Edgar Filing: NUVEEN ARIZONA DIVIDEND ADVANTAGE MUNICIPAL FUND 3

nxe.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF

REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-21157

Nuveen Arizona Dividend Advantage Municipal Fund 3

(Exact name of registrant as specified in charter)

Nuveen Investments

333 West Wacker Drive

Chicago, IL 60606

(Address of principal executive offices) (Zip code)

Kevin J. McCarthy

Nuveen Investments

333 West Wacker Drive

Chicago, IL 60606

(Name and address of agent for service)

Registrant's telephone number, including area code: (312) 917-7700

Date of fiscal year end: February 28

Date of reporting period: February 28, 2013

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507.

ITEM 1. REPORTS TO STOCKHOLDERS.

LIFE IS COMPLEX.

Nuveen makes things e-simple.

It only takes a minute to sign up for e-Reports. Once enrolled, you’ll receive an e-mail as soon as your Nuveen Fund information is ready. No more waiting for delivery by regular mail. Just click on the link within the e-mail to see the report and save it on your computer if you wish.

Free e-Reports right to your e-mail!

www.investordelivery.com

If you receive your Nuveen Fund distributions and statements from your financial advisor or brokerage account.

www.nuveen.com/accountaccess

If you receive your Nuveen Fund distributions and statements directly from Nuveen.

Table of Contents

Chairman’s Letter to Shareholders	4

Portfolio Managers’ Comments	5

Fund Leverage	13

Common Share Information	15

Risk Considerations	17

Performance Overview and Holding Summaries	18

Shareholder Meeting Report	23

Report of Independent Registered Public Accounting Firm	27

Portfolios of Investments	28

Statement of Assets and Liabilities	52

Statement of Operations	53

Statement of Changes in Net Assets	54

Statement of Cash Flows	56

Financial Highlights	58

Notes to Financial Statements	67

Board Members & Officers	80

Annual Investment Management Agreement Approval Process	85

Reinvest Automatically, Easily and Conveniently	87

Glossary of Terms Used in this Report	89

Additional Fund Information	91

Chairman’s

Letter to Shareholders

Dear Shareholders,

Despite the global economy’s ability to muddle through the many economic headwinds of recent years, investors continue to have good reason to remain cautious. The European Central Bank’s commitment to “do what it takes” to support sovereign debt markets has stabilized the broader euro area financial markets. The larger member states of the European Union (EU) are working diligently to strengthen the framework for a tighter financial and banking union and meaningful progress has been made by agreeing to centralize large bank regulation under the European Central Bank. However, economic conditions in the southern tier members are not improving and the pressures on their political leadership remain intense. The jury is out on whether the respective populations will support the continuing austerity measures that are required to meet the EU fiscal targets.

In the U.S., the Fed’s commitment to low interest rates through Quantitative Easing is the subject of increasing debate in its policy making deliberations and many independent economists are expressing concern about the economic distortions resulting from negative real interest rates. There are encouraging signs in Congress that both political parties are working toward compromises on previously irreconcilable social issues. It is too early to tell whether those efforts will produce meaningful results or pave the way for cooperation on the major fiscal issues that potentially loom ahead. Over the longer term, there are some positive trends for the U.S. economy: house prices are clearly recovering, banks and corporations continue to strengthen their financial positions and incentives for capital investment in the U.S. by domestic and foreign corporations are increasing due to more competitive energy and labor costs.

During the last eighteen months, U.S. investors have benefited from strong returns in the domestic equity markets and steady total returns in many fixed income markets. However, many macroeconomic risks remain unresolved, including negotiating through the many U.S. fiscal issues, managing the risks of another year of abnormally low U.S. interest rates, achieving a better balance between fiscal discipline and encouraging economic growth in the euro area and reducing the potential economic impact of geopolitical issues, particularly in the Middle East and East Asia. In the face of these uncertainties, the experienced investment professionals at Nuveen Investments seek out investments in companies that are enjoying positive economic conditions. At the same time they are always on the alert for risks in markets subject to excessive optimism. Monitoring this process is a critical function for the Fund Board as it oversees your Nuveen Fund on your behalf.

As always, I encourage you to communicate with your financial consultant if you have any questions about your investment in a Nuveen Fund. On behalf of the other members of your Fund Board, we look forward to continuing to earn your trust in the months and years ahead.

Sincerely,

Robert P. Bremner

Chairman of the Board

April 22, 2013

Nuveen Investments

Portfolio Managers’ Comments

Nuveen Arizona Premium Income Municipal Fund (NAZ)

(formerly Nuveen Arizona Premium Municipal Fund, Inc.)

Nuveen Arizona Dividend Advantage Municipal Fund (NFZ)

Nuveen Arizona Dividend Advantage Municipal Fund 2 (NKR)

Nuveen Arizona Dividend Advantage Municipal Fund 3 (NXE)

Nuveen Texas Quality Income Municipal Fund (NTX)

Portfolio managers Michael Hamilton and Daniel Close review economic and municipal market conditions at the national and state levels, key investment strategies and the twelve-month performance of the Nuveen Arizona and Texas Funds. Michael assumed portfolio management responsibility for the Arizona Funds in 2011 and Dan has managed NTX since 2007.

FUND REORGANIZATIONS

Effective before the opening of business on April 8, 2013 (subsequent to the close of this reporting period), certain Arizona Funds (the Acquired Funds) were reorganized into one, larger-state Arizona Fund included in this report (the Acquiring Fund) as follows:


Acquired Funds		Symbol	Acquiring Fund	Symbol
•	Nuveen Arizona Dividend	NFZ	Nuveen Arizona Premium	NAZ
	Advantage Municipal Fund		Income Municipal Fund
•	Nuveen Arizona Dividend	NKR
	Advantage Municipal Fund 2
•	Nuveen Arizona Dividend	NXE
	Advantage Municipal Fund 3

Upon the closing of the reorganizations, the Acquired Funds transferred their assets to the Acquiring Funds in exchange for common and preferred shares of the Acquiring Funds and the assumption by the Acquiring Funds of the liabilities of the Acquired Funds. The Acquired Funds were then liquidated, dissolved and terminated in accordance with their Declaration of Trust. Shareholders of the Acquired Funds became shareholders of the Acquiring Funds. Holders of common shares of the Acquired Funds received newly issued common shares of the Acquiring Funds, the aggregate net asset value of which was equal to the aggregate net asset value of the common shares of the Acquired Funds held immediately prior to the reorganizations (including for this purpose fractional Acquiring Funds shares to which shareholders would be entitled). Fractional shares were sold on the open market and shareholders received cash in lieu

Certain statements in this report are forward-looking statements. Discussions of specific investments are for illustration only and are not intended as recommendations of individual investments. The forward-looking statements and other views expressed herein are those of the portfolio managers as of the date of this report. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and the views expressed herein are subject to change at any time, due to numerous market and other factors. The Funds disclaim any obligation to update publicly or revise any forward-looking statements or views expressed herein.

Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below investment grade ratings. Certain bonds backed by U.S. Government or agency securities are regarded as having an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by these national rating agencies.

