NORTHERN FUNDS, 497, 1996-08-05

NORTHERN FUNDS
497, 1996-08-05

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<PAGE> 1

Northern Funds

MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT SELECT MONEY MARKET FUND
CALIFORNIA MUNICIPAL MONEY MARKET FUND

[LOGO]

P.O. Box 75986
Chicago, IL 60690-6319

PROSPECTUS
July 31, 1996
<PAGE> 2

Northern Funds Prospectus July 31, 1996

[LOGO]
The Northern Trust Company
50 S. LaSalle Street Investment Adviser,
Chicago, Illinois 60675 Transfer Agent and
1-800-595-9111 Custodian

The shares offered by this Prospectus represent interests in the Money
Market Fund, the U.S. Government Money Market Fund, the Municipal Money Market
Fund, the U.S. Government Select Money Market Fund and the California Municipal
Money Market Fund (the "Funds") of Northern Funds, a no-load management
investment company designed to meet the cash management and investment needs of
investors.

Each Fund is advised by The Northern Trust Company ("Northern
Trust"). Shares are sold and redeemed without any purchase or redemption
charge by Northern Funds, although Northern Trust and other institutions may
charge their customers for their services in connection with investments.

Included in this Prospectus are the following Northern Funds:

Money Market Fund, which seeks to maximize current income to the extent
consistent with the preservation of capital and maintenance of liquidity by
investing exclusively in high-quality money market instruments.

U.S. Government Money Market Fund, which seeks to maximize current
income to the extent consistent with the preservation of capital and
maintenance of liquidity by investing exclusively in obligations of the U.S.
government, its agencies and instrumentalities and related repurchase
agreements.

Municipal Money Market Fund, which seeks, to the extent consistent
with the preservation of capital and prescribed portfolio standards, a high
level of income exempt from regular federal income tax by investing primarily
in municipal instruments.

U.S. Government Select Money Market Fund, which seeks to maximize
current income to the extent consistent with the preservation of capital and
maintenance of liquidity by investing solely in obligations of the U.S.
government, its agencies and instrumentalities.

California Municipal Money Market Fund, which seeks to provide to its
shareholders, to the extent consistent with the preservation of capital and
prescribed portfolio standards, a high level of income exempt from regular
federal income tax and California state personal income tax.

This Prospectus provides information about the Funds that you should
know before investing. It should be read and retained for future reference.
Further information is included in a statement of additional information dated
July 31, 1996 (the "Additional Statement"), which is incorporated by reference
herein. For a free copy, write to Northern Funds' distributor, Sunstone
Financial Group, Inc., at 207 E. Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202 or call 1-414-271-5885. The California Municipal Money Market
Fund is not available in certain states. Please call 1-800-595-9111 to
determine availability in your state.

SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST COMPANY, ITS
PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED
BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.

THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. INVESTMENT IN THE FUNDS INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.

THE CALIFORNIA MUNICIPAL MONEY MARKET FUND MAY INVEST A SIGNIFICANT
PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND THEREFORE, INVESTMENTS IN THIS
FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is July 31, 1996.
<PAGE> 3
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Expense Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Investment Information
Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
U.S. Government Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Municipal Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
U.S. Government Select Money Market Fund . . . . . . . . . . . . . . . . . . . . 5
California Municipal Money Market Fund . . . . . . . . . . . . . . . . . . . . . 5
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
California Municipal Money Market Fund -
Additional Risks and Considerations
Regarding California Investments . . . . . . . . . . . . . . . . . . . . 7

Additional Investment Information,
Risks and Considerations
Description of Securities and Investment Techniques . . . . . . . . . . . . . . . 8
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Opening an Account and Purchasing Shares
Purchasing Shares Through Northern Trust and Other Organizations . . . . . . . . . 17
Purchasing Shares Directly from the Funds . . . . . . . . . . . . . . . . . . . . 17
Additional Purchase Information . . . . . . . . . . . . . . . . . . . . . . . . . 19

Redeeming and Exchanging Shares
Redeeming and Exchanging Through Northern Trust and Other Organizations . . . . . 20
Redeeming and Exchanging Directly from the Funds . . . . . . . . . . . . . . . . . 20
Additional Redemption and Exchange Information . . . . . . . . . . . . . . . . . . 23

Distributions and Taxes
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Tax Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Management
Board of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Investment Adviser, Transfer Agent and Custodian . . . . . . . . . . . . . . . . . 27
Administrator and Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Further Information
Determining Share Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Advertising Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Shareholder Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
<PAGE> 4

EXPENSE SUMMARY

The following table will help you understand the expenses you will bear
directly or indirectly as a shareholder of the Funds. Shareholder Transaction
Expenses are charges you pay when buying or selling Fund shares. Annual
Operating Expenses are paid out of a Fund's assets and include fees for
portfolio management, maintenance of shareholder accounts, general Fund
administration, accounting and other services. Examples based on this
information are also provided.

<TABLE>
<CAPTION>
U.S. U.S. Gov't. California
Gov't Municipal Select Municipal
Money Money Money Money Money
Market Market Market Market Market
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None None None None
Sales Charge Imposed on Reinvested Distributions None None None None None
Deferred Sales Charge Imposed on Redemptions None None None None None
Redemption Fees(1) None None None None None
Exchange Fees None None None None None

Annual Operating Expenses
(as a percentage of average net assets)
Management Fees (after fee reductions and waivers) 0.40% 0.40% 0.40% 0.25% 0.30%
12b-1 Fees 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee reductions and
reimbursements) 0.15% 0.15% 0.15% 0.15% 0.15%
-----------------------------------------------------------
Total Operating Expenses(2)
After Fee Reductions, Waivers and
Reimbursements 0.55% 0.55% 0.55% 0.40% 0.45%
===========================================================
Example of Expenses(3)
Based on the foregoing table, you would pay the
following expenses on a $1,000 investment,
assuming a 5% annual return and redemption
at the end of each time period:
One Year $ 6 $ 6 $ 6 $ 4 $ 5
Three Years $18 $18 $18 $13 $15
Five Years $32 $32 $32 $23 $26
Ten Years $71 $71 $71 $52 $58
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) A fee of $15.00 may be applicable for each wire redemption.

(2) The table and example shown do not reflect any charges that may be
imposed by Northern Trust or other institutions on their customers.

(3) The example should not be considered a representation of past or
future expenses or rates of return. Actual operating expenses and
investment return may be more or less than those shown.

The above information reflects the expenses the Funds incurred for Northern
Funds' fiscal year ended March 31, 1996 as restated to reflect current
voluntary fee reductions. Without fee reductions, waivers and reimbursements,
"Management Fees" would be 0.60% for each Fund; "Other Expenses" would be
0.31%, 0.34%, 0.31%, 0.40% and 0.34%, respectively, for the Money Market, U.S.
Government Money Market, Municipal Money Market, U.S. Government Select Money
Market and California Municipal Money Market Funds; and "Total Operating
Expenses" would be 0.91%, 0.94%, 0.91%, 1.00% and 0.94%, respectively. In
addition, during the last fiscal year these Funds did not, and during the
current fiscal year do not expect to, pay any 12b-1 fees (otherwise payable at
an annual rate of up to 0.25%) under Northern Funds' Distribution and Service
Plan. For more expense information, see "Management."

1
<PAGE> 5

FINANCIAL
HIGHLIGHTS

The "Financial Highlights" in the following table sets forth selected per
share data and ratios for each of the Funds for the period ended March 31,
1996. The information has been audited by Northern Funds' independent auditors
and should be read in conjunction with the financial statements and related
notes incorporated by reference into the Additional Statement. Information
about the performance of the Funds is contained in Northern Funds' annual
report to shareholders, which may be obtained without charge by calling the
Northern Funds Center, at 1-800-595-9111 or writing P.O. Box 75986, Chicago,
Illinois 60690-6319.

<TABLE>
<CAPTION>
U.S. GOVERNMENT MUNICIPAL
MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
----------------------- ----------------------- -----------------------
YEAR PERIOD YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
SELECTED PER SHARE DATA 1996 1995(1) 1996 1995(1) 1996 1995(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00

Income from Investment Operations:
Net investment income 0.05 0.04 0.05 0.04 0.03 0.03
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions Paid:
From net investment income (0.05) (0.04) (0.05) (0.04) (0.03) (0.03)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return(4) 5.57% 4.55% 5.46% 4.47% 3.54% 2.90%

Supplemental Data and Ratios:
Net assets, in thousands, end of period $1,061,813 $894,279 $207,105 $227,543 $1,102,789 $927,747
Ratio to average net assets of:(5)
Expenses, net of waivers and reimbursements 0.49% 0.45% 0.49% 0.45% 0.49% 0.45%
Expenses, before waivers and reimbursements 0.91% 0.96% 0.94% 1.01% 0.91% 0.95%
Net investment income, net of waivers and
reimbursements 5.42% 4.94% 5.33% 4.93% 3.46% 3.10%
Net investment income, before waivers and
reimbursements 5.00% 4.43% 4.88% 4.37% 3.04% 2.60%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Commenced investment operations on April 11, 1994.
(2) Commenced investment operations on December 12, 1994.
(3) Commenced investment operations on November 29, 1994.
(4) Total return is not annualized for periods less than a full year.
(5) Annualized for periods less than a full year.

<PAGE> 6
<TABLE>
<CAPTION>
U.S. GOVERNMENT CALIFORNIA
SELECT MUNICIPAL
MONEY MARKET MONEY MARKET
FUND FUND
----------------------- -----------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
SELECTED PER SHARE DATA 1996 1995(1) 1996 1995(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00

Income from Investment Operations:
Net investment income 0.05 0.02 0.04 0.01
- -------------------------------------------------------------------------------------------------------
Less Distributions Paid:
From net investment income (0.05) (0.02) (0.04) (0.01)
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------
Total Return(4) 5.55% 1.75% 3.63% 1.27%

Supplemental Data and Ratios:
Net assets, in thousands, end of period $85,400 $82,162 $165,087 $161,316
Ratio to average net assets of:(5)
Expenses, net of waivers and reimbursements 0.33% 0.30% 0.39% 0.35%
Expenses, before waivers and reimbursements 1.00% 1.32% 0.94% 1.07%
Net investment income, net of waivers and
reimbursements 5.43% 5.84% 3.55% 3.78%
Net investment income, before waivers and
reimbursements 4.76% 4.82% 3.00% 3.06%
- -------------------------------------------------------------------------------------------------------
</TABLE>

3
<PAGE> 7
INVESTMENT INFORMATION

The investment objectives and policies of each of the Funds are described
below. Additional information regarding the securities, investment techniques
and restrictions of each Fund are described under "Additional Investment
Information, Risks and Considerations."

MONEY MARKET FUND

The investment objective of the Money Market Fund is to seek to maximize
current income to the extent consistent with the preservation of capital and
the maintenance of liquidity by investing exclusively in high-quality money
market instruments. In pursuing its investment objective, the Money Market Fund
may invest in a broad range of government, bank and commercial obligations that
are available in the money markets. In particular, the Fund may invest in:

A. U.S. dollar-denominated obligations of U.S. banks with total assets in
excess of $1 billion (including obligations of foreign branches of
such banks);

B. U.S. dollar-denominated obligations of foreign commercial banks with
total assets in excess of $5 billion;

C. high-quality commercial paper and other obligations issued or
guaranteed by U.S. and foreign corporations and other issuers rated
(at the time of purchase) A-2 or higher by Standard & Poor's Ratings
Group ("S&P"), Prime-2 or higher by Moody's Investors Service, Inc.
("Moody's"), D-2 or higher by Duff & Phelps Credit Co. ("Duff"), F-2
or higher by Fitch Investors Service, Inc. ("Fitch") or TBW-2 or
higher by Thomson BankWatch, Inc. ("TBW");

D. high-grade corporate bonds and unrated notes, paper and other
instruments that are of comparable quality as determined by Northern
Trust;

E. rated asset-backed securities non-governmental issuers (including
interests in pools of assets such as mortgages, installment purchase
obligations and credit card receivables);

F. securities issued or guaranteed as to principal and interest by the
U.S. government or by its agencies or instrumentalities and custodial
receipts with respect thereto;

G. dollar-denominated securities issued or guaranteed by one or more
foreign governments or political subdivisions, agencies or
instrumentalities thereof;

H. repurchase agreements relating to the above instruments; and

I. securities issued or guaranteed by state or local governmental bodies.

U.S. GOVERNMENT MONEY MARKET FUND

The investment objective of the U.S. Government Money Market Fund is also to
seek to maximize current income to the extent consistent with the preservation
of capital and the maintenance of liquidity by investing exclusively in
high-quality money market instruments. The U.S. Govern- ment Money Market Fund
seeks to achieve its investment objective by investing in:

A. securities issued or guaranteed as to principal and interest by the
U.S. government or by any of its agencies or instrumentalities
(including the International Bank for Reconstruction and Development);

B. repurchase agreements relating to the above instruments; and

C. custodial receipts with respect to securities issued or guaranteed as
to principal and interest by the U.S. government or by any of its
agencies or instrumentalities.

4
<PAGE> 8
MUNICIPAL MONEY MARKET FUND

The investment objective of the Municipal Money Market Fund is to seek, to the
extent consistent with the preservation of capital and prescribed portfolio
standards, a high level of income exempt from regular federal income tax by
investing primarily in municipal instruments. The Municipal Money Market Fund
seeks to achieve its investment objective by investing in:

A. fixed and variable rate notes and similar debt instruments rated
MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher
by S&P, D-2 or higher by Duff or F-2 or higher by Fitch;

B. tax-exempt commercial paper and similar debt instruments rated Prime-2
or higher by Moody's, A-2 or higher by S&P, D-2 or higher by Duff or
F-2 or higher by Fitch;

C. high-grade municipal bonds and unrated notes, paper or other
instruments that are of comparable quality as determined by Northern
Trust; and

D. municipal bonds and notes which are guaranteed as to principal and
interest by the U.S. government or an agency or instrumentality
thereof or which otherwise depend directly or indirectly on the credit
of the United States.

U.S. GOVERNMENT SELECT MONEY MARKET FUND

The investment objective of the U.S. Government Select Money Market Fund is to
seek to maximize current income to the extent consistent with the preservation
of capital and maintenance of liquidity by investing exclusively in
high-quality money market instruments. The U.S. Government Select Money Market
Fund seeks to achieve its investment objective by investing solely in
securities issued or guaranteed as to principal and interest by the U.S.
government or by any of its agencies or instrumentalities.

In making investment decisions, Northern Trust will seek to acquire,
during normal market conditions, only those U.S. government securities the
interest on which is generally exempt from state income taxation. Securities
generally eligible for this exemption include those issued by the U.S. Treasury
and certain U.S. government agencies and instrumentalities, including the
Tennessee Valley Authority, Federal Home Loan Bank, Federal Farm Credit Bank
Funding Corp. and the Student Loan Marketing Association. The Fund intends to
limit investments to only the foregoing exempt U.S. government securities.
However, under extraordinary circumstances, such as when appropriate exempt
securities are unavailable, the Fund may make investments in non-exempt U.S.
government securities and cash equivalents, and may hold uninvested cash. See
"Distributions and Taxes" below for certain tax considerations.

CALIFORNIA MUNICIPAL MONEY MARKET FUND

The investment objective of the California Municipal Money Market Fund is to
seek to provide, to the extent consistent with the preservation of capital and
prescribed portfolio standards, a high level of income exempt from regular
federal income tax and California state personal income tax. The California
Municipal Money Market Fund seeks to achieve its investment objective by
investing in:

A. fixed and variable rate notes and similar debt instruments rated
MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher
by S&P, D-2 or higher by Duff or F-2 or higher by Fitch;

B. tax-exempt commercial paper and similar debt instruments rated Prime-2
or higher by Moody's, A-2 or higher by S&P, D-2 or higher by Duff or
F-2 or higher by Fitch;

5
<PAGE> 9
C. high-grade municipal bonds and unrated notes, paper or other
instruments that are of comparable quality as determined by Northern
Trust; and

Because the California Municipal Money Market Fund concentrates its
investments in obligations issued by California and its political subdivisions,
an investment in this Fund may be riskier than an investment in the other
Funds.

OTHER INFORMATION

All securities acquired by the Funds will be determined at the time of purchase
by Northern Trust to present minimal credit risks and will be "Eligible
Securities" as defined by the Securities and Exchange Commission (the "SEC").
Eligible Securities are (a) securities that either (i) have short-term debt
ratings at the time of purchase in the two highest rating categories by at
least two unaffiliated nationally recognized statistical rating organizations
("NRSROs") (or one NRSRO if the security is rated by only one NRSRO), or (ii)
are comparable in priority and security with an instrument issued by an issuer
which has such ratings, and (b) securities that are unrated (including
securities of issuers that have long-term but not short-term ratings) but are
of comparable quality as determined by Northern Trust.

Each Fund is managed so that the average maturity of all instruments
in a Fund (on a dollar-weighted basis) will not exceed 90 days. In no event
will the Funds purchase any securities which mature more than 397 days from the
date of purchase (except for certain variable and floating rate instruments and
securities collateralizing repurchase agreements). Securities in which the
Funds invest may not earn as high a level of income as longer term or lower
quality securities, which generally have greater market risk and more
fluctuation in market value.

As a matter of fundamental policy, changeable only with the approval
of the holders of a majority of the outstanding shares of the Fund, at least
80% of the annual gross income of the Municipal Money Market and the California
Municipal Money Market Funds will be derived from debt instruments, the
interest on which is, in the opinion of bond counsel or counsel for the
issuers, exempt from regular income tax ("Municipal Instruments"), except in
extraordinary circumstances such as when Northern Trust believes that market
conditions indicate that the Fund should adopt a temporary defensive posture by
holding uninvested cash or investing in taxable short-term securities ("Taxable
Investments"). In addition, as a non-fundamental policy, under normal market
conditions at least 65% of the value of the California Municipal Money Market
Fund's total assets will be invested in Municipal Instruments the interest on
which, in the opinion of bond counsel for the issuers, is exempt from
California state personal income tax ("California Municipal Instruments").
These opinions may contain various assumptions, qualifications or exceptions
that are reasonably acceptable to Northern Trust. The Municipal Money Market
and the California Municipal Money Market Funds are not limited in the amount
of their assets that may be invested in "private activity bonds" the interest
on which may be treated as an item of tax preference to shareholders under the
federal alternative minimum tax. Taxable Investments will consist exclusively
of instruments that may be purchased by the Money Market Fund. Under normal
market conditions, Taxable Investments will not exceed 20% of the value of the
total assets of either Fund; during temporary defensive periods, however, all
or any portion of a Fund's assets may be invested in such instruments.

6
<PAGE> 10
CALIFORNIA MUNICIPAL MONEY MARKET FUND --
ADDITIONAL RISKS AND CONSIDERATIONS
REGARDING CALIFORNIA INVESTMENTS

The investments of the California Municipal Money Market Fund in California
Municipal Instruments raise additional considerations. Payment of the interest
on and the principal of these instruments is dependent upon the continuing
ability of California issuers to meet their obligations.

The Fund's investments include obligations of California governmental
issuers which rely in whole or in part, directly or indirectly, on real
property taxes as a source of revenue. "Proposition Thirteen" and similar
California constitutional and statutory amendments and initiatives in recent
years have restricted the ability of California taxing entities to increase
real property tax revenues. Other initiative measures approved by California
voters in recent years, through limiting various other taxes, have resulted in
a substantial reduction in state revenues. Decreased state revenues may result
in reductions in allocations of state revenues to local governments.

Because of the complex nature of the various initiatives mentioned
above and certain possible ambiguities and inconsistencies in their terms and
the scope of various exemptions and exceptions, as well as the impossibility of
predicting the level of future appropriations for state and local California
governmental entities, it is not possible to determine the impact of these
initiatives and related measures on the ability of California governmental
issuers to pay interest or repay principal on their obligations. There have,
however, been certain adverse developments with respect to California Municipal
Instruments over the past several years.

In addition to the various initiatives discussed above, economic
factors such as the reduction in defense spending, a decline in tourism and
high levels of unemployment have had an adverse impact on the economy of
California. In recent years, these economic factors reduced revenues to the
state government at a time when expenses of state government such as education
costs, various welfare costs and other expenses were rising. Such economic
factors adversely impacted the ability of state and local California
governmental entities to repay debt, and these factors, and others that cannot
be predicted, may have an adverse impact in the future.

In addition to the risk of nonpayment on California Municipal
Instruments, if these obligations decline in quality and are downgraded by the
NRSROs, they may become ineligible for purchase by the Fund. Since there are
large numbers of buyers of these instruments, the supply of California
Municipal Instruments that are eligible for purchase by the Fund could become
inadequate at certain times.

Investors should consider the greater risk inherent in the California
Municipal Money Market Fund's concentration in such obligations versus the
safety that comes with a less geographically concentrated investment portfolio,
and should compare the yield available on a portfolio of California Municipal
Instruments with the yield of a more diversified portfolio including
non-California securities before making an investment decision.

A more detailed description of special factors affecting investments
in California Municipal Instruments is provided in the Additional Statement.

7
<PAGE> 11
ADDITIONAL INVESTMENT
INFORMATION, RISKS
AND CONSIDERATIONS

DESCRIPTION OF SECURITIES AND
INVESTMENT TECHNIQUES

MUNICIPAL INSTRUMENTS

The Municipal Money Market and California Municipal Money Market Funds (the
"Municipal Funds") intend to invest primarily in Municipal Instruments.
Municipal Instruments include debt obligations issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities.

Municipal Instruments include both "general" and "revenue" obligations.
General obligations are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue obligations
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as lease revenue payments from the user of
the facility being financed. Industrial development bonds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of an industrial revenue bond is
usually directly related to the credit standing of the private user of the
facility involved.

The Municipal Funds may also invest in "moral obligation" bonds, which
are normally issued by special purpose public authorities. If the issuer of a
moral obligation bond is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund (if such a fund has been
established), the restoration of which is a moral commitment but not a legal
obligation of the state or municipality which created the issuer.

Within the principal classifications of Municipal Instruments described
above there are a variety of categories, including municipal bonds, municipal
notes, municipal leases, custodial receipts and participation certificates.
Municipal notes include tax, revenue and bond anticipation notes of short
maturity, which are issued to obtain temporary funds for various public
purposes. Municipal leases are obligations issued by state and local governments
or authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Custodial receipts are underwritten by securities dealers or
banks and evidence ownership of future interest payments, principal payments or
both on certain municipal securities. Participation certificates are
obligations issued by state or local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
Municipal leases (and participations in such leases) present the risk that a
municipality will not appropriate funds for the lease payments. Northern Trust,
under the supervision of Northern Funds' Board of Trustees, will determine the
credit quality of any unrated municipal leases on an ongoing basis, including an
assessment of the likelihood that the leases will not be cancelled.

Each Municipal Fund may acquire "stand-by commitments" relating to the
Municipal Instruments it holds. Under a stand-by commitment, a dealer agrees to
purchase, at the Fund's option, specified Municipal Instruments at a specified
price. A stand-by commitment may increase the cost, and thereby reduce the
yield, of the Municipal Instruments to which the commitment relates. The

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<PAGE> 12
Municipal Funds will acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights for trading
purposes.

Municipal Instruments purchased by the Municipal Funds may be backed
by letters of credit or other forms of credit enhancement issued by domestic or
foreign banks and other financial institutions. The credit quality of these
banks and financial institutions could, therefore, cause loss to a Fund that
invests in Municipal Instruments and affect its share price. Foreign letters of
credit may involve certain risks in addition to those of domestic obligations.
Foreign banks and foreign branches of domestic banks may be subject to less
stringent reserve requirements, and to different accounting, auditing and
recordkeeping requirements than domestic banks.

The Municipal Funds do not intend to invest 25% or more of the value
of their total assets in industrial development bonds or similar obligations
where the non-governmental entities supplying the revenues from which such
bonds or obligations are to be paid are in the same industry. Each Fund may,
however, invest 25% or more of its total assets in Municipal Instruments the
interest on which is paid solely from revenues of similar projects. In
addition, although the Municipal Money Market Fund does not expect to do so
during normal market conditions, it may invest more than 25% of the value of
its total assets in Municipal Instruments whose issuers are in the same state.
The California Municipal Money Market Fund expects to invest principally in
California Municipal Instruments. When a substantial portion of a Fund's assets
is invested in instruments which are used to finance facilities involving a
particular industry, whose issuers are in the same state or which are otherwise
related, there is a possibility that an economic, business or political
development affecting one instrument would likewise affect the related
instruments.

The Money Market and U.S. Government Money Market Funds may invest
from time to time in Municipal Instruments or other securities issued by state
and local governmental bodies when Northern Trust believes such an investment
strategy is in the best interest of Northern Funds' shareholders. Dividends
paid by Funds other than the Municipal Funds on such investments will be
taxable to shareholders.

FOREIGN SECURITIES

The Money Market Fund may invest in dollar-denominated obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities. These obligations may be issued by
supranational entities, including international organizations (such as the
European Coal and Steel Community) designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies.

There are risks and costs involved in investing in foreign securities
which are in addition to the usual risks inherent in domestic investments.
Investment in foreign securities involves higher costs than investment in U.S.
securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments. Foreign investments also
involve risks associated with less complete financial information about the
issuers, less market liquidity, more market volatility and political
instability. Future political and economic developments, the possible
imposition of withholding taxes on dividend income, the possible seizure or
nationalization of foreign holdings, the possible establishment of exchange
controls, or the adoption of other governmental restrictions might adversely
affect an investment in foreign securities. Additionally, foreign banks and
foreign branches of domestic banks are subject to less stringent reserve
requirements, and to different accounting, auditing and recordkeeping
requirements.

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UNITED STATES GOVERNMENT OBLIGATIONS

To the extent consistent with their respective investment objectives, each Fund
may invest in a variety of U.S. Treasury obligations consisting of bills, notes
and bonds, which principally differ only in their interest rates, maturities and
time of issuance. The Funds may also invest in other securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities, such as the Government
National Mortgage Association ("GNMA"), are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association ("SLMA"), are supported only by the credit of the
instrumentalities. No assurance can be given that the U.S. government would
provide financial support to its agencies or instrumentalities if it is not
obligated to do so by law. Obligations of the International Bank for
Reconstruction and Development (also known as the World Bank) are supported by
subscribed, but unpaid, commitments of its member countries. There is no
assurance that these commitments will be undertaken or complied with in the
future.

Securities guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities are deemed to include: (a)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. government or an agency or
instrumentality thereof; and (b) participations in loans made to foreign
governments or their agencies that are so guaranteed. The secondary market for
certain of these participations is limited. Such participations will therefore
be regarded as illiquid. No assurance can be given that the U.S. government
would provide financial support to its agencies or instrumentalities if it is
not obliged to do so by law.

STRIPPED OBLIGATIONS

To the extent consistent with their respective investment objectives, the Funds
may purchase Treasury receipts and other "stripped" securities that evidence
ownership in either the future interest payments or the future principal
payments on U.S. government and other obligations. These participations, which
may be issued by the U.S. government (or a U.S. government agency or
instrumentality) or by private issuers such as banks and other institutions,
are issued at a discount to their "face value," and may include stripped
mortgage-backed securities ("SMBS") which are derivative multi-class mortgage
securities. Stripped securities, particularly SMBS, may exhibit greater price
volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors.

SMBS are usually structured with two or more classes that receive
different proportions of the interest and principal distributions from a pool
of mortgage-backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class receives all of the
principal. However, in some cases, one class will receive some of the interest
and most of the principal while the other class will receive most of the
interest and the remainder of the principal. If the underlying obligations
experience greater than anticipated prepayments of principal, a Fund may fail
to fully recoup its initial investment. The market value of the class
consisting entirely of principal payments can be extremely volatile in response
to changes in interest rates. The yields on a class of SMBS that receives all
or most of the interest are generally higher than prevailing market yields on
other mortgage-backed

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<PAGE> 14
obligations because their cash flow patterns are also volatile and there is a
greater risk that the initial investment will not be fully recouped.

SMBS issued by the U.S. government (or a U.S. government agency or
instrumentality) may be considered liquid under guidelines established by
Northern Funds' Board of Trustees if they can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of a Fund's per share net asset value.

CUSTODIAL RECEIPTS FOR TREASURY SECURITIES

To the extent consistent with their respective investment objectives, the
Funds, other than the U.S. Government Select Money Market Fund, may also
purchase participations in trusts that hold U.S. Treasury securities (such as
TIGRs and CATs) or other obligations where the trust participations evidence
ownership in either the future interest payments or the future principal
payments on the obligations. Like other stripped obligations, these
participations are also normally issued at a discount to their "face value,"
and can exhibit greater price volatility than ordinary debt securities because
of the way in which their principal and interest are returned to investors.
Investments by the U.S. Government Money Market Fund in such participations
will not exceed 35% of the value of that Fund's total assets.

ASSET-BACKED SECURITIES

The U.S. Government Money Market Fund may purchase securities that are secured
or backed by mortgages and that are issued by the U.S. government, its
agencies or instrumentalities. The other Funds may purchase asset-backed
securities that are secured or backed by mortgages or other assets (e.g.,
automobile loans, credit card receivables and other financial assets) and are
issued by the U.S. government, GNMA, FNMA, Federal Home Loan Mortgage
Corporation, and private issuers such as commercial banks, financial companies,
finance subsidiaries of industrial companies, savings and loan associations,
mortgage banks, investment banks and certain special-purpose entities.

Non-mortgage asset-backed securities involve certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which have given debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.

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<PAGE> 15
a specified fixed or floating interest rate and a final distribution date. The
relative payment rights of the various CMO classes may be structured in a
variety of ways. The Funds will not purchase "residual" CMO interests, which
normally exhibit greater price volatility.

The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an asset- backed security is purchased at a discount, faster
than expected prepayments will increase, while slower than expected prepayments
will decrease, yield to maturity.

Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore, prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. Like other fixed income securities, when interest rates rise the
value of an asset-backed security generally will decline; however, when
interest rates decline, the value of an asset-backed security with prepayment
features may not increase as much as that of other fixed income securities.

