodative interest rate policy and for the first time tied future changes in short-term rates to specified inflation and unemployment targets. Improving economic conditions and the Federal Reserve s commitment to accommodative policy induced investors to add risk to their portfolios. The Federal Reserve to purchase longer-dated Treasury and mortgage-backed securities, helping to support Treasury bond prices and flatten the yield curve. While volatile throughout the reporting period, tax-exempt yields declined. Strong mutual fund inflows, improved state and municipal fiscal conditions, and declining new issuance supported the municipal market. In terms of the new-issue market, refinancing volume dominated, as municipal issuers sought to reduce their debt service costs. The tax-exempt yield curve also flattened as demand for longer-term credits outstripped supply. Investors to purchase lower-rated credits in their search for yield, which helped lower-rated bonds to outperform higher quality issues. For the reporting period, the Short-Intermediate Tax-Exempt Fund returned 1.27%, compared with the 2.00% return of its benchmark, the Barclays Municipal 1-5 Year Blend Municipal Bond Index. During the period, we focused on high quality essential-service revenue and unlimited-tax general obligation securities. Our underweight to lower-rated securities and sectors perceived as higher risk detracted from relative performance as both of these areas outperformed. However, shareholders benefited from the Fund s broader maturity profile relative to the benchmark as the municipal yield curve flattened. While we maintained a relatively neutral interest rate exposure through most of the period, we reduced duration toward the end of March in anticipation of an increase in municipal supply. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2013 TOTAL RETURN ONE YEAR THREE YEAR FIVE YEAR SINCE INCEPTION SHORT-INTERMEDIATE TAX-EXEMPT 1.27% 1.88% 2.65% 3.01% BARCLAYS 1-5 YEAR BLEND MUNICIPAL BOND INDEX 2.00 2.83 3.63 4.17 Performance reflects voluntary and contractual fee waivers and reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northernfunds.com. GROWTH OF A $10,000 INVESTMENT $13,000 $12,000 $11,000 $10,000 $9,000 8/22/07 $11,809 $12,576 SHORT-INTERMEDIATE TAX-EXEMPT FUND BARCLAYS 1-5 YEAR BLEND MUNICIPAL BOND INDEX 3/31/13 The Barclays 1-5 Year Blend Municipal Bond Index is an unmanaged index of investment grade (Baa3 or better) tax-exempt bonds with maturities of at least one year and less than six years. Income from the Fund may be subject to federal alternative minimum tax (AMT) and state and local taxes. Information about Investment Considerations can be found on page 115. TIMOTHY P. BLAIR With Northern Trust since 1992 FUND FACTS (as of 3/31/13) TICKER SYMBOL NSITX INCEPTION DATE 08/22/07 NET ASSETS $1.2 BILLION NETASSET $10.58 DIVIDEND SCHEDULE MONTHLY GROSS EXPENSE RATIO (1) 0.81% NET EXPENSE RATIO 0.45% (1) The Gross Expense Ratio presented is based on the gross expense ratio as reported in the Fund s current prospectus, which may differ from the gross expense ratio presented in the Fund s financial highlights. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. NORTHERN FUNDS ANNUAL REPORT 7 TAX-EXEMPT FIXED INCOME FUNDS