Nuveen Investments

of such fractional shares. Holders of preferred shares of the Acquired Funds received on a one-for-one basis newly issued preferred shares of the Acquiring Funds, in exchange for their preferred shares of the Acquired Funds held immediately prior to the reorganizations.

In conjunction with the reorganizations a change-of-domicile reorganization was approved to convert NAZ from a Minnesota corporation to a Massachusetts business trust. As a result, on April 8, 2013 the Fund’s name was changed to Nuveen Arizona Premium Income Municipal Fund. The Fund’s ticker remained unchanged.

What factors affected the U.S. economic and municipal market environments during the twelve-month reporting period ended February 28, 2013?

During this reporting period, the U.S. economy’s progress toward recovery from recession continued at a moderate pace. The Federal Reserve (Fed) maintained its efforts to improve the overall economic environment by holding the benchmark fed funds rate at the record low level of zero to 0.25% that it established in December 2008. At its March 2013 meeting (following the end of this reporting period), the central bank stated it expected that its “highly accommodative stance of monetary policy” would keep the fed funds rate in “this exceptionally low range” as long as the unemployment rate remained above 6.5% and the outlook for inflation was no higher than 2.5%. The Fed also decided to continue purchasing $40 billion of mortgage-backed securities and $45 billion of longer-term Treasury securities each month in an open-ended effort to bolster growth. Taken together, the goals of these actions are to put downward pressure on longer-term interest rates, make broader financial conditions more accommodative and support a stronger economic recovery as well as continued progress toward the Fed’s mandates of maximum employment and price stability.

In the fourth quarter of 2012, the U.S. economy, as measured by the U.S. gross domestic product (GDP), grew at an annualized rate of 0.4%, bringing GDP growth for the calendar year 2012 to 2.2%, compared with 1.8% in 2011. The Consumer Price Index (CPI) rose 2.0% year-over-year as of February 2013, while the core CPI (which excludes food and energy) increased 2.0% during the period, staying within the Fed’s unofficial objective of 2.0% or lower for this inflation measure. Labor market conditions continued to show signs of improvement. As of February 2013, the national unemployment rate was 7.7%, the lowest level since December 2008, down from 8.3% in February 2012. The housing market, long a major weak spot in the economic recovery, also delivered some good news, as the average home price in the S&P/Case-Shiller Index of 20 major metropolitan areas rose 8.1% for the twelve months ended January 2013 (most recent data available at the time this report was prepared). This marked the largest twelve-month percentage gain for the index since the pre-recession summer of 2006, although housing prices continued to be off approximately 30% from their mid-2006 peak.

Nuveen Investments

During this period, the outlook for the U.S. economy continued to be clouded by uncertainty about global financial markets and the outcome of the “fiscal cliff.” The tax consequences of the fiscal cliff situation, which were scheduled to become effective in January 2013, were averted through a last-minute deal that raised payroll taxes but left in place a number of tax breaks, including the tax exemption on municipal bond interest. However, lawmakers postponed and then failed to reach a resolution on $1.2 trillion in spending cuts, the “sequestration”, intended to address the federal budget deficit. As a result, automatic spending cuts affecting both defense and non-defense programs (excluding Social Security and Medicaid) took effect March 1, 2013, with potential implications for economic growth over the next decade.

Municipal bond prices generally rallied during this period, as strong demand and tight supply combined to create favorable market conditions for municipal bonds. Although the total volume of tax-exempt supply improved over the same period a year earlier, the issuance pattern remained light compared with long-term historical trends and new money issuance was relatively flat. This supply/demand dynamic served as a key driver of performance. Concurrent with rising prices, yields continued to decline across most maturities, especially at the longer end of the municipal yield curve and the long end of the curve continued to flatten. In addition to the lingering effects of the Build America Bonds (BAB) program, which expired at the end of 2010 but impacted issuance well into 2012, the low level of municipal issuance reflected the current political distaste for additional borrowing by state and local governments facing fiscal constraints and the prevalent atmosphere of municipal budget austerity. During this reporting period, we continued to see borrowers come to market seeking to take advantage of the low interest rate environment through refunding activity, with approximately two-thirds of municipal paper issued by borrowers that were calling existing debt and refinancing at lower rates.

Over the twelve months ended February 28, 2013, municipal bond issuance nationwide totaled $379.6 billion, an increase of 16% over the issuance for the twelve-month period ended February 29, 2012. As previously discussed, the majority of this supply was attributable to refunding issues, rather than new money issuance. During this period, demand for municipal bonds remained consistently strong, especially from individual investors, but also from mutual funds, banks and crossover buyers such as hedge funds.

How were the economic and market environments in Arizona and Texas during this reporting period?

Arizona’s economy continued its slow recovery from the far-reaching effects of the recession, especially in the state’s hard-hit housing market. Growth in professional services, health care and tourism, which represent about 40% of the jobs in Arizona, have

Nuveen Investments

led recent improvements in the state’s economy. As of February 2013, the unemployment rate in Arizona dropped to 7.9%, the lowest level in more than four years, down from 8.4% in February 2012. Gains in Arizona housing prices have been driven primarily by the Phoenix market, with the state’s smaller metropolitan areas also showing progress. According to the S&P/Case-Shiller Index, housing prices in Phoenix rose 23.2% over the twelve months ended January 2013 (most recent data available at the time this report was prepared), the largest annual gain for this period among the 20 metropolitan areas tracked by the Index. For fiscal 2013, Arizona enacted an $8.6 billion general fund budget, up 3.4% over fiscal 2012, that provided for increased spending on K-12 education, universities, a new state prison and automation projects. The 2013 budget also included a $200 million deposit to the state’s rainy day fund. At the end of fiscal 2013 on June 30, the temporary one-cent sales tax, which was enacted in 2011, will expire, requiring the state to locate additional revenue sources to avoid a potential budget gap for fiscal 2014. The proposed general fund budget for fiscal 2014 totaled $8.9 billion, including increased spending for child safety and education. As of February 2013, Moody’s and S&P rated Arizona’s issuer credit at Aa3 and AA-, respectively, with stable outlooks. For the twelve months ended February 28, 2013, municipal issuance in Arizona totaled $6.1 billion, up 24% from the previous twelve months.

The economic recovery in Texas continued to outpace the average rate of growth nationally during this period. Solid employment growth across almost all of the state’s industries, most recently led by construction, has resulted in expanded labor force participation, which, coupled with positive demographic trends, produced greater demand for housing and increases in housing prices and home sales. Education and health services, professional and business services, and trade, the state’s three largest employment sectors represent almost 40% of the state’s workers. As of February 2013, the state’s jobless rate was 6.4%, down from 7.1% in February 2012 and well below the February 2013 national rate of 7.7%. According to the S&P/Case-Shiller Index, housing prices in Dallas posted a year-over-year increase of 7.0% as of January 2013 (most recent data available at the time this report was prepared), the strongest annual gain for this market in the index’s history, but lower than the average increase of 8.1% nationwide. On the fiscal front, since the fiscal 2012-2013 biennial budget was balanced with deep cuts to most programs, revenue collections in the state have improved. Sales tax receipts, which make up more than half of the general revenue funds in Texas, came in above projections, and oil and natural gas revenues also rose, as projects such as Eagle Ford Shale came online. In January 2013, it was announced that the state had a budget surplus estimated at $8.8 billion. General revenues were projected at $85.6 billion for the fiscal 2014-2015 budget, a 6.6% increase over the fiscal 2012-2013 forecast. As of February 2013, Moody’s and S&P rated Texas general

Nuveen Investments

obligation (GO) debt at Aaa and AA+, respectively, with stable outlooks. For the twelve months ended February 28, 2013, municipal issuance in Texas totaled $37.9 billion, an increase of 37% from the previous twelve months. Texas continued to rank as the third largest state issuer behind New York and California.