CORPORATE AND BANK OBLIGATIONS

To the extent consistent with their respective investment objectives, the
Funds, other than the U.S. Government Select Money Market Fund, may invest in
debt obligations of domestic or foreign corporations and banks, and may acquire
commercial obligations issued by Canadian corporations and Canadian
counterparts of U.S. corporations, as well as Europaper, which is U.S.
dollar-denominated commercial paper of a foreign issuer. Bank obligations may
include certificates of deposit, notes, bankers' acceptances and fixed time
deposits. These obligations may be general obligations of the parent bank or
may be limited to the issuing branch or subsidiary by the terms of specific
obligation or by government regulation. For purposes of determining the
permissibility of an investment in bank obligations, the total assets of a bank
are determined on the basis of the bank's most recent annual financial
statements.

GUARANTEED INVESTMENT CONTRACTS

The Money Market Fund may make limited investments in guaranteed investment
contracts ("GICs") issued by highly rated U.S. and foreign insurance companies.
Pursuant to these contracts, a Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
to the Fund, on a monthly basis, interest which is based on an index (such as
the Salomon Brothers CD Index), but is guaranteed not to be less than a certain
minimum rate. The Money Market Fund will only purchase GICs from insurance
companies which, at the time of purchase, have assets of $1 billion or more and
meet quality and credit standards established by Northern Trust. Generally, GICs
are not assignable or transferable without the permission of the issuing
insurance companies, and an active secondary market in GICs does not currently
exist. Therefore, GICs will normally be considered illiquid investments, and
will be acquired subject to the limitation on illiquid investments.

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VARIABLE AND FLOATING RATE INSTRUMENTS

In accordance with their respective investment objectives, the Funds may
purchase rated and unrated variable and floating rate instruments. These
instruments may include variable amount master demand notes that permit the
indebtedness to vary in addition to providing for periodic adjustments in the
interest rate. A Fund may purchase variable and floating rate instruments with
stated maturities in excess of its maturity limitations provided that the Fund
may demand payment of the principal of the instrument at least once within the
applicable maturity limitation on not more than thirty days' notice (unless the
instrument is issued or guaranteed by the U.S. government or an agency or
instrumentality thereof). Unrated instruments will be determined by Northern
Trust to be of comparable quality at the time of purchase to rated instruments
purchasable by the Funds.

The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Fund to
dispose of the instruments if the issuer defaulted on its payment obligation or
during periods that the Fund is not entitled to exercise demand rights, and a
Fund could, for these or other reasons, suffer a loss with respect to such
instruments. Variable and floating rate instruments (including inverse
floaters) will be subject to a Fund's limitation on illiquid investments when
the Fund may not demand payment of the principal amount within seven days and a
reliable trading market is absent. See "Illiquid Securities."

REPURCHASE AGREEMENTS

Each Fund may agree to purchase portfolio securities from financial
institutions subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price ("repurchase agreements"). Although the securities
subject to a repurchase agreement may bear maturities exceeding one year,
settlement for the repurchase agreement will never be more than one year after
a Fund's acquisition of the securities and normally will be within a shorter
period of time. Securities subject to repurchase agreements are held either by
Northern Funds' custodian or subcustodian (if any), or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement
will be required to maintain the value of the securities subject to the
agreement in an amount exceeding the repurchase price (including accrued
interest). Default by the seller would, however, expose a Fund to possible loss
because of adverse market action or delay in connection with the disposition of
the underlying obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS

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<PAGE> 17
be regarded as leveraging and, therefore, speculative. Reverse repurchase
agreements involve the risks that the interest income earned in the investment
of the proceeds will be less than the interest expense, that the market value
of the securities sold by a Fund may decline below the price of the securities
the Fund is obligated to repurchase and that the securities may not be returned
to the Fund. During the time a reverse repurchase agreement is outstanding, a
Fund will maintain a segregated account with Northern Funds' custodian
containing cash, U.S. government or other appropriate liquid securities having
a value at least equal to the repurchase price. A Fund's reverse repurchase
agreements, together with any other borrowings, will not exceed, in the
aggregate, 331/3% of the value of its total assets. In addition, whenever
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
investments.

SECURITIES LENDING

Each Fund may seek additional income from time to time by lending securities on
a short-term basis to banks, brokers and dealers. The securities lending
agreements will require that the loans be secured by collateral in cash, cash
equivalents, U.S. government securities or irrevocable bank letters of credit
maintained on a current basis equal in value to at least the market value of
the loaned securities. A Fund may not make such loans in excess of 331/3% of
the value of its total assets. Securities loans involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent.

FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS

Each Fund may purchase or sell securities on a when-issued or delayed-delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Securities purchased or sold on a
when-issued, delayed-delivery or forward commitment basis involve a risk of
loss if the value of the security to be purchased declines, or the value of the
security to be sold increases, before the settlement date. Although a Fund will
generally purchase securities with the intention of acquiring them, a Fund may
dispose of securities purchased on a when-issued, delayed-delivery or a forward
commitment basis before settlement when deemed appropriate by Northern Trust.

INVESTMENT COMPANIES

In connection with the management of its daily cash positions, each Fund may
invest in securities issued by other investment companies which invest in
short-term, high-quality debt securities and which determine their net asset
value per share based on the amortized cost or penny-rounding method of
valuation. In addition, each Fund may invest in securities issued by other
investment companies if otherwise consistent with its investment objectives and
policies. As a shareholder of another investment company, a Fund will bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses including advisory fees. These expenses would be in addition
to the advisory fees and other expenses the Fund bears directly in connection
with its own operations. Investments in other investment companies will be
subject to the limits imposed by the Investment Company Act of 1940 (the "1940
Act").

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ILLIQUID SECURITIES

Each Fund may invest up to 10% of the value of its net assets in illiquid
securities. Illiquid securities generally include repurchase agreements and
time deposits with notice/termination dates in excess of seven days, SMBS
issued by private issuers, interest rate and currency swaps, unlisted
over-the-counter options, GICs and certain securities which are subject to
trading restrictions because they are not registered under the Securities Act
of 1933 (the "1933 Act").

If otherwise consistent with its investment objective and policies,
each Fund may purchase commercial paper issued pursuant to Section 4(2) of the
1933 Act and securities that are not registered under the 1933 Act but can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. These securities will not be considered illiquid so long as Northern
Trust determines, under guidelines approved by Northern Funds' Board of
Trustees, that an adequate trading market exists. This practice could increase
the level of illiquidity during any period that qualified institutional buyers
become uninterested in purchasing these securities. The ability to sell to
qualified institutional buyers under Rule 144A is a relatively recent
development, and it is not possible to predict how this market will ultimately
develop.

PORTFOLIO TRANSACTIONS

Northern Trust's Advisory Agreement provides that in selecting brokers or
dealers to place orders for transactions (a) involving common and preferred
stocks, Northern Trust shall use its best judgment to obtain the best overall
terms available and (b) involving bonds and other fixed income obligations,
Northern Trust shall attempt to obtain best net price and execution. In
assessing the best overall terms available for any transaction, Northern Trust
is to consider all factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. In evaluating the best overall terms available and in selecting the
broker or dealer to execute a particular transaction, Northern Trust may
consider the brokerage and research services provided to the Funds and/or other
accounts over which Northern Trust or an affiliate of Northern Trust exercises
investment discretion. These brokerage and research services may include
industry and company analysis, portfolio services, quantitative data, market
information systems and economic and political consulting and analytical
services.

MISCELLANEOUS

After its purchase by a Fund, a rated security may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Fund. Northern Trust will consider such an event in determining whether the
Fund should continue to hold the security. Northern Trust expects to sell
promptly any securities that are below "high quality" where it has determined
that such sale is in the best interest of the Fund.

For a description of applicable securities ratings, see Appendix A to
the Additional Statement.

The Funds do not intend to purchase certificates of deposit of
Northern Trust or its affiliate banks, commercial paper issued by Northern
Trust's parent holding company or other securities issued or guaranteed by
Northern Trust, its parent holding company or their subsidiaries or affiliates.

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INVESTMENT RESTRICTIONS

A Fund's investment objective may be changed by Northern Funds' Board of
Trustees without shareholder approval. Shareholders will, however, be notified
of any changes. Any such change may result in a Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund. No assurance can be provided
that a Fund will achieve its investment objective.

Each Fund has also adopted certain fundamental investment restrictions
that may be changed only with the approval of a majority of a Fund's
outstanding shares. The following description summarizes several of the Funds'
fundamental restrictions, which are set forth in full in the Additional
Statement.

No Fund may:

1. invest 25% or more of its total assets at the time of purchase in
securities of issuers whose principal business activities are in the same
industry, with certain limited exceptions set forth in the Additional
Statement;

2. borrow money except in amounts up to 33-1/3% of the value of its
total assets at the time of borrowing;

3. purchase securities (except U.S. government securities and
repurchase agreements collateralized by such securities) if more than 5% of its
total assets at the time of purchase will be invested in the securities of any
one issuer, except that up to 25% (50% for the California Municipal Money
Market Fund) of a Fund's total assets may be invested without regard to this 5%
limitation; or

4. subject to the foregoing 25% exception, purchase more than 10% of
the outstanding voting securities of any issuer.

In accordance with current SEC regulations (which are more restrictive
than the Funds' fundamental investment restrictions), the Funds intend, as a
non-fundamental policy, to limit investments in the securities of any single
issuer (other than securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities and repurchase agreements collateralized by such
securities) to not more than 5% of the value of their respective total assets
at the time of purchase, except that (a) 25% of the value of the total assets
of the California Municipal Money Market Fund may be invested in fewer than
five issuers; (b) 25% of the value of the total assets of the other Funds may
be invested in any one issuer for a period of up to three Business Days; and
(c) securities subject to certain unconditional demand features are subject to
different diversification requirements as described in the Additional
Statement. In addition, the Money Market, U.S. Government Money Market and U.S.
Government Select Money Market Funds will limit their investments in all
securities, and the Municipal Money Market and California Municipal Money
Market Funds will limit investments in certain conduit securities as described
in the Additional Statement, that are not in the highest rating category as
determined by two NRSROs (or one NRSRO if the security is rated by only one
NRSRO) or, if unrated, are not of comparable quality, to 5% of their total
assets, with investments in any one such issuer being limited to no more than
1% of its total assets or $1 million, whichever is greater, measured at the
time of purchase.

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OPENING AN ACCOUNT AND PURCHASING SHARES

An investment account may be opened and shares purchased directly from Northern
Funds by following the instructions below under "Purchasing Shares Directly
from the Funds." If you maintain certain accounts at Northern Trust or another
organization (such as a bank or broker/dealer) that has entered into a
distribution or servicing agreement with Northern Funds, you may purchase
shares through that organization in accordance with its procedures. See
"Purchasing Shares Through Northern Trust and Other Organizations" below for
more details. If you have any questions or need any assistance in opening an
investment account or purchasing shares, call 1-800-595-9111.

PURCHASING SHARES THROUGH NORTHERN TRUST AND OTHER ORGANIZATIONS

Northern Trust customers may purchase shares through their qualified accounts
and should consult with their account officer for additional information and
instructions. Customers of other organizations (together with Northern Trust,
"Service Organizations") that have entered into agreements with Northern Funds,
should contact their account officer or other designated representative for
appropriate purchase instructions. Northern Trust or another Service
Organization may impose particular customer account requirements in connection
with investments in the Funds, such as minimum account size or minimum account
thresholds above which excess cash balances may be invested in Fund shares. To
determine whether you may purchase shares through another organization, contact
that organization directly or call 1-800-595-9111. Purchases (and redemptions)
placed through Northern Trust or another Service Organization are processed only
on days that both Northern Funds and the particular organization are open for
business. Service Organizations may make alternative arrangements for their
clients in Northern Funds related to fund options and shareholder services which
are listed as available in this Prospectus. For more information on which Funds
and shareholder services are available through your program, contact your
organization directly.

Depending on the terms of the particular account used to purchase Fund
shares, Northern Trust or other organizations may impose charges against the
account. These charges could include asset allocation fees, account maintenance
fees, sweep fees, compensating balance requirements or other charges based upon
account transactions, assets or income. The charges will reduce the net return
on an investment in a Fund. For further discussion of Service Organizations and
the procedures for purchasing (and redeeming) shares through them, see
"Management -- Service Organizations."

PURCHASING SHARES DIRECTLY FROM THE FUNDS

For your convenience, there are a number of ways to invest directly with
Northern Funds. When establishing an investment account directly with Northern
Funds, the minimum initial investment in a Fund is $2,500 ($500 for an IRA;
$250 for a spousal IRA; $250 under the Automatic Investment Plan; and $500 for
employees of Northern Trust and its affiliates). The minimum subsequent
investment is $50 (except for reinvestments of distributions for which there is
no minimum). The Funds reserve the right to waive these minimums.

BY MAIL

You may purchase shares by mail by sending a Purchase Application together with
a check or money order payable to Northern Funds by addressing your envelope to
Northern Funds at P.O. Box 75986, Chicago, Illinois 60690-6319. Additional
requirements may be imposed. If using overnight delivery use the following
address: 801 South Canal Street, Chicago, Illinois 60607, Attn: Northern Funds.
Your

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check must be drawn on a bank located in the U.S. and must be payable in U.S.
dollars. When making subsequent investments, enclose your check with the return
remittance portion of the confirmation of your previous investment, or indicate
on your check or a separate piece of paper your name, address and account
number.

A $20 fee will be charged by the Transfer Agent if any check used for
investment does not clear. In addition, you will be responsible for any loss
suffered by a Fund. If you purchase shares by check and subsequently request
the redemption of those shares, Northern Funds may delay the payment of
redemption proceeds until the Transfer Agent is satisfied that the check has
cleared, which may take up to 15 days from the purchase date. If you anticipate
redemptions soon after purchase, you may wish to wire funds to avoid delays.
Northern Funds will not accept payment in cash or third party checks for the
purchase of shares.

BY WIRE

You may make initial or subsequent investments in shares of the Funds by wiring
federal funds. If you are opening an account with a wire purchase, you must
call 1-800-595-9111 for instructions prior to wiring funds. You must promptly
complete a Purchase Application and forward it to the Transfer Agent by
addressing your envelope to Northern Funds at P.O. Box 75986, Chicago, Illinois
60690-6319. Additional requirements may be imposed. Redemptions will not be
paid until your completed application has been received by the Transfer Agent.
If you wish to add to an existing account by wire purchase, you may wire
federal funds to:

The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account Number)
(Reference Shareholder's Name)

DIRECT DEPOSIT

You may purchase additional shares through the Direct Payroll Deposit Plan
offered by Northern Funds. Through this plan, periodic investments (minimum
$50) are made automatically from your payroll check into your existing Fund
account. In order to participate in the plan, your employer must have direct
deposit capabilities through the Automated Clearing House ("ACH") available to
its employees. The plan may be used for other direct deposits, such as social
security checks, military allotments, and annuity payments. Further details
about this service may be obtained from the Transfer Agent by calling
1-800-595-9111. Northern Funds reserves the right, at any time and without
prior notice, to limit or terminate the Direct Payroll Deposit privilege or its
use in any manner by any person.

AUTOMATIC INVESTMENT

Northern Funds offers an Automatic Investment Plan that allows you to
automatically purchase shares on a regular, monthly basis ($250 initial
minimum, $50 monthly minimum additions). Under this plan the Transfer Agent
originates an ACH request to your financial institution which forwards funds
periodically to the Transfer Agent to purchase shares. The plan can be
established with any financial institution that participates in the ACH funds
transfer system. No service fee is currently charged by Northern Funds for
participation in the plan. You may establish the plan by completing the
appropriate section on the Purchase Application when opening an account. You
may also establish the plan after an account is opened by completing an
Automatic Investment Plan Application which may be obtained by calling
1-800-595-9111. If an investor discontinues participation in the plan, the
Funds reserve the right to redeem the investor's account involuntarily, upon 60
days' written notice, if the account's net asset value is $1,000 or less.

18
<PAGE> 22
DIRECTED REINVESTMENTS

In addition to having your income dividends and/or capital gains distributions
reinvested in shares of the Fund from which such distributions are paid, you
may elect the directed reinvestment option and have dividends and capital gains
distributions automatically invested in another Northern Fund. In addition,
systematic withdrawals from one account and reinvestments in another account
may be established. See "Redeeming and Exchanging Directly from the Funds --
Systematic Withdrawals." Reinvestments can only be directed to an existing
Northern Funds account (which must meet the minimum investment requirement).
Directed reinvestments may be used to invest funds from a regular account to
another regular account, from a qualified plan account to another qualified
plan account, or from a qualified plan account to a regular account. Directed
reinvestments from a qualified plan account to a regular account may have
adverse tax consequences including imposition of a penalty tax and therefore
you should consult your own tax adviser before commencing these transactions.

BY EXCHANGE

You may open a new account or add to an existing account by exchanging shares
of one Fund for shares of any other Fund offered by Northern Funds. See
"Redeeming and Exchanging Shares" for details.

ADDITIONAL PURCHASE INFORMATION

EFFECTIVE TIME AND PRICE OF PURCHASES

A purchase order for Fund shares received by the Transfer Agent by 1:00 p.m.
(Chicago Time) on a Business Day will be executed that day, provided
immediately available funds have been received by the Transfer Agent by that
time. If your purchase order or immediately available funds are not received by
the Transfer Agent by 1:00 p.m. (Chicago Time), then your purchase order will
be executed on the next Business Day following the Business Day on which your
order and immediately available funds are received by the Transfer Agent.
Purchase orders that are accompanied by payment in any form other than
immediately available funds will be executed on the next Business Day after the
Business Day on which both the order and payment in proper form are received by
the Transfer Agent. Certain Service Organizations which use a centralized
purchase method for fund shares may have an earlier cutoff time for same-day
purchase orders than stated above to facilitate purchase orders by bulk wire.
For more information on transaction cutoffs, contact your organization
directly.

MISCELLANEOUS PURCHASE INFORMATION

19
<PAGE> 23
(for example, a change in registration from a joint account to an individual
account) may be made by submitting a written request to the Transfer Agent
accompanied by a signature guarantee by a financial institution that is a
participant in the Stock Transfer Agency Medallion Program ("STAMP") or such
other means or evidence of authority as may be acceptable to the Transfer
Agent. Additional requirements may be imposed. In the interests of economy and
convenience, certificates representing shares of the Funds are not issued.
Northern Funds may reproduce this Prospectus in an electronic format which may
be available on the Internet. If you have received this Prospectus in its
electronic format you, or your representative, may contact the Transfer Agent
for a free paper copy of this Prospectus by writing to the Northern Funds
Center at P.O. Box 75986, Chicago, Illinois 60690-6319 or by calling
1-800-595-9111.

REDEEMING AND EXCHANGING SHARES

You can arrange to withdraw your investment in the Funds by selling some or all
of your shares. This process is known as "redeeming" your shares. The
procedures for redeeming shares differ depending on whether you purchase your
shares directly from Northern Funds or through Northern Trust or another
Service Organization. If you purchase your shares through an account at
Northern Trust or another Service Organization, you will redeem them in
accordance with the instructions pertaining to that account.

REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER ORGANIZATIONS

If you purchase your shares through an account at Northern Trust or another
Service Organization, you will redeem or exchange them in accordance with the
instructions pertaining to that account. If you are listed on the books of
Northern Funds as the shareholder of record, you may also redeem and exchange
your shares using any of the methods described above under "Redeeming and
Exchanging Directly from the Funds." Questions regarding these redemptions or
exchanges should be directed to your account representative at Northern Trust
or, if you purchased shares through a Service Organization, contact that
organization directly for redemption instructions. Some organizations will hold
shares of Northern Funds in nominee or street name as agent for their clients.
In such instances, Northern Funds will have no information with respect to, or
control over individual shareholder accounts. Although Northern Funds imposes
no charges when you redeem, when shares are purchased through Northern Trust or
another Service Organization a fee may be charged by those organizations for
providing services in connection with your account.

REDEEMING AND EXCHANGING DIRECTLY FROM THE FUNDS

When you purchase your shares directly from Northern Funds, you may redeem or
exchange shares by the methods described below. You may also use any of these
methods if you purchase your shares through an account at Northern Trust or
another Service Organization and you appear on Northern Funds' records as the
registered holder. You may call 1-800-595-9111 if you have any questions
regarding redemptions or exchanges.

20
<PAGE> 24
Northern Funds imposes no charges when you redeem or exchange shares. Remember,
however, when shares are purchased through Northern Trust or another Service
Organization, a fee may be charged by those institutions for providing services
in connection with your investment.

BY MAIL

You may redeem shares in any number or dollar amount by sending a written
request to Northern Funds, P.O. Box 75986, Chicago, Illinois 60690-6319. The
redemption request must state the number of shares or the dollar amount to be
redeemed and identify the Fund account number. If the redemption proceeds are
to be sent elsewhere than the address of record, each request must be
accompanied by a signature guarantee by a financial institution that
participates in STAMP or such other means or evidence of authority as may be
acceptable to the Transfer Agent. In addition, written requests for redemptions
exceeding $50,000 must be accompanied by a signature guarantee by a financial
institution that participates in STAMP or such other means or evidence of
authority as may be acceptable to the Transfer Agent. Additional requirements
may be imposed. A signature notarized by a notary public is unacceptable.
Northern Funds reserves the right to require signature guarantees in other
circumstances based on the amount of the redemption request or other factors,
and may impose additional requirements.

BY WIRE

If you authorize wire redemptions on your Purchase Application, shares can be
redeemed and the proceeds sent by federal wire transfer to a previously
designated account. You will be charged $15 for each wire redemption unless the
designated account is maintained at Northern Trust or an affiliated bank. The
minimum amount that may be redeemed by this method is $250. Northern Funds
reserves the right to change this minimum or to terminate the wire redemption
privilege at any time without notice. To change bank instructions, a written
request accompanied by a signature guarantee by a financial institution that
participates in STAMP, or such other means or evidence of authority acceptable
to the Transfer Agent, must be sent to Northern Funds, P.O. Box 75986, Chicago,
Illinois 60690-6319. Additional requirements may be imposed.

BY CHECK

You may also redeem shares of the Funds by redemption check in amounts of $250
or more once the checkwriting privilege has been established. When the check
is presented to the Transfer Agent for payment, the Transfer Agent, as your
agent, will cause the particular Fund involved to redeem a sufficient number of
your shares to cover the amount of the check. Dividends are earned until the
check clears the Transfer Agent. You can establish the checkwriting privilege
by checking the appropriate box on the Purchase Application, or if your Fund
account is already opened, by completing the appropriate form which may be
obtained by calling the Transfer Agent at 1-800-595-9111. When establishing
checkwriting for an account that is already opened, the form must be signed by
each person whose name appears on the account accompanied by signature
guarantees by a financial institution that participates in STAMP or such other
means or evidence of authority as may be acceptable to the Transfer Agent.
Additional requirements may be imposed.

You may place stop payment requests on checks by calling the Transfer
Agent at 1-800-595-9111. A $20 fee will be charged for each stop payment
request. If there are insufficient shares in your account to cover the amount
of your redemption by check, the check will be returned, marked

21
<PAGE> 25
"insufficient funds," and a fee of $20 will be charged to the account. You may
not use checks to close an account or redeem shares purchased within the past
fifteen days. Checks you write will not be returned to you, although copies are
available upon request. Northern Funds reserves the right, at any time without
prior notice, to suspend, limit or terminate the checkwriting privilege or its
use in any manner by any person.

SYSTEMATIC WITHDRAWALS

Northern Funds offers a Systematic Withdrawal Plan. If you own shares of a Fund
with a minimum value of $10,000, you may elect to have a fixed sum redeemed at
regular intervals ($250 minimum amount per withdrawal) and distributed in cash
or reinvested in one or more of the other Funds offered by Northern Funds. See
"Purchasing Shares Directly from the Funds -- Directed Reinvestments." An
application form and additional information may be obtained from the Transfer
Agent by calling 1-800-595-9111.

EXCHANGE PRIVILEGE

Northern Funds offers an exchange privilege that permits you to exchange shares
of one Fund or portfolio for shares of another Fund or portfolio offered by
Northern Funds. To establish the exchange privilege, you must check the
appropriate box on the Purchase Application or, if your Fund account is already
opened, you may send a written request to the Transfer Agent, and must
establish or maintain accounts with an identical title in each Fund involved in
an exchange transaction. In addition, the shares being exchanged must have a
value of at least $1,000 ($2,500 if a new account is being established by the
exchange).

Since an excessive number of exchanges may be disadvantageous to
Northern Funds, Northern Funds reserves the right, at any time without prior
notice, to suspend, limit or terminate the exchange privilege of any
shareholder who makes more than eight exchanges of shares in a year and/or two
exchanges of shares in a calendar quarter. A shareholder may continue making
exchanges until notified that the exchange privilege has been suspended,
limited or terminated. Questions regarding the exchange privilege may be
directed to 1-800-595-9111 or to your account officer at your Service
Organization. Exchanges will be processed only when the shares being acquired
can be legally sold in the state of the investor's residence.

Exchanges may have tax consequences. No exchange fee is currently
imposed by Northern Funds on exchanges. Northern Funds reserves, however, the
right to impose a charge in the future.

TELEPHONE PRIVILEGE

This privilege permits you to redeem or exchange shares by telephone. To
establish the telephone privilege, you must check the appropriate box on the
Purchase Application, or if your Fund account is already opened, you may send a
written request to the Transfer Agent. The request must be signed by each owner
of the account and accompanied by signature guarantees as provided below or
such other means or evidence of authority as may be acceptable to the Transfer
Agent. Once you have established the telephone privilege, you may use the
telephone privilege by calling the Transfer Agent at 1-800-595-9111.

22
<PAGE> 26
ture guarantees by a financial institution that participates in STAMP or such
other means or evidence of authority as may be acceptable to the Transfer Agent
and sent to Northern Funds, P.O. Box 75986, Chicago, Illinois 60690-6319.
Additionally, the Transfer Agent utilizes recorded lines for telephone
transactions and will request a form of personal identification if such
identification has been furnished to the Transfer Agent. Neither Northern Funds
nor its Transfer Agent will be responsible for the authenticity of instructions
received by telephone that are reasonably believed to be genuine. To the extent
that Northern Funds fails to use reasonable procedures to verify the genuineness
of telephone instructions, it or its service providers may be liable for
instructions that prove to be fraudulent or unauthorized. In all other cases,
you will bear the risk of loss.

Northern Funds reserves the right to refuse a telephone redemption if
it believes it is advisable to do so. Procedures for redeeming shares by
telephone may be modified or terminated by Northern Funds at any time without
notice. During periods of substantial economic or market change, telephone
redemptions may be difficult to place. If you are unable to contact the
Transfer Agent by telephone, shares may also be redeemed by mail as described
above under the discussion of redemptions by mail.

ADDITIONAL REDEMPTION AND EXCHANGE INFORMATION

EFFECTIVE TIME AND PRICE OF REDEMPTIONS AND EXCHANGES

Redemption orders for shares of a Fund are processed at the net asset value
next determined at 1:00 p.m. (Chicago Time) after receipt in good order by the
Transfer Agent by 1:00 p.m. (Chicago Time) on a Business Day. Good order means
that the request must include the following information: the account number and
Fund name; the amount of the transaction (as specified in dollars or number of
shares); the signatures of all account owners exactly as they are registered on
the account (except for telephone and wire redemptions); required signature
guarantees (if applicable); and other supporting legal documents that might be
required in the case of estates, corporations, trusts and certain other
accounts. Call 1-800-595-9111 for the additional documentation that may be
required of these entities. Exchange orders are likewise processed at the net
asset value per share next determined after receipt in good order by the
Transfer Agent on a Business Day.

PAYMENT OF REDEMPTION PROCEEDS

If received by the Transfer Agent by 1:00 p.m. (Chicago Time) on a Business
Day, a redemption request normally will result in proceeds being sent on the
next Business Day, unless payment in immediately available funds on the same
Business Day is specifically requested. Proceeds for redemption orders received
on a non-Business Day will normally be sent on the second Business Day after
receipt in good order. However, if any portion of the shares to be redeemed
represents an investment made by check, Northern Funds may delay the payment of
the redemption proceeds until the Transfer Agent is reasonably satisfied that
the check has been collected, which could take up to fifteen days from the
purchase date. Northern Funds reserves the right to defer crediting, sending
or wiring redemption proceeds for up to seven days after receiving the
redemption order if, in its judgment, an earlier payment could adversely affect
a Fund.

MISCELLANEOUS REDEMPTION INFORMATION

All redemption proceeds will be sent by check unless Northern Trust or the
Transfer Agent is directed otherwise. The ACH system may be utilized for
payment of redemp-

23
<PAGE> 27
tion proceeds. Redemptions may not be processed if a shareholder has failed to
submit a completed and signed Purchase Application. Northern Funds may require
any information reasonably necessary to ensure that a redemption has been duly
authorized.

To relieve Northern Funds of the cost of maintaining uneconomical
accounts, Northern Funds reserves the right to redeem the shares held in any
account if at the time of any redemption of shares in the account, the net
asset value of the remaining shares in the account falls below $1,000. Before
such involuntary redemption would occur, you would be given at least 60 days'
written notice and, during that period, you could make an additional investment
to restore the account to at least the minimum amount, in which case there
would be no such redemption. Involuntary redemptions will not be made because
the value of shares in an account falls below the minimum amount solely because
of a decline in a Fund's net asset value. Any involuntary redemption would be
at net asset value. Northern Funds also reserves the right to redeem shares
involuntarily if it is otherwise appropriate to do so under the 1940 Act (see
"Amortized Cost Valuation" in the Additional Statement).

DISTRIBUTIONS AND TAXES

Each Fund's net investment income is declared as a dividend on each Business
Day on the shares that are outstanding at 1:00 p.m. (Chicago Time) on the
declaration date. Net investment income includes interest accrued on the Fund's
assets less the Fund's estimated expenses. Dividends from net investment income
are paid monthly. Net realized short-term capital gains, after reduction for
capital loss carry-forwards, if any, of a Fund may be distributed from time to
time during Northern Funds' fiscal year (but not less frequently than
annually). The Funds do not expect to realize net long-term capital gains.

Dividends and capital gain distributions, if any, are automatically
reinvested (without any sales charge or portfolio transaction fee) in
additional shares of the same Fund at their net asset value determined on the
payment date. You may, however, notify the Transfer Agent in writing that you
elect to have dividends and/or capital gain distributions paid in cash or
reinvested in shares of another Fund offered by Northern Funds at their net
asset value determined on the payment date (provided you maintain an account in
such Fund). This election will become effective for distributions paid two days
after its receipt by the Transfer Agent.