TAX-EXEMPT FIXED INCOME FUNDS TAX-EXEMPT FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The Tax-Exempt Fund returned 5.85% during the 12-month reporting period ended March 31, 2013, compared with the 5.25% return of its benchmark, the Barclays Municipal Bond Index. Outperformance was derived from the Fund s duration positioning and yield curve structure, as well as from our rigorous security selection process. The U.S. Federal Reserve its easy monetary policy, featuring $85 billion in monthly asset purchases. The U.S. economy displayed moderate growth with little inflation pressure, while global concerns remained. In this environment, we positioned the Fund with a duration 10% longer than normal, which benefited performance as tax-exempt rates declined. In addition, the municipal yield curve flattened during the reporting period as demand from retail investors and institutional buyers combined to lower long-term interest rates more than shorter rates. The Fund s broad and barbelled maturity structure helped performance. In addition, investor risk tolerance remains low to mixed. In this environment, our careful search for value in both the secondary and primary municipal markets added to returns. The Fund also maintained a substantially higher credit profile than the benchmark, as 85% of portfolio assets were in AAA and AA credits on average. The Fund also held fewer single -A and BBB bonds than the benchmark. Our overweight to higher quality issues detracted from relative performance as investors clamored for yield. However, the Fund s high quality profile boosts its liquidity, which can be beneficial during volatile markets. In the coming months we expect additional market volatility, stemming from the uncertain macroeconomic environment, the ongoing federal budget battles and seasonal tax-exempt supply/demand variations. Going forward, we will continue to utilize our relative value management style in an effort to capitalize on municipal market opportunities. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2013 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION TAX-EXEMPT 5.85% 6.14% 4.81% 5.50% BARCLAYS MUNICIPAL BOND INDEX 5.25 6.10 5.01 5.91 Performance reflects voluntary and contractual fee waivers and reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northernfunds.com. GROWTH OF A $10,000 INVESTMENT $30,000 $27,000 $24,000 $21,000 $18,000 $15,000 $12,000 $9,000 4/1/94 TAX-EXEMPT FUND BARCLAYS MUNICIPAL BOND INDEX $27,672 $29,757 3/31/13 The Barclays Municipal Bond Index is an unmanaged index of investment grade (Baa3 or better) tax-exempt bonds with a remaining maturity of at least one year. Income from the Fund may be subject to federal alternative minimum tax (AMT) and state and local taxes. Information about Investment Considerations can be found on page 115. TIMOTHY T.A. MCGREGOR With Northern Trust since 1989 FUND FACTS (as of 3/31/13) TICKER SYMBOL NOTEX INCEPTION DATE 04/01/94 NET ASSETS $1.2 BILLION NETASSET $10.95 DIVIDEND SCHEDULE MONTHLY GROSS EXPENSE RATIO (1) 0.87% NET EXPENSE RATIO 0.45% (1) The Gross Expense Ratio presented is based on the gross expense ratio as reported in the Fund s current prospectus, which may differ from the gross expense ratio presented in the Fund s financial highlights. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. TAX-EXEMPT FIXED INCOME FUNDS 8 NORTHERN FUNDS ANNUAL REPORT

TAX-EXEMPT FIXED INCOME FUNDS THIS PAGE INTENTIONALLY LEFT BLANK NORTHERN FUNDS ANNUAL REPORT 9 TAX-EXEMPT FIXED INCOME FUNDS

TAX-EXEMPT FIXED INCOME FUNDS STATEMENTS OF ASSETS AND LIABILITIES Amounts in thousands, except per share data ARIZONA TAX-EXEMPT FUND CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND ASSETS: Investments, at cost $111,015 (1) $376,498 Investments, at value $120,192 (3) $398,789 Dividend income receivable Interest income receivable 1,147 3,895 Receivable for securities sold 10,875 Receivable for fund shares sold 6 1,115 Receivable from investment adviser 11 33 Prepaid and other assets 1 1 Total Assets 121,357 414,708 LIABILITIES: Cash overdraft 2,444 Payable for securities purchased Payable for when-issued securities 380 Payable for fund shares redeemed 14 138 Distributions to shareholders 63 199 Payable to affiliates: Investment advisory fees 13 43 Administration fees 4 12 Custody and accounting fees 2 3 Shareholder servicing fees 3 2 Transfer agent fees 2 8 Trustee fees 4 4 Accrued other liabilities 33 33 Total Liabilities 518 2,886 Net Assets $120,839 $411,822 ANALYSIS OF NET ASSETS: Capital stock $111,364 $389,033 Accumulated undistributed net investment income (loss) (10) (4) Accumulated undistributed net realized gain (loss) 308 502 Net unrealized appreciation 9,177 22,291 Net Assets $120,839 $411,822 Shares Outstanding ($.0001 par value, unlimited authorization) 10,954 37,995 Net Asset Value, Redemption and Offering Price Per Share $11.03 $10.84 (1) (2) (3) (4) Amounts include cost from the Tax-Exempt Portfolio of the Northern Institutional Funds of $1,006, $3,106, $325,779, $91,114 and $152,662, respectively. Amounts include cost from the California Municipal Money Market Fund of the Northern Funds of $939. Amounts include value from the Tax-Exempt Portfolio of the Northern Institutional Funds of $1,006, $3,106, $325,779, $91,114 and $152,662, respectively. Amounts include value from the California Municipal Money Market Fund of the Northern Funds of $939. TAX-EXEMPT FIXED INCOME FUNDS 10 NORTHERN FUNDS ANNUAL REPORT