How did the Funds perform during the twelve-month reporting period ended February 28, 2013? What strategies were used to manage the Funds during the reporting period and how did these strategies influence performance?

The tables in each Fund’s Performance Overview and Holding Summaries section of this report provide total returns for the Funds for the one-year, five-year and ten-year period ended February 28, 2013. Each Fund’s total returns are compared with the performance of a corresponding market index and Lipper classification average.

For the twelve months ended February 28, 2013, the total return on common share net asset value (NAV) for all of the Funds in this report exceeded the returns for their respective state’s S&P Municipal Bond Index as well as that of the S&P Municipal Bond Index. For the same period, NAZ, NFZ, NKR and NTX outperformed the average return for the Lipper Other States Municipal Debt Funds Classification Average, while NXE trailed this Lipper average.

Key management factors that influenced the Funds’ returns during this period included duration and yield curve positioning, credit exposure and sector allocation. In addition, the use of leverage was an important positive factor affecting the Funds’ performance. Leverage is discussed in more detail later in this report.

In an environment of declining rates and a flattening yield curve, municipal bonds with longer maturities generally outperformed those with shorter maturities during this reporting period. Overall, credits at the longest end of the municipal yield curve posted the strongest returns during this period, while bonds at the shortest end produced some of the weakest results. Duration and yield curve positioning was a net positive contributor to the performance of all these Funds, especially NAZ and NXE, as they benefited from heavier exposure to the outperforming long part of the yield curve and less exposure to the shorter segments of the curve that underperformed.

Credit exposure was another important factor in the Funds’ performance during these twelve months, as lower quality bonds generally outperformed higher quality bonds. This outperformance was due in part to the greater demand for lower rated bonds as investors looked for investment vehicles offering higher yields. As investors became more comfortable taking on additional investment risk, credit spreads, or the difference

Nuveen Investments

in yield spreads between U.S. Treasury securities and comparable investments such as municipal bonds, narrowed through a variety of rating categories. As a result of this spread compression, the Funds generally benefited from their holdings of lower rated credits. The performance of the Arizona Funds was helped by their overweighting in bonds rated A and BBB as well as non-rated credits, which also performed well. NTX, on the other hand, was underweighted in non-rated bonds, which hurt performance. The impact of this was offset to some degree by NTX’s underweighting in bonds rated AAA, which lessened the impact of this quality sector’s underperformance for the period.

During this period, revenue bonds as a whole outperformed the general municipal market. Holdings that generally made positive contributions to the Funds’ returns included industrial development revenue (IDR) credits, health care (together with hospitals), transportation and housing bonds. In particular, NTX’s position in multifamily housing was positive for its performance, although this was partially offset by the Fund’s underweighting of IDR bonds. In addition, the Arizona Funds benefited from their holdings of charter school bonds. Tobacco credits backed by the 1998 master tobacco settlement agreement were the top performing market sector in 2012, helped by their longer effective durations and the increased demand for higher yielding investments by investors who had become less risk-averse. In addition, based on recent data showing that cigarette sales had fallen less steeply than anticipated, the 46 states participating in the agreement, including Arizona, stand to receive increased payments from the tobacco companies. NAZ, NXE and NTX held very small positions (less than 1%) in Puerto Rico tobacco bonds, while NFZ and NKR did not hold any tobacco credits.

In contrast, pre-refunded bonds, which are often backed by U.S. Treasury securities, were among the poorest performing market segments during this period. The under-performance of these bonds can be attributed primarily to their shorter effective maturities and higher credit quality. As of February 28, 2013, NTX had the heaviest weighting of pre-refunded bonds, while NKR held a negligible position in pre-refunded bonds. We continued to hold pre-refunded bonds in our portfolios due to the higher yields they provided. Also lagging the performance of the general municipal market for this period were GO bonds. The performance of the Arizona Funds was also negatively impacted by two holdings in the utilities sector. First, Far West Water and Sewer encountered regulatory issues during this period, and the bonds, issued by the Yuma County Industrial Development Authority, decreased in value. The Funds held substantial positions in these bonds, which hurt performance for the period. We continue to hold the Far West bonds in our portfolios, as we believe the regulatory issues have been resolved. In addition, long duration, gas prepayment bonds issued by the Salt Verde Financial Corporation for Citigroup Energy performed well during the period. The

Nuveen Investments

Funds’ ability to benefit from this performance was in line with their individual weightings in the Salt Verde bonds. Overall, NAZ received the largest benefit from these bonds and NFZ the least.

In light of recent events in the municipal marketplace, shareholders also should be aware of an issue involving some of the Funds’ holdings, i.e., the downgrade of Puerto Rico bonds. In December 2012, Moody’s downgraded Puerto Rico general obligation bonds to Baa3 from Baa1 based on Puerto Rico’s ongoing economic problems, unfunded pension liabilities, elevated debt levels, and structural budget gaps. Earlier in the year (July 2012), bonds issued by the Puerto Rico Sales Tax Financing Corporation (COFINA) also were downgraded by Moody’s to Aa3 from Aa2. The downgrade of the COFINA bonds was due mainly to the performance of Puerto Rico’s economy and its impact on the projected growth of sales tax revenues, and not to any sector or structural issues. In addition, the COFINA bonds were able to maintain a higher rating than the GOs because, unlike the revenue streams supporting some Puerto Rican issues, the sales taxes supporting the COFINA bonds cannot be diverted and used to support the commonwealth’s GO bonds. Shareholders of the Arizona and Texas Funds should note that each of these Funds has limited exposure to Puerto Rico bonds, with holdings ranging from less than 1% in NTX to approximately 5% in NXE. The Funds’ holdings are predominately the dedicated sales tax bonds issued by COFINA, although the Arizona Funds also hold hospital, university, electric power and water and sewer credits issued in Puerto Rico. These bonds were generally purchased in the past to help keep the Funds fully invested when in-state paper was scarce and to provide higher yields, added diversification and triple exemption (i.e., exemption from federal, state, and local taxes). NAZ, NXE and NTX also hold Puerto Rico tobacco bonds. During this period, no additional Puerto Rico bonds were purchased in NTX or NXE, while NAZ, NFZ and NKR bought additional COFINA sales tax bonds, but no Puerto Rico GOs. The purchase of additional COFINA bonds was largely due to the nature of Arizona issuance during this period, that is, there was a shortage of higher yielding, longer duration Arizona paper that met our objectives for the Arizona Funds. For the reporting period ended February 28, 2013, Puerto Rico paper generally underperformed the market as whole, although Puerto Rico tobacco bonds performed very well. The impact on performance differed from Fund to Fund in line with the type and amount of its holdings. As we continue to emphasize Puerto Rico’s stronger credits, we view these holdings as long-term and note that, in the case of the COFINA bonds, the commonwealth’s recent enforcement of sales tax collections has improved significantly.