TAXES

As with any investment, you should consider the tax implications of an
investment in Northern Funds. The following is only a short summary of the
important tax considerations generally affecting the Funds and their
shareholders. You should consult your tax adviser with specific reference to
your own tax situation. Northern Funds will send written notices to
shareholders annually regarding the tax status of distributions made by the
Funds. The Funds will determine annually the percentages of their respective
net investment income which are exempt from tax, which constitute an item of
tax preference for purposes of the federal alternative minimum tax, and which
are fully taxable and will apply these percentages uniformly to all dividends
declared from net investment income during that year. These percentages may
differ significantly from the actual percentages for any particular day.

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<PAGE> 28
FEDERAL TAXES

Each Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code (the "Code"), meaning that to the extent a Fund's
earnings are distributed to shareholders as required by the Code, the Fund
itself is not required to pay federal income taxes.

To qualify, a Fund will pay as dividends at least 90% of its
investment company taxable income and at least 90% of its net tax-exempt income
(if any) each year. Investment company taxable income includes, but is not
limited to, taxable interest, dividends and short-term capital gains less
expenses. Dividends based on either investment company taxable income (which
includes income resulting from investments in options and futures contracts) or
the excess of net short-term capital gain over net long-term capital loss are
treated as ordinary income in determining gross income for tax purposes,
whether or not the dividends are received in cash or additional shares.
(Federal income taxes for distributions to an IRA other qualified retirement
account are deferred under the Code.)

Dividends paid by the Municipal Funds (but not the other Funds) that
are derived from interest on Municipal Instruments ("exempt-interest
dividends") may be excludable from your federal taxable income (unless because
of your particular situation exclusion would be disallowed). You should note
that income that is not subject to federal income taxes may nevertheless have
to be considered along with other adjusted gross income in determining whether
any Social Security payments received by you are subject to federal income
taxes. You should also note that a portion of the exempt-interest dividends
paid by the Municipal Funds generally will be an item of tax preference for
both corporate and individual taxpayers in determining federal alternative
minimum and environmental tax liability. (Corporate taxpayers will be required
to take into account all exempt-interest dividends from the Municipal Funds in
determining certain adjustments for alternative minimum tax and environmental
tax purposes.)

Any distribution based on the excess of long-term capital gain over
net short-term capital loss will be taxable as a long-term capital gain, no
matter how long you hold Fund shares.

Any dividends declared in October, November or December and payable to
shareholders of record during those months will be deemed to have been paid by
a Fund and received by shareholders on December 31, so long as the dividends
are actually paid, as expected, in January of the following year.

Northern Funds will be required in certain cases to withhold and remit
to the U.S. Treasury 31% of the dividends and distributions payable to any
investor (i) who has provided either an incorrect Social Security Number or
Taxpayer Identification Number or no number at all, (ii) who is subject to
withholding by the Internal Revenue Service for failure to properly include on
his return payments of interest or dividends, or (iii) who has failed to
certify to Northern Funds, when required to do so, that he is not subject to
backup withholding or is an "exempt recipient."

STATE AND LOCAL TAXES GENERALLY

Additionally, although the U.S. Government Select Money Market Fund
intends to invest principally in U.S. government securities the interest on
which is generally exempt from state income taxation, you should see your tax
adviser to determine whether distributions from the Fund are exempt in light of
your particular circumstances.

25
<PAGE> 29
STATE AND LOCAL TAXES -- CALIFORNIA MUNICIPAL MONEY MARKET FUND

If, at the close of each quarter of the California Municipal Money Market
Fund's taxable year, at least 50% of the value of its total assets consists of
California Municipal Instruments and certain specified federal obligations, and
if the Fund qualifies as a regulated investment company for federal tax
purposes, then the Fund will be qualified to pay dividends exempt from
California state personal income tax to its shareholders. If the Fund so
qualifies, dividends derived from interest attributable to California Municipal
Instruments and such federal obligations will be exempt from California state
personal income tax. (Such treatment may not apply, however, to investors who
are "substantial users" or "related persons" with respect to facilities
financed by portfolio securities held by the Fund.) Any dividends paid to
shareholders subject to California state franchise tax or California state
corporate income tax may be taxed as ordinary dividends to such shareholders
notwithstanding that all or a portion of such dividends are exempt from
California state personal income tax.

Except as noted with respect to the California state personal income
tax, dividends paid by the California Municipal Money Market Fund may be
taxable under state or local law as dividend income even though all or part of
those dividends come from interest on obligations that, if held by you
directly, would be free of such income taxes. Moreover, to the extent, if any,
that dividends paid by the Fund to its shareholders are derived from taxable
interest or from capital gains, such dividends will be subject to federal
income tax and California state personal income tax, if applicable, whether or
not such dividends are reinvested. Future legislative or administrative changes
or court decisions may materially affect the tax consequences of investing in
the Fund.

TAX TABLE

You may find it particularly useful to compare the tax-free yields of the
Municipal Funds to the equivalent yields from taxable investments. For an
investor in a low tax bracket, it may not be helpful to invest in a tax-exempt
investment if a higher after-tax yield can be achieved from a taxable
instrument.

The following table illustrates the difference between hypothetical
tax-free yields and tax-equivalent yields for different tax brackets. You
should be aware, however, that tax brackets can change over time and that your
tax adviser should be consulted for specific yield calculations.

Federal
Marginal Tax-Exempt Yields
Taxable Income Tax Rate 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%
- -----------------------------------------------------------------------------------------------------------------------
Single Return Joint Return Equivalent Taxable Yields
- ---------------------- ------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $ 24,000 $ 0 - $ 40,100 15% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 24,001 - $ 58,150 $ 40,101 - $ 96,900 28% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11%
$ 58,151 - $121,300 $ 96,901 - $147,700 31% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59%
$121,301 - $263,750 $147,701 - $263,750 36% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50%
Over $263,750 Over $263,750 39.6% 3.31% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

The tax-exempt yields used here are hypothetical and no assurance can be made
that the Funds will attain any particular yield. A Fund's yield fluctuates as
market conditions change. The tax brackets and related yield calculations are
based on the 1996 federal marginal tax rates indicated in the table. The table
does not reflect the phase out of personal exemptions and itemized deductions
which will apply to certain higher income taxpayers. In addition, the brackets
do not take into consideration the California state personal income tax.

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<PAGE> 30
MANAGEMENT

BOARD OF TRUSTEES

The business and affairs of Northern Funds are managed under the direction of
its Board of Trustees. The Additional Statement contains the name of each
Trustee and other background information.

INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN

Northern Trust, with offices at 50 S. LaSalle Street, Chicago, Illinois 60675,
serves as Northern Funds' investment adviser, transfer agent and custodian. As
transfer agent, Northern Trust provides various administrative servicing
functions, and any shareholder inquiries may be directed to it.

Northern Trust, a member of the Federal Reserve System, is an Illinois
state-chartered commercial bank and the principal subsidiary of Northern Trust
Corporation, a bank holding company. Northern Trust was formed in 1889 with
capitalization of $1 million. As of June 30, 1996, Northern Trust Corporation
had approximately $21.8 billion in assets, $13.3 billion in deposits and
employed approximately 6,700 persons.

Northern Trust and its affiliates administered in various capacities
(including as master trustee, investment manager or custodian) $692.9 billion
in assets as of June 30, 1996 including $120 billion for which Northern Trust
had investment management responsibility.

Subject to the general supervision of Northern Funds' Board of
Trustees, Northern Trust is responsible for making investment decisions for the
Funds and placing purchase and sale orders for portfolio securities. Northern
Trust is also responsible for monitoring and preserving the records required to
be maintained under the regulations of the SEC (with certain exceptions
unrelated to its activities for Northern Funds). In making investment
recommendations for the Funds, investment advisory personnel must not inquire
or take into consideration whether issuers of securities proposed for purchase
or sale for the Funds' accounts are customers of Northern Trust's commercial
banking department. These requirements are designed to prevent investment
advisory personnel for the Funds from knowing which companies have commercial
business with Northern Trust and from purchasing securities where they know the
proceeds will be used to repay loans to the bank.

During Northern Funds' fiscal year ended March 31, 1996, Northern
Trust received investment management fees (after waivers) at the annualized
rates of 0.37%, 0.36%, 0.37%, 0.22% and 0.27% of the average daily net assets
of the Money Market Fund, U.S. Government Money Market Fund, Municipal Money
Market Fund, U.S. Government Select Money Market Fund and California Municipal
Money Market Fund, respectively. Northern Trust also receives compensation as
Northern Funds' custodian and transfer agent. The fees payable by the Funds for
these services are described in the Additional Statement.

Northern Trust may, at its own expense, provide compensation to
certain dealers and other institutions whose customers purchase shares of a
Fund. The amount of such compensation may be made on a one-time and/or periodic
basis, and may equal or exceed the annual fees that are earned by Northern
Trust from a Fund and are attributable to shares held by such customers. Such
compensation will not represent an additional expense to the Funds or their
shareholders, since it will be paid from the assets of Northern Trust or its
affiliates.

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<PAGE> 31
ADMINISTRATOR AND DISTRIBUTOR

Sunstone Financial Group, Inc. ("Sunstone"), 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202, acts as administrator and distributor for Northern
Funds. Shares of the Funds are sold by Sunstone, as distributor, on a
continuous basis. As compensation for its administrative services (which
include clerical, compliance, regulatory and other services) and the assumption
of related expenses, Sunstone is entitled to a fee, computed daily and payable
monthly, at an annual rate of .15% of Northern Funds' average net assets. No
compensation is payable by Northern Funds to Sunstone for its distribution
services.

SERVICE ORGANIZATIONS

Northern Funds may enter into agreements with Service Organizations such as
banks, corporations, brokers, dealers and other financial organizations,
including Northern Trust, concerning the provision of support and/or
distribution services to their customers who own Fund shares. These services,
which are described more fully in the Additional Statement, may include support
services such as assisting investors in processing administrative purchase,
exchange and redemption requests; processing dividend and distribution payments
from the Funds; providing information to customers showing their positions in
the Funds; and providing subaccounting with respect to Fund shares beneficially
owned by customers or the information necessary for subaccounting. In addition,
Service Organizations may provide assistance, such as the forwarding of sales
literature and advertising to their customers, in connection with the
distribution of Fund shares. For their services, Service Organizations may
receive fees from a Fund at annual rates of up to .25% of the average daily net
asset value of the shares covered by their agreements.

Service Organizations may charge their customers fees for providing
administrative services in connection with investments in a Fund. Investors
should contact their Service Organization with respect to these fees and the
particular Service Organization's procedures for purchasing and redeeming
shares. It is the responsibility of Service Organizations to transmit purchase
and redemption orders and record those orders on a timely basis in accordance
with their agreements with their customers.

Conflict-of-interest restrictions may apply to the receipt of
compensation paid by Northern Funds in connection with the investment of
fiduciary funds in Fund shares. Organizations, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel before entering into
agreements with Northern Funds.

The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities.
Accordingly, banks will be engaged under agreements with Northern Funds only to
perform the administrative and investor servicing functions described above,
and will represent that the services provided by them under the agreements will
not be primarily intended to result in the sale of Fund shares.

Agreements that contemplate the provision of distribution services by
Service Organizations are governed by a Distribution and Service Plan (the
"Plan") that has been adopted by Northern Funds pursuant to Rule 12b-1 under
the 1940 Act. Payments to Service Organizations, including Northern Trust,
under the Plan are not tied directly to their own out-of-pocket expenses and
therefore may be used as they elect (for example, to defray their overhead
expenses), and may exceed their direct and indirect costs.

EXPENSES

Except as set forth above and in the Additional Statement, each Fund is
responsible for the payment of its expenses.

28
<PAGE> 32
These expenses include, without limitation, the fees and expenses payable to
Northern Trust and Sunstone, brokerage fees and commissions, fees for the
registration or qualification of Fund shares under federal or state securities
laws, expenses of the organization of Northern Funds, taxes, interest, costs of
liability insurance, fidelity bonds, indemnification or contribution, any
costs, expenses or losses arising out of any liability of, or claim for damages
or other relief asserted against Northern Funds for violation of any law,
legal, tax and auditing fees and expenses, expenses of preparing and printing
prospectuses, statements of additional information, proxy materials, reports
and notices and the printing and distributing of the same to the Funds'
shareholders and regulatory authorities, compensation and expenses of its
Trustees, payments to Service Organizations, fees of industry organizations
such as the Investment Company Institute, and miscellaneous and extraordinary
expenses incurred by Northern Funds.

Northern Trust and Sunstone intend to voluntarily reimburse a portion
of the Funds' expenses and/or reduce their advisory and administrative fees
from the Funds during the current fiscal year. The result of these
reimbursements and fee reductions will be to increase the performance of the
Funds during the periods for which the reductions and reimbursements are made.

FURTHER INFORMATION

DETERMINING SHARE PRICE

Net asset value per share for purposes of purchases and redemptions is
calculated by Northern Trust on each Business Day as of 1:00 p.m. (Chicago
Time) for each Fund. Net asset value is calculated by dividing the value of all
securities and other assets belonging to a Fund, less the liabilities charged
to a Fund, by the number of the Fund's outstanding shares.

In seeking to maintain a net asset value of $1.00 per share with
respect to each Fund for purposes of purchases and redemptions, Northern Funds
values the portfolio securities held by each of the Funds pursuant to the
amortized cost method of valuation described in the Additional Statement under
"Amortized Cost Valuation."

ADVERTISING PERFORMANCE

The performance of each Fund may be compared to those of other mutual funds
with similar investment objectives and to other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds. For example, the performance of a
Fund may be compared to data prepared by Lipper Analytical Services, Inc.
Performance data as reported in national financial publications such as Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in publications of a local or regional nature, may also be used in comparing
the performance of a Fund.

The yield of a Fund is computed based on the Fund's net income during
a specified seven-day period. The net investment income is then "annualized."
That is, the amount of net investment income generated by the investment during
the period is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective" yield of a Fund is
calculated similarly but, when annualized, the net investment income generated
by the investment is assumed to be reinvested. The "effective" yield will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment.

The tax-equivalent yield for the Municipal Funds shows the amount of
taxable yield needed to produce an after-tax equivalent of a tax-free yield,
and is calculated by increas-

29
<PAGE> 33
ing the yield (as calculated above) by the amount necessary to reflect the
payment of federal and/or state income taxes at a stated rate. The
tax-equivalent yield for the Municipal Funds will always be higher than their
yields.

Performance is based on historical earnings and is not intended to
indicate future performance. The investment return of an investment in a Fund
will fluctuate so that shares, when redeemed, may be worth more or less than
their original cost. Performance data may not provide a basis for comparison
with bank deposits and other investments which provide a fixed yield for a
stated period of time. Changes in the net asset value should be considered in
ascertaining the total return to shareholders for a given period. Total return
data should also be considered in light of the risks associated with a Fund's
composition, quality, operating expenses and market conditions. Any fees
charged by Northern Trust or a Service Organization directly to its customers
in connection with investments in the Funds will not be included in Northern
Funds' calculations of performance data.

VOTING RIGHTS

Northern Funds was formed as a Massachusetts Business Trust on October 12, 1993
under an Agreement and Declaration of Trust (the "Trust Agreement"). The Trust
Agreement permits the Board of Trustees to issue an unlimited number of shares
of beneficial interest of one or more separate series representing interests in
different investment portfolios. Northern Funds currently offers nineteen
separate Funds, five of which are described in this Prospectus.

Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Each series entitled
to vote on a matter will vote in the aggregate and not by series, except as
required by law or when the matter to be voted on affects only the interests of
shareholders of a particular series. The Additional Statement gives examples of
situations where the law requires voting by series. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate
shares of Northern Funds may elect all of the Trustees.

Northern Funds does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law.
Pursuant to the Trust Agreement, the Trustees will promptly call a meeting of
shareholders to vote upon the removal of any Trustee when so requested in
writing by the record holders of 10% or more of the outstanding shares. To the
extent required by law, Northern Funds will assist in shareholder
communications in connection with the meeting.

As of July 15, 1996, Northern Trust possessed sole or shared voting or
investment power for its customer accounts with respect to more than 50% of the
outstanding shares of Northern Funds.

SHAREHOLDER REPORTS

Shareholders of record will be provided each year with a semi-annual report
showing portfolio investments and other information as of September 30 and,
after the close of the Funds' fiscal year March 31, with an annual report
containing audited financial statements. To eliminate unnecessary duplication,
only one copy of shareholder reports will be sent to shareholders with the same
mailing address. Shareholders who desire a duplicate copy of shareholder
reports to be mailed to their residence should call 1-800-595-9111.

RETIREMENT PLANS

30
<PAGE> 34
accounts. Further information about how to participate in these plans, the fees
charged and the limits on contributions can be obtained from Northern Trust. To
invest through any of the tax-sheltered retirement plans, please call Northern
Trust for information and the required separate application. To determine
whether the benefits of a tax-sheltered retirement plan are available and/or
appropriate, a shareholder should consult with a tax adviser.

MISCELLANEOUS

The address of Northern Funds is 207 E. Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202 and the telephone number is 1-800-595-9111. Northern Funds is
registered as an open-end management investment company under the 1940 Act, and
each of the Funds (other than the California Municipal Money Market Fund) is
classified under that Act as a diversified portfolio.

As used in this Prospectus, "Business Day" means each day Northern
Trust and the New York Stock Exchange (the "Exchange") are open, which is
Monday through Friday, except for holidays observed by Northern Trust and/or
the Exchange. In 1996, these holidays are New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus
Day, Veterans Day, Thanksgiving and Christmas. On days when Northern Trust or
the Exchange closes early as a result of unusual weather or other conditions,
the right is reserved to advance the time by which purchase and redemption
requests must be received. In addition, on any Business Day when the Public
Securities Association ("PSA") recommends that the securities markets close
early, the Funds reserve the right to cease or to advance the deadline for
accepting purchase and redemption orders for same Business Day credit up to one
hour before the PSA recommended closing time. Purchase and redemption requests
received after the advanced closing time will be effected on the next Business
Day. Northern Trust is not required to calculate the net asset value of a Fund
on days during which no shares are tendered to a Fund for redemption and no
orders to purchase or sell shares are received by a Fund, or on days on which
there is an insufficient degree of trading in the Fund's portfolio securities
for changes in the value of such securities to affect materially the net asset
value per share.

From time to time, Northern Funds' distributor may provide promotional
incentives to brokers whose representatives have sold or are expected to sell
shares of the Funds. At various times, the distributor may implement programs
under which a broker's sales force may be eligible to win cash or non-cash
awards for sales efforts, and may finance broker sales contests or recognition
programs conforming to criteria established by the distributor. The distributor
may also provide marketing services to brokers consisting of written
informational material relating to sales incentive campaigns conducted by such
brokers for their representatives.

Northern Trust is sometimes referred to as "The Northern Trust Bank"
in advertisements and other literature.

-------------------

No person has been authorized to give any information or to make any
representations not contained in this Prospectus or in Northern Funds'
Additional Statement in connection with the offering made by this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by Northern Funds or its distributor. This
Prospectus does not constitute an offering by Northern Funds or by the
distributor in any jurisdiction in which such offering may not lawfully be
made.

31
<PAGE> 35

NORTHERN FUNDS

MONEY MARKET FUNDS
MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT SELECT MONEY MARKET FUND
CALIFORNIA MUNICIPAL MONEY MARKET FUND
FIXED INCOME FUNDS
U.S. GOVERNMENT FUND
FIXED INCOME FUND
INTERMEDIATE TAX-EXEMPT FUND
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
TAX-EXEMPT FUND
INTERNATIONAL FIXED INCOME FUND
EQUITY FUNDS
INCOME EQUITY FUND
STOCK INDEX FUND
GROWTH EQUITY FUND
SELECT EQUITY FUND
SMALL CAP FUND
INTERNATIONAL GROWTH EQUITY FUND
INTERNATIONAL SELECT EQUITY FUND
TECHNOLOGY FUND

PROSPECTUS
July 31, 1996
<PAGE> 36
[LOGO]

The Northern Trust Company Investment Adviser,
50 S. LaSalle Street Transfer Agent and
Chicago, Illinois 60675 Custodian
1-800-595-9111

The shares offered by this Prospectus represent interests in Northern
Funds, a no-load management investment company consisting of nineteen funds
(the "Funds") designed to offer investors a range of investment opportunities.

Each Fund is advised by The Northern Trust Company ("Northern Trust").
Shares are sold and redeemed without any purchase or redemption charge by
Northern Funds, although Northern Trust and other institutions may charge their
customers for their services in connection with investments.

Northern Funds consists of the following portfolios:

Money Market Funds:
Money Market Fund
U.S. Government Money Market Fund
Municipal Money Market Fund
U.S. Government Select Money Market Fund
California Municipal Money Market Fund

Fixed Income Funds:
U.S. Government Fund
Fixed Income Fund
Intermediate Tax-Exempt Fund
Florida Intermediate Tax-Exempt Fund
Tax-Exempt Fund
International Fixed Income Fund

Equity Funds:
Income Equity Fund
Stock Index Fund
Growth Equity Fund
Select Equity Fund
Small Cap Fund (formerly, Small Cap Growth Fund)
International Growth Equity Fund
International Select Equity Fund
Technology Fund

THERE CAN BE NO ASSURANCE THAT THE MONEY MARKET FUND, U.S. GOVERNMENT
MONEY MARKET FUND, MUNICIPAL MONEY MARKET FUND, U.S. GOVERNMENT SELECT MONEY
MARKET FUND OR CALIFORNIA MUNICIPAL MONEY MARKET FUND (TOGETHER, THE "MONEY
MARKET FUNDS") WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.

THE CALIFORNIA MUNICIPAL MONEY MARKET FUND MAY INVEST A SIGNIFICANT
PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND THEREFORE INVESTMENTS IN THIS
FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.

The date of this Prospectus is July 31, 1996.
<PAGE> 37
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Expense Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Investment Information
Money Market Funds
Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
U.S. Government Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Municipal Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
U.S. Government Select Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . 17
California Municipal Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Fixed Income Funds
U.S. Government Fund and Fixed Income Fund . . . . . . . . . . . . . . . . . . . . . . . . 18
Intermediate Tax-Exempt Fund, Tax-Exempt Fund and Florida Intermediate Tax-Exempt Fund . . 18
International Fixed Income Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Equity Funds
Income Equity Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Growth Equity Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Select Equity Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Small Cap Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
International Growth Equity Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
International Select Equity Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Technology Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Stock Index Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
California Municipal Money Market Fund and Florida Intermediate Tax-Exempt Fund --
Additional Risks and Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Technology Fund -- Additional Risks and Considerations . . . . . . . . . . . . . . . . . . . . 24
International Funds -- Further Information . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Fundamentals of Fixed Income Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
<PAGE> 38

<TABLE>
<CAPTION>
Page
<S> <C>
Additional Investment Information, Risks and Considerations
Description of Securities and Investment Techniques . . . . . . . . . . . . . . . . . . . . . 26
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Opening an Account and Purchasing Shares
Purchasing Shares Directly from the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Purchasing Shares Through Northern Trust and Other Institutions . . . . . . . . . . . . . . . 39
Additional Purchase Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Redeeming and Exchanging Shares
Redeeming and Exchanging Directly from the Funds . . . . . . . . . . . . . . . . . . . . . . . 41
Redeeming and Exchanging Through Northern Trust and Other Institutions . . . . . . . . . . . . 43
Additional Redemption and Exchange Information . . . . . . . . . . . . . . . . . . . . . . . . 43

Distributions and Taxes
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Tax Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Management
Board of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Investment Adviser, Transfer Agent and Custodian . . . . . . . . . . . . . . . . . . . . . . . 48
Administrator and Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Further Information
Determining Share Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Advertising Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Shareholder Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
</TABLE>
<PAGE> 39

HIGHLIGHTS

Q. WHAT IS NORTHERN FUNDS?

A. Northern Funds is an open-end management investment company (commonly
known as a mutual fund) that offers investors the opportunity to invest in
different investment portfolios, each having separate investment objectives and
policies. Northern Funds presently consists of nineteen portfolios, including
money market, domestic and international fixed income and equity portfolios.

MONEY MARKET FUNDS

Money Market Fund seeks to maximize current income to the extent consistent
with the preservation of capital and maintenance of liquidity by investing
exclusively in high-quality money market instruments.

U.S. Government Money Market Fund seeks to maximize current income to the
extent consistent with the preservation of capital and maintenance of liquidity
by investing exclusively in obligations of the U.S. government, its agencies
and instrumentalities and related repurchase agreements.

Municipal Money Market Fund seeks, to the extent consistent with the
preservation of capital and prescribed portfolio standards, a high level of
income exempt from regular federal income tax by investing primarily in
municipal instruments.

U.S. Government Select Money Market Fund seeks to maximize current income to
the extent consistent with the preservation of capital and maintenance of
liquidity by investing solely in obligations of the U.S. government, its
agencies and instrumentalities.

California Municipal Money Market Fund seeks to provide to its shareholders, to
the extent consistent with the preservation of capital and prescribed portfolio
standards, a high level of income exempt from regular federal income tax and
California state personal income tax.

FIXED INCOME FUNDS

U.S. Government Fund seeks a high level of current income from investment in
U.S. government securities while maintaining a dollar-weighted average maturity
between one and ten years.

Fixed Income Fund seeks a high level of current income from investment in fixed
income securities while maintaining a dollar-weighted average maturity between
seven and twelve years.

Intermediate Tax-Exempt Fund seeks a high level of current income exempt from
regular federal income tax by investing in municipal instruments while
maintaining a dollar-weighted average maturity between three and ten years.

Tax-Exempt Fund seeks a high level of current income exempt from regular
federal income tax by investing in municipal instruments while maintaining a
dollar-weighted average maturity between ten and thirty years.

Florida Intermediate Tax-Exempt Fund seeks a high level of current income
exempt from regular federal income tax by investing in municipal instruments
while maintaining a dollar-weighted average maturity between three and ten
years. The Fund intends, but cannot guarantee, that its shares will qualify for
exemption from the Florida intangibles tax.

International Fixed Income Fund seeks to maximize total return consistent with
reasonable risk by investing primarily in bonds and other fixed income
securities of foreign issuers while maintaining a dollar-weighted average
maturity between three and eleven years.

EQUITY FUNDS

Income Equity Fund seeks a high level of current income by investing
principally in convertible and other equity securities with long-term capital
appreciation as a secondary objective.

Growth Equity Fund seeks long-term capital appreciation by investing
principally in common and preferred stocks and convertible securities of growth
companies.

Select Equity Fund seeks long-term capital appreciation by investing
principally in common stocks of growth companies.

Small Cap Fund seeks long-term capital appreciation by investing principally in
equity securities of companies with market capitalizations that are below the
median capitalization of stocks listed on the New York Stock Exchange.

International Growth Equity Fund seeks long-term capital appreciation by
investing principally in equity securities of foreign issuers.

International Select Equity Fund seeks long-term capital appreciation by
invest-

4
<PAGE> 40
ing principally in common stocks of foreign issuers that Northern Trust believes
to be growing more rapidly than their respective markets.

Technology Fund seeks long-term capital appreciation by investing principally
in equity securities and securities convertible into common stock.

Stock Index Fund seeks investment results approximating the aggregate price and
dividend performance of the securities included in the Standard & Poor's 500(R)
Composite Stock Price Index (the "S&P 500 Index").

Each portfolio is described in further detail in this Prospectus.

Q. WHO ADVISES THE FUNDS?

A. The Northern Trust Company ("Northern Trust"), the principal
subsidiary of Northern Trust Corporation, serves as investment adviser to
Northern Funds. Northern Trust also serves as the Funds' transfer agent and
custodian. Northern Trust and its affiliates administered $692.9 billion in
assets as of June 30, 1996 in various capacities, including $120 billion for
which Northern Trust had investment management responsibility. See
"Management."

Q. HOW DOES ONE BUY AND REDEEM SHARES?

A. Shares of the Funds are distributed by Sunstone Financial Group, Inc.
Shares may be purchased directly from Northern Funds or through a qualified
account at Northern Trust or certain other institutions. Shares are sold and
redeemed without any purchase or redemption charge by Northern Funds, although
Northern Trust and other institutions may charge their customers for their
services in connection with investments. The minimum initial investment for
purchases directly with Northern Funds is $2,500 ($500 for an IRA; $250 for a
spousal IRA; and $250 under the Automatic Investment Plan). The minimum for
subsequent investments is $50. Northern Trust or other organizations may impose
particular customer account requirements such as minimum account sizes.

The Stock Index Fund will not commence operations until it has received
orders for the purchase of its shares aggregating $5 million, and will not
accept payment for the purchase of shares until orders in this aggregate amount
are received. Northern Trust anticipates that the Stock Index Fund will commence
operations in the Fall of 1996. Under normal circumstances at least 65% of the
Fund's total assets will be invested in issues included in the S&P 500 Index.

Additional share purchase and redemption information for both
purchases and redemptions directly with Northern Funds or through qualified
accounts is provided below under "Opening an Account and Purchasing Shares" and
"Redeeming and Exchanging Shares."

Q. WHAT SHAREHOLDER SERVICES ARE AVAILABLE?

A. Northern Funds offers the advantage of automatic dividend reinvestment
in shares of the same Fund or in another Northern Fund, exchange privileges
among Northern Funds should your investment goals change, telephone exchange
and redemption privileges, an Automatic Investment Plan (with a reduced minimum
initial investment) and a Systematic Withdrawal Plan. See "Opening an Account
and Purchasing Shares" and "Redeeming and Exchanging Shares." Shares of
Northern Funds may be purchased in connection with a variety of tax-sheltered
retirement plans. See "Further Information -- Retirement Plans."

Q. WHEN ARE DISTRIBUTIONS MADE?

A. Dividends from the net investment income of the Money Market Funds,
the U.S. Government Fund, the Fixed Income Fund, the Intermediate Tax-Exempt
Fund, the Tax-Exempt Fund and the Florida Intermediate Tax-Exempt Fund are
declared daily and paid monthly. Dividends of the International Fixed Income
Fund are declared daily and paid quarterly. Dividends of the other Funds are
declared and paid as follows: Income Equity Fund -- monthly; Growth Equity Fund
and Stock Index Fund -- quarterly; Select Equity Fund, Small Cap Fund,
International Growth Equity Fund, International Select Equity Fund and
Technology Fund -- annually.