MARCH 31, 2013 CALIFORNIA TAX-EXEMPT FUND HIGH YIELD MUNICIPAL FUND INTERMEDIATE TAX-EXEMPT FUND SHORT- INTERMEDIATE TAX-EXEMPT FUND TAX-EXEMPT FUND $148,082 (2) $282,597 (1) $2,450,369 (1) $1,133,217 (1) $1,155,210 (1) $160,909 (4) $320,795 (3) $2,537,513 (3) $1,170,113 (3) $1,214,733 (3) 3 1 2 1,365 4,887 22,758 12,151 11,420 1,825 1,046 8,067 23,377 186 1,004 2,330 4,290 315 18 11 216 79 97 1 1 4 1 2 164,304 327,744 2,570,891 1,186,635 1,249,946 2,931 527 27,073 5,687 71,310 14 75 2,025 1,569 3,205 81 241 804 285 537 17 41 261 113 124 5 9 73 34 34 2 3 11 6 6 32 10 215 10 46 3 6 49 22 23 4 4 10 4 8 33 34 97 55 55 191 423 33,549 8,312 75,348 $164,113 $327,321 $2,537,342 $1,178,323 $1,174,598 $149,036 $327,660 $2,440,109 $1,141,716 $1,103,930 (1) (201) (289) (260) 2,251 (38,537) 10,290 11,405 12,827 38,198 87,144 36,896 59,523 $164,113 $327,321 $2,537,342 $1,178,323 $1,174,598 13,933 36,223 237,071 111,327 107,228 $11.78 $9.04 $10.70 $10.58 $10.95 NORTHERN FUNDS ANNUAL REPORT 11 TAX-EXEMPT FIXED INCOME FUNDS

TAX-EXEMPT FIXED INCOME FUNDS STATEMENTS OF OPERATIONS Amounts in thousands ARIZONA TAX-EXEMPT FUND CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND INVESTMENT INCOME: Interest income $4,260 $12,300 Dividend income 1 (1) Total Investment Income 4,260 12,301 EXPENSES: Investment advisory fees 647 2,002 Administration fees 176 546 Custody and accounting fees 54 105 Transfer agent fees 118 364 Registration fees 23 20 Printing fees 6 39 Professional fees 32 32 Shareholder servicing fees 13 9 Trustee fees 10 10 Other 11 10 Total Expenses 1,090 3,137 Less expenses reimbursed by investment adviser (561) (1,502) Net Expenses 529 1,635 Net Investment Income 3,731 10,666 NET REALIZED AND UNREALIZED GAINS (LOSSES): Net realized gains on: Investments 874 4,581 Net change in unrealized appreciation (depreciation) on: Investments 1,802 2,345 Net Gains (Losses) 2,676 6,926 Net Increase in Net Assets Resulting from Operations $6,407 $17,592 (1) (2) Amounts include dividend income from the California Municipal Money Market Fund of the Northern Funds of $1 and $1, respectively. Amounts include dividend income from the Tax-Exempt Portfolio of the Northern Institutional Funds of $30, $6 and $14, respectively. TAX-EXEMPT FIXED INCOME FUNDS 12 NORTHERN FUNDS ANNUAL REPORT

FOR THE FISCAL YEAR ENDED MARCH 31, 2013 CALIFORNIA TAX-EXEMPT FUND HIGH YIELD MUNICIPAL FUND INTERMEDIATE TAX-EXEMPT FUND SHORT- INTERMEDIATE TAX-EXEMPT FUND TAX-EXEMPT FUND $5,480 $19,464 $60,114 $21,865 $39,275 1 (1) 30 (2) 6 (2) 14 (2) 5,481 19,464 60,144 21,871 39,289 891 2,417 12,792 5,381 6,536 243 558 3,560 1,614 1,783 65 106 511 250 273 162 372 2,374 1,076 1,188 21 32 63 50 44 14 57 29 31 32 32 67 46 44 136 53 812 50 199 10 10 40 20 20 7 11 34 21 20 1,567 3,605 20,310 8,537 10,138 (841) (630) (10,051) (3,717) (4,848) 726 2,975 10,259 4,820 5,290 4,755 16,489 49,885 17,051 33,999 4,658 8,022 40,432 2,968 33,813 2,365 9,030 6,887 (6,335) (438) 7,023 17,052 47,319 (3,367) 33,375 $11,778 $33,541 $97,204 $13,684 $67,374 NORTHERN FUNDS ANNUAL REPORT 13 TAX-EXEMPT FIXED INCOME FUNDS