As previously discussed, municipal bond prices generally rallied nationally during this period, driven by strong demand and tight supply of new issuance. At the same time,

Nuveen Investments

yields continued to be relatively low. In this environment, we continued to take a bottom-up approach to discovering sectors that appeared undervalued as well as individual credits that had the potential to perform well over the long term and helped us keep our Funds fully invested.

During this period, the Arizona Funds added to their positions in bonds issued by the health care, airport, universities, charter school and community facilities district sectors. Because new paper issuance in Arizona continued to be moderated by refunding activity, we also looked for additional ways to put cash to work, purchasing some territorial bonds that are exempt from federal, state and local taxes. In NTX, we found value in diversified areas of the market, including electric utilities, water and sewer, toll roads, and a lower rated charter school. NTX also purchased bonds issued for the YMCA in Houston and the Harris County-Houston Sports Authority, which owns and operates stadiums for the Houston Astros, Texans and Rockets.

In general, our focus in the Arizona Funds was on purchasing lower rated bonds, especially those rated A, with longer durations and higher yields. Overall, our goal was to keep these Funds duration neutral, focused on income and fully invested. NTX also emphasized bonds with longer maturities. This helped to keep duration within targeted objectives and provide protection for duration and yield curve positioning. The purchase of longer term bonds also enabled us to take advantage of more attractive yields at the longer end of the municipal yield curve.

Cash for new purchases during this period was generated primarily by the proceeds from the increased number of bond calls resulting from the growth in refinancings. The elevated number of bond calls provided a meaningful source of liquidity, which drove much of our activity during this period as we worked to redeploy these proceeds, as well as those from maturing bonds, to keep the Funds fully invested and support their income streams. In addition, the Funds sold selected pre-refunded bonds, and the Arizona Funds took advantage of unusual liquidity in LIBOR floating rate securities backed by Banner Health Systems to close out their positions in these bonds. Overall, selling was minimal during this period, as the bonds in our portfolios generally offered higher yields than those available in the current marketplace.

As of February 28, 2013, all of these Funds continued to use inverse floating rate securities. We employ inverse floaters for a variety of reasons, including duration management, income enhancement and total return enhancement.

Nuveen Investments

Fund Leverage

IMPACT OF THE FUNDS’ LEVERAGE STRATEGIES ON PERFORMANCE

One important factor impacting the return of the Funds relative to their benchmarks was the Funds’ use of leverage. The Funds use leverage because their managers believe that, over time, leveraging provides opportunities for additional income and total return for common shareholders. However, use of leverage also can expose common shareholders to additional volatility. For example, as the prices of securities held by a Fund decline, the negative impact of these valuation changes on common share net asset value and common shareholder total return is magnified by the use of leverage. Conversely, leverage may enhance common share returns during periods when the prices of securities held by a Fund generally are rising. Leverage had a positive impact on the performance of the Funds over this reporting period.

As of February 28, 2013, the Funds’ percentages of effective and regulatory leverage are as shown in the accompanying table:


	Effective		Regulatory
Fund	Leverage	*	Leverage	*
NAZ	31.06%		28.80	%
NFZ	35.45%		31.66	%
NKR	34.91%		32.69	%
NXE	33.72%		30.74	%
NTX	32.03%		30.86	%

Effective Leverage is a Fund’s effective economic leverage, and includes both regulatory leverage and the leverage effects of certain derivative and other investments in a Fund’s portfolio that increase the Fund’s investment exposure. Currently, the leverage effects of Tender Option Bond (TOB) inverse floater holdings are included in effective leverage values, in addition to any regulatory leverage. Regulatory leverage consists of preferred shares issued or borrowings of a Fund. Both of these are part of a Fund’s capital structure. Regulatory leverage is sometimes referred to as “‘40 Act Leverage” and is subject to asset coverage limits set forth in the Investment Company Act of 1940.

Nuveen Investments

THE FUNDS’ REGULATORY LEVERAGE

As of February 28, 2013, the Funds have issued and outstanding MuniFund Term Preferred (MTP) Shares and Variable Rate MuniFund Term Preferred (VMTP) Shares as shown in the accompanying tables.

MTP Shares


		MTP Shares Issued		Annual	NYSE
Fund	Series	at Liquidation Value		Interest Rate	Ticker
NFZ	2015	$	11,100,000	2.05%	NFZ PrC
NKR	2015	$	18,725,000	2.05%	NKR PrC
NXE	2016	$	20,846,000	2.90%	NXE PrC
NTX	2015	$	70,920,000	2.30%	NTX PrC

VMTP Shares

		VMTP Shares Issued
Fund	Series	at Liquidation Value
NAZ	2014	$	28,000,000

Refer to Notes to Financial Statements, Footnote 1 – General Information and Significant Accounting Policies for further details on MTP and VMTP Shares.

Nuveen Investments

Common Share Information

COMMON SHARE DIVIDENDS

During the twelve-month reporting period, the Fund’s monthly dividends to Common shareholders were as shown in the accompanying table.

		Per Common Share Amounts
		NAZ		NFZ		NKR		NXE		NTX
March	$	0.0640	$	0.0645	$	0.0670	$	0.0630	$	0.0685
April		0.0640		0.0645		0.0670		0.0630		0.0685
May		0.0640		0.0645		0.0670		0.0630		0.0685
June		0.0640		0.0610		0.0670		0.0600		0.0640
July		0.0640		0.0610		0.0670		0.0600		0.0640
August		0.0640		0.0610		0.0670		0.0600		0.0640
September		0.0640		0.0610		0.0670		0.0600		0.0640
October		0.0640		0.0610		0.0670		0.0600		0.0640
November		0.0640		0.0610		0.0670		0.0600		0.0640
December		0.0640		0.0610		0.0640		0.0580		0.0610
January		0.0640		0.0610		0.0640		0.0580		0.0610
February		0.0640		0.0610		0.0640		0.0580		0.0610

Market Yield**		4.89%		4.73%		4.87%		4.60%		4.58%
Taxable-Equivalent Yield**		7.12%		6.89%		7.09%		6.70%		6.36%

Market Yield is based on the Fund’s current annualized monthly dividend divided by the Fund’s current market price as of the end of the reporting period. Taxable-Equivalent Yield represents the yield that must be earned on a fully taxable investment in order to equal the yield of the Fund on an after-tax basis. It is based on a combined federal and state income tax rate of 31.3% for the Arizona Funds and a federal income tax rate of 28.0% for the Texas Fund. When comparing a Fund to investments that generate qualified dividend income, the Taxable-Equivalent Yield is lower.

All of the Funds in this report seek to pay stable dividends at rates that reflect each Fund’s past results and projected future performance. During certain periods, each Fund may pay dividends at a rate that may be more or less than the amount of net investment income actually earned by the Fund during the period. If a Fund has cumulatively earned more than it has paid in dividends, it holds the excess in reserve as undistributed net investment income (UNII) as part of the Fund’s NAV. Conversely, if a Fund has cumulatively paid dividends in excess of its earnings, the excess constitutes negative UNII that is likewise reflected in the Fund’s NAV. Each Fund will, over time, pay all of its net investment income as dividends to shareholders. As of February 28, 2013, all five of the Funds in this report had positive UNII balances for both tax and financial reporting purposes.