Net realized capital gains of each Fund are distributed at least
annually. See "Distributions and Taxes."

Q. WHAT ARE THE POTENTIAL RISKS PRESENTED BY THE FUNDS' INVESTMENT
PRACTICES?

A. Investing in the Funds involves the risks common to any investment in
securities. The market value of fixed income securities, which constitutes a
major part of the investments of several of the Funds, will generally vary
inversely with changes in prevailing interest rates as described below under
"Investment Information -- Fundamentals of Fixed Income Investing." The Fixed
Income Funds will invest in securities rated investment grade or higher, or
will

5
<PAGE> 41

be unrated securities of comparable quality. However, the International Funds
may invest up to 5%, and the Equity Funds may invest up to 10% of their total
assets (35% for the Income Equity Fund), in convertible securities rated below
investment grade. Several of the Funds may invest a substantial portion of
their assets in foreign securities directly, and indirectly through the
purchase of European Depository Receipts ("EDRs") and American Depository
Receipts ("ADRs"). These Funds may also enter into foreign currency exchange
contracts. Foreign securities may be subject to certain risks in addition to
those inherent in U.S. investments, including the possible imposition of
exchange control regulations, freezes on convertibility of currency and adverse
changes in foreign currency exchange rates. The International Fixed Income
Fund, as well as Northern Funds' two other international investment portfolios,
may concentrate investments in issuers located in certain industrialized
countries and may also invest in issuers located in emerging countries.

Certain risks are presented by the California Municipal Money Market
Fund and the Florida Intermediate Tax-Exempt Fund as a result of their
investments in municipal instruments of issuers located in particular states.
See "California Municipal Money Market Fund and Florida Intermediate Tax-Exempt
Fund -- Additional Risks and Considerations." In addition, the California
Municipal Money Market, Florida Intermediate Tax-Exempt and International Fixed
Income Funds are non-diversified funds, which means their portfolios can be
dependent upon the performance of a smaller number of securities than is the
case with the other Funds, which are diversified funds. Each Fund (other than
the Money Market Funds) may engage in certain transactions involving puts and
calls. Further, certain of the Funds may invest in the stocks of smaller
companies which present greater risk and price volatility. The Funds may lend
their securities and enter into repurchase agreements and reverse repurchase
agreements with qualifying banks and broker/dealers which may involve
leveraging. The Funds may also purchase eligible securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" or "delayed
settlement" basis. The Funds may invest up to 15% (10% in the case of the Money
Market Funds) of their net assets in illiquid securities.

The Funds may also purchase "derivative" instruments. "Derivative"
instruments are instruments that derive value from the performance of
underlying assets, interest or currency exchange rates, or indices, and include
(but are not limited to) interest rate and currency swaps, futures contracts,
options, forward currency contracts and structured debt obligations (including
collateralized mortgage obligations and other types of asset-backed securities,
"stripped" securities and various floating rate instruments, including
"inverse" floaters). Derivative instruments present, to varying degrees, market
risk that the performance of the underlying assets, exchange rates or indices
will decline; credit risk that the dealer or other counterparty to the
transaction will fail to pay its obligations; volatility and leveraging risk
that, if interest or exchange rates change adversely, the value of the
"derivative" instrument will decline more than the assets, rates or indices on
which it is based; liquidity risk that a Fund will be unable to sell a
"derivative" instrument when it wants because of lack of market depth or market
disruption; pricing risk that the value of a "derivative" instrument (such as
an option) will not correlate exactly to the value of the underlying assets,
rates or indices on which it is based; and operations risk that loss will occur
as a result of inadequate systems and controls, human error or otherwise. Some
"derivative" instruments are more complex than others, and for those
instruments that have been developed recently, complete information is lacking
regarding their actual performance over entire market cycles. Northern Trust
will evaluate the risks presented by the "derivative" instruments purchased by
the Funds, and will determine, in connection with its day-to-day management of
the Funds, how they will be used in furtherance of the Funds' investment
objectives. It is possible, however, that Northern Trust's evaluations will
prove to be inaccurate or incomplete and, even when accurate and complete, it
is possible that the Funds will, because of the risks discussed above, incur
loss as a result of their investments in "derivative" instruments.

The foregoing is a summary of certain of the potential risks presented
by the Funds' investment practices. Details regarding these and other risks
presented by the policies of the Funds are described under "Additional
Investment Information, Risks and Considerations."

6
<PAGE> 42

EXPENSE SUMMARY

The following tables will help you understand the expenses you will bear
directly or indirectly as a shareholder of the Funds. Shareholder Transaction
Expenses are charges you pay when buying or selling Fund shares. Annual
Operating Expenses are paid out of a Fund's assets and include fees for
portfolio management, maintenance of shareholder accounts, general Fund
administration, accounting and other services. Examples based on this
information are also provided.

<TABLE>
<CAPTION>
U.S.
U.S. GOV'T. CALIFORNIA
GOV'T. MUNICIPAL SELECT MUNICIPAL
MONEY MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET MARKET
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None None None None
Sales Charge Imposed on Reinvested Distributions None None None None None
Deferred Sales Charge Imposed on Redemptions None None None None None
Redemption Fees(1) None None None None None
Exchange Fees None None None None None

Annual Operating Expenses
(as a percentage of average net assets)
Management Fees (after fee reductions and waivers) 0.40% 0.40% 0.40% 0.25% 0.30%
12b-1 Fees 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee reductions
and reimbursements) 0.15% 0.15% 0.15% 0.15% 0.15%
-------------------------------------------------
Total Operating Expenses(2)
After Fee Reductions, Waivers and Reimbursements 0.55% 0.55% 0.55% 0.40% 0.45%
-------------------------------------------------
Example of Expenses(3)
Based on the foregoing table, you would
pay the following expenses on a
$1,000 investment, assuming a 5%
annual return and redemption at
the end of each time period:
One Year $6 $6 $6 $4 $5
Three Years $18 $18 $18 $13 $15
Five Years $32 $32 $32 $23 $26
Ten Years $71 $71 $71 $52 $58
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) A fee of $15.00 may be applicable for each wire redemption.

(2) The table and example shown do not reflect any charges that may be
imposed by Northern Trust or other institutions on their customers.

(3) The example should not be considered a representation of past or
future expenses or rates of return. Actual operating expenses and
investment return may be more or less than those shown.

The above information reflects the expenses these Funds incurred for Northern
Funds' fiscal year ended March 31, 1996 as restated to current voluntary fee
reductions. Without fee reductions, waivers and reimbursements, "Management
Fees" would be 0.60% for each Fund; "Other Expenses" would be 0.31%, 0.34%,
0.31%, 0.40% and 0.34%, respectively, for the Money Market, U.S. Government
Money Market, Municipal Money Market, U.S. Government Select Money Market and
California Municipal Money Market Funds; and "Total Operating Expenses" would
be 0.91%, 0.94%, 0.91%, 1.00% and 0.94%, respectively. In addition, during the
last fiscal year these Funds did not, and during the current fiscal year do not
expect to, pay any 12b-1 fees (otherwise payable at an annual rate of up to
0.25%) under Northern Funds' Distribution and Service Plan. For more expense
information, see "Management."

7
<PAGE> 43

<TABLE>
<CAPTION>
INTER-
INTER- FLORIDA NATIONAL
U.S. FIXED MEDIATE INTERMEDIATE TAX- FIXED
GOVERNMENT INCOME TAX-EXEMPT TAX-EXEMPT EXEMPT INCOME
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None None None None None
Sales Charge Imposed on Reinvested Distributions None None None None None None
Deferred Sales Charge Imposed on Redemptions None None None None None None
Redemption Fees(1) None None None None None None
Exchange Fees None None None None None None

Annual Operating Expenses
(as a percentage of average net assets)
Management Fees (after fee reductions and waivers) 0.75% 0.75% 0.70% 0.70% 0.70% 0.90%
12b-1 Fees 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee reductions and
reimbursements) 0.15% 0.15% 0.15% 0.15% 0.15% 0.25%
----------------------------------------------------------------
Total Operating Expenses(2)
After Fee Reductions, Waivers and Reimbursements 0.90% 0.90% 0.85% 0.85% 0.85% 1.15%
----------------------------------------------------------------
Example of Expenses(3)
Based on the foregoing table, you would pay the
following expenses on a $1,000 investment,
assuming a 5% annual return and redemption
at the end of each time period:
One Year $ 9 $ 9 $ 9 $ 9 $ 9 $12
Three Years $30 $30 $28 $28 $28 $38
Five Years $51 $51 $48 N/A $48 $65
Ten Years $114 $114 $108 N/A $108 $144
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) A fee of $15.00 may be applicable for each wire redemption.

(2) The table and example shown do not reflect any charges that may be
imposed by Northern Trust or other institutions on their customers.

(3) The example should not be considered a representation of past or
future expenses or rates of return. Actual operating expenses and
investment return may be more or less than those shown.

The above information reflects the expenses these Funds incurred for Northern
Funds' fiscal year ended March 31, 1996. Since the Florida Intermediate
Tax-Exempt Fund had not commenced operations as of the date of this prospectus,
the information for that Fund reflects the estimated expenses this Fund expects
to pay during the current fiscal year. Without fee reductions, waivers and
reimbursements, "Management Fees" would be 0.75% for the Intermediate
Tax-Exempt, Tax-Exempt and Florida Intermediate Tax-Exempt Funds; "Other
Expenses" would be 0.35%, 0.39%, 0.33%, 0.35%, 0.73% and 1.10%, respectively,
for the U.S. Government, Fixed Income, Intermediate Tax-Exempt, Tax-Exempt,
Florida Intermediate Tax-Exempt and International Fixed Income Funds; and
"Total Operating Expenses" would be 1.10%, 1.14%, 1.08%, 1.10%, 1.48% and
2.00%, respectively. In addition, during the last fiscal year these Funds did
not, and during the current fiscal year do not expect to, pay any 12b-1 fees
(otherwise payable at an annual rate of up to 0.25%) under Northern Funds'
Distribution and Service Plan. For more expense information, see "Management."

8
<PAGE> 44

<TABLE>
<CAPTION>
INTER- INTER-
SMALL NATIONAL NATIONAL
INCOME GROWTH SELECT CAP GROWTH SELECT TECH- STOCK
EQUITY EQUITY EQUITY GROWTH EQUITY EQUITY NOLOGY INDEX
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed
on Purchases None None None None None None None None
Sales Charge Imposed on
Reinvested Distributions None None None None None None None None
Deferred Sales Charge Imposed
on Redemptions None None None None None None None None
Redemption Fees(1) None None None None None None None None
Exchange Fees None None None None None None None None

Annual Operating Expenses
(as a percentage of average net assets)
Management Fees (after fee
reductions and waivers) 0.85% 0.85% 0.85% 0.85% 1.00% 1.00% 1.00% 0.40%
12b-1 Fees 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee reductions
and reimbursements) 0.15% 0.15% 0.15% 0.15% 0.25% 0.25% 0.25% 0.15%
-----------------------------------------------------------------------------
Total Operating Expenses(2)
After Fee Reductions, Waivers and
Reimbursements 1.00% 1.00% 1.00% 1.00% 1.25% 1.25% 1.25% 0.55%
-----------------------------------------------------------------------------
Example of Expenses(3)
Based on the foregoing table, you would
pay the following expenses on a
$1,000 investment, assuming a 5%
annual return and redemption at
the end of each time period:
One Year $10 $10 $10 $10 $13 $13 $13 $5
Three Years $33 $33 $33 $33 $41 $41 $41 $18
Five Years $57 $57 $57 $57 $71 $71 N/A N/A
Ten Years $126 $126 $126 $126 $155 $155 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) A fee of $15.00 may be applicable for each wire redemption.

(2) The table and example shown do not reflect any charges that may be
imposed by Northern Trust or other institutions on their customers.

(3) The example should not be considered a representation of past or
future expenses or rates of return. Actual operating expenses and
investment return may be more or less than those shown.

The above information reflects the expenses these Funds incurred for Northern
Funds' fiscal year ended March 31, 1996. Since the Technology Fund did not
commence investment operations until April 1, 1996 and the Stock Index Fund had
not commenced operations as of the date of this prospectus, the information for
those Funds reflects the estimated expenses those Funds expect to pay during
the current fiscal year. Without the fee reductions, waivers and
reimbursements, "Management Fees" would be 1.00%, 1.00%, 1.20%, 1.20%, 1.20%,
1.20%, 1.20% and 0.60%, respectively, of the average daily net assets of the
Income Equity, Growth Equity, Select Equity, Small Cap, International Growth
Equity, International Select Equity, Technology and Stock Index Funds; "Other
Expenses" would be 0.48%, 0.36%, 0.71%, 0.41%, 0.45%, 0.51%, 0.45% and 0.90%,
respectively; and "Total Operating Expenses" would be 1.48%, 1.36%, 1.91%,
1.61%, 1.65%, 1.71%, 1.65% and 1.51%, respectively. In addition, during the
last fiscal year these Funds did not, and during the current fiscal year do not
expect to, pay any 12b-1 fees (otherwise payable at an annual rate of up to
0.25%) under Northern Funds' Distribution and Service Plan. For more expense
information, see "Management."

9
<PAGE> 45

FINANCIAL
HIGHLIGHTS

The "Financial Highlights" in the following tables set forth selected per share
data and ratios for each of the Funds for the period ended March 31, 1996,
except for the Florida Intermediate Tax-Exempt, Technology and Stock Index
Funds which had not yet commenced operations. The information has been audited
by Northern Funds' independent auditors and should be read in conjunction with
the financial statements and related notes incorporated by reference into the
Additional Statement. Information about the performance of the Funds is
contained in Northern Funds' annual report to shareholders, which may be
obtained without charge by calling the Northern Funds Center, at 1-800-595-9111
or writing P.O. Box 75986, Chicago, Illinois 60690-6319.

MONEY MARKET FUNDS

<TABLE>
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET MONEY MARKET
FUND FUND
----------------------------- ---------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
SELECTED PER SHARE DATA 1996 1995(1) 1996 1995(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00

Income from Investment Operations:
Net investment income 0.05 0.04 0.05 0.04
- -------------------------------------------------------------------------------------------------------------------------
Less Distributions Paid:
From net investment income (0.05) (0.04) (0.05) (0.04)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------------------
Total Return(4) 5.57% 4.55% 5.46% 4.47%

Supplemental Data and Ratios:
Net assets, in thousands, end of period $1,061,813 $894,279 $207,105 $227,543
Ratio to average net assets of:(5)
Expenses, net of waivers and reimbursements 0.49% 0.45% 0.49% 0.45%
Expenses, before waivers and reimbursements 0.91% 0.96% 0.94% 1.01%
Net investment income, net of waivers and
reimbursements 5.42% 4.94% 5.33% 4.93%
Net investment income, before waivers and
reimbursements 5.00% 4.43% 4.88% 4.37%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

10
<PAGE> 46
<TABLE>
<CAPTION>
U.S. GOVERNMENT CALIFORNNIA
MUNICIPAL SELECT MUNICIPAL
MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
----------------------- ---------------------- -----------------------
YEAR PERIOD YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
SELECTED PER SHARE DATA 1996 1995(1) 1996 1995(2) 1996 1995(3)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00

Income from Investment Operations:
Net investment income 0.03 0.03 0.05 0.02 0.04 0.01
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions Paid:
From net investment income (0.03) (0.03) (0.05) (0.02) (0.04) (0.01)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return(4) 3.54% 2.90% 5.55% 1.75% 3.63% 1.27%

Supplemental Data and Ratios:
Net assets, in thousands, end of period $1,102,789 $927,747 $85,400 $82,162 $165,087 $161,316
Ratio to average net assets of:(5)
Expenses, net of waivers and reimbursements 0.49% 0.45% 0.33% 0.30% 0.39% 0.35%
Expenses, before waivers and reimbursements 0.91% 0.95% 1.00% 1.32% 0.94% 1.07%
Net investment income, net of waivers and
reimbursements 3.46% 3.10% 5.43% 5.84% 3.55% 3.78%
Net investment income, before waivers and
reimbursements 3.04% 2.60% 4.76% 4.82% 3.00% 3.06%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

11
<PAGE> 47

FIXED INCOME FUNDS

<TABLE>
<CAPTION>
U.S. FIXED
GOVERNMENT INCOME
FUND FUND
---------------------- ---------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
Selected per share data 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $9.84 $10.00 $9.78 $10.00

Income (Loss) from Investment Operations:
Net investment income 0.51 0.50 0.60 0.62
Net realized and unrealized gains (losses)
on investments and foreign currency
transactions 0.29 (0.16) 0.48 (0.22)
- ------------------------------------------------------------------------------------------------------
Total Income from Investment Operations 0.80 0.34 1.08 0.40
- ------------------------------------------------------------------------------------------------------
Less Distributions Paid:
From net investment income (0.51) (0.50) (0.59) (0.62)
From net realized gains (0.07) -- (0.17) --
In excess of net investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.58) (0.50) (0.76) (0.62)
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.06 $9.84 $10.10 $9.78

Total Return 7.65% 3.49% 11.18% 4.16%

Supplemental Data and Ratios:
Net assets, in thousands, end of period $149,062 $116,443 $101,339 $65,929
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.90% 0.90% 0.90% 0.90%
Expenses, before waivers and reimbursements 1.10% 1.12% 1.14% 1.18%
Net investment income, net of waivers and
reimbursements 5.07% 5.20% 5.79% 6.48%
Net investment income, before waivers and
reimbursements 4.87% 4.98% 5.55% 6.20%

Portfolio Turnover Rate 112.00% 42.29% 116.22% 55.27%
- ------------------------------------------------------------------------------------------------------

</TABLE>

<PAGE> 48
FIXED INCOME FUNDS

<TABLE>
<CAPTION>
INTERMEDIATE INTERNATIONAL
TAX-EXEMPT TAX-EXEMPT FIXED INCOME
FUND FUND FUND
--------------------- -------------------- -------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
Selected Per Share Data 1996 1995 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.03 $10.00 $10.08 $10.00 $10.64 $10.00

Income (Loss) from Investment Operations:
Net investment income 0.41 0.40 0.48 0.48 0.62 0.58
Net realized and unrealized gains (losses)
on investments and foreign currency
transactions 0.26 0.03 0.29 0.08 -- 0.64
- ----------------------------------------------------------------------------------------------------------------------
Total Income from Investment Operations 0.67 0.43 0.77 0.56 0.62 1.22
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions Paid:
From net investment income (0.41) (0.40) (0.48) (0.48) (0.62) (0.56)
From net realized gains (0.07) -- (0.02) -- (0.02) --
In excess of net investment income -- -- -- -- -- (0.02)
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.48) (0.40) (0.50) (0.48) (0.64) (0.58)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.22 $10.03 $10.35 $10.08 $10.62 $10.64
- ----------------------------------------------------------------------------------------------------------------------
Total Return 6.81% 4.38% 7.80% 5.78% 5.84% 12.77%

Supplemental Data and Ratios:
Net assets, in thousands, end of period $244,139 $221,251 $125,113 $118,690 $15,665 $13,028
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.85% 0.85% 0.85% 0.85% 1.15% 1.15%
Expenses, before waivers and reimbursements 1.08% 1.09% 1.10% 1.11% 2.00% 2.42%
Net investment income, net of waivers and
reimbursements 4.01% 4.09% 4.62% 4.95% 5.75% 5.96%
Net investment income, before waivers and
reimbursements 3.78% 3.85% 4.37% 4.69% 4.90% 4.69%

Portfolio Turnover Rate 137.85% 78.87% 60.50% 54.94% 52.05% 43.24%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

13
<PAGE> 49

EQUITY FUNDS

<TABLE>
<CAPTION>
INCOME EQUITY GROWTH EQUITY SELECT EQUITY
FUND FUND FUND
----------------------- ----------------------- -----------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
Selected per share data 1996 1995 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.95 $10.00 $10.61 $10.00 $10.77 $10.00

Income (Loss) from Investment Operations:
Net investment income 0.34 0.29 0.08 0.08 0.02 0.06
Net realized and unrealized gains (losses) on
investments, options, futures contracts
and foreign currency transactions 1.66 (0.08) 2.59 0.60 2.73 0.75
------- ------- -------- -------- ------- -------
Total Income (loss) from Investment Operations 2.00 0.21 2.67 0.68 2.75 0.81
------- ------- -------- -------- ------- -------
Less Distributions Paid:
From net investment income (0.36) (0.26) (0.08) (0.07) (0.03) (0.04)
From net realized gains -- -- (0.05) -- (0.37) --
In excess of net investment income -- -- -- -- -- --
In excess of accumulated net realized gains
on investment transactions -- -- -- -- -- --

Total Distributions (0.36) (0.26) (0.13) (0.07) (0.40) (0.04)
------- ------- -------- -------- ------- -------
Net Asset Value, End of Period $11.59 $9.95 $13.15 $10.61 $13.12 $10.77
------- ------- -------- -------- ------- -------
Total Return 20.41% 2.21% 25.13% 6.90% 25.70% 8.18%

Supplemental Data and Ratios:
Net assets, in thousands, end of period $55,919 $38,954 $224,571 $113,185 $33,842 $15,123
Ratio to average net assets of:(3)
Expenses, net of waivers and
reimbursements 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers and
reimbursements 1.48% 1.55% 1.36% 1.40% 1.91% 2.61%
Net investment income, net of waivers
and reimbursements 3.17% 3.08% 0.70% 0.86% 0.22% 0.82%
Net investment income (loss), before
waivers and reimbursements 2.69% 2.53% 0.34% 0.46% (0.69)% (0.79)%

Portfolio Turnover Rate 67.32% 45.68% 73.20% 82.90% 137.99% 48.88%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Commenced investment operations on April 6, 1994.
(2) Commenced investment operations on April 5, 1994.
(3) Annualized for periods less than a full year.

<PAGE> 50
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL INTERNATIONAL
FUND SELECT EQUITY FUND SELECT EQUITY FUND
--------------------- --------------------- ---------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
Selected per share data 1996 1995 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.98 $10.00 $9.61 $10.00 $9.78 $10.00

Income (Loss) from Investment Operations:
Net investment income 0.05 0.11 0.10 0.04 0.01 0.04
Net realized and unrealized gains (losses) on
investments, options, futures contracts
and foreign currency transactions 2.29 (0.05) 0.72 (0.31) 0.99 (0.23)
-------- ------- -------- -------- -------- -------
Total Income (loss) from Investment Operations 2.34 0.06 0.82 (0.27) 1.00 (0.19)
-------- ------- -------- -------- -------- -------
Less Distributions Paid:
From net investment income (0.07) (0.08) (0.11) (0.03) (0.02) (0.03)
From net realized gains (0.67) -- -- -- -- --
In excess of net investment income -- -- (0.09) -- (0.03) --
In excess of accumulated net realized gains
on investment transactions -- -- -- (0.09) -- --
-------- ------- -------- ------- -------- -------
Total Distributions (0.74) (0.08) (0.20) (0.12) (0.05) (0.03)
-------- ------- -------- ------- -------- -------
Net Asset Value, End of Period $11.58 $9.98 $10.23 $9.61 $10.73 $9.78
-------- ------- -------- -------- -------- -------
Total Return 24.09% 0.57% 8.61% (2.65)% 10.20% (1.95)%

Supplemental Data and Ratios:
Net assets, in thousands, end of period $155,238 $76,627 $181,237 $114,673 $102,719 $71,958
Ratio to average net assets of:(3)
Expenses, net of waivers and
reimbursements 1.00% 1.00% 1.25% 1.25% 1.25% 1.25%
Expenses, before waivers and
reimbursements 1.61% 1.76% 1.65% 1.71% 1.71% 1.75%
Net investment income, net of waivers
and reimbursements 0.65% 1.36% 0.92% 0.47% 0.12% 0.47%
Net investment income (loss), before
waivers and reimbursements 0.04% 0.60% 0.52% 0.01% (0.34)% (0.03)%

Portfolio Turnover Rate 46.59% 82.46% 216.86% 158.31% 176.71% 97.69%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Commenced investment operations on April 6, 1994.
(2) Commenced investment operations on April 5, 1994.
(3) Annualized for periods less than a full year.

15
<PAGE> 51

INVESTMENT INFORMATION

MONEY MARKET FUNDS

MONEY MARKET FUND

A. U.S. dollar-denominated obligations of U.S. banks with total assets in
excess of $1 billion (including obligations of foreign branches of
such banks);

B. U.S. dollar-denominated obligations of foreign commercial banks with
total assets in excess of $5 billion;

D. high-grade corporate bonds and unrated notes, paper and other
instruments that are of comparable quality as determined by Northern
Trust;

E. rated asset-backed securities of non-governmental issuers (including
interests in pools of assets such as mortgages, installment purchase
obligations and credit card receivables);

F. securities issued or guaranteed as to principal and interest by the
U.S. government or by its agencies or instrumentalities and custodial
receipts with respect thereto;

G. dollar-denominated securities issued or guaranteed by one or more
foreign governments or political subdivisions, agencies or
instrumentalities thereof;

H. repurchase agreements relating to the above instruments; and

I. securities issued or guaranteed by state or local governmental
bodies.

U.S. GOVERNMENT MONEY MARKET FUND

The investment objective of the U.S. Government Money Market Fund is also to
seek to maximize current income to the extent consistent with the preservation
of capital and the maintenance of liquidity by investing exclusively in
high-quality money market instruments. The U.S. Government Money Market Fund
seeks to achieve its investment objective by investing in:

B. repurchase agreements relating to the above instruments; and

C. custodial receipts with respect to securities issued or guaranteed as
to principal and interest by the U.S. government or by any of its
agencies or instrumentalities.

MUNICIPAL MONEY MARKET FUND

A. fixed and variable rate notes and similar debt instruments rated
MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher
by S&P, D-2 or higher by Duff or F-2 or higher by Fitch;

B. tax-exempt commercial paper and similar debt instruments rated Prime-2
or higher by Moody's, A-2 or higher by S&P, Duff 2 or higher by Duff
or F-2 or higher by Fitch;

16
<PAGE> 52
C. high-grade municipal bonds and unrated notes, paper or other
instruments that are of comparable quality as determined by Northern
Trust; and

U.S. GOVERNMENT SELECT MONEY MARKET FUND

In making investment decisions, Northern Trust will seek to acquire,
during normal market conditions, only those U.S. government securities the
interest on which is generally exempt from state income taxation. Securities
generally eligible for this exemption include those issued by the U.S. Treasury
and certain U.S. government agencies and instrumentalities, including the
Tennessee Valley Authority, Federal Home Loan Bank, Federal Farm Credit Banks
Funding Corp. and the Student Loan Marketing Association. The Fund intends to
limit investments to only the foregoing exempt U.S. government securities.
However, under extraordinary circumstances, such as when appropriate exempt
securities are unavailable, the Fund may make investments in non-exempt U.S.
government securities and cash equivalents, and may hold uninvested cash. See
"Distributions and Taxes" below for certain tax considerations.

CALIFORNIA MUNICIPAL MONEY MARKET FUND

A. fixed and variable rate notes and similar debt instruments rated
MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher
by S&P, D-2 or higher by Duff or F-2 or higher by Fitch;

B. tax-exempt commercial paper and similar debt instruments rated Prime-2
or higher by Moody's, A-2 or higher by S&P, Duff 2 or higher by Duff
or F-2 or higher by Fitch;

C. high-grade municipal bonds and unrated notes, paper or other
instruments that are of comparable quality as determined by Northern
Trust; and

OTHER INFORMATION

All securities acquired by the Money Market Funds will be determined at the
time of purchase by Northern Trust to present minimal credit risks and will be
"Eligible Securities" as defined by the Securities and Exchange Commission (the
"SEC"). Eligible Securities are (a) securities that either (i) have short-term
debt ratings at the time of purchase in the two highest rating categories by at
least two unaffiliated nationally recognized statistical rating organizations
("NRSROs") (or one NRSRO if the security is rated by only one NRSRO), or (ii)
are comparable in priority and security with an instrument issued by an issuer
which has such ratings, and (b) securities that are unrated (including
securities of issuers that have long-term but not short-term ratings) but are
of comparable quality as determined by Northern Trust.

Each Money Market Fund is managed so that the average maturity of all
instruments in the Fund (on a dollar-weighted basis) will not exceed 90 days.
In no event will the Money Market Funds purchase any securities which mature
more than 397 days from the date of purchase (except for certain variable and
floating rate instruments and securities collateralizing repurchase
agreements). Securities in which the

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<PAGE> 53

Money Market Funds invest may not earn as high a level of income as longer term
or lower quality securities, which generally have greater market risk and more
fluctuation in market value.

As a matter of fundamental policy, changeable only with the approval
of the holders of a majority of the outstanding shares of a Fund, at least 80%
of the annual gross income of the Municipal Money Market Fund and the
California Municipal Money Market Fund will be derived from debt instruments,
the interest on which is, in the opinion of bond counsel or counsel for the
issuers, exempt from regular income tax ("Municipal Instruments"), except in
extraordinary circumstances such as when Northern Trust believes that market
conditions indicate that the Fund should adopt a temporary defensive posture by
holding uninvested cash or investing in taxable short-term securities ("Taxable
Investments"). In addition, as a non-fundamental policy, under normal market
conditions at least 65% of the value of the California Municipal Money Market
Fund's total assets will be invested in Municipal Instruments the interest on
which, in the opinion of bond counsel for the issuers, is exempt from
California state personal income tax ("California Municipal Instruments").
These opinions may contain various assumptions, qualifications or exceptions
that are reasonably acceptable to Northern Trust. The Municipal Money Market
and California Municipal Money Market Funds are not limited in the amount of
their assets that may be invested in "private activity bonds" the interest on
which may be treated as an item of tax preference to shareholders under the
federal alternative minimum tax. Taxable Investments will consist exclusively
of instruments that may be purchased by the Money Market Fund. Under normal
market conditions, Taxable Investments will not exceed 20% of the value of the
total assets of either Fund; during temporary defensive periods, however, all
or any portion of a Fund's assets may be invested in such instruments.

FIXED INCOME FUNDS

U.S. GOVERNMENT FUND AND FIXED INCOME FUND

The investment objective of both the U.S. Government Fund and the Fixed Income
Fund is to seek a high level of current income.