TAX-EXEMPT FIXED INCOME FUNDS STATEMENTS OF CHANGES IN NET ASSETS ARIZONA TAX-EXEMPT FUND CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND Amounts in thousands 2013 2012 2013 2012 OPERATIONS: Net investment income $3,731 $3,677 $10,666 $10,178 Net realized gains 874 1,706 4,581 2,256 Net change in unrealized appreciation (depreciation) 1,802 7,113 2,345 18,705 Net Increase in Net Assets Resulting from Operations 6,407 12,496 17,592 31,139 CAPITAL SHARE TRANSACTIONS: Net increase (decrease) in net assets resulting from capital share transactions 2,997 6,883 64,007 33,615 Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 2,997 6,883 64,007 33,615 DISTRIBUTIONS PAID: From net investment income (3,741) (3,677) (10,885) (10,178) From net realized gains (1,440) (404) (4,283) Total Distributions Paid (5,181) (4,081) (15,168) (10,178) Total Increase (Decrease) in Net Assets 4,223 15,298 66,431 54,576 NET ASSETS: Beginning of year 116,616 101,318 345,391 290,815 End of year $120,839 $116,616 $411,822 $345,391 Accumulated Undistributed Net Investment Income (Loss) $(10) $ $(4) $ TAX-EXEMPT FIXED INCOME FUNDS 14 NORTHERN FUNDS ANNUAL REPORT

FOR THE FISCAL YEARS ENDED MARCH 31, CALIFORNIA TAX-EXEMPT FUND HIGH YIELD MUNICIPAL FUND INTERMEDIATE TAX-EXEMPT FUND SHORT- INTERMEDIATE TAX-EXEMPT FUND TAX-EXEMPT FUND 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 $4,755 $4,340 $16,489 $30,443 $49,885 $46,639 $17,051 $19,071 $33,999 $34,285 4,658 4,817 8,022 12,640 40,432 36,089 2,968 407 33,813 22,100 2,365 10,391 9,030 64,373 6,887 98,479 (6,335) 23,231 (438) 68,544 11,778 19,548 33,541 107,456 97,204 181,207 13,684 42,709 67,374 124,929 12,218 20,761 (88,587) (504,575) 244,868 472,459 72,316 (324,220) 17,489 130,901 12,218 20,761 (88,587) (504,575) 244,868 472,459 72,316 (324,220) 17,489 130,901 (4,756) (4,340) (16,489) (30,443) (50,163) (46,639) (18,806) (19,071) (34,192) (34,285) (4,379) (1,106) (49,200) (4,008) (1,859) (30,438) (9,135) (5,446) (16,489) (30,443) (99,363) (50,647) (20,665) (19,071) (64,630) (34,285) 14,861 34,863 (71,535) (427,562) 242,709 603,019 65,335 (300,582) 20,233 221,545 149,252 114,389 398,856 826,418 2,294,633 1,691,614 1,112,988 1,413,570 1,154,365 932,820 $164,113 $149,252 $327,321 $398,856 $2,537,342 $2,294,633 $1,178,323 $1,112,988 $1,174,598 $1,154,365 $(1) $ $ $ $(201) $77 $(289) $ $(260) $(67) NORTHERN FUNDS ANNUAL REPORT 15 TAX-EXEMPT FIXED INCOME FUNDS