Nuveen Investments

COMMON SHARE REPURCHASES

During November 2012, the Nuveen Funds Board of Directors/Trustees reauthorized the Funds’ open-market share repurchase program, allowing each Fund to repurchase an aggregate of up to approximately 10% of its outstanding common shares.

As of February 28, 2013, and since the inception of the Funds’ repurchase programs, the Funds have cumulatively repurchased and retired their outstanding common shares as shown in the accompanying table. Since the inception of the Funds’ repurchase programs, NAZ and NTX have not repurchased any of their outstanding common shares.


	Common Shares	% of Outstanding
Fund	Repurchased and Retired	Common Shares
NAZ	—	—
NFZ	2,500	0.2	%
NKR	800	0.0	%*
NXE	1,600	0.1	%
NTX	—	—

*	Rounds to less than 0.1%.

During the twelve-month reporting period, the Funds did not repurchase any of their outstanding common shares.

COMMON SHARE SHELF EQUITY PROGRAMS

During the current reporting period, NTX filed a registration statement with the SEC authorizing the Fund to issue an additional 950,000 common shares through a equity shelf program.

Under this equity shelf program, the Fund, subject to market conditions, may raise additional capital from time to time in varying amounts and offering methods at a net price at or above the Fund’s NAV per common share.

During the current reporting period, NTX sold common shares through its shelf equity program at a weighted average premium to NAV per common share as shown in the accompanying table.


	Common Shares	Weighted Average
	Sold through	Premium to NAV
Fund	Shelf Offering	Per Common Share Sold
NTX	398,357	3.21%

COMMON OTHER SHARE INFORMATION

As of February 28, 2013, and during the twelve-month reporting period, the Funds’ common share prices were trading at a premium/(discount) to their common share NAV as shown in the accompanying table.


		NAZ			NFZ			NKR			NXE			NTX
Common Share NAV	$	15.47		$	15.47		$	15.80		$	15.32		$	15.87
Common Share Price	$	15.70		$	15.47		$	15.77		$	15.13		$	16.00
Premium/(Discount) to NAV		1.49	%		0.00	%		(0.19	)%		(1.24	)%		0.82	%
12-Month Average Premium/(Discount) to NAV		1.06	%		(2.67	)%		(1.55	)%		(3.32	)%		5.03	%

Nuveen Investments

Risk Considerations

Fund Shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation. Past performance is no guarantee of future results. Fund common shares are subject to a variety of risks, including:

Investment, Market and Price Risk. An investment in common shares is subject to investment risk, including the possible loss of the entire principal amount that you invest. Your investment in common shares represents an indirect investment in the municipal securities owned by the Fund, which generally trade in the over-the-counter markets. Shares of closed-end investment companies like these Funds frequently trade at a discount to their NAV. Your common shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of Fund dividends and distributions.

Leverage Risk. Each Fund’s use of leverage creates the possibility of higher volatility for the Fund’s per share NAV, market price, distributions and returns. There is no assurance that a Fund’s leveraging strategy will be successful.

Tax Risk. The tax treatment of Fund distributions may be affected by new IRS interpretations of the Internal Revenue Code and future changes in tax laws and regulations.

Issuer Credit Risk. This is the risk that a security in a Fund’s portfolio will fail to make dividend or interest payments when due.

Interest Rate Risk. Fixed-income securities such as bonds, preferred, convertible and other debt securities will decline in value if market interest rates rise.

Reinvestment Risk. If market interest rates decline, income earned from a Fund’s portfolio may be reinvested at rates below that of the original bond that generated the income.

Call Risk or Prepayment Risk. Issuers may exercise their option to prepay principal earlier than scheduled, forcing a Fund to reinvest in lower-yielding securities.

Inverse Floater Risk. The Funds invest in inverse floaters. Due to their leveraged nature, these investments can greatly increase a Fund’s exposure to interest rate risk and credit risk. In addition, investments in inverse floaters involve the risk that the Fund could lose more than its original principal investment.

Nuveen Investments

Nuveen Arizona Premium Income Municipal Fund (NAZ)

Performance Overview and Holding Summaries as of February 28, 2013

Average Annual Total Returns as of February 28, 2013

	Average Annual
	1-Year	5-Year	10-Year
NAZ at Common Share NAV	9.77%	9.38%	6.22	%
NAZ at Common Share Price	13.02%	10.77%	5.23	%
S&P Municipal Bond Arizona Index	6.05%	6.98%	5.25	%
S&P Municipal Bond Index	5.69%	6.81%	5.19	%
Lipper Other States Municipal Debt Funds Classification Average	7.59%	8.95%	6.08	%

Past performance is not predictive of future results. Current performance may be higher or lower than the data shown. Returns do not reflect the deduction of taxes that shareholders may have to pay on Fund distributions or upon the sale of Fund shares. Comparative index and Lipper return information is provided for the Fund’s shares at NAV only. Indexes and Lipper averages are not available for direct investment.

Common Share Price Performance — Weekly Closing Price

Portfolio Composition1
(as a % of total investments)
Tax Obligation/Limited	23.5	%
Utilities	18.9	%
Health Care	17.0	%
Education and Civic Organizations	13.6	%
U.S. Guaranteed	9.3	%
Tax Obligation/General	8.3	%
Water and Sewer	8.3	%
Other	1.1	%

Credit Quality
(as a % of total investment exposure)1,2,3
AAA/U.S.Guaranteed	15	%
AA	24	%
A	42	%
BBB	13	%
BB or Lower	1	%
N/R	4	%

Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview and Holding Summaries page.

1	Holdings are subject to change.
2	Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Certain bonds backed by U.S. Government or agency securities are regarded as having an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by these national rating agencies.
3	Percentage may not add to 100% due to the exclusion of Other Assets Less Liabilities from the table.

Nuveen Investments

Nuveen Arizona Dividend Advantage Municipal Fund (NFZ)

Performance Overview and Holding Summaries as of February 28, 2013

Average Annual Total Returns as of February 28, 2013

	Average Annual
	1-Year	5-Year	10-Year
NFZ at Common Share NAV	7.63%	8.86%	5.70	%
NFZ at Common Share Price	12.93%	9.44%	5.58	%
S&P Municipal Bond Arizona Index	6.05%	6.98%	5.25	%
S&P Municipal Bond Index	5.69%	6.81%	5.19	%
Lipper Other States Municipal Debt Funds Classification Average	7.59%	8.95%	6.08	%

Common Share Price Performance — Weekly Closing Price

Portfolio Composition1
(as a % of total investments)
Tax Obligation/Limited	32.7	%
Utilities	17.0	%
Health Care	16.5	%
Tax Obligation/General	12.1	%
U.S. Guaranteed	9.0	%
Education and Civic Organizations	8.2	%
Other	4.5	%

Credit Quality
(as a % of total investment exposure)1,2,3
AAA/U.S.Guaranteed	16	%
AA	31	%
A	27	%
BBB	16	%
BB or Lower	1	%
N/R	8	%

Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview and Holding Summaries page.