The U.S. Government Fund seeks to achieve its objective by investing
primarily (at least 65% of the value of its total assets during normal market
conditions) in securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities and repurchase agreements relating to such
securities. These securities may include mortgage-related securities. The
Fund's dollar-weighted average maturity will be between one and ten years.

The Fixed Income Fund seeks to achieve its objective by investing in a
broad range of fixed income securities while maintaining a dollar-weighted
average maturity between seven and twelve years. The Fund will invest primarily
(at least 65% of the value of its total assets during normal market conditions)
in fixed income securities rated investment grade or better at the time of
purchase (within the four highest rating categories of S&P, Duff, Fitch or
Moody's) or, if unrated, of comparable quality as determined by Northern Trust.
These securities may be of all types and in any proportion, including
obligations of the U.S. government, its agencies or instrumentalities,
obligations of foreign, state and local governments, obligations of U.S. and
foreign corporations, obligations of U.S. and foreign banks and repurchase
agreements relating to such obligations. The Fund may purchase bonds,
debentures, mortgage and other asset-related securities, zero coupon bonds and
convertible debentures. The Fund may also invest in short-term obligations that
are permissible investments for the Money Market Fund. The obligations of a
foreign issuer will not be purchased by the Fixed Income Fund if, as a result
of the purchase, more than 20% of the Fund's total assets will be invested in
the obligations of issuers within a single foreign country.

Each Fund may utilize options, interest rate swaps and futures
contracts and the Fixed Income Fund may enter into forward currency contracts
as described more fully under "Additional Investment Information, Risks and
Considerations."

INTERMEDIATE TAX-EXEMPT FUND, TAX-EXEMPT FUND AND FLORIDA INTERMEDIATE
TAX-EXEMPT FUND

The investment objective of the Intermediate Tax-Exempt Fund is to seek a high
level of current income exempt from regular federal income tax by investing in
a broad range of Municipal Instruments while maintaining a dollar-weighted
average maturity between three and ten years. The Tax-Exempt Fund seeks a high
level of current income exempt from regular federal income tax by investing in
a broad range of Municipal Instruments while maintaining a dollar-weighted
average maturity between ten and thirty years. The Florida Intermediate
Tax-Exempt Fund seeks a high level of current income exempt from regular
federal

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<PAGE> 54
income tax by investing in Municipal Instruments while maintaining a
dollar-weighted average maturity between three and ten years.

Municipal Instruments purchased by the Funds will be investment grade
or better at the time of purchase (within the four highest rating categories of
S&P, Duff, Fitch or Moody's) or, if unrated, of comparable quality as
determined by Northern Trust. Short-term obligations will be limited to those
obligations that are permissible investments for the Municipal Money Market
Fund.

As a matter of fundamental policy, changeable only with the approval
of the holders of a majority of the outstanding shares of a Fund, at least 80%
of each Fund's annual gross income will be derived from Municipal Instruments,
except in extraordinary circumstances, such as when Northern Trust believes
that market conditions indicate that a Fund should adopt a temporary defensive
posture by holding uninvested cash or investing in Taxable Investments. In
addition, as a matter of non-fundamental policy which may be changed by the
Board of Trustees, under normal market conditions, at least 65% of the value of
the Florida Intermediate Tax-Exempt Fund's total assets will be invested in
Municipal Instruments issued by the state of Florida and its municipalities,
counties and other taxing districts, as well as other securities exempt from
the Florida intangibles tax ("Florida Municipal Instruments"). "Private
activity bonds," the interest from which may be treated as an item of tax
preference to shareholders under the federal alternative minimum tax ("AMT
obligations"), will not be counted in determining a Fund's investments in
Municipal Instruments for these purposes. Under normal market conditions,
Taxable Investments will not exceed 20% of the value of the total assets of a
Fund; during temporary defensive periods, however, all or any portion of a
Fund's assets may be invested in such instruments. Taxable Investments will
consist exclusively of instruments that may be purchased by the Fixed Income
Fund. So long as other suitable Municipal Instruments are available for
investment, the Funds do not intend to invest in AMT obligations. Certain
Municipal Instruments purchased by the Funds (such as "moral obligation" bonds)
may be issued by issuers with a "moral" but not legal obligation to provide for
the payment of the bonds. See "Additional Investment Information, Risks and
Considerations -- Description of Securities and Investment Techniques --
Municipal Securities."

The Florida Intermediate Tax-Exempt Fund is classified as a
non-diversified investment company under the Investment Company Act of 1940
(the "1940 Act"). Investment return on a non-diversified portfolio typically is
dependent upon the performance of a smaller number of securities relative to
the number held in a diversified portfolio. Consequently, the change in value
of any one security may affect the overall value of a non-diversified portfolio
more than it would a diversified portfolio.

INTERNATIONAL FIXED INCOME FUND

The investment objective of the International Fixed Income Fund is to seek to
maximize total return consistent with reasonable risk. In pursuing its
investment objective, the Fund invests primarily (at least 65% of the value of
its total assets under normal market conditions) in a broad range of fixed
income securities of foreign issuers. The Fund's dollar-weighted average
maturity will range between three and eleven years.

Securities purchased by the Fund will generally be rated investment
grade or better at the time of purchase (within the four highest rating
categories of S&P, Duff, Fitch or Moody's) or, if unrated, be of comparable
quality as determined by Northern Trust. These securities may include bonds,
debentures, mortgage and other asset-related securities, zero coupon bonds and
convertible debentures (i.e., debentures that may convert into other fixed
income debt) of foreign governments, their agencies, instrumentalities and
political subdivisions; supranational organizations (e.g., the European
Investment Bank and Inter-American Development Bank); and foreign corporations
and banks. The Fund may also invest in obligations of the U.S. government, its
agencies and instrumentalities (including repurchase agreements collateralized
by such obligations) and of U.S. corporations and banks. Currently, a
substantial portion of the Fund's assets is invested in foreign governmental
obligations. Commercial paper and other short-term obligations acquired by the
Fund will be rated within the two highest rating categories at the time of
purchase or, if unrated, will be determined by Northern Trust to be of
comparable quality.

The International Fixed Income Fund may invest up to 5% of its total
assets in non-investment grade convertible securities that are rated "B" or
higher by at least one major rating agency at the time of purchase or, if
unrated, are determined to be of comparable quality by Northern Trust. See
"Additional Investment Information, Risks and Considerations -- Description of

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<PAGE> 55

Securities and Investment Techniques -- Convertible Securities." The
International Fixed Income Fund may make indirect investments in foreign
securities through the purchase of EDRs and ADRs and may enter into forward
currency contracts and utilize options, swaps and futures contracts as more
fully described under "Additional Investment Information, Risks and
Considerations." Pending investment, as a temporary defensive measure and to
meet anticipated redemption requests, the International Fixed Income Fund may
also invest, in accordance with its investment policies, in various short-term
obligations that are permissible investments for the Money Market Fund, as well
as other similar foreign denominated short-term obligations.

The International Fixed Income Fund is classified as a non-diversified
investment company under the 1940 Act. Investment return on a non-diversified
portfolio typically is dependent upon the performance of a smaller number of
securities relative to the number held in a diversified portfolio.
Consequently, the change in value of any one security may affect the overall
value of the International Fixed Income Fund more than it would the other
Funds.

EQUITY FUNDS

INCOME EQUITY FUND

The investment objective of the Income Equity Fund is to seek a high level of
current income with long-term capital appreciation as a secondary objective.
The Fund seeks to achieve its objective by investing, under normal market
conditions, at least 65% of the value of its total assets in income-producing
convertible and other equity securities. Investments are selected based on
factors such as current income, prospects for growth and possible capital
appreciation. The Fund expects to make significant investments in convertible
securities and, at times, may be fully invested in such securities. Generally,
convertible securities will be rated investment grade or better at the time of
purchase or, if unrated, will be determined to be of comparable quality by
Northern Trust. Investment-grade securities are rated BBB or higher by S&P,
Duff or Fitch or Baa or higher by Moody's. Up to 35% of the Fund's total assets
may, however, be invested in non-investment grade convertible securities
(commonly referred to as "high risk" or "junk" bonds) that are rated "B" or
higher by at least one major rating agency or, if unrated, are determined to be
of comparable quality by Northern Trust. See "Additional Investment
Information, Risks and Considerations -- Description of Securities and
Investment Techniques -- Convertible Securities."

The Fund may also invest, under normal market conditions, up to 35% of
its total assets in a broad range of bonds and other fixed income securities
rated investment grade or better at the time of purchase. These fixed income
securities will be limited to the types that are permissible investments for
the Fixed Income Fund. The Fund may utilize interest rate swaps as described
more fully under "Additional Investment Information, Risks and Considerations."

GROWTH EQUITY FUND

The investment objective of the Growth Equity Fund is to seek long-term capital
appreciation. Any income received is incidental to this objective. The Fund
seeks to achieve its objective by investing primarily (at least 65% of the
value of its total assets under normal market conditions) in equity securities
(i.e., common and preferred stocks and convertible securities) of "growth
companies" that Northern Trust believes have demonstrated above average sales
and earnings growth and return on equity relative to their peers and the
general market. Investments are selected based on factors such as financial
condition, market share, product leadership, earnings growth rates as compared
with those of relevant competitors, market valuation in comparison to other
stocks and the stock's own historical norms, improving relative price trend and
other investment criteria. The Fund will have broad sector exposure and
emphasis will be on issue selection rather than sector rotation.

SELECT EQUITY FUND

The investment objective of the Select Equity Fund is to seek long-term capital
appreciation. Any income received is incidental to this objective. The Fund
pursues its objective by investing, under normal market conditions, at least
65% of the value of its total assets in common stocks of companies believed by
Northern Trust to have superior quality and growth characteristics. The Fund is
not sector-weighted, and will purchase securities of companies primarily based
on their performance in the following areas over a five-year period: growth of
sales, growth of earnings per share, consistency of earnings per share growth,
return on equity, and low debt relative to total capital. As companies which
perform relatively well in some or all of these categories often retain their
earnings to finance current and future growth, they generally pay low or no
dividends. The Fund intends to invest primarily in the securities of companies
which together with their predecessors have been in continuous operation for

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<PAGE> 56
at least five years and have stock market capitalizations in excess of $500
million.

SMALL CAP FUND

The investment objective of the Small Cap Fund (formally called the "Small Cap
Growth Fund") is to seek long-term capital appreciation. Any income received is
incidental to this objective. In seeking to attain its investment objective,
the Fund will invest, under normal market conditions, at least 65% of the value
of its total assets in equity securities of companies with market
capitalizations, at the time of purchase, that are below the median
capitalization of stocks listed on the New York Stock Exchange. In selecting
stocks, Northern Trust will consider the relationship between price and book
value, and other factors such as trading volume and bid-ask spreads in an
effort to allow the Fund to achieve cost-effective diversification.

While Northern Trust believes that smaller companies can provide
greater growth potential than larger, more mature firms, investing in the
securities of such companies also involves greater risk, portfolio price
volatility and cost. Historically, small capitalization stocks, which will be
the Fund's primary investments, and stocks of recently organized companies, in
which the Fund may also invest, have been more volatile in price than the
larger capitalization stocks included in the Standard & Poor's 500 Stock Index
(the "S&P 500 Index"). Among the reasons for this greater price volatility are
the lower degree of market liquidity (the securities of companies with small
stock market capitalizations may trade less frequently and in limited volume)
and the greater sensitivity of small companies to changing economic conditions.
For example, these companies are associated with higher investment risk due to
the greater business risks of small size and limited product lines, markets,
distribution channels and financial and managerial resources.

The values of small company stocks will frequently fluctuate
independently of the values of larger company stocks. Small company stocks may
decline in price as large company stock prices rise, or rise in price as large
company stock prices decline. You should, therefore, expect that the net asset
value of the Fund's shares will be more volatile than, and may fluctuate
independently of, broad stock market indices such as the S&P 500 Index.

The additional costs associated with the acquisition of small company
stocks include brokerage costs, market impact costs (that is, the increase in
market prices which may result when the Fund purchases thinly traded stock) and
the effect of the "bid-ask" spread in small company stocks. These costs will be
borne by all shareholders and may negatively impact investment performance.

INTERNATIONAL GROWTH EQUITY FUND

The investment objective of the International Growth Equity Fund is to seek
long-term capital appreciation. Any income received is incidental to this
objective. The Fund seeks to achieve its objective by investing principally in
common and preferred stocks and securities convertible into common stock of
foreign issuers. The Fund will, under normal market conditions, invest at least
65% of the value of its total assets in equity securities. The Fund emphasizes
stocks of companies that Northern Trust believes to be growing more rapidly
than their respective markets and that have low debt ratios and above-average
returns on equity. The Fund is country-weighted but not sector-weighted and
selects investments based on such factors as financial condition, market share,
product leadership, earnings growth rates as compared with those of relevant
competitors in the same local market, market valuation in comparison to other
stocks and the stock's own historical norms, improving relative price trend and
other investment criteria. The Fund will normally limit its equity investments
to the securities of companies which together with their predecessors have been
in continuous operation for at least five years and have stock market
capitalizations in excess of $200 million. The Fund invests in securities
listed on foreign and domestic securities exchanges and securities traded in
foreign and domestic over-the-counter markets. See "International Funds --
Further Information."

INTERNATIONAL SELECT EQUITY FUND

The investment objective of the International Select Equity Fund is to seek
long-term capital appreciation. Any income received is incidental to this
objective. The Fund will pursue its objective by investing primarily (at least
65% of the value of its total assets under normal market conditions) in equity
securities of foreign issuers that Northern Trust believes to be growing more
rapidly than their respective markets, including stocks of companies that have
medium to smaller stock market capitalizations (generally less than $1 billion)
and that transact a significant level of their business in countries growing in
excess of the world averages. The Fund is neither country-weighted nor sector-
weighted and will invest in stocks of companies primarily based on their
performance in the following areas over a five-year period: growth of sales,

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<PAGE> 57

growth of earnings per share, consistency of earnings per share growth, return
on equity and low debt relative to total capital. As companies which perform
relatively well in some or all of these categories often retain their earnings
to finance current and future growth, they generally pay low or no dividends.
The Fund will normally limit its equity investments to the securities of
companies which together with their predecessors have been in continuous
operation for at least five years and have stock market capitalizations in
excess of $200 million. The Fund invests in securities listed on foreign and
domestic securities exchanges and securities traded in foreign and domestic
over-the-counter markets. See "International Funds -- Further Information."

TECHNOLOGY FUND

The Technology Fund's investment objective is to seek long-term capital
appreciation by investing principally in equity securities and securities
convertible into common stock of companies that develop, produce or distribute
products and services related to advances in technology. In addition, the Fund
will, under normal market conditions, invest at least 65% of the value of its
total assets in securities of companies principally engaged in technology
business activities. Northern Trust will consider an issuer principally engaged
in technology business activities if such issuer is listed on the Hambrecht and
Quist Technology Index (the "H&Q Index"), the SoundView Technology Index (the
"SoundView Index"), the technology grouping of the S&P 500 Index or any other
comparable technology index. The H&Q Index is an index of computer and chip
makers, biotechnology concerns and other high-tech companies, and the SoundView
Index is an unweighted index consisting of more than 100 technology companies.

The Fund emphasizes stocks of companies that Northern Trust believes
have the potential to outperform the market over the next one-to two-year
period. Investments are selected based on factors such as financial condition,
market share, product leadership or market niches, earnings growth rates as
compared with those of relevant competitors, market valuation in comparison to
other stocks and the stock's own historical norms, improving relative price
trend and other investment criteria. Companies in which the Fund may invest
include industrial and business machines; communications; computers, software
and peripheral products; electronics; electronic media; environmental services;
office equipment and supplies; television and video equipment and services; and
satellite technology and equipment. For the purposes of the Fund's industry
concentration policy all of the foregoing companies will be deemed part of the
technology industry. See "Additional Investment Information, Risks and
Considerations -- Investment Restrictions." Certain of the policies of the Fund
present additional risks which are described under "Technology Fund --
Additional Risks and Considerations."

STOCK INDEX FUND

The investment objective of the Stock Index Fund is to seek investment results
approximating the aggregate price and dividend performance of the securities
included in the S&P 500 Index. Although the Fund will not always hold securities
of all 500 issuers included in the S&P 500 Index, it will normally invest at
least 65% of its total assets in the issues included in the S&P 500 Index. The
S&P 500 Index is a market value-weighted index consisting of 500 common stocks
which are traded on the New York Stock Exchange, American Stock Exchange and the
Nasdaq National Market System and selected by Standard & Poor's Corporation
("Standard & Poor's") through a detailed screening process starting on a
macro-economic level and working toward a micro-economic level dealing with
company specific information such as market value, industry group
classification, capitalization and trading activity. Standard & Poor's primary
objective for the S&P 500 Index is to be the performance benchmark for the U.S.
equity markets. The companies chosen for inclusion in the S&P 500 Index tend to
be leaders in important industries within the U.S. economy. However, companies
are not selected by Standard & Poor's for inclusion because they are expected to
have superior stock price performance relative to the market in general or other
stocks in particular. Standard & Poor's makes no representation or warranty,
implied or express, to purchasers of Fund shares or any member of the public
regarding the advisability of investing in the Fund or the ability of the S&P
500 Index to track general stock market performance.

The Fund is managed through the use of a "passive" or "indexing"
investment approach, which attempts to duplicate the investment composition and
performance of the S&P 500 Index through statistical procedures. As a result, in
this Fund, Northern Trust does not employ traditional methods of fund investment
management, such as selecting securities on the basis of economic, financial and
market analysis.

Northern Trust believes that under normal market conditions, the
quarterly performance of the Fund will be within a .95 correlation with the S&P
500 Index. However, there is no assurance

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<PAGE> 58
that the Fund will be able to do so on a consistent basis. Deviations from the
performance of the S&P 500 Index ("tracking error") may result from shareholder
purchases and redemptions of shares of the Fund that occur daily, as well as
from the expenses borne by the Fund. Such purchases and redemptions may
necessitate the purchase and sale of securities by the Fund, and the resulting
transaction costs may be substantial because of the number and the
characteristics of the securities held. In addition, transaction costs may be
incurred because sales of securities received in connection with spin-offs and
other corporate reorganizations will be made to conform the Fund's holdings
with its investment objective. Tracking error may also occur due to factors
such as the size of the Fund, the maintenance of a cash reserve pending
investment or to meet expected redemptions, changes made in the S&P 500 Index
or the manner in which the S&P 500 Index is calculated or because the indexing
and investment approach of Northern Trust does not produce the intended goal of
the Fund. In the event the performance of the Fund is not comparable to the
performance of the S&P 500 Index, the Board of Trustees will evaluate the
reasons for the deviation and the availability of corrective measures. If
substantial deviation in the Fund's performance were to continue for extended
periods, it is expected that the Board of Trustees would consider possible
changes to the Fund's investment objective.

The Fund may invest in options, futures contracts and securities issued
by other investment companies (such as Standard & Poor's Depository Receipts --
"SPDRs"). In a manner designed to achieve returns comparable to the S&P 500
Index, the Fund may also invest in certain short-term fixed income securities as
cash reserves. The Fund does not anticipate that it would use cash reserves,
options or futures contracts and related options as part of a temporary
defensive strategy such as lowering its investment in common stocks to protect
against potential stock market declines.

OTHER INFORMATION

The Growth Equity, Income Equity, Select Equity, Small Cap, International
Growth Equity, International Select Equity and Technology Funds may purchase
warrants and rights that entitle the holder to buy equity securities at a
specific price for a specific period of time. (Warrants and rights will not be
counted in determining a Fund's investments in equity securities.) In addition
to investing in foreign securities directly, the International Growth Equity
and International Select Equity Funds may make indirect investments in foreign
securities through the purchase of EDRs and ADRs. Each of the Growth Equity,
Income Equity, Select Equity, Small Cap and Technology Funds may invest up to
10% of its net assets in foreign securities directly and indirectly through the
purchase of EDRs, and up to 25% of its net assets in ADRs, in addition to
short-term investments in foreign time deposits as discussed below. The Income
Equity Fund may enter into interest rate swaps and the International Growth
Equity and International Select Equity Funds may enter into currency swaps. The
Funds may purchase convertible securities, enter into forward currency
contracts and utilize options and futures contracts as more fully described
under "Additional Investment Information, Risks and Considerations." Pending
investment, as a temporary defensive measure and to meet anticipated redemption
requests, the Funds may also invest, in accordance with their respective
investment policies, in various short-term obligations that are permissible
investments for the Money Market Fund and, with respect to the International
Growth Equity and International Select Equity Funds, other similar foreign
denominated short-term obligations.

CALIFORNIA MUNICIPAL MONEY MARKET FUND AND FLORIDA INTERMEDIATE TAX-EXEMPT FUND
- -- ADDITIONAL RISKS AND CONSIDERATIONS

The investments of the California Municipal Money Market Fund in California
Municipal Instruments and the Florida Intermediate Tax-Exempt Fund in Florida
Municipal Instruments raise additional considerations. Payment of the interest
on and the principal of these instruments is dependent upon the continuing
ability of issuers in these states to meet their obligations.

The California Municipal Money Market Fund's investments include
obligations of California governmental issuers which rely in whole or in part,
directly or indirectly, on real property taxes as a source of revenue.
"Proposition Thirteen" and similar California constitutional and statutory
amendments and initiatives in recent years have restricted the ability of
California taxing entities to increase real property tax revenues. Other
initiative measures approved by California voters in recent years, through
limiting various other taxes, have resulted in a substantial reduction in state
revenues. Decreased state revenues may result in reductions in allocations of
state revenues to local governments.

Because of the complex nature of the various initiatives mentioned
above and certain possible ambiguities and incon-

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<PAGE> 59

sistencies in their terms and the scope of various exemptions and exceptions, as
well as the impossibility of predicting the level of future appropriations for
state and local California governmental entities, it is not possible to
determine the impact of these initiatives and related measures on the ability of
California governmental issuers to pay interest or repay principal on their
obligations. There have, however, been certain adverse developments with respect
to California Municipal Instruments over the past several years.

Similarly, if Florida or any of its political subdivisions should
suffer serious financial difficulties to the extent their ability to pay their
obligations might be jeopardized, the ability of such entities to market their
securities, and the value of the Florida Intermediate Tax-Exempt Fund, could be
adversely affected.

In addition to the risk of nonpayment on California or Florida
Municipal Instruments, if these obligations decline in quality and are
downgraded by the NRSROs, they may become ineligible for purchase by the Funds.
Since there are large numbers of buyers of these instruments, the supply of
California or Florida Municipal Instruments that are eligible for purchase by
the Funds could become inadequate at certain times.

Investors should consider the greater risk inherent in the
concentration of the California Municipal Money Market Fund and the Florida
Intermediate Tax-Exempt Fund in such obligations versus the safety that comes
with a less geographically concentrated investment portfolio, and should
compare the yield available on a portfolio of California or Florida Municipal
Instruments with the yield of a more diversified portfolio including other
Municipal Instruments before making an investment decision.

A more detailed description of special factors affecting investments
in California Municipal Instruments and Florida Municipal Instruments is
provided in the Additional Statement.

TECHNOLOGY FUND -- ADDITIONAL RISKS AND CONSIDERATIONS

The Technology Fund's concentration in technology securities presents special
risk considerations. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Competitive pressures in the
technology industry may affect negatively the financial condition of technology
companies, and the Fund's concentration in technology securities may subject it
to more volatile price movements than a more diversified securities portfolio.
In certain instances, technology securities may experience dramatic price
movements precipitated by investors' excessive optimism or pessimism with
little or no basis in fundamental economic conditions. As a result of these and
other reasons, investments in the technology industry can experience sudden and
rapid appreciation and depreciation. Investors should, therefore, expect that
the net asset value of the Fund's shares will be more volatile than, and may
fluctuate independently of, broad stock market indices such as the S&P 500
Index.

In addition, it is expected that more than 25% of the Technology
Fund's total assets will normally be invested in technology companies which
develop or sell computers, software and peripheral products. In addition to the
risks associated with other technology companies, these companies are often
dependent on the existence and health of other products or industries and face
highly competitive pressures, product licensing, trademark and patent
uncertainties and rapid technological changes which may have a significant
effect on their financial condition. For example, an increasing number of
companies and new product offerings can lead to price cuts and slower selling
cycles, and many of these companies may be dependent on the success of a
principal product, may rely on sole source providers and third-party
manufacturers, and may experience difficulties in managing growth.

The Technology Fund may invest in the stocks of both large and small
companies. While Northern Trust believes that smaller companies can provide
greater growth potential than larger, more mature firms, investing in the
securities of small companies also involves greater risk and portfolio price
volatility as described above under "Investment Information -- Small Cap Fund."

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INTERNATIONAL FUNDS -- FURTHER INFORMATION

The International Fixed Income, International Growth Equity and International
Select Equity Funds (the "International Funds") will be invested at all times
in the securities of issuers located in at least three different foreign
countries. These countries may include, but are not limited to, Argentina,
Australia, Austria, Belgium, Brazil, Canada, Chile, Columbia, Denmark, Finland,
France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel,
Italy, Japan, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand,
Norway, the Philippines, Poland, Portugal, Peru, Singapore, South Africa, South
Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom
and Venezuela. Criteria for determining the appropriate distribution of
investments among various countries and regions include prospects for relative
economic growth, expected levels of inflation, government policies influencing
business conditions, the outlook for currency relationships, and the range of
investment opportunities available to international investors.

Because the securities markets in the following countries are highly
developed, liquid and subject to extensive regulation, the International Growth
Equity and the International Select Equity Funds may invest more than 25% of
their respective total assets in the securities of issuers located in Japan and
the United Kingdom, and the International Fixed Income Fund may invest more
than 25% of its total assets in the securities of issuers located in Canada,
France, Germany, Japan, the United Kingdom and the United States. Investment in
a particular country of 25% or more of a Fund's total assets will make a Fund's
performance more dependent upon the political and economic circumstances of a
particular country than a mutual fund that is more widely diversified among
issuers in different countries. For example, efforts by the member countries of
the European Community to eliminate internal barriers to the free movement of
goods, persons, services and capital have encountered opposition arising from
the conflicting economic, political and cultural interests and traditions of
the member countries and their citizens. The reunification of the former German
Democratic Republic (East Germany) with the Federal Republic of Germany (West
Germany) and other political and social events in Europe have caused
considerable economic and social dislocations. Similarly, events in the
Japanese economy as well as social developments and natural disasters have
affected Japanese securities and currency markets, and have disrupted the
relationship of the Japanese yen with other currencies and with the U.S.
dollar. Future political, economic and social developments can be expected to
produce continuing effects on securities and currency markets. Investment in
foreign securities, including securities of issuers located in the countries
listed above, involves other risks which are described under "Additional
Investment Information, Risks and Considerations."

Certain investments by the International Funds will involve risks
associated with investments in emerging market countries. In addition,
securities issued in certain countries are currently accessible to the
International Funds only through investment in other investment companies that
are specifically authorized to invest in such securities. Further information
about these matters is provided under "Additional Investment Information, Risks
and Considerations."

FUNDAMENTALS OF FIXED INCOME INVESTING

Even though interest-bearing securities are investments which often offer a
stable stream of income, the prices of fixed income securities are affected by
changes in the prevailing level of interest rates. These securities experience
appreciation when interest rates decline and depreciation when interest rates
rise. A bond fund portfolio consisting of fixed income securities will react in
a similar manner. Generally, the longer the maturity of a fixed income
security, the higher its yield and the greater its price volatility.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. The values of fixed income securities also may be affected by
changes in the credit rating or financial condition of the issuing entities. A
security's rating normally depends on the likelihood that the borrower will
meet each interest and principal installment on a timely basis. As a result,
lower-rated bonds typically yield more than higher-rated bonds of the same
maturity. Credit ratings evaluate the safety of principal and interest
payments, not market risk, and rating agencies may or may not make timely
changes in a rating to reflect economic or company conditions that affect a
security's market value. As a result, the ratings of rating services are used
by Northern Trust only as indicators of investment quality. For a more complete
discussion of ratings, see Appendix A to the Additional Statement.

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ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS

DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES

CONVERTIBLE SECURITIES

Each Equity Fund (other than the Stock Index Fund) and the International Fixed
Income Fund may invest in convertible securities including convertible bonds,
debentures, and preferred stock. A convertible security may be converted either
at a stated price or rate within a specified period of time into a specified
number of shares of common stock. By investing in convertible securities, a
Fund seeks the opportunity, through the conversion feature, to participate in a
portion of the capital appreciation of the common stock into which the
securities are convertible, while earning higher current income than is
available from the common stock. Convertible securities acquired by a Fund will
usually be rated investment grade by S&P, Moody's, Duff or Fitch or, if
unrated, will be of comparable quality as determined by Northern Trust. A Fund
may, however, acquire convertible securities rated below investment grade when
Northern Trust believes that their investment characteristics make them
desirable, so long as (a) under normal market and economic conditions, less
than 10% of the Fund's total assets (35% in the case of the Income Equity Fund
and 5% in the case of the International Fixed Income Fund, International Growth
Equity Fund and International Select Equity Fund) are invested in
non-investment grade convertible securities and (b) any such security will be
rated "B" or higher by at least one major rating agency. As of March 31, 1996,
the Income Equity Fund had the following percentages of its portfolio assets
invested in convertible securities with the following ratings: 0.0% AAA, 3.9%
AA, 16.8% A, 14.3% BBB, 8.5% BB, 10.1% B and 2.0% unrated. For a description of
applicable securities ratings, See Appendix A to the Additional Statement.

Non-investment grade securities (those that are rated "Ba" or lower by
Moody's or "BB" or lower by S&P, Duff or Fitch) are commonly referred to as
"junk bonds." Particular risks associated with lower-rated convertible
securities are: (a) the relative youth and growth of the market for such
securities; (b) the sensitivity of such securities to interest rate and
economic changes; (c) the lower degree of protection of principal and interest
payments; (d) the relatively low trading market liquidity for the securities;
(e) the impact that legislation may have on the high yield bond market (and, in
turn, on a Fund's net asset value and investment practices); and (f) the
creditworthiness of the issuers of such securities. During an economic downturn
or substantial period of rising interest rates, leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet projected
business goals, and to obtain additional financing. An economic downturn could
also disrupt the market for lower-rated convertible securities and adversely
affect the value of outstanding securities and the ability of the issuers to
repay principal and interest. If the issuer of a convertible security held by a
Fund defaulted, the Fund could incur additional expenses to seek recovery.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower-rated securities
held by a Fund, especially in a thinly traded market.