TAX-EXEMPT FIXED INCOME FUNDS FINANCIAL HIGHLIGHTS ARIZONA TAX-EXEMPT FUND Selected per share data 2013 2012 2011 2010 2009 Net Asset Value, Beginning of Year $10.91 $10.08 $10.34 $9.92 $10.01 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income 0.35 0.36 0.36 0.38 0.40 Net realized and unrealized gains (losses) 0.26 0.87 (0.23) 0.42 (0.09) Total from Investment Operations 0.61 1.23 0.13 0.80 0.31 LESS DISTRIBUTIONS PAID: From net investment income (0.35) (0.36) (0.36) (0.38) (0.40) From net realized gains (0.14) (0.04) (0.03) Total Distributions Paid (0.49) (0.40) (0.39) (0.38) (0.40) Net Asset Value, End of Year $11.03 $10.91 $10.08 $10.34 $9.92 Total Return (1) 5.63% 12.30% 1.23% 8.11% 3.17% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year $120,839 $116,616 $101,318 $102,059 $84,461 Ratio to average net assets of: Expenses, net of reimbursements and credits 0.45% (2) 0.67% (2) 0.74% (2) 0.75% 0.75% Expenses, before reimbursements and credits 0.93% 0.94% 0.94% 0.93% 0.95% Net investment income, net of reimbursements and credits 3.16% (2) 3.34% (2) 3.49% (2) 3.66% 4.03% Net investment income, before reimbursements and credits 2.68% 3.07% 3.29% 3.48% 3.83% Portfolio Turnover Rate 34.54% 50.48% 48.37% 31.71% 47.59% (1) (2) Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. The net expenses and net investment income ratios include additional reimbursements of advisory fees incurred in connection with the investment of uninvested cash in affiliated money market funds of approximately $2,000, $2,000 and $7,000, which represents less than 0.005, less than 0.005 and 0.01 percent of average net assets for the fiscal years ended March 31, 2013, 2012 and 2011, respectively. Absent the additional reimbursements, net investment income and reimbursements would have been decreased and net expenses increased by a corresponding amount. TAX-EXEMPT FIXED INCOME FUNDS 16 NORTHERN FUNDS ANNUAL REPORT

FOR THE FISCAL YEARS ENDED MARCH 31, CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND Selected per share data 2013 2012 2011 2010 2009 Net Asset Value, Beginning of Year $10.74 $10.04 $10.15 $9.79 $9.94 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income 0.32 0.34 0.32 0.32 0.33 Net realized and unrealized gains (losses) 0.23 0.70 (0.07) 0.36 (0.15) Total from Investment Operations 0.55 1.04 0.25 0.68 0.18 LESS DISTRIBUTIONS PAID: From net investment income (0.33) (0.34) (0.32) (0.32) (0.33) From net realized gains (0.12) (0.04) Total Distributions Paid (0.45) (0.34) (0.36) (0.32) (0.33) Net Asset Value, End of Year $10.84 $10.74 $10.04 $10.15 $9.79 Total Return (1) 5.17% 10.56% 2.36% 7.01% 1.88% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year $411,822 $345,391 $290,815 $265,784 $187,964 Ratio to average net assets of: Expenses, net of reimbursements and credits 0.45% (2) 0.67% (2) 0.74% (2)(3) 0.75% 0.75% Expenses, before reimbursements and credits 0.86% 0.85% 0.86% 0.86% 0.88% Net investment income, net of reimbursements and credits 2.92% (2) 3.20% (2) 3.11% (2) 3.17% 3.39% Net investment income, before reimbursements and credits 2.51% 3.02% 2.99% 3.06% 3.26% Portfolio Turnover Rate 55.59% 53.21% 54.12% 33.12% 30.72% (1) (2) (3) Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. The net expenses and net investment income ratios include additional reimbursements of advisory fees incurred in connection with the investment of uninvested cash in affiliated money market funds of approximately $6,000, $3,000 and $16,000, which represents less than 0.005, less than 0.005 and 0.01 percent of average net assets for the fiscal years ended March 31, 2013, 2012 and 2011, respectively. Absent the additional reimbursements, net investment income and reimbursements would have been decreased and net expenses increased by a corresponding amount. The net expense ratio includes custodian credits of approximately $1,000, which represents less than 0.01 percent of average net assets for the fiscal year ended March 31, 2011. Absent the custodian credit arrangement, expense reimbursement would have been increased by a corresponding amount. NORTHERN FUNDS ANNUAL REPORT 17 TAX-EXEMPT FIXED INCOME FUNDS