1	Holdings are subject to change.
2	Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Certain bonds backed by U.S. Government or agency securities are regarded as having an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by these national rating agencies.
3	Percentage may not add to 100% due to the exclusion of Other Assets Less Liabilities from the table.

Nuveen Investments

Nuveen Arizona Dividend Advantage Municipal Fund 2 (NKR)

Performance Overview and Holding Summaries as of February 28, 2013

Average Annual Total Returns as of February 28, 2013

	Average Annual
	1-Year	5-Year	10-Year
NKR at Common Share NAV	7.99%	8.76%	5.98	%
NKR at Common Share Price	12.30%	9.45%	6.22	%
S&P Municipal Bond Arizona Index	6.05%	6.98%	5.25	%
S&P Municipal Bond Index	5.69%	6.81%	5.19	%
Lipper Other States Municipal Debt Funds Classification Average	7.59%	8.95%	6.08	%

Common Share Price Performance — Weekly Closing Price

Portfolio Composition1
(as a % of total investments)
Tax Obligation/Limited	28.0	%
Health Care	22.1	%
Tax Obligation/General	17.2	%
Education and Civic Organizations	12.0	%
Utilities	7.9	%
Water and Sewer	7.4	%
Other	5.4	%

Credit Quality
(as a % of total investment exposure)1,2,3
AAA/U.S.Guaranteed	13	%
AA	29	%
A	29	%
BBB	16	%
BB or Lower	2	%
N/R	9	%

Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview and Holding Summaries page.

1	Holdings are subject to change.
2	Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Certain bonds backed by U.S. Government or agency securities are regarded as having an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by these national rating agencies.
3	Percentage may not add to 100% due to the exclusion of Other Assets Less Liabilities from the table.

Nuveen Investments

Nuveen Arizona Dividend Advantage Municipal Fund 3 (NXE)

Performance Overview and Holding Summaries as of February 28, 2013

Average Annual Total Returns as of February 28, 2013

	Average Annual
	1-Year	5-Year	10-Year
NXE at Common Share NAV	7.30%	8.83%	6.08	%
NXE at Common Share Price	11.26%	9.32%	6.43	%
S&P Municipal Bond Arizona Index	6.05%	6.98%	5.25	%
S&P Municipal Bond Index	5.69%	6.81%	5.19	%
Lipper Other States Municipal Debt Funds Classification Average	7.59%	8.95%	6.08	%

Common Share Price Performance — Weekly Closing Price

Portfolio Composition1
(as a % of total investments)
Tax Obligation/Limited	29.1	%
Health Care	20.2	%
Education and Civic Organizations	13.1	%
Utilities	11.1	%
Tax Obligation/General	8.9	%
U.S. Guaranteed	6.6	%
Water and Sewer	6.6	%
Other	4.4	%

Credit Quality
(as a % of total investment exposure)1,2,3
AAA/U.S.Guaranteed	12	%
AA	22	%
A	32	%
BBB	19	%
BB or Lower	2	%
N/R	11	%

Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview and Holding Summaries page.

1	Holdings are subject to change.
2	Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Certain bonds backed by U.S. Government or agency securities are regarded as having an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by these national rating agencies.
3	Percentage may not add to 100% due to the exclusion of Other Assets Less Liabilities from the table.

Nuveen Investments

Nuveen Texas Quality Income Municipal Fund (NTX)

Performance Overview and Holding Summaries as of February 28, 2013

Average Annual Total Returns as of February 28, 2013

	Average Annual
	1-Year	5-Year	10-Year
NTX at Common Share NAV	7.80%	8.71%	6.23	%
NTX at Common Share Price	2.97%	10.76%	6.88	%
S&P Municipal Bond Texas Index	6.26%	7.14%	5.55	%
S&P Municipal Bond Index	5.69%	6.81%	5.19	%
Lipper Other States Municipal Debt Funds Classification Average	7.59%	8.95%	6.08	%

Common Share Price Performance — Weekly Closing Price

Portfolio Composition1
(as a % of total investments)
Tax Obligation/General	19.8	%
Utilities	12.2	%
U.S. Guaranteed	11.7	%
Tax Obligation/Limited	11.5	%
Transportation	10.7	%
Water and Sewer	10.6	%
Education and Civic Organizations	8.9	%
Health Care	8.8	%
Other	5.8	%

Credit Quality
(as a % of total investment exposure)1,2,3
AAA/U.S.Guaranteed	26	%
AA	31	%
A	22	%
BBB	20	%
BB or Lower	1	%

Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview and Holding Summaries page.

1	Holdings are subject to change.
2	Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Certain bonds backed by U.S. Government or agency securities are regarded as having an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by these national rating agencies.
3	Percentage may not add to 100% due to the exclusion of Other Assets Less Liabilities from the table.

Nuveen Investments

NAZ		Shareholder Meeting Report
NFZ		The annual meeting of shareholders for NFZ, NKR, NXE and NAZ was held in the offices of Nuveen Investments on October 12, 2012; at this meeting the shareholders were asked to vote on the approval of an Agreement and Plan of Reorganization to enable the Fund to reorganize as a newly created Massachusetts business trust, the approval of an Agreement and Plan of Reorganization, the approval of the issuance of additional common shares, the approval of an amendment to the Fund’s articles of incorporation and the election of Board Members. The meeting was subsequently adjourned to November 16, 2012. The meeting for NFZ, NKR and NXE was additionally adjourned to December 14, 2012, January 24, 2013, February 8, 2013 and March 11, 2013, respectively. The annual meeting of shareholders for NTX was held in the offices of Nuveen Investments on November 14, 2012; at this meeting the shareholders were asked to vote on the election of Board Members.

	NAZ						NFZ
	Common and Preferred shares voting together as a class		Preferred Shares		Common Shares		Common and Preferred shares voting together as a class		Preferred Shares
To approve an Agreement and Plan of Reorganization to enable the Fund to reorganize as a newly created Massachusetts business trust.
For		2,314,131		280		—		—		—
Against		110,933		—		—		—		—
Abstain		51,040		—		—		—		—
Broker Non-Votes		1,076,478		—		—		—		—
Total		3,552,582		280		—		—		—
To approve an Agreement and Plan of Reorganization.
For		2,444,785		280		—		1,453,489		533,389
Against		152,412		—		—		38,739		3,200
Abstain		183,555		—		—		69,494		47,500
Broker Non-Votes		880,413		—		—		775,903		378,829
Total		3,661,165		280		—		2,337,625		962,918
To approve the issuance of additional common shares in connection with each Reorganization.
For		2,057,795		—		2,057,515		—		—
Against		273,074		—		273,074		—		—
Abstain		145,235		—		145,235		—		—
Broker Non-Votes		1,076,478		—		1,076,478		—		—
Total		3,552,582		—		3,552,302		—		—
To approve an amendment to the Fund’s articles of incorporation.
For		2,397,315		280		—		—		—
Against		210,308		—		—		—		—
Abstain		173,129		—		—		—		—
Broker Non-Votes		880,413		—		—		—		—
Total		3,661,165		280		—		—		—