For purposes of determining the percentage of Fund's assets that is
invested in equity securities, only that portion of the value of convertible
securities attributable to their fixed income characteristics will be deemed to
be a fixed income investment. The remaining value will be deemed to be an
equity investment.

WARRANTS

Each Equity Fund (other than the Stock Index Fund) may invest up to 5% of its
net assets at the time of purchase in warrants and similar rights in addition
to those that have been acquired in units or are attached to other securities).
Warrants represent rights to purchase securities at a specific price for a
specific period of time. A Fund may also purchase bonds that are issued in
tandem with warrants entitling the holder to purchase common stock at a
specified price during a specified period. The prices of warrants do not
necessarily correlate with the prices of the underlying securities.

MUNICIPAL INSTRUMENTS

The Intermediate Tax-Exempt, Tax-Exempt, Florida Intermediate Tax-Exempt,
Municipal Money Market and California Municipal Money Market Funds (the
"Tax-Exempt Funds") intend to invest primarily in Municipal Instruments.
Municipal Instruments include debt obligations issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities.

Municipal Instruments include both "general" and "revenue"
obligations. General obligations are secured by the

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issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as lease revenue payments from the user of the facility being financed.
Industrial development bonds are in most cases revenue securities and are not
payable from the unrestricted revenues of the issuer. Consequently, the credit
quality of an industrial revenue bond is usually directly related to the credit
standing of the private user of the facility involved.

The Tax-Exempt Funds may also invest in "moral obligation" bonds,
which are normally issued by special purpose public authorities. If the issuer
of a moral obligation bond is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund (if such a fund has been
established), the restoration of which is a moral commitment but not a legal
obligation of the state or municipality which created the issuer.

Within the principal classifications of Municipal Instruments
described above there are a variety of categories, including municipal bonds,
municipal notes, municipal leases, custodial receipts and participation
certificates. Municipal notes include tax, revenue and bond anticipation notes
of short maturity, generally less than three years, which are issued to obtain
temporary funds for various public purposes. Municipal leases are obligations
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. Certain municipal lease obligations may include
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Custodial
receipts are underwritten by securities dealers or banks and evidence ownership
of future interest payments, principal payments or both on certain municipal
securities. Participation certificates are obligations issued by state or local
governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Municipal leases (and
participations in such leases) present the risk that a municipality will not
appropriate funds for the lease payments. Northern Trust, under the
supervision of Northern Funds' Board of Trustees, will determine the credit
quality of any unrated municipal leases on an ongoing basis, including an
assessment of the likelihood that the leases will not be cancelled.

The Tax-Exempt Funds (other than the Municipal Money Market Fund and
California Municipal Money Market Fund) may also hold tax-exempt derivative
instruments that have interest rates that reset inversely to changing
short-term rates and/or have imbedded interest rate floors and caps that
require the issuer to pay an adjusted interest rate if market rates fall below
or rise above a specified rate. These derivative instruments represent
beneficial interests in Municipal Instruments that are marketed by investment
banking firms under various names such as FLOATsSM, RITEsSM, SAVRsSM and
RIBsSM. These instruments represent relatively recent innovations in the
municipal bond markets, and the trading market for these instruments is less
developed than the markets for traditional types of Municipal Instruments. It
is uncertain how these instruments will perform under different economic and
interest-rate scenarios. Because certain of these instruments are leveraged,
their market values may be more volatile than other types of Municipal
Instruments and may present greater potential for capital gain or loss. On the
other hand, the imbedded option features of other derivative instruments could
limit the amount of appreciation a Fund can realize on its investment, could
cause a Fund to hold a security it might otherwise sell or could force the sale
of a security at inopportune times or for prices that do not reflect current
market value. The possibility of default by the issuer or the issuer's credit
provider may be greater for these derivative instruments than for other types
of instruments. In some cases it may be difficult to determine the fair value
of a derivative instrument because of a lack of reliable objective information
and an established secondary market for some instruments may not exist. In many
cases, the Internal Revenue Service has not ruled on whether the interest
received on a tax-exempt derivative instrument is tax-exempt and, accordingly,
purchases of such instruments are based on the opinion of counsel to the
sponsors of the instruments. Neither the Funds nor Northern Trust will review
the proceedings related to the creation of any tax-exempt derivatives or the
basis for such opinions.

Each Tax-Exempt Fund may acquire "stand-by commitments" relating to
the Municipal Instruments it holds. Under a standby commitment, a dealer agrees
to purchase, at the Fund's option, specified Municipal Instruments at a
specified price. A stand-by commitment may

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increase the cost, and thereby reduce the yield, of the Municipal Instruments
to which the commitment relates. The Funds will acquire stand-by commitments
solely to facilitate portfolio liquidity and do not intend to exercise their
rights for trading purposes.

Municipal Instruments purchased by the Tax-Exempt Funds may be backed
by letters of credit or other forms of credit enhancement issued by domestic or
foreign banks and other financial institutions. The credit quality of these
banks and financial institutions could, therefore, cause loss to a Fund that
invests in Municipal Instruments and affect its share price. Foreign letters of
credit may involve certain risks in addition to those of domestic obligations.
Foreign banks and foreign branches of domestic banks may be subject to less
stringent reserve requirements, and to different accounting, auditing and
recordkeeping requirements than domestic banks.

The Tax-Exempt Funds do not intend to invest 25% or more of the value
of their respective total assets in industrial development bonds or similar
obligations where the non-governmental entities supplying the revenues from
which such bonds or obligations are to be paid are in the same industry. Each
Fund may, however, invest 25% or more of its total assets in Municipal
Instruments the interest on which is paid solely from revenues of similar
projects. In addition, although the Funds, other than the Florida Intermediate
Tax-Exempt Fund and the California Municipal Money Market Fund, do not expect
to do so during normal market conditions, each may invest more than 25% of the
value of its total assets in Municipal Instruments whose issuers are in the
same state. The Florida Intermediate Tax-Exempt Fund expects to invest
principally in Florida Municipal Instruments and the California Municipal Money
Market Fund expects to invest principally in California Municipal Instruments.
When a substantial portion of a Fund's assets is invested in instruments which
are used to finance facilities involving a particular industry, whose issuers
are in the same state or which are otherwise related, there is a possibility
that an economic, business or political development affecting one instrument
would likewise affect the related instruments.

Funds in addition to the Tax-Exempt Funds may invest from time to time
in Municipal Instruments or other securities issued by state and local
governmental bodies when Northern Trust believes such an investment strategy is
in the best interest of Northern Funds' shareholders. Dividends paid by Funds
other than the Tax-Exempt Funds on such investments will be taxable to
shareholders.

FOREIGN SECURITIES

The International Funds intend to invest primarily in the securities of foreign
issuers. In addition, each Equity Fund and the Fixed Income Fund may invest a
portion of their assets in such securities, including (except with respect to
the Fixed Income Fund) eurodollar convertible securities, which are fixed
income securities that are issued in U.S. dollars outside the United States and
are convertible into or exchangeable for equity securities of the same or a
different issuer. The Money Market Fund may also invest in dollar-denominated
obligations issued or guaranteed by one or more foreign governments or any of
their political subdivisions, agencies or instrumentalities. These obligations
may be issued by supranational entities, including international organizations
(such as the European Coal and Steel Community) designated or supported by
governmental entities to promote economic reconstruction or development and
international banking institutions and related government agencies.

Investment in foreign securities involves special risks. These include
market risk, interest rate risk and the risks of investing in securities of
foreign issuers and of companies whose securities are principally traded
outside the United States and in investments denominated in foreign currencies.
Market risk involves the possibility that stock prices will decline over short
or even extended periods. The stock markets tend to be cyclical, with periods
of generally rising prices and periods of generally declining prices. These
cycles will affect the value of a Fund that invests in foreign stocks. The
holdings of a Fund that invest in fixed income securities will be sensitive to
changes in interest rates and the interest rate environment. Generally, the
prices of bonds and debt securities fluctuate inversely with interest rate
changes. In addition, the performance of investments in securities denominated
in a foreign currency will depend on the strength of the foreign currency
against the U.S. dollar and the interest rate environment in the country
issuing the currency. Absent other events which could otherwise affect the
value of a foreign security (such as a change in the political climate or an
issuer's credit quality), appreciation in the value of the foreign currency
generally can be expected to increase the value of a foreign
currency-denominated security in terms of U.S. dollars. A rise in foreign
interest rates or decline in the value of the foreign currency relative to the
U.S. dollar generally can be expected to depress the value of a foreign
currency-denominated security.

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There are other risks and costs involved in investing in foreign
securities which are in addition to the usual risks inherent in domestic
investments. Investment in foreign securities involves higher costs than
investment in U.S. securities, including higher transaction and custody costs
as well as the imposition of additional taxes by foreign governments. Foreign
investments also involve risks associated with the level of currency exchange
rates, less complete financial information about the issuers, less market
liquidity, more market volatility and political instability. Future political
and economic developments, the possible imposition of withholding taxes on
dividend income, the possible seizure or nationalization of foreign holdings,
the possible establishment of exchange controls, or the adoption of other
governmental restrictions might adversely affect an investment in foreign
securities. Additionally, foreign banks and foreign branches of domestic banks
are subject to less stringent reserve requirements, and to different
accounting, auditing and recordkeeping requirements.

The Money Market Fund, the Fixed Income Fund, each Equity Fund and
each International Fund may invest in foreign debt, or the securities of
foreign governments. Several risks exist concerning such investments, including
the risk that foreign governments may default on their obligations, may not
respect the integrity of such debt, may attempt to renegotiate the debt at a
lower rate, and may not honor investments by United States entities or
citizens.

In addition, the International Funds may invest their assets in
countries with emerging economies or securities markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Political and economic structures in many of such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristics of more
developed countries. Some of these countries may have in the past failed to
recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result, the risks described
above, including the risks of nationalization or expropriation of assets, may
be heightened. In addition, unanticipated political or social developments may
affect the values of a Fund's investments in those countries and the
availability to a Fund of additional investments in those countries. The small
size and inexperience of the securities markets in certain of such countries
and the limited volume of trading in securities in those countries may make a
Fund's investments in such countries illiquid and more volatile than
investments in Japan or most Western European countries, and a Fund may be
required to establish special custodial or other arrangements before making
certain investments in those countries. There may be little financial or
accounting information available with respect to issuers located in certain of
such countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.

Although a Fund (other than the Money Market Fund) may invest in
securities denominated in foreign currencies, its portfolio securities and
other assets are valued in U.S. dollars. Currency exchange rates may fluctuate
significantly over short periods of time causing, together with other factors,
a Fund's net asset value to fluctuate as well. Currency exchange rates can be
affected unpredictably by the intervention or the failure to intervene by U.S.
or foreign governments or central banks, or by currency controls or political
developments in the U.S. or abroad. To the extent that a Fund's total assets,
adjusted to reflect the Fund's net position after giving effect to currency
transactions, are denominated in the currencies of foreign countries, the Fund
will be more susceptible to the risk of adverse economic and political
developments within those countries. In addition, through the use of forward
currency exchange contracts and other instruments, the respective net currency
positions of the International Funds may expose them to risks independent of
their securities positions. Although the net long and short foreign currency
exposure of the International Funds will not exceed their respective total
asset values, to the extent that a Fund is fully invested in foreign securities
while also maintaining currency positions, it may be exposed to greater risk
than it would have if it did not maintain the currency positions. The Funds are
also subject to the possible imposition of exchange control regulations or
freezes on convertibility of currency.

The International Fixed Income Fund may invest in debt securities
denominated in the European Currency Unit ("ECU"), which is a "basket"
consisting of specified amounts in the currencies of certain of the twelve
member states of the European Community. The specific amounts of currencies
comprising the ECU may be adjusted by the Council of Ministers of the European
Community from time to time to reflect changes in relative values of the
underlying currencies. The Fund may also invest in securities denominated in
other currency "baskets."

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Investors should understand that the expense ratios of the
International Funds can be expected to be higher than those of Funds investing
primarily in domestic securities. The costs attributable to investing abroad
are usually higher for several reasons, such as the higher cost of investment
research, higher cost of custody of foreign securities, higher commissions paid
on comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities.

Dividends and interest payable on a Fund's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such
taxes are not offset by credits or deductions allowed to investors under U.S.
federal income tax law, they may reduce the net return to the shareholders. See
"Distributions and Taxes."

AMERICAN DEPOSITORY RECEIPTS

Each Equity Fund (other than the Stock Index Fund) and each International Fund
can invest in ADRs. ADRs are receipts typically issued by a United States bank
or trust company evidencing ownership of the underlying foreign securities and
are denominated in U.S. dollars. Some institutions issuing ADRs may not be
sponsored by the issuer.

A non-sponsored depository may not provide the same shareholder
information that a sponsored depository is required to provide under its
contractual arrangement with the issuer.

EUROPEAN DEPOSITORY RECEIPTS

Each Equity Fund (other than the Stock Index Fund) and each International Fund
can also invest in EDRs. EDRs are receipts issued by a European financial
institution evidencing ownership of underlying foreign securities and are
usually denominated in foreign currencies. EDRs may not be denominated in the
same currency as the securities they represent. Generally, EDRs, in bearer
form, are designed for use in the European securities markets.

FORWARD CURRENCY EXCHANGE CONTRACTS

The Equity Funds (other than the Stock Index Fund), the International Funds and
the Fixed Income Fund may enter into forward currency exchange contracts in an
effort to hedge all or any portion of their portfolio positions. Specifically,
foreign currency contracts may be used for this purpose to reduce the level of
volatility caused by changes in foreign currency exchange rates or when such
transactions are economically appropriate for the reduction of risks in the
ongoing management of the Fund. The International Funds may also enter into
foreign currency exchange contracts to seek to increase total return when
Northern Trust anticipates that a foreign currency will appreciate or
depreciate in value, but securities denominated in that currency do not in
Northern Trust's view present attractive investment opportunities and are not
held by the Fund. In addition, the International Funds may engage in
cross-hedging by using forward contracts in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
Northern Trust believes that there is a pattern of correlation between the two
currencies.

A forward currency exchange contract is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set
at the time of contract. Although these contracts may be used to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of such currency increase. Consequently, a Fund may choose to refrain
from entering into such contracts. In connection with its forward currency
exchange contracts, a Fund will create a segregated account of liquid assets,
such as cash, U.S. government securities or other liquid securities, or will
otherwise cover its position in accordance with applicable requirements of the
SEC.

OPTIONS AND FUTURES CONTRACTS

To the extent consistent with its investment objective, each Fund (other than
the Money Market Funds) may write covered call options, buy put options, buy
call options and write secured put options for the purpose of hedging or
earning additional income, which may be deemed speculative or, with respect to
the International Funds, cross-hedging. These options may relate to particular
securities, financial instruments, foreign currencies, stock or bond indices or
(in the case of the International Fixed Income Fund) the yield differential
between two securities, and may or may not be listed on a securities exchange
and may or may not be issued by the Options Clearing Corporation. A Fund will
not purchase put and call options where the aggregate premiums on outstanding
options exceed 5% of its net assets at the time of purchase, and will not write
options on more than 25% of the value of its net assets (measured at the time
an option is written). Options trading is a highly specialized activity that
entails greater than ordinary investment risks.

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In addition, unlisted options are not subject to the protections afforded
purchasers of listed options issued by the Options Clearing Corporation, which
performs the obligations of its members if they default.

To the extent consistent with its investment objective, each Fund
(other than the Money Market Funds) may also invest in futures contracts and
options on futures contracts for hedging purposes or to maintain liquidity to
meet potential shareholder redemptions, invest cash balances or dividends or
minimize trading costs. The value of a Fund's futures contracts may equal or
exceed 100% of the Fund's total assets, although a Fund will not purchase or
sell a futures contract unless immediately afterwards the aggregate amount of
margin deposits on its existing futures positions plus the amount of premiums
paid for related futures options is 5% or less of its net assets.

Futures contracts obligate a Fund, at maturity, to take or make
delivery of certain securities, the cash value of a securities index or a
stated quantity of a foreign currency. A Fund may sell a futures contract in
order to offset an expected decrease in the value of its portfolio that might
otherwise result from a market decline or currency exchange fluctuation. A Fund
may do so either to hedge the value of its securities portfolio as a whole, or
to protect against declines occurring prior to sales of securities in the value
of the securities to be sold. In addition, a Fund may utilize futures contracts
in anticipation of changes in the composition of its holdings or in currency
exchange rates.

A Fund may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or a
seller of a futures contract at a specified exercise price anytime during the
option period. When a Fund sells an option on a futures contract, it becomes
obligated to sell or buy a futures contract if the option is exercised. In
connection with a Fund's position in a futures contract or related option, the
Fund will create a segregated account of liquid high-grade assets or will
otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and
options are: (a) the imperfect correlation between the change in market value
of the instruments held by a Fund and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c)
losses caused by unanticipated market movements, which are potentially
unlimited; and (d) Northern Trust's ability to predict correctly the direction
of securities prices, interest rates, currency exchange rates and other
economic factors. For further discussion of risks involved with domestic and
foreign futures and options, see "Futures Contracts and Related Options" and
Appendix B in the Additional Statement.

Northern Funds intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Funds from registration as a
"commodity pool operator."

INTEREST RATE AND CURRENCY SWAPS

In order to protect their value from interest rate fluctuations, the U.S.
Government, Fixed Income, Intermediate Tax-Exempt, Tax-Exempt, Florida
Intermediate Tax-Exempt, International Fixed Income and Income Equity Funds may
enter into interest rate swaps. The Funds expect to enter into interest rate
swaps primarily to preserve a return or spread of a particular investment or
portion of their respective holdings and to protect against an increase in the
price of securities the Funds anticipate purchasing at a later date. Interest
rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments). In order to protect against
currency fluctuations, the International Funds may also enter into currency
swaps. Currency swaps involve the exchange of the rights of a Fund and another
party to make or receive payments in specified currencies.

The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each interest rate or currency swap will be
accrued on a daily basis and an amount of liquid assets, such as cash, U.S.
government securities or other liquid securities, having an aggregate net asset
value at least equal to such accrued excess will be maintained in a segregated
account by Northern Funds' custodian. A Fund will not enter into any interest
rate or currency swap unless the unsecured commercial paper, senior debt, or
claims paying ability of the other party is rated either A or A-1 or better by
S&P, Duff or Fitch, or A or P-1 or better by Moody's.

UNITED STATES GOVERNMENT OBLIGATIONS

To the extent consistent with their respective investment objectives, the Funds
may invest in a variety of U.S. Treasury obligations consisting of bills,

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notes and bonds, which principally differ only in their interest rates,
maturities and time of issuance. The Funds may also invest in other securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities, such as the Government
National Mortgage Association ("GNMA"), are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
government to purchase the agency's obligations; still others, such as those of
the Student Loan Marketing Association ("SLMA"), are supported only by the
credit of the instrumentalities. No assurance can be given that the U.S.
government would provide financial support to its agencies or instrumentalities
if it is not obligated to do so by law. Obligations of the International Bank
for Reconstruction and Development (also known as the World Bank) are supported
by subscribed, but unpaid, commitments of its member countries. There is no
assurance that these commitments will be undertaken or complied with in the
future.

STRIPPED OBLIGATIONS

To the extent consistent with their respective investment objectives, the Funds
may purchase Treasury receipts and other "stripped" securities that evidence
ownership in either the future interest payments or the future principal
payments on U.S. government and other domestic and foreign obligations. These
participations, which may be issued by the U.S. government (or a U.S.
government agency or instrumentality), foreign governments or private issuers
such as banks and other institutions, are issued at a discount to their "face
value," and may include stripped mortgage-backed securities ("SMBS"), which are
derivative multi-class mortgage securities. Stripped securities, particularly
SMBS, may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors.

CUSTODIAL RECEIPTS FOR TREASURY SECURITIES

To the extent consistent with their respective investment objectives, the
Funds, other than the U.S. Government Select Money Market Fund, may also
purchase participations in trusts that hold U.S. Treasury securities (such as
TIGRs and CATS) or other obligations where the trust participations evidence
ownership in either the future interest payments or the future principal
payments on the obligations. Like other stripped obligations, these
participations are also normally issued at a discount to their "face value,"
and can exhibit greater price volatility than ordinary debt securities because
of the way in which their principal and interest are returned to investors.
Investments by the U.S. Government Money Market Fund in such participations
will not exceed 35% of the value of that Fund's total assets.

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ASSET-BACKED SECURITIES

The U.S. Government Fund and U.S. Government Money Market Fund may purchase
securities that are secured or backed by mortgages and that are issued by the
U.S. government, its agencies or instrumentalities. The other Funds may
purchase asset-backed securities that are secured or backed by mortgages or
other assets (e.g., automobile loans, credit card receivables and other
financial assets) and are issued by the U.S. government, GNMA, FNMA, Federal
Home Loan Mortgage Corporation, and private issuers such as commercial banks,
financial companies, finance subsidiaries of industrial companies, savings and
loan associations, mortgage banks, investment banks and certain special purpose
entities. The Funds will not purchase non-mortgage asset-backed securities that
are not rated investment grade by S&P, Duff, Fitch or Moody's.

The Funds may acquire several types of mortgage-backed securities,
including guaranteed mortgage pass-through certificates, which provide the
holder with a pro rata interest in the underlying mortgages, and collateralized
mortgage obligations ("CMOs"), which provide the holder with a specified
interest in the cash flow of a pool of underlying mortgages or other
mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways. The
Funds will not purchase "residual" CMO interests, which normally exhibit
greater price volatility.

CORPORATE AND BANK OBLIGATIONS

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subsidiary by the terms of specific obligation or by government regulation. For
purposes of determining the permissibility of an investment in bank
obligations, the total assets of a bank are determined on the basis of the
bank's most recent annual financial statements.

EXCHANGE RATE-RELATED SECURITIES

The Income Equity, International Fixed Income and Fixed Income Funds may each
invest in securities for which the principal repayment at maturity, while paid
in U.S. dollars, is determined by reference to the exchange rate between the
U.S. dollar and the currency of one or more foreign countries ("Exchange
Rate-Related Securities"). The interest payable on these securities is
denominated in U.S. dollars and is not subject to foreign currency risk and, in
most cases, is paid at rates higher than most other similarly rated securities
in recognition of the foreign currency risk component of Exchange Rate-Related
Securities.

Investments in Exchange Rate-Related Securities entail certain risks.
There is the possibility of significant changes in rates of exchange between
the U.S. dollar and any foreign currency to which an Exchange Rate-Related
Security is linked. In addition, there is no assurance that sufficient trading
interest to create a liquid secondary market will exist for a particular
Exchange Rate-Related Security due to conditions in the debt and foreign
currency markets. Illiquidity in the forward foreign exchange market and the
high volatility of the foreign exchange market may, from time to time, combine
to make it difficult to sell an Exchange Rate-Related Security prior to
maturity without incurring a significant price loss.

GUARANTEED INVESTMENT CONTRACTS

The Fixed Income Fund and the Money Market Fund may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. and
foreign insurance companies. Pursuant to these contracts, a Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the Fund, on a monthly basis, interest which
is based on an index (such as the Salomon Brothers CD Index), but is guaranteed
not to be less than a certain minimum rate. The Money Market Fund and Fixed
Income Fund will only purchase GICs from insurance companies which, at the time
of purchase, have assets of $1 billion or more and meet quality and credit
standards established by Northern Trust. Generally, GICs are not assignable or
transferable without the permission of the issuing insurance companies, and an
active secondary market in GICs does not currently exist. Therefore, GICs will
normally be considered illiquid investments, and will be acquired subject to
the limitation on illiquid investments.

VARIABLE AND FLOATING RATE INSTRUMENTS

The Funds (other than the Money Market Funds) may also invest in
leveraged inverse floating rate debt instruments ("inverse floaters"). The
interest rate of an inverse floater resets in the opposite direction from the
market rate of interest to which it is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values.

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REPURCHASE AGREEMENTS

Each Fund may agree to purchase portfolio securities from financial
institutions subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price ("repurchase agreements"). Although the securities
subject to a repurchase agreement may bear maturities exceeding one year,
settlement for the repurchase agreement will never be more than one year after
a Fund's acquisition of the securities and normally will be within a shorter
period of time. Securities subject to repurchase agreements are held either by
Northern Funds' custodian or subcustodian (if any), or in the Federal Reserve/
Treasury Book-Entry System. The seller under a repurchase agreement will be
required to maintain the value of the securities subject to the agreement in an
amount exceeding the repurchase price (including accrued interest). Default by
the seller would, however, expose a Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS

Each Fund is authorized to make limited borrowings as described below under
"Investment Restrictions." If the securities held by a Fund should decline in
value while borrowings are outstanding, the market value of the Fund's
portfolio will decline in value by proportionately more than the decline in
value it would otherwise suffer. Borrowings may be made through reverse
repurchase agreements under which a Fund sells portfolio securities to
financial institutions such as banks and broker/dealers and agrees to
repurchase them at a particular date and price. The Funds may use the proceeds
of reverse repurchase agreements to purchase other securities either maturing,
or under an agreement to resell, on a date simultaneous with or prior to the
expiration of the reverse repurchase agreement. The Funds (other than the
Municipal Money Market, U.S. Government Select Money Market, California
Municipal Money Market, Income Equity, Growth Equity, Select Equity and Small
Cap Funds) may utilize reverse repurchase agreements when it is anticipated
that the interest income to be earned from the investment of the proceeds of
the transaction is greater than the interest expense of the transaction. This
use of reverse repurchase agreements may be regarded as leveraging and,
therefore, speculative. Reverse repurchase agreements involve the risks that
the interest income earned in the investment of the proceeds will be less than
the interest expense, that the market value of the securities sold by a Fund
may decline below the price of the securities the Fund is obligated to
repurchase and that the securities may not be returned to the Fund. During the
time a reverse repurchase agreement is outstanding, a Fund will maintain a
segregated account with Northern Funds' custodian containing cash, U.S.
government or other appropriate liquid securities having a value at least equal
to the repurchase price. A Fund's reverse repurchase agreements, together with
any other borrowings, will not exceed, in the aggregate, 331/3% of the value of
its total assets. In addition, whenever borrowings exceed 5% of the Fund's
total assets, the Fund will not make any investments.

SECURITIES LENDING

FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS

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INVESTMENT COMPANIES

In connection with the management of its daily cash positions, each Fund may
invest in securities issued by other investment companies which invest in
short-term, high-quality debt securities and which determine their net asset
value per share based on the amortized cost or penny- rounding method of
valuation. In addition, each Fund may invest in securities issued by other
investment companies if otherwise consistent with its investment objectives and
policies which, with respect to the International Funds, includes shares of
investment companies investing primarily in foreign securities, including
so-called "country funds." Country funds have portfolios consisting exclusively
of securities of issuers located in one or more specified foreign countries. As
a shareholder of another investment company, a Fund will bear, along with other
shareholders, its pro rata portion of the other investment company's expenses
including advisory fees. These expenses would be in addition to the advisory
fees and other expenses the Fund bears directly in connection with its own
operations. Investments in other investment companies will be subject to the
limits imposed by the 1940 Act.

ILLIQUID SECURITIES

Each Fund may invest up to 15% (10% in the case of the Money Market Funds) of
the value of its net assets in illiquid securities. Illiquid securities
generally include repurchase agreements and time deposits with
notice/termination dates in excess of seven days, SMBS issued by private
issuers, interest rate and currency swaps, unlisted over-the-counter options,
GICs and certain securities which are subject to trading restrictions because
they are not registered under the Securities Act of 1933 (the "1933 Act").

PORTFOLIO TRANSACTIONS AND TURNOVER

Northern Trust's Advisory Agreement provides that in selecting brokers or
dealers to place orders for transactions (a) involving common and preferred
stocks, Northern Trust shall use its best judgment to obtain the best overall
terms available and (b) involving bonds and other fixed income obligations,
Northern Trust shall attempt to obtain best net price and execution. In
assessing the best overall terms available for any transaction, Northern Trust
is to consider all factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. In evaluating the best overall terms available and in selecting the
broker or dealer to execute a particular transaction, Northern Trust may
consider the brokerage and research services provided to the Funds and/or other
accounts over which Northern Trust or an affiliate of Northern Trust exercises
investment discretion. These brokerage and research services may include
industry and company analyses, portfolio services, quantitative data, market
information systems and economic and political consulting and analytical
services.

The portfolio turnover rates of the Funds will vary from year to year,
and may be affected by changes in country and currency weightings, as well as
changes in the holdings of specific issuers. Investments in issuers in smaller
or emerging markets may also contribute to portfolio turnover for the
International Funds. High portfolio turnover (100% or more) may result in the
realization of short-term capital gains which are taxable to shareholders as
ordinary income. In addition, higher turnover rates can result in corresponding
increases in commissions and other transaction costs. Northern Trust will not
consider turnover rate a limiting factor in making investment decisions. The
portfolio turnover rates of each Fund (other than the Money Market Funds and
the Florida Intermediate Tax-Exempt Fund, Stock Index Fund and Technology Fund)
for Northern Funds' fiscal year ended March 31, 1996 are stated under
"Financial Highlights." Northern Funds expects that the annual turnover rate of
the Florida Intermediate Tax-Exempt Fund, Technology Fund and Stock Index Fund
will generally not exceed 100%, 150% and 100%, respectively.

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MISCELLANEOUS

After its purchase by a Fund, a rated security may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Fund. Northern Trust will consider such an event in determining whether the
Fund should continue to hold the security. Except for the convertible
securities described above, Northern Trust expects to sell promptly any
securities that are non-investment grade which exceed 5% of a Fund's net
assets, or are below "high quality" in the case of the Money Market Funds,
where it has determined that such sale is in the best interest of the Fund.

For a description of applicable securities ratings, see Appendix A to
the Additional Statement. Investment grade securities rated BBB by S&P, Duff or
Fitch, or Baa by Moody's have certain speculative characteristics and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than in the case of
higher rated securities.