Nuveen Investments

		Shareholder Meeting Report (continued)
NAZ
NFZ

	NAZ						NFZ
	Common and Preferred shares voting together as a class		Preferred Shares		Common Shares		Common and Preferred shares voting together as a class		Preferred Shares
Approval of the Board Members was reached as follows:
John P. Amboian
For		3,440,519		—		—		—		—
Withhold		112,063		—		—		—		—
Total		3,552,582		—		—		—		—
Robert P. Bremner
For		3,437,319		—		—		2,170,443		—
Withhold		115,263		—		—		63,994		—
Total		3,552,582		—		—		2,234,437		—
Jack B. Evans
For		3,440,519		—		—		2,170,443		—
Withhold		112,063		—		—		63,994		—
Total		3,552,582		—		—		2,234,437		—
William C. Hunter
For		—		280		—		—		876,157
Withhold		—		—		—		—		8,511
Total		—		280		—		—		884,668
David J. Kundert
For		3,439,319		—		—		—		—
Withhold		113,263		—		—		—		—
Total		3,552,582		—		—		—		—
William J. Schneider
For		—		280		—		—		876,157
Withhold		—		—		—		—		8,511
Total		—		280		—		—		884,668
Judith M. Stockdale
For		3,437,678		—		—		—		—
Withhold		114,904		—		—		—		—
Total		3,552,582		—		—		—		—
Carole E. Stone
For		3,433,431		—		—		—		—
Withhold		119,151		—		—		—		—
Total		3,552,582		—		—		—		—
Virginia L. Stringer
For		3,433,431		—		—		—		—
Withhold		119,151		—		—		—		—
Total		3,552,582		—		—		—		—
Terence J. Toth
For		3,440,519		—		—		—		—
Withhold		112,063		—		—		—		—
Total		3,552,582		—		—		—		—

Nuveen Investments

NKR
NXE
NTX

	NKR				NXE				NTX
	Common and Preferred shares voting together as a class		Preferred Shares		Common and Preferred shares voting together as a class		Preferred Shares		Common and Preferred shares voting together as a class		Preferred Shares
To approve an Agreement and Plan of Reorganization to enable the Fund to reorganize as a newly created Massachusetts business trust.
For		—		—		—		—		—		—
Against		—		—		—		—		—		—
Abstain		—		—		—		—		—		—
Broker Non-Votes		—		—		—		—		—		—
Total		—		—		—		—		—		—
To approve an Agreement and Plan of Reorganization.
For		2,347,161		946,188		2,840,957		1,129,549		—		—
Against		125,691		54,527		194,422		56,900		—		—
Abstain		95,579		17,500		108,651		25,000		—		—
Broker Non-Votes		1,316,530		609,748		1,412,030		525,001		—		—
Total		3,884,961		1,627,963		4,556,060		1,736,450		—		—
To approve the issuance of additional common shares in connection with each Reorganization.
For		—		—		—		—		—		—
Against		—		—		—		—		—		—
Abstain		—		—		—		—		—		—
Broker Non-Votes		—		—		—		—		—		—
Total		—		—		—		—		—		—
To approve an amendment to the Fund’s articles of incorporation.
		—		—		—		—		—		—
Against		—		—		—		—		—		—
Abstain		—		—		—		—		—		—
Broker Non-Votes		—		—		—		—		—		—
Total		—		—		—		—		—		—

Nuveen Investments

NKR		Shareholder Meeting Report (continued)
NXE
NTX

	NKR				NXE				NTX
	Common and Preferred shares voting together as a class		Preferred Shares		Common and Preferred shares voting together as a class		Preferred Shares		Common and Preferred shares voting together as a class		Preferred Shares
Approval of the Board Members was reached as follows:
John P. Amboian
For		—		—		—		—		—		—
Withhold		—		—		—		—		—		—
Total		—		—		—		—		—		—
Robert P. Bremner
For		3,424,350		—		4,135,426		—		15,197,249		—
Withhold		203,694		—		120,187		—		444,249		—
Total		3,628,044		—		4,255,613		—		15,641,498		—
Jack B. Evans
For		3,435,505		—		4,120,466		—		15,248,841		—
Withhold		192,539		—		135,147		—		392,657		—
Total		3,628,044		—		4,255,613		—		15,641,498		—
William C. Hunter
For		—		1,347,384		—		1,479,788		—		6,619,429
Withhold		—		78,279		—		12,261		—		118,396
Total		—		1,425,663		—		1,492,049		—		6,737,825
David J. Kundert
For		—		—		—		—		—		—
Withhold		—		—		—		—		—		—
Total		—		—		—		—		—		—
William J. Schneider
For		—		1,347,384		—		1,479,788		—		6,619,429
Withhold		—		78,279		—		12,261		—		118,396
Total		—		1,425,663		—		1,492,049		—		6,737,825
Judith M. Stockdale
For		—		—		—		—		—		—
Withhold		—		—		—		—		—		—
Total		—		—		—		—		—		—
Carole E. Stone
For		—		—		—		—		—		—
Withhold		—		—		—		—		—		—
Total		—		—		—		—		—		—
Virginia L. Stringer
For		—		—		—		—		—		—
Withhold		—		—		—		—		—		—
Total		—		—		—		—		—		—
Terence J. Toth
For		—		—		—		—		—		—
Withhold		—		—		—		—		—		—
Total		—		—		—		—		—		—

Nuveen Investments

Report of Independent

Registered Public Accounting Firm

The Board of Trustees and Shareholders

Nuveen Arizona Premium Income Municipal Fund

(formerly Nuveen Arizona Premium Income Municipal Fund, Inc.)

Nuveen Arizona Dividend Advantage Municipal Fund

Nuveen Arizona Dividend Advantage Municipal Fund 2

Nuveen Arizona Dividend Advantage Municipal Fund 3

Nuveen Texas Quality Income Municipal Fund

We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of Nuveen Arizona Premium Income Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund 2, Nuveen Arizona Dividend Advantage Municipal Fund 3, and Nuveen Texas Quality Income Municipal Fund (the “Funds”) as of February 28, 2013, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Funds’ internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of February 28, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of Nuveen Arizona Premium Income Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund 2, Nuveen Arizona Dividend Advantage Municipal Fund 3, and Nuveen Texas Quality Income Municipal Fund at February 28, 2013, and the results of their operations and their cash flows for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

Chicago, Illinois

April 25, 2013

Nuveen Investments

		Nuveen Arizona Premium Income Municipal Fund
		(formerly Nuveen Arizona Premium Municipal Fund, Inc.)
NAZ		Portfolio of Investments
		February 28, 2013