INVESTMENT RESTRICTIONS

No Fund may:

1. invest 25% or more of its total assets at the time of purchase in
securities of issuers whose principal business activities are in the
same industry (a) with certain limited exceptions set forth in the
Additional Statement and (b) except that the Technology Fund may not
invest less than 25% of its assets at the time of purchase in the
securities of issuers principally engaged in technology business
activities, other than during temporary defensive periods;

2. borrow money except in amounts up to 331/3% of the value of its total
assets at the time of borrowing;

3. purchase securities (except U.S. government securities and repurchase
agreements collateralized by such securities) if more than 5% of its
total assets at the time of purchase will be invested in the
securities of any one issuer, except that up to 25% (50% for the
California Municipal Money Market Fund) of a Fund's total assets may
be invested without regard to this 5% limitation; or

4. subject to the foregoing 25% exception, purchase more than 10% of the
outstanding voting securities of any issuer.

Restrictions 3 and 4 do not apply to the Florida Intermediate
Tax-Exempt Fund or the International Fixed Income Fund. Instead, as a
non-fundamental investment restriction, the Florida Intermediate Tax-Exempt
Fund and International Fixed Income Fund will not hold any securities (except
U.S. government securities and repurchase agreements collateralized by such
securities) that would cause, at the end of any tax quarter, more than 5% of
their respective total assets to be invested in the securities of any one
issuer, except that up to 50% of the respective Fund's total assets may be
invested without regard to this limitation so long as no more than 25% of the
Fund's total assets are invested in any one issuer (except the U.S. government,
its agencies and instrumentalities).

In accordance with current SEC reg-ulations (which are more
restrictive than the Funds' fundamental investment restrictions), the Money
Market, U.S. Government Money Market, U.S. Government Select Money Market,
Municipal Money Market and California Municipal Money Market Funds intend, as a
non-fundamental policy, to limit investments in the securities of any single
issuer (other than securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities and repurchase agreements collateralized by such
securities) to not more than 5% of the value of their respective total assets
at the time of purchase, except that (a) 25% of the value of the total assets
of the California Municipal Money Market Fund may be invested in fewer than
five

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issuers; (b) 25% of the value of the total assets of the other Money Market
Funds may be invested in any one issuer for a period of up to three Business
Days; and (c) securities subject to certain unconditional demand features are
subject to different diversification requirements as described in the
Additional Statement. In addition, the Money Market, U.S. Government Money
Market and U.S. Government Select Money Market Funds will limit their
investments in all securities, and the Municipal Money Market and California
Municipal Money Market Funds will limit their investments in certain conduit
securities as described in the Additional Statement, that are not in the
highest rating category as determined by two NRSROs (or one NRSRO if the
security is rated by only one NRSRO) or, if unrated, are not of comparable
quality, to 5% of their total assets, with investments in any one such issuer
being limited to no more than 1% of its total assets or $1 million, whichever
is greater, measured at the time of purchase.

OPENING AN ACCOUNT AND PURCHASING SHARES

An investment account may be opened and shares purchased directly from Northern
Funds by following the instructions below under "Purchasing Shares Directly
from the Funds." If you maintain certain accounts at Northern Trust or another
institution (such as a bank or broker/dealer) that has entered into an
agreement with Northern Funds to provide services to its customers, you may
purchase shares through your institution in accordance with its procedures. See
"Purchasing Shares Through Northern Trust and Other Institutions" below for
more details. If you have any questions or need any assistance in opening an
investment account or purchasing shares, call 1-800-595-9111.

The Stock Index Fund will not commence investment operations until it
has received orders for the purchase of its shares aggregating $5 million, and
will not accept payment for the purchase of shares until orders in this
aggregate amount are received. Northern Trust anticipates that the Stock Index
Fund will commence in the Fall of 1996.

PURCHASING SHARES DIRECTLY FROM THE FUNDS

For your convenience, there are a number of ways to invest directly with
Northern Funds. When establishing an investment account directly with Northern
Funds, the minimum initial investment in a Fund is $2,500 ($500 for an IRA;
$250 for a spousal IRA; $250 under the Automatic Investment Plan; and $500 for
employees of the Northern Trust and its affiliates). The minimum subsequent
investment is $50 (except for reinvestments of distributions for which there is
no minimum). The Funds reserve the right to waive these minimums.

BY MAIL

You may purchase shares by mail by sending a Purchase Application, a copy of
which accompanies this Prospectus, together with a check or money order payable
to Northern Funds in the envelope provided or by addressing your envelope to
Northern Funds at P.O. Box 75986, Chicago, Illinois 60690-6319. Additional
requirements may be imposed. If using overnight delivery use the following
address: 801 South Canal Street, Chicago, Illinois 60607, Attn: Northern Funds.
Your check must be drawn on a bank located in the U.S. and must be payable in
U.S. dollars. When making subsequent investments, enclose your check with the
return remittance portion of the confirmation of your previous investment, or
indicate on your check or a separate piece of paper your name, address and
account number.

BY WIRE

You may make initial or subsequent investments in shares of the Funds by wiring
federal funds. If you are opening an account with a wire purchase, you must
call 1-800-595-9111 for instructions prior to wiring funds. You must promptly
complete a Purchase Application and forward it to the Transfer Agent in the
envelope provided herewith, or by addressing your envelope to Northern Funds at
P.O. Box 75986, Chicago, Illinois 60690-6319. Additional requirements may be

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<PAGE> 74
imposed. Redemptions will not be paid until your completed application has been
received by the Transfer Agent. If you wish to add to an existing account by
wire purchase, you may wire federal funds to:

The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account Number)
(Reference Shareholder's Name)

DIRECT DEPOSIT

AUTOMATIC INVESTMENT

DIRECTED REINVESTMENTS

In addition to having your income dividends and/or capital gains distributions
reinvested in shares of the Fund from which such distributions are paid, you
may elect the directed reinvestment option and have dividends and capital gains
distributions automatically invested in another Northern Fund. In addition,
systematic withdrawals from one account and reinvestments in another account
may be established. See "Redeeming and Exchanging Directly from the Funds --
Systematic Withdrawals." Reinvestments can only be directed to an existing
Northern Funds' account (which must meet the minimum investment requirement).
Directed reinvestments may be used to invest funds from a regular account to
another regular account, from a qualified plan account to another qualified
plan account, or from a qualified plan account to a regular account. Directed
reinvestments from a qualified plan account to a regular account may have
adverse tax consequences including imposition of a penalty tax and therefore
you should consult your own tax adviser before commencing these transactions.

BY EXCHANGE

You may open a new account or add to an existing account by exchanging shares
of one Fund for shares of any other Fund offered by Northern Funds. See
"Redeeming and Exchanging Shares" for details.

PURCHASING SHARES THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS

Northern Trust customers may purchase shares through their qualified accounts
and should consult with their account officer for additional information and
instructions. Customers of other institutions (together with Northern Trust,
"Service Organizations"), such as banks or broker/dealers that have entered
into agreements with Northern Funds, should contact their account officers for
appropriate purchase instructions. Northern Trust or another Service
Organization may impose particular customer account requirements in connection
with investments in the Funds, such as minimum account size or minimum account
thresholds above which excess cash balances may be invested in Fund shares. To
determine whether you may purchase shares through your institution, contact
your institution directly or call 1-800-595-9111. Purchases (and redemptions)
placed through Northern Trust or another Service Organization are processed
only on days that both Northern Funds and the particular institution are open
for business.

Depending on the terms of the particular account used to purchase Fund

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<PAGE> 75

shares, Northern Trust or other institutions may impose charges against the
account. These charges could include asset allocation fees, account maintenance
fees, sweep fees, compensating balance requirements or other charges based upon
account transactions, assets or income. The charges will reduce the net return
on an investment in a Fund. For further discussion of Service Organizations and
the procedures for purchasing (and redeeming) shares through them, see
"Management -- Service Organizations."

ADDITIONAL PURCHASE INFORMATION

EFFECTIVE TIME AND PRICE OF PURCHASES -- NON-MONEY MARKET FUNDS

A purchase order for Fund shares received by the Transfer Agent by 3:00 p.m.
(Chicago Time) on a Business Day (as defined below under "Further Information
- -- Miscellaneous") will be priced at the net asset value determined on that
day, provided that either: (a) the order is accompanied by payment of the
purchase price; or (b) the order is placed by Northern Trust or a Service
Organization that is acting on behalf of itself or its qualified customer
accounts and undertakes to make payment on the next Business Day in the form of
federal funds or other immediately available funds. If an order in proper form
with proper payment is not received by the Transfer Agent by such time, the
order will be processed at the next determined net asset value after the
Transfer Agent has received both an order in proper form and such payment.

EFFECTIVE TIME AND PRICE OF PURCHASES -- MONEY MARKET FUNDS

MISCELLANEOUS PURCHASE INFORMATION

You will be responsible for all losses and expenses of the Funds as a result of
a check that does not clear or an ACH transfer that is rejected. Northern Funds
may decline to accept a purchase order when, in the judgment of Northern Funds
or its investment adviser, it would not be in the best interest of existing
shareholders to accept the order. Federal regulations require that you provide
a social security number or other certified taxpayer identification number upon
opening or reopening an account. Purchase Applications without such a number or
an indication that a number has been applied for will not be accepted. If a
number has been applied for, the number must be provided and certified within
60 days of the date of the Purchase Application. Payment for shares of a Fund
may, in the discretion of Northern Trust, be made in the form of securities
that are permissible investments for the respective Fund. For further
information, see the Additional Statement. Additions or changes to any
information in your account registration (for example, a change in registration
from a joint account to an individual account) may be made by submitting a
written request to the Transfer Agent accompanied by a signature guarantee by a
financial institution that is a participant in the Stock Transfer Agency
Medallion Program ("STAMP") or such other means or evidence of authority as may
be acceptable to the Transfer Agent. Additional requirements may be imposed. In
the interests of economy and convenience, certificates representing shares of
the Funds are not issued. Northern Funds may reproduce this Prospectus in an
electronic format which may be available on the Internet. If you have received
this Prospectus in its electronic format you, or your representative, may
contact the Transfer Agent for a free paper copy of this Prospectus by writing
to the Northern Funds Center at P.O. Box 75986, Chicago, Illinois 60690-6319 or
by calling 1-800-595-9111.

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REDEEMING AND EXCHANGING SHARES

REDEEMING AND EXCHANGING DIRECTLY FROM THE FUNDS

Northern Funds imposes no charges when you redeem or exchange shares.
Remember, however, when shares are purchased through Northern Trust or another
Service Organization, a fee may be charged by those institutions for providing
services in connection with your investment.

BY MAIL

You may redeem shares in any number or dollar amount by sending a written
request to Northern Funds, P.O. Box 75986, Chicago, Illinois 60690- 6319. The
redemption request must state the number of shares or the dollar amount to be
redeemed and identify the Fund account number. If the redemption proceeds are
to be sent elsewhere than the address of record, each request must be
accompanied by a signature guarantee by a financial institution that
participates in STAMP or such other means or evidence of authority as may be
acceptable to the Transfer Agent. In addition, written requests for redemptions
exceeding $50,000 must be accompanied by a signature guarantee by a financial
institution that participates in STAMP or such other means or evidence of
authority as may be acceptable to the Transfer Agent. Additional requirements
may be imposed. A signature notarized by a notary public is unacceptable.
Northern Funds reserves the right to require signature guarantees in other
circumstances based on the amount of the redemption request or other factors,
and may impose additional requirements.

BY WIRE

BY CHECK

You may also redeem shares of the Money Market Funds by redemption check in
amounts of $250 or more once the checkwriting privilege has been established.
When the check is presented to the Transfer Agent for payment, the Transfer
Agent, as your agent, will cause the particular Fund involved to redeem a
sufficient number of your shares to cover the amount of the check. Dividends
are earned until the check clears the Transfer Agent. You can establish the
checkwriting privilege by checking the appropriate box on the Purchase
Application, or if your Fund account is already opened, by completing the
appropriate form which may be obtained by calling the Transfer Agent at
1-800-595-9111. When establishing checkwriting for an account that is already
opened, the form must be signed by each person whose name appears on the
account accompanied by signature guarantees by a financial institution that
participates in STAMP or such other means or evidence of authority as may be
acceptable to the Transfer Agent. Additional requirements may be imposed.

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<PAGE> 77

redeem shares purchased within the past fifteen days. Checks you write will not
be returned to you, although copies are available upon request. Northern Funds
reserves the right, at any time without prior notice, to suspend, limit or
terminate the checkwriting privilege or its use in any manner by any person.

SYSTEMATIC WITHDRAWALS

EXCHANGE PRIVILEGE

Northern Funds offers an exchange privilege that permits you to exchange shares
of one Fund for shares of another Fund offered by Northern Funds. To establish
the exchange privilege, you must check the appropriate box on the Purchase
Application or, if your Fund account is already opened, you may send a written
request to the Transfer Agent, and must establish or maintain accounts with an
identical title in each Fund involved in an exchange transaction. In addition,
the shares being exchanged must have a value of at least $1,000 ($2,500 if a
new account is being established by the exchange).

Exchanges may have tax consequences. No exchange fee is currently
imposed by Northern Funds on exchanges. Northern Funds reserves, however, the
right to impose a charge in the future.

TELEPHONE PRIVILEGE

The Transfer Agent has adopted procedures in an effort to establish
reasonable safeguards against fraudulent telephone transactions. The proceeds
for redemption orders will be sent by check, by wire transfer or by transfer to
an account maintained at Northern Trust or an affiliated bank. All checks will
be made payable to the shareholder of record and mailed only to the
shareholder's address of record. The address of record for redemption checks
may be changed only by a written request accompanied by signature guarantees by
a financial institution that participates in STAMP or such other means or
evidence of authority as may be acceptable to the Transfer Agent and sent to
Northern Funds, P.O. Box 75986, Chicago, Illinois 60690-6319. Additionally, the
Transfer Agent utilizes recorded lines for telephone transactions and will
request a form of personal identification if such identification has been
furnished to the Transfer Agent. Neither Northern Funds nor its Transfer Agent
will be responsible for the authenticity of instructions received by telephone
that are reasonably believed to be genuine. To the extent that Northern Funds
fails to use reasonable procedures to verify the genuineness of telephone
instructions, it or its service providers may be liable for instructions that
prove to be fraudulent or unauthorized. In all other cases, you will bear the
risk of loss.

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REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS

If you purchase your shares through an account at Northern Trust or another
Service Organization, you will redeem or exchange them in accordance with the
instructions pertaining to that account. If you are listed on the books of
Northern Funds as the shareholder of record, you may also redeem and exchange
your shares using any of the methods described above under "Redeeming and
Exchanging Directly from the Funds." Questions regarding these redemptions or
exchanges should be directed to your account representative at Northern Trust
or another Service Organization. Although Northern Funds imposes no charges
when you redeem, when shares are purchased through Northern Trust or another
Service Organization a fee may be charged by those institutions for providing
services in connection with your account.

ADDITIONAL REDEMPTION AND EXCHANGE INFORMATION

EFFECTIVE TIME AND PRICE OF REDEMPTIONS AND EXCHANGES

Redemption orders for shares of a non-Money Market Fund are processed at the
net asset value next determined at 3:00 p.m. (Chicago Time) after receipt in
good order by the Transfer Agent by 3:00 p.m. (Chicago Time) on a Business Day.
Redemption orders for shares of a Money Market Fund are processed at the net
asset value next determined at 1:00 p.m. (Chicago Time) after receipt in good
order by the Transfer Agent by 1:00 p.m. (Chicago Time) on a Business Day.
Good order means that the request must include the following information: the
account number and Fund name; the amount of the transaction (as specified in
dollars or number of shares); the signatures of all account owners exactly as
they are registered on the account (except for telephone and wire redemptions);
required signature guarantees (if applicable); and other supporting legal
documents that might be required in the case of estates, corporations, trusts
and certain other accounts. Call 1-800-595-9111 for the additional
documentation that may be required of these entities. Exchange orders are
likewise processed at the net asset value per share next determined after
receipt in good order by the Transfer Agent on a Business Day.

PAYMENT OF REDEMPTION PROCEEDS -- NON-MONEY MARKET FUNDS

The non-Money Market Funds will make payment for redeemed shares typically
within one or two Business Days, but no later than the seventh day after
receipt by the Transfer Agent of a request in good order on a Business Day,
except as otherwise provided by the rules of the SEC. However, if any portion
of the shares to be redeemed represents an investment made by check, the Funds
may delay the payment of the redemption proceeds until the Transfer Agent is
reasonably satisfied that the check has been collected, which could take up to
fifteen days from the purchase date. This procedure does not apply to shares
purchased by money order or wire payment.

PAYMENT OF REDEMPTION PROCEEDS -- MONEY MARKET FUNDS

MISCELLANEOUS REDEMPTION INFORMATION

All redemption proceeds will be sent by check unless Northern Trust or the
Transfer Agent is directed otherwise. The ACH system may be utilized for
payment of redemption proceeds. Redemptions may not be processed if a
shareholder has failed to submit a completed and signed Purchase Application.
Northern Funds may require any information reasonably necessary to ensure that
a redemption has been duly authorized.

43
<PAGE> 79

could make an additional investment to restore the account to at least the
minimum amount, in which case there would be no such redemption. Involuntary
redemptions will not be made because the value of shares in an account falls
below the minimum amount solely because of a decline in a Fund's net asset
value. Any involuntary redemption would be at net asset value. Northern Funds
also reserves the right to redeem shares involuntarily if it is otherwise
appropriate to do so under the 1940 Act (see "Amortized Cost Valuation" in the
Additional Statement).

DISTRIBUTIONS AND TAXES

DISTRIBUTIONS

Each Money Market Fund's net investment income is declared as a dividend on
each Business Day on the shares that are outstanding at 1:00 p.m. (Chicago
Time) on the declaration date. Net investment income includes interest accrued
on the Fund's assets less the Fund's estimated expenses. Dividends from net
investment income are paid monthly. Net realized short-term capital gains,
after reduction for capital loss carry- forwards, if any, of a Fund may be
distributed from time to time during Northern Funds' fiscal year (but not less
frequently than annually). The Money Market Funds do not expect to realize net
long-term capital gains.

Dividends from the net investment income of each of the U.S.
Government, Fixed Income, Intermediate Tax-Exempt, Tax-Exempt and Florida
Intermediate Tax-Exempt Funds are declared daily on each Business Day and paid
monthly. Dividends from the net investment income of the International Fixed
Income Fund are declared daily on each Business Day and paid quarterly. Shares
of these six Funds are entitled to the dividends declared by a Fund beginning
on the next Business Day after the purchase order is executed.
Dividends from the net investment income of the other Funds are
declared and paid as follows:

<TABLE>
<CAPTION>
Dividends
Declared
Fund and Paid
- ---- --------
<S> <C>
Income Equity Monthly
Growth Equity Quarterly
Select Equity Annually
Small Cap Annually
International Growth Equity Annually
International Select Equity Annually
Technology Annually
Stock Index Quarterly
</TABLE>

The net realized capital gains of each Fund are distributed at least
annually.

Dividends and capital gain distributions, if any, will reduce the net
asset value of a Fund (other than a Money Market Fund) by the amount of the
dividend or capital gain distribution. Dividends and capital gain
distributions, if any, are automatically reinvested (without any sales charge
or portfolio transaction fee) in additional shares of the same Fund at their
net asset value determined on the payment date. You may, however, notify the
Transfer Agent in writing that you elect instead to have dividends and/or
capital gain distributions paid in cash or reinvested in shares of another Fund
offered by Northern Funds at their net asset value determined on the payment
date (provided you maintain an account in such Fund). This election will become
effective for distributions paid two days after its receipt by the Transfer
Agent.

Net loss, if any, from certain foreign currency transactions or
instruments that is otherwise taken into account with respect to the
International Fixed Income Fund in calculating net investment income or net
realized capital gains for accounting purposes may not be taken into account in
determining the amount of dividends to be declared and paid, with the result
that a portion of the Fund's dividends may be treated as a return of capital,
nontaxable to the extent of a shareholder's tax basis in his or her shares.

TAXES

As with any investment, you should consider the tax implications of an
investment in Northern Funds. The following is only a short summary of the
important tax considerations generally affecting the Funds and their
shareholders. You should consult your tax adviser with specific reference to
your own tax situation. Northern Funds will send written notices to
shareholders annually regarding the tax status of distributions made by the
Funds. The Funds will determine annually the percentages of their respective
net investment income which are exempt from tax, which constitute an item of
tax preference for purposes of the federal alternative minimum tax, and which
are fully taxable, and will apply these percentages uniformly to all dividends
declared from net investment income during that year. These percentages may
differ significantly from the actual percentages for any particular day.

44
<PAGE> 80
FEDERAL TAXES

To qualify, a Fund will pay as dividends at least 90% of its
investment company taxable income and at least 90% of its net tax-exempt income
(if any) each year. Investment company taxable income includes, but is not
limited to, taxable interest, dividends and short-term capital gains less
expenses. Dividends based on either investment company taxable income (which
includes income resulting from investments in options and futures contracts) or
the excess of net short-term capital gain over net long-term capital loss are
treated as ordinary income in determining gross income for tax purposes,
whether or not the dividends are received in cash or additional shares.
(Federal income taxes for distributions to an IRA or other qualified retirement
account are deferred under the Code.)

Dividends paid by the Tax-Exempt Funds (but not the other Funds) that
are derived from interest on Municipal Instruments ("exempt- interest
dividends") may be excludable from your federal taxable income (unless because
of your particular situation exclusion would be disallowed). You should note
that income that is not subject to federal income taxes may nevertheless have
to be considered along with other adjusted gross income in determining whether
any Social Security payments received by you are subject to federal income
taxes. You should also note that a portion of the exempt-interest dividends
paid by the Intermediate Tax-Exempt Fund, Tax-Exempt Fund, Florida Intermediate
Tax-Exempt Fund may be, and a portion of such dividends by the Municipal Money
Market and California Municipal Money Market Funds generally will be, an item
of tax preference for both corporate and individual taxpayers in determining
federal alternative minimum and environmental tax liability. (Corporate
taxpayers will be required to take into account all exempt-interest dividends
from the Tax-Exempt Funds in determining certain adjustments for alternative
minimum tax and environmental tax purposes.) If you hold shares for six months
or less, and during that time receive exempt-interest dividends, any loss
realized on the sale of those shares will be disallowed to the extent of the
exempt-interest dividends.

Any distribution based on the excess of long-term capital gain over
net short-term capital loss will be taxable as a long-term capital gain, no
matter how long you hold Fund shares. If you hold shares for six months or
less, and during that time receive a distribution that is taxable as a
long-term capital gain, any loss realized on the sale of those shares will be
treated as a long-term loss to the extent of the earlier capital gain
distribution.

Before purchasing shares you should consider the effect of any capital
gain distributions and, for those Funds that do not declare dividends daily,
any net income dividends that are expected to be declared or that have been
declared but not yet paid. The per share price will be reduced by the amount of
the payment, so that a shareholder will, in effect, have paid full price for
the shares and then received a portion of the price back as a taxable
distribution. This is because at any given time the value of your shares
includes the undistributed net gains, if any, realized by a Fund on the sale of
portfolio securities, and undistributed dividends and interest received, less
the Fund's expenses. Because such gains and dividends are included in the price
of your shares, when they are distributed, the price of your shares is reduced
by the amount of the distribution. Accordingly, if your distribution is
reinvested in additional shares, the distribution has no effect on the value of
your investment; while you own more shares, the price of each share has been
reduced by the amount of the distribution. Likewise, if you take your
distribution in cash, the value of your shares after the record date will be
reduced by the cash received.

Shareholders may realize a taxable gain or loss when redeeming,
transferring or exchanging their shares (or in using the Systematic Withdrawal
Plan to direct reinvestments), depending on the difference in the prices at
which the shares were originally purchased and when redeemed, transferred or
exchanged.

Dividends and certain interest income earned by a Fund from foreign
securities may be subject to foreign withholding taxes or other taxes. So long
as more than 50% of the value of a Fund's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, the Fund
may elect, for U.S. federal income tax purposes, to treat certain foreign taxes
paid by it, including generally any withholding taxes and other foreign income

45
<PAGE> 81

taxes, as paid by its shareholders. It is possible that one or more of the
International Funds will make this election in certain years. Should a Fund
make the election, the amount of such foreign taxes paid by the Fund will be
included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and each shareholder will be entitled
either (a) to credit his proportionate amounts of such taxes against applicable
U.S. federal income tax liabilities, or (b) if the shareholder itemizes
deductions, to deduct such proportionate amounts from applicable U.S. federal
taxable income.

If a Fund invests in certain "passive foreign investment companies"
("PFICs"), it would be subject to federal income tax (and possibly additional
interest charges) on a portion of any "excess distribution" or gain from the
disposition of such investments even if it distributes the income to its
shareholders. If a Fund elects to treat the PFIC as a "qualified electing fund"
("QEF") and the PFIC furnishes certain financial information in the required
form, the Fund instead would be required to include in income each year its
allocable share of the ordinary earnings and net capital gains of the QEF,
whether or not received, and such amounts would be subject to the various
distribution requirements described above. In addition, a Fund could, as an
alternative, treat unrealized gains as though they were realized for tax
purposes.

STATE AND LOCAL TAXES GENERALLY

Because your state and local taxes may be different than the federal taxes
described above, you should see your tax adviser. In particular, dividends may
be taxable under state or local law as dividend income even though all or part
of those dividends come from interest on obligations that, if held by you
directly, would be free of such income taxes. Additionally, although the U.S.
Government Select Money Market Fund intends to invest principally in U.S.
government securities the interest on which is generally exempt from state
income taxation, you should see your tax adviser to determine whether
distributions from the Fund are exempt in light of your particular
circumstances.

STATE AND LOCAL TAXES -- CALIFORNIA MUNICIPAL MONEY MARKET FUND

STATE AND LOCAL TAXES -- FLORIDA INTERMEDIATE TAX-EXEMPT FUND

Florida does not currently have an income tax for individuals, and therefore
individual shareholders of this Fund will not be subject to any Florida income
tax on amounts received from the Fund. However, Florida does impose an income
tax on certain corporations,

46
<PAGE> 82
so that such amounts may be taxable to corporate shareholders.

Florida also imposes an "intangibles tax" at the annual rate of 2
mills or 0.20% on certain securities and other intangible assets owned by
Florida residents. With respect to the first mill, or first 0.10% of the
intangibles tax, every natural person is entitled each year to an exemption of
the first $20,000 of the value of the property subject to the tax. A husband
and wife filing jointly will have an exemption of $40,000. With respect to the
last one mill, or last .10% of the intangibles tax, every natural person is
entitled each year to an exemption of the first $100,000 of the value of the
property subject to the tax. A husband and wife filing jointly will have an
exemption of $200,000.

Obligations issued by the State of Florida or its municipalities,
counties, and other taxing districts, or by the U.S. government, certain U.S.
government agencies and certain U.S. territories and possessions (such as Guam,
Puerto Rico and the Virgin Islands), as well as cash, are exempt from this
intangibles tax. If on December 31 of any year the portfolio of the Florida
Intermediate Tax-Exempt Fund consists solely of such exempt assets, then the
Fund's shares will be entirely exempt from the Florida intangibles tax payable
in the following year.

The Fund intends, but cannot guarantee, that its shares will qualify
for exemption from the Florida intangibles tax.

TAX TABLE

You may find it particularly useful to compare the tax-free yields of the
Tax-Exempt Funds to the equivalent yields from taxable investments. For an
investor in a low tax bracket, it may not be helpful to invest in a tax-exempt
investment if a higher after-tax yield can be achieved from a taxable
instrument.

<TABLE>
<CAPTION>
Federal
Marginal Tax-Exempt Yields
Taxable Income Tax Rate 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%
- ------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return Equivalent Taxable Yields
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $ 24,000 $ 0 - $ 40,100 15% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 24,001 - $ 58,150 $ 40,101 - $ 96,900 28% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11%
$ 58,151 - $121,300 $ 96,901 - $147,700 31% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59%
$121,301 - $263,750 $147,701 - $263,750 36% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50%
Over $263,750 Over $263,750 39.6% 3.31% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25%
</TABLE>

47
<PAGE> 83

MANAGEMENT

BOARD OF TRUSTEES

The business and affairs of Northern Funds are managed under the direction of
its Board of Trustees. The Additional Statement contains the name of each
Trustee and other background information.

INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN

Northern Trust and its affiliates administered in various capacities
(including as master trustee, investment manager or custodian) $692.9 billion
in assets as of June 30, 1996, including $120 billion for which Northern Trust
and its affiliates had investment management responsibility.

As compensation for its advisory services and its assumption of
related expenses, Northern Trust is entitled to a fee, computed daily and
payable monthly, at an annual rate of 0.60% of the average daily net assets of
each of the Money Market Funds; 0.75% of the average daily net assets of each
of the U.S. Government, Fixed Income, Intermediate Tax-Exempt, Tax-Exempt and
Florida Intermediate Tax-Exempt Funds; 0.90% of the average daily net assets of
the International Fixed Income Fund; 1.00% of the average daily net assets of
each of the Income Equity and Growth Equity Funds; 1.20% of the average daily
net assets of each of the Select Equity, Small Cap, International Growth
Equity, International Select Equity and Technology Funds; and 0.60% of the
average daily net assets of the Stock Index Fund. Although these advisory fee
rates (except for the Money Market Funds and Stock Index Fund) are higher than
the rates payable by most mutual funds, the Board of Trustees believes they are
comparable to the rates payable by other fixed income, equity and international
funds.

During Northern Funds' fiscal year ended March 31, 1996, Northern
Trust received investment management fees (after waivers) at the annualized
rates of 0.37%, 0.36%, 0.37%, 0.22% and 0.27% of the average daily net assets
of the Money Market Fund, U.S. Government Money Market Fund, Municipal Money
Market Fund, U.S. Government Select Money Market Fund and California Municipal
Money Market Fund, respectively, and at the annualized rates set forth above
under "Expense Summary" with respect to the other Funds.

Northern Trust also receives compensation as Northern Funds' custodian
and transfer agent. The fees payable by the Funds for these services are
described in the Additional Statement.

Northern Trust may, at its own expense, provide compensation to
certain dealers and other institutions whose customers purchase shares of a
Fund. The amount of such compensation may be made on a one-time and/or periodic
basis, and may equal or exceed the annual fees that are earned by Northern from
a Fund and are attributable to shares held by such customers. Such compensation
will not represent an additional expense to the Funds or their shareholders,
since it will be paid from the assets of Northern Trust or its affiliates.