	Principal		Optional Call
	Amount (000)	Description (1)	Provisions (2)	Ratings (3)		Value
		Consumer Staples – 1.1% (0.7% of Total Investments)
$	725	Puerto Rico, The Children’s Trust Fund, Tobacco Settlement Asset-Backed Refunding Bonds, Series 2002, 5.375%, 5/15/33	5/13 at 100.00	BBB+	$	732,236
		Education and Civic Organizations – 19.2% (13.6% of Total Investments)
	615	Arizona Board of Regents, Arizona State University System Revenue Bonds, Refunding Bonds, Series 2013A, 5.000%, 7/01/37	No Opt. Call	AA		709,931
	2,500	Arizona Higher Education Loan Authority, Student Loan Revenue Bonds, Series 2007B, Auction Rate Securities, 0.320%, 11/01/41 (Alternative Minimum Tax) (4)	4/13 at 100.00	A		2,066,898
		Arizona State University, System Revenue Bonds, Series 2005:
	1,455	5.000%, 7/01/20 – AMBAC Insured	7/15 at 100.00	Aa3		1,595,408
	750	5.000%, 7/01/21 – AMBAC Insured	7/15 at 100.00	Aa3		822,375
	755	Glendale Industrial Development Authority, Arizona, Revenue Bonds, Midwestern University, Refunding Series 2007, 5.000%, 5/15/31	5/22 at 100.00	A–		833,792
	1,600	Glendale Industrial Development Authority, Arizona, Revenue Bonds, Midwestern University, Refunding Series 2010, 5.125%, 5/15/40	5/20 at 100.00	A+		1,705,024
	280	Phoenix Industrial Development Authority, Arizona, Education Facility Revenue Bonds, Brighter Choice Foundation Charter Middle Schools Project, Albany, New York, Series 2012, 7.500%, 7/01/42	7/22 at 100.00	BB+		302,803
	220	Phoenix Industrial Development Authority, Arizona, Education Revenue Bonds, Great Hearts Academies – Veritas Project, Series 2012, 6.300%, 7/01/42	7/21 at 100.00	BBB		237,985
	280	Phoenix Industrial Development Authority, Arizona, Education Revenue Bonds, Painted Rock Academy Charter School Project, Series 2012A, 7.500%, 7/01/42	7/20 at 100.00	N/R		296,442
	1,400	Phoenix Industrial Development Authority, Arizona, Lease Revenue Bonds, Rowan University Project, Series 2012, 5.000%, 6/01/42 (UB) (5)	6/22 at 100.00	A+		1,526,014
	280	Pima County Industrial Development Authority, Arizona, Education Revenue Bonds, Carden Traditional Schools Project, Series 2012, 7.500%, 1/01/42	1/22 at 100.00	BBB–		309,473
		Pima County Industrial Development Authority, Arizona, Education Revenue Bonds, Paradise Education Center Project, Series 2010:
	170	6.000%, 6/01/40	6/19 at 100.00	BBB–		176,985
	200	6.100%, 6/01/45	6/19 at 100.00	BBB–		208,516
	1,500	Tempe Industrial Development Authority, Arizona, Lease Revenue Bonds, Arizona State University Foundation Project, Series 2003, 5.000%, 7/01/34 – AMBAC Insured	7/13 at 100.00	N/R		1,504,770
	825	Yavapai County Industrial Development Authority, Arizona, Charter School Revenue Bonds, Arizona Agribusiness and Equine Center Charter School, Series 2011, 7.875%, 3/01/42	3/21 at 100.00	BB+		970,596
	12,830	Total Education and Civic Organizations				13,267,012
		Health Care – 23.9% (17.0% of Total Investments)
	1,430	Arizona Health Facilities Authority, Hospital Revenue Bonds, Banner Health Systems, Series 2007A, 5.000%, 1/01/25	1/17 at 100.00	AA–		1,622,721
	3,470	Arizona Health Facilities Authority, Hospital Revenue Bonds, Banner Health Systems, Series 2008D, 5.500%, 1/01/38	1/18 at 100.00	AA–		3,852,290
	2,300	Arizona Health Facilities Authority, Hospital System Revenue Bonds, Phoenix Children’s Hospital, Refunding Series 2012A, 5.000%, 2/01/42	2/22 at 100.00	BBB+		2,486,392
	675	Glendale Industrial Development Authority, Arizona, Revenue Bonds, John C. Lincoln Health Network, Series 2005B, 5.000%, 12/01/37	12/15 at 100.00	BBB+		694,292
	1,110	Glendale Industrial Development Authority, Arizona, Revenue Bonds, John C. Lincoln Health Network, Series 2007, 5.000%, 12/01/42	12/17 at 100.00	BBB+		1,154,422
	2,150	Maricopa County Industrial Development Authority, Arizona, Health Facility Revenue Bonds, Catholic Healthcare West, Series 2004A, 5.375%, 7/01/23	7/14 at 100.00	A		2,265,219
	2,900	Maricopa County Industrial Development Authority, Arizona, Health Facility Revenue Bonds, Catholic Healthcare West, Series 2007A, 5.250%, 7/01/32	7/17 at 100.00	A		3,139,685
	330	Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority, Hospital Revenue Bonds, Hospital de la Concepcion, Series 2000A, 6.375%, 11/15/15	5/13 at 100.00	AA+		331,746

Nuveen Investments

	Principal		Optional Call
	Amount (000)	Description (1)	Provisions (2)	Ratings (3)		Value
		Health Care (continued)
		Show Low Industrial Development Authority, Arizona, Hospital Revenue Bonds, Navapache Regional Medical Center, Series 2005:
$	525	5.000%, 12/01/25 – RAAI Insured	12/15 at 100.00	BBB+	$	545,885
	435	5.000%, 12/01/30 – RAAI Insured	12/15 at 100.00	BBB+		448,811
	15,325	Total Health Care				16,541,463
		Long-Term Care – 0.5% (0.3% of Total Investments)
	295	Tempe Industrial Development Authority, Arizona, Revenue Bonds, Friendship Village of Tempe Project, Refunding Series 2012A, 6.000%, 12/01/32	12/21 at 100.00	N/R		319,169
		Tax Obligation/General – 11.6% (8.3% of Total Investments)
	420	El Mirage, Arizona, General Obligation Bonds Series 2012, 5.000%, 7/01/42 – AGM Insured	7/22 at 100.00	AA–		469,636
	1,265	Gila County Unified School District 10 Payson, Arizona, School Improvement Bonds, Project 2006, Series 2008B, 5.750%, 7/01/28	7/18 at 100.00	Aa3		1,497,115
	1,200	Maricopa County Unified School District 95 Queen Creek, Arizona, General Obligation Bonds, Series 2008, 5.000%, 7/01/27 – AGM Insured	7/18 at 100.00	A1		1,375,404
	515	Pima County Continental Elementary School District 39, Arizona, General Obligation Bonds, Series 2011A, 6.000%, 7/01/30 – AGM Insured	7/21 at 100.00	AA–		636,169
	3,530	Pinal County Unified School District 1, Florence, Arizona, General Obligation Bonds, Series 2008C, 5.250%, 7/01/28	7/18 at 100.00	A		4,083,186
	6,930	Total Tax Obligation/General				8,061,510
		Tax Obligation/Limited – 33.1% (23.5% of Total Investments)
	990	Arizona Sports and Tourism Authority, Senior Revenue Refunding Bonds, Multipurpose Stadium Facility Project, Series 2012A, 5.000%, 7/01/36	7/22 at 100.00	A1		1,101,989
	275	Buckeye, Arizona, Festival Ranch Community Facilities District General Obligation Bonds, Series 2012, 5.000%, 7/15/31	7/22 at 100.00	BBB		289,176
	250	Centerra Community Facilities District, Goodyear, Arizona, General Obligation Bonds, Series 2005, 5.500%, 7/15/29	7/15 at 100.00	N/R		239,065