The Money Market, Fixed Income and Equity Funds are advised by
Northern Trust's Investment Services Group. James M. Snyder, Vice President of
Northern Trust since 1980, Senior Vice President since 1991 and Chief
Investment Officer since 1995, oversees the management of all fixed income,

48
<PAGE> 84
equity and money market assets managed by Northern Trust and is the head of
Northern's Investment Services Group. Mr. Snyder received his B.S. degree from
Indiana University and his M.B.A. degree from DePaul University. He is a
Chartered Financial Analyst and a member of the Investment Analysts Society of
Chicago.

The portfolio managers primarily responsible for the management of the
investment selections of the Funds (other than the Money Market Funds),
together with information as to their principal business occupations during the
past five years, are shown below.

FIXED INCOME FUNDS

Primary responsibility for the management of the Fixed Income Fund and
International Fixed Income Fund lies with Michael J. Lannan, Vice President in
the Fixed Income Management Division. Mr. Lannan has had such responsibility
for the Funds since they commenced operations in April 1994. Mr. Lannan
received his B.A. degree from Harvard University and his M.B.A. degree from
DePaul University. He is a member of the Institute of Chartered Financial
Analysts and the Investment Analysts Society of Chicago. Mr. Lannan joined
Northern Trust in 1986. During the past five years, Mr. Lannan has managed
various fixed income portfolios, including common and collective trust funds
invested in obligations of domestic and foreign issuers. Primary responsibility
for the management of the Intermediate Tax-Exempt Fund lies with Eric
Boeckmann, Second Vice President in Northern Trust's Fixed Income Management
Division. Mr. Boeckmann has had such responsibility for the Fund since it
commenced operations in April 1994. Mr. Boeckmann received his B.S. degree from
the University of Illinois and joined Northern Trust in 1985. During the past
five years, Mr. Boeckmann has managed various municipal bond portfolios,
including common trust funds comprised of municipal securities. Primary
responsibility for the management of the Tax-Exempt Fund lies with Peter J.
Flood, Vice President in Northern Trust's Fixed Income Management Division and
has had such responsibility for the Fund since it commenced operations in April
1994. Mr. Flood received his S.B. degree from Loyola University and his M.B.A.
degree from the University of Chicago. Mr. Flood joined Northern Trust in 1979.
During the past five years, Mr. Flood has managed various municipal bond
portfolios, including common trust funds invested in municipal securities.
Primary responsibility for the management of the Florida Intermediate
Tax-Exempt Fund lies with Eric M. Bergson, Vice President in the Fixed Income
Management Division. Mr. Bergson received his A.B. and M.B.A. degrees from the
University of Chicago. He is a member of the Institute of Chartered Financial
Analysts and the Investment Analysts Society of Chicago. Mr. Bergson joined
Northern Trust in 1986. During the past five years, Mr. Bergson has managed
various municipal bond portfolios, including common trust funds comprised of
municipal securities. Primary responsibility for the management of the U.S.
Government Fund lies with Monty M. Memler, Vice President. Mr. Memler has had
such responsibility for the Fund since November 1994. Mr. Memler received his
B.S. degree from the University of Illinois and his M.B.A. degree from the
University of Chicago. He is a Chartered Financial Analyst and a member of the
Investment Analysts Society of Chicago. Mr. Memler joined Northern Trust in
1986. During the past five years, Mr. Memler has managed various fixed income
portfolios, including common and collective trust funds and a mutual fund for
another investment company.

EQUITY FUNDS

Primary responsibility for the management of the Income Equity Fund lies with
Theodore T. Southworth, Vice President in the Personal Investment Management
Division since joining Northern Trust in 1984. Mr. Southworth has had such
responsibility for the Fund since November 1995. Mr. Southworth received his
B.A. degree, cum laude, from Harvard College. He is a Chartered Financial
Analyst and a member of the Investment Analysts Society of Chicago. Primary
responsibility for the management of the Growth Equity Fund lies with Theodore
Breckel, Vice President in the Personal Investment Management Division. Mr.
Breckel has had such responsibility for the Fund since February 1995. Mr.
Breckel received his A.B. and M.B.A. degrees from Indiana University and his
M.S. degree from DePaul University. He is a Chartered Financial Analyst and a
member of the Investment Analysts Society of Chicago and the Financial Analysts
Federation. He has been with Northern Trust since 1968. He has served in the
Personal Investment Management Division since 1985. Primary responsibility for
the management of the Select Equity Fund lies with Robert N. Streed, Vice
President in the Northern Investment Counselors Division. Mr. Streed has had
such responsibility for the Fund since it commenced operations in April 1994.
Mr. Streed received his B.B. degree from Western Illinois University and his

49
<PAGE> 85

M.B.A. degree from DePaul University. He is a Chartered Financial Analyst and a
member of the Investment Analysts Society of Chicago and the Association for
Investment Management and Research. Mr. Streed joined Northern Trust in 1990.
Prior to joining Northern Trust, he was a Senior Vice President at Capitol
Supervisors, Inc. where he managed an equity mutual fund and various equity
portfolios. Since joining Northern Trust, Mr. Streed has managed various equity
portfolios.

John R. Goodwin, Senior Vice President of Northern Trust since 1987,
heads the Structured Equity Management Division of Northern's Investment
Services Group. Mr. Goodwin received his B.S. degree from Oregon State
University and his M.B.A. degree from the University of Chicago. He is a
Chartered Financial Analyst and a member of the following organizations: the
Society of Quantitative Analysts; the International Society of Financial
Analysts; the Chicago Options/Futures Society; the Investment Analysts Society
of Chicago; and the Association for Investment Management and Research. Primary
responsibility for the management of the Small Cap Fund lies with Susan J.
French, Vice President in the Structured Equity Management Division. Ms. French
has had such responsibility for the Fund since it commenced operations in April
1994. Ms. French received her B.S. degree from Fairfield University and is a
member of the Investment Analysts Society of Chicago. Ms. French joined
Northern Trust in 1986. During the past five years, Ms. French has managed
short-term investment funds and equity index funds including common and
collective trust funds and a mutual fund for another investment.

Robert A. LaFleur, Vice President of Northern Trust since 1982 and
Senior Vice President since 1990, is the Chief Investment Strategist and head
of the Funds Global Strategy Management Division of Northern's Investment
Services Group. Mr. LaFleur is responsible for developing and implementing
domestic and global investment strategies for Northern Trust and its affiliate
banks. During the past five years, Mr. LaFleur has managed international equity
portfolios, including common and collective trust funds invested principally in
foreign securities. Primary responsibility for the management of the
International Growth Equity and International Select Equity Funds lies with Mr.
LaFleur. Mr. LaFleur has had such responsibility for the Funds since the Funds
commenced operations in April 1994. Mr. LaFleur received his B.S. and M.B.A.
degrees from the University of Illinois. He is a Chartered Financial Analyst
and a member of the Financial Analysts Federation and the Chicago Society of
Analysts. John B. Leo, Vice President, has had primary responsibility over the
management of the Technology Fund since it commenced operations in April 1996.
Mr. Leo received his B.S. degree from Northern Illinois University and his
M.B.A. degree from the University of Chicago. Mr. Leo joined Northern Trust in
1984. During the past five years, Mr. Leo has managed equity and bond
portfolios.

ADMINISTRATOR AND DISTRIBUTOR

Sunstone Financial Group, Inc. ("Sunstone"), 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202, acts as administrator and distributor for Northern
Funds. Shares of the Funds are sold by Sunstone, as distributor, on a
continuous basis. As compensation for its administrative services (which
include clerical, compliance, regulatory and other services) and the assumption
of related expenses, Sunstone is entitled to a fee, computed daily and payable
monthly, at an annual rate of 0.15% of Northern Funds' average net assets. No
compensation is payable by Northern Funds to Sunstone for its distribution
services.

SERVICE ORGANIZATIONS

Northern Funds may enter into agreements with Service Organizations such as
banks, corporations, brokers, dealers and other financial institutions,
including Northern Trust, concerning the provision of support and/or
distribution services to their customers who own Fund shares. These services,
which are described more fully in the Additional Statement, may include support
services such as assisting investors in processing administrative purchase,
exchange and redemption requests; processing dividend and distribution payments
from the Funds; providing information to customers showing their positions in
the Funds; and providing subaccounting with respect to Fund shares beneficially
owned by customers or the information necessary for subaccounting. In addition,
Service Organizations may provide assistance, such as the forwarding of sales
literature and advertising to their customers, in connection with the
distribution of Fund shares. For their services, Service Organizations may
receive fees from a Fund at annual rates of up to 0.25% of the average daily
net asset value of the shares covered by their agreements.

50
<PAGE> 86
Service Organizations may charge their customers fees for providing
administrative services in connection with investments in a Fund. Investors
should contact their Service Organization with respect to these fees and the
particular Service Organization's procedures for purchasing and redeeming
shares. It is the responsibility of Service Organizations to transmit purchase
and redemption orders and record those orders on a timely basis in accordance
with their agreements with their customers.

Conflict-of-interest restrictions may apply to the receipt of
compensation paid by Northern Funds in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel before entering into
agreements with Northern Funds.

EXPENSES

Except as set forth above and in the Additional Statement, each Fund is
responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern Trust and Sunstone,
brokerage fees and commissions, fees for the registration or qualification of
Fund shares under federal or state securities laws, expenses of the
organization of Northern Funds, taxes, interest, costs of liability insurance,
fidelity bonds, indemnification or contribution, any costs, expenses or losses
arising out of any liability of, or claim for damages or other relief asserted
against Northern Funds for violation of any law, legal, tax and auditing fees
and expenses, expenses of preparing and printing prospectuses, statements of
additional information, proxy materials, reports and notices and the printing
and distributing of the same to the Funds' shareholders and regulatory
authorities, compensation and expenses of its Trustees, payments to Service
Organizations, fees of industry organizations such as the Investment Company
Institute, and miscellaneous and extraordinary expenses incurred by Northern
Funds.

FURTHER INFORMATION

DETERMINING SHARE PRICE

Net asset value per share for purposes of purchases and redemptions is
calculated by Northern Trust on each Business Day as of 3:00 p.m. (Chicago
Time) for each non-Money Market Fund, and as of 1:00 p.m. (Chicago Time) for
each Money Market Fund. Net asset value is calculated by dividing the value of
all securities and other assets belonging to a Fund, less the liabilities
charged to a Fund, by the number of the Fund's outstanding shares.

In seeking to maintain a net asset value of $1.00 per share with
respect to each Money Market Fund for purposes of purchases and redemptions,
Northern Funds values the portfolio securities held by each of the Money Market
Funds pursuant to the amortized cost method of valuation described in the
Additional Statement under "Amortized Cost Valuation."

Securities held by the other Funds that are listed on a recognized
U.S. or foreign securities exchange are valued at the last quoted sales price
on the securities exchange on which the securities are primarily traded, except
that securities listed on an exchange in the United Kingdom are valued at the
average of the closing bid and ask prices. If securities listed on a U.S.
exchange are not

51
<PAGE> 87

traded on a valuation date, they will be valued at the last quoted bid price.
If securities traded on a foreign securities exchange are not traded on a
valuation date, they will be valued at the most recent quoted sales price.
Securities that are traded in the U.S. over-the-counter markets, absent a last
quoted sales price, are valued at the last quoted bid price. Securities which
are traded in the foreign over-the-counter markets are valued at the last sales
price, except that such securities traded in the United Kingdom are valued at
the average of the closing bid and ask prices. Any securities for which no
current quotations are readily available are valued at fair value as determined
in good faith by Northern Trust under the supervision of the Board of Trustees.
Temporary short-term investments are valued at amortized cost which Northern
Trust has determined, pursuant to Board authorization, approximates market
value. Securities may be valued on the basis of prices provided by independent
pricing services when those prices are believed to reflect the fair market
value of the securities.

ADVERTISING PERFORMANCE

The performance of each Fund may be compared to those of other mutual funds
with similar investment objectives and to stock, bond and other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For
example, the performance of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc. or to the S&P 500 Index, the Russell 2000 or 1000
Small Stock Index, the Consumer Price Index or the Dow Jones Industrial
Average. In addition, performance of the International Funds may be compared to
the Morgan Stanley Capital International Europe, Australia and Far East Index
("EAFE"), the Morgan Stanley EAFE and Emerging Markets Free Index and the J.P.
Morgan International Government Bond Index, and performance of the Fixed Income
and U.S. Government Funds may be compared to the Lehman Brothers Government
Bond Index (or its two components, the Treasury Bond Index and Agency Bond
Index), the Lehman Brothers Corporate Bond Index and the Lehman Brothers
Intermediate Government Bond Index. Performance of the Intermediate Tax-Exempt
and Tax-Exempt Funds may be compared to the Lehman Brothers Municipal Bond or
5-Year Municipal Bond Indices, performance of the Florida Intermediate
Tax-Exempt Fund may be compared to the Lehman Brothers Mutual Fund Florida
Intermediate Municipal Bond Index and performance of the Income Equity Fund may
be compared to the Merrill Lynch Investment Grade Convertible Bond Index.
Performance of the Technology Fund may be compared to the Hambrecht and Quist
Technology Index, the SoundView Technology Index, the technology grouping of
the S&P 500 Index and any other comparable technology index. Performance data
as reported in national financial publications such as Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature, may also be used in comparing the performance of a
Fund. From time to time, the Funds may also quote the mutual fund ratings of
Morningstar, Inc. and other services in their advertising materials.

A Fund (other than the Money Market Funds) calculates its total return
on an "average annual total return" basis for various periods from the date the
Fund commences investment operations and for other periods as permitted under
SEC rules. Average annual total return reflects the average annual percentage
change in value of an investment over the measuring period. Total return may
also be calculated on an aggregate total return basis for various periods.
Aggregate total return reflects the total percentage change in value over the
measuring period. Both methods of calculating total return reflect changes in
the price of a Fund's shares and assume that any dividends and capital gain
distributions are reinvested. When considering average total return figures for
periods longer than one year, you should note that the annual total return for
any one year may be more or less than the average for the entire period. A Fund
may also advertise its total return on an aggregate, year-by-year or other
basis for various specified periods through charts, graphs, schedules or
quotations.

The yield of a Fund (other than the Money Market Funds) is computed
based on the Fund's net income during a specified 30-day (or one- month)
period. More specifically, the Fund's yield is computed by dividing its per
share net income during the relevant period by the per share net asset value on
the last day of the period and annualizing the result on a semi-annual basis.
The yield of a Money Market Fund is computed based on the Fund's net income
during a specified seven-day period. The net investment income is then
"annualized." That is, the amount of net investment income generated by the
investment during the period is

52
<PAGE> 88
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The "effective" yield of a Money Market Fund is
calculated similarly but, when annualized, the net investment income generated
by the investment is assumed to be reinvested. The "effective" yield will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment.

The tax-equivalent yield for a Tax-Exempt Fund shows the amount of
taxable yield needed to produce an after-tax equivalent of a tax- free yield,
and is calculated by increasing the yield (as calculated above) by the amount
necessary to reflect the payment of federal and/or state income taxes at a
stated rate. The tax-equivalent yield for a Tax-Exempt Fund will always be
higher than the Fund's yield.

Performance is based on historical earnings and is not intended to
indicate future performance. The investment return and principal value of an
investment in a Fund will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Performance data may not provide a basis
for comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in the net asset value should be
considered in ascertaining the total return to shareholders for a given period.
Total return data should also be considered in light of the risks associated
with a Fund's composition, quality, operating expenses and market conditions.
Any fees charged by Northern Trust or a Service Organization directly to its
customers in connection with investments in the Funds will not be included in
Northern Funds' calculations of performance data.

VOTING RIGHTS

As of July 15, 1996, Northern Trust possessed sole or shared voting or
investment power for its customer accounts with respect to more than 50% of the
outstanding shares of Northern Funds.

SHAREHOLDER REPORTS

RETIREMENT PLANS

Shares of the Funds may be purchased in connection with certain tax-sheltered
retirement plans, including profit-sharing plans, 401(k) plans, money purchase
pension plans, target benefit plans and individual retirement accounts. Further
information about how to participate in these plans, the fees charged and the
limits on contributions can be obtained from Northern Trust. To invest through
any of the tax-sheltered retirement plans, please call Northern Trust for
information and the required separate application. To determine whether the
benefits of a tax- sheltered retirement plan are available and/or appropriate,
a shareholder should consult with a tax adviser.

MISCELLANEOUS

The address of Northern Funds is 207 E. Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202 and the telephone number is 1-800-595-9111. Northern

53
<PAGE> 89

Funds is registered as an open-end management investment company under the 1940
Act, and each of the Funds (other than the California Municipal Money Market
Fund, the Florida Intermediate Tax-Exempt Fund and the International Fixed
Income Fund) is classified under that Act as a diversified portfolio.

As used in this Prospectus, "Business Day" means each day Northern
Trust and the New York Stock Exchange (the "Exchange") are open, which is
Monday through Friday, except for holidays observed by Northern Trust and/or
the Exchange. In 1996, these holidays are New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday (except for the Money Market Funds),
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving and Christmas. On days when Northern Trust or the Exchange closes
early as a result of unusual weather or other conditions, the right is reserved
to advance the time by which purchase and redemption requests must be received.
In addition, on any Business Day when the Public Securities Association ("PSA")
recommends that the securities markets close early, the Funds reserve the right
to cease or to advance the deadline for accepting purchase and redemption
orders for same Business Day credit up to one hour before the PSA recommended
closing time. Purchase and redemption requests received after the advanced
closing time will be effected on the next Business Day. Northern Trust is not
required to calculate the net asset value of a Fund on days during which no
shares are tendered to a Fund for redemption and no orders to purchase or sell
shares are received by a Fund, or on days on which there is an insufficient
degree of trading in the Fund's portfolio securities for changes in the value
of such securities to affect materially the net asset value per share.

Northern Trust is sometimes referred to as "The Northern Trust Bank"
in advertisements and other literature.

The Stock Index Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's, nor does Standard & Poor's guarantee the accuracy and/or
completeness of the S&P 500 Index or any data included therein. Standard &
Poor's makes no warranty, express or implied, as to the results to be obtained
by the Fund, owners of the Fund, any person or any entity from the use of the
S&P 500 Index or any data included therein. Standard & Poor's makes no express
or implied warranties and expressly disclaims all such warranties of
merchantability of fitness for a particular purpose for use with respect to the
S&P 500 Index or any data included therein.

---------------

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<PAGE> 90

33-73404
811-8236

PART B

STATEMENT OF ADDITIONAL INFORMATION

MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT SELECT MONEY MARKET FUND
CALIFORNIA MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT FUND
FIXED INCOME FUND
INTERMEDIATE TAX-EXEMPT FUND
TAX-EXEMPT FUND
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
INTERNATIONAL FIXED INCOME FUND
INCOME EQUITY FUND
GROWTH EQUITY FUND
SELECT EQUITY FUND
SMALL CAP FUND
(FORMERLY, SMALL CAP GROWTH FUND)
INTERNATIONAL GROWTH EQUITY FUND
INTERNATIONAL SELECT EQUITY FUND
TECHNOLOGY FUND
STOCK INDEX FUND

NORTHERN FUNDS
(THE "TRUST")

This Statement of Additional Information (the "Additional Statement")
dated July 31, 1996 is not a prospectus. This Additional Statement should be
read in conjunction with the Prospectus dated July 31, 1996, as amended or
supplemented from time to time, for the Money Market Fund, U.S. Government
Money Market Fund, Municipal Money Market Fund, U.S. Government Select Money
Market Fund, California Municipal Money Market Fund (collectively, the "Money
Market Funds"), U.S. Government Fund, Fixed Income Fund, Intermediate
Tax-Exempt Fund, Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund,
International Fixed Income Fund, Income Equity Fund, Growth Equity Fund, Select
Equity Fund, Small Cap Fund, International Growth Equity Fund, International
Select Equity Fund, Technology Fund and Stock Index Fund (collectively, the
"Non-Money Market Funds," and together with the Money Market Funds, the
"Funds") of Northern Funds (the "Prospectus"). Copies of the Prospectus may be
obtained without charge from the Transfer Agent by writing to the Northern
Funds Center, P.O. Box 75986, Chicago, Illinois 60690-9069 or by
<PAGE> 91
calling 1-800-595-9111. Capitalized terms not otherwise defined have the same
meaning as in the Prospectus.

__________

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS ADDITIONAL STATEMENT OR IN THE PROSPECTUS
IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NORTHERN FUNDS OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.

SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST BANK, ITS
PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED
BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.

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<PAGE> 92
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . . 4
Special Risk Factors and Considerations Relating to California
Municipal Instruments and Florida Municipal Instruments . . . . . . 26
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . 44

ADDITIONAL TRUST INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Investment Adviser, Transfer Agent and Custodian . . . . . . . . . . . . . . 51
Administrator and Distributor . . . . . . . . . . . . . . . . . . . . . . . 65
Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Counsel and Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
In-Kind Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Automatic Investing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Redemptions and Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . 71

PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Non-Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

AMORTIZED COST VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Federal - General Information . . . . . . . . . . . . . . . . . . . . . . . 80
Federal - Tax-Exempt Information . . . . . . . . . . . . . . . . . . . . . . 82
Taxation of Certain Financial Instruments . . . . . . . . . . . . . . . . 83
Special State Tax Considerations Pertaining to the California Municipal
Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . 86
Special State Tax Considerations Pertaining to the Florida Intermediate
Tax-Exempt Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 88

DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>

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<PAGE> 93
ADDITIONAL INVESTMENT INFORMATION

INVESTMENT OBJECTIVES AND POLICIES

The following supplements the investment objectives and policies of
the Funds as set forth in the Prospectus.

MONEY MARKET FUNDS

Money Market Fund seeks to maximize current income to
the extent consistent with the preservation of
capital and maintenance of liquidity by investing
only in high-quality money market instruments.

U.S. Government Money Market Fund has the same
objective as the Money Market Fund but invests
primarily in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities
and related repurchase agreements.

Municipal Money Market Fund seeks high current income
exempt from regular federal tax to the extent
consistent with preserving capital by investing
mainly in short-term Municipal Instruments.

U.S. Government Select Money Market Fund seeks to
maximize current income to the extent consistent with
the preservation of capital and maintenance of
liquidity by investing exclusively in high quality
money market instruments.

California Municipal Money Market Fund seeks to
provide its shareholders to the extent consistent
with the preservation of capital and prescribed
portfolio standards, a high level of income exempt
from regular federal income tax and California state
personal income tax.

FIXED INCOME FUNDS

U.S. Government Fund seeks high current income from
U.S. government securities. The Fund's
dollar-weighted average maturity is anticipated to
range between one and ten years. It is designed for
investors who seek greater principal stability than
is generally available from higher yielding corporate
bonds.

Fixed Income Fund seeks high current income from a
broad range of bonds and other fixed income

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securities. It is designed for investors who seek
income and greater stability of principal than is
generally available from longer-term, higher yielding
bonds. The Fund's average maturity is anticipated to
range between seven and twelve years. This Fund
generally presents greater risk and reward potential
than the U.S. Government Fund.

International Fixed Income Fund seeks to maximize
total return consistent with reasonable risk while
investing in foreign securities markets. Total
return is comprised of current income and value
fluctuations from investing in bonds and other fixed
income securities of foreign issuers.

TAX-EXEMPT FUNDS

Intermediate Tax-Exempt Fund seeks high current income
exempt from regular federal income tax. The Fund
invests in a broad range of Municipal Instruments
with an expected average maturity of three to ten
years.

Tax-Exempt Fund also seeks high current income exempt
from regular federal income tax by investing in
Municipal Instruments with an expected average
maturity of ten to thirty years.

Florida Intermediate Tax-Exempt Fund seeks a high
level of current income exempt from regular federal
income tax. The Fund intends, but cannot guarantee,
that its shares will qualify for exemption from the
Florida intangibles tax.

EQUITY FUNDS

Income Equity Fund seeks to achieve high current
income and, as a secondary objective, longer-term
capital appreciation. The Fund invests in
convertible and other equity securities. Because it
emphasizes high current income, this Fund is likely
to have the least price fluctuation of Northern
Fund's equity funds.

Growth Equity Fund seeks long-term capital
appreciation by investing mainly in the equity
securities of growth companies. It is designed for
investors willing to accept above-average price
volatility in search of long-term reward.

Select Equity Fund is also for the more aggressive
investor, seeking long-term capital appreciation by

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investing principally in common stocks of companies
the adviser believes to have superior growth
characteristics. Any income is incidental to this
objective.

Small Cap Fund seeks long-term capital appreciation;
any income is incidental to this objective. Because
it invests principally in the equity securities of
smaller companies, this Fund is likely to have more
price volatility than the Growth Equity and Select
Equity Funds.

International Growth Equity Fund offers the potential
benefits of international diversification to
investors willing to accept above-average price
volatility while seeking long-term capital
appreciation. While subject to additional risks such
as currency fluctuations and the higher volatility of
foreign securities, this Fund uses diversification,
in an effort to control risk.

International Select Equity Fund seeks long-term
growth by investing principally in common stock of
foreign issuers that the adviser believes are growing
faster than their markets. Because fewer countries
and securities are generally represented in this Fund
than in the International Growth Equity Fund, it is
likely to experience more price volatility.

Technology Fund seeks long-term capital appreciation
by investing principally in equity securities and
securities convertible into common stock of companies
that develop, produce or distribute products and
services related to advances in technology. The Fund
will, under normal market conditions, invest at least
65% of the value of its total assets in securities of
companies principally engaged in technology business
activities. An issuer is considered principally
engaged in technology business activities if such
issuer is listed on the Hambrecht and Quist
Technology Index, the SoundView Technology Index, the
technology grouping of the S&P 500 Index or any other
comparable index.

The SoundView Technology Index includes approximately
100 companies from the design, automation,
communications, mainframe computer, microcomputer,
minicomputer, peripherals, semiconductor, software
and related services industries. The Hambrecht &
Quist Technology Index

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<PAGE> 96
(the "H&Q Index") is comprised of publicly traded
stocks of approximately 200 technology companies.
The H&Q Index includes companies in the electronics,
medical and related technologies industries and is a
market capitalization weighted index. Changes in the
indices may occur when SoundView or H&Q choose to
modify their indices or as mergers, acquisitions and
failures dictate. Such changes may happen with fair
regularity owing to the fast-changing nature of the
technology industries.

Stock Index Fund seeks to provide investment results
approximating the aggregate price and dividend
performance of the securities included in the S&P 500
Index.

COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF DEPOSIT, TIME
DEPOSITS AND BANK NOTES. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to deposit liabilities of the bank and pari passu with
other senior, unsecured obligations of the bank. Bank notes are classified as
"other borrowings" on a bank's balance sheet, while deposit notes and
certificates of deposit are classified as deposits. Bank notes are not insured
by the Federal Deposit Insurance Corporation or any other insurer. Deposit
notes are insured by the Federal Deposit Insurance Corporation only to the
extent of $100,000 per depositor per bank.

A Fund may invest a portion of its net assets in the obligations of
foreign banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs"), which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or

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<PAGE> 97
a foreign bank; Canadian Time Deposits ("CTDs"), which are essentially the same
as ETDs except they are issued by Canadian offices of major Canadian banks;
Schedule Bs, which are obligations issued by Canadian branches of foreign or
domestic banks; Yankee Certificates of Deposit ("Yankee Cds"), which are U.S.
dollar-denominated certificates of deposit issued by a U.S. branch of a foreign
bank and held in the United States; and Yankee Bankers' Acceptances ("Yankee
Bas"), which are U.S. dollar-denominated bankers' acceptances issued by a U.S.
branch of a foreign bank and held in the United States.

GUARANTEED INVESTMENT CONTRACTS. A guaranteed investment contract
("GIC") is normally a general obligation of the issuing insurance company and
not a separate account. The purchase price paid for a GIC becomes part of the
general assets of the insurance company, and the contract is paid from the
company's general assets. The Money Market Fund and Fixed Income Fund will
only purchase GICs from insurance companies which, at the time of purchase,
have assets of $1 billion or more and meet quality and credit standards
established by Northern Trust. Generally, GICs are not assignable or
transferable without the permission of the issuing insurance companies, and an
active secondary market in GICs does not currently exist. Therefore, GICs will
normally be considered illiquid investments, and will be acquired subject to
the limitation on illiquid investments.

REPURCHASE AGREEMENTS. Each Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered to be loans under the
Investment Company Act of 1940 (the "1940 Act"). Although the securities
subject to a repurchase agreement may bear maturities exceeding one year,
settlement for the repurchase agreement will never be more than one year after
a Fund's acquisition of the securities and normally will be within a shorter
period of time. Securities subject to repurchase agreements are held either by
Northern Funds' custodian or subcustodian (if any), or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement
will be required to maintain the value of the securities subject to the
agreement in an amount exceeding the repurchase price (including accrued
interest). Default by the seller would, however, expose a Fund to possible
loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS. A Fund may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price
("reverse repurchase agreements"). Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a

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<PAGE> 98
Fund may decline below the repurchase price. A Fund will pay interest on
amounts obtained pursuant to a reverse repurchase agreement. While reverse
repurchase agreements are outstanding, a Fund will maintain in a segregated
account cash, U.S. Government securities or other liquid high-grade debt
securities of an amount at least equal to the market value of the securities,
plus accrued interest, subject to the agreement.

VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to the variable
and floating rate instruments that may be acquired by the Funds as described in
the Prospectus, Northern Trust will consider the earning power, cash flows and
other liquidity ratios of the issuers and guarantors of such instruments and,
if the instruments are subject to demand features, will monitor their financial
status to meet payment on demand. In determining weighted average portfolio
maturity, an instrument may, subject to applicable SEC regulations, be deemed
to have a maturity shorter than its nominal maturity based on the period
remaining until the next interest rate adjustment or the time a Fund can
recover payment of principal as specified in the instrument. Where necessary
to ensure that a variable or floating rate instrument is of the minimum
required credit quality for a Fund, the issuer's obligation to pay the
principal of the instrument will be backed by an unconditional bank letter or
line of credit, guarantee or commitment to lend.

FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. Each Fund may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Fund to
purchase or sell securities at a future date. The price of the underlying
securities (usually expressed in terms of yield) and the date when the
securities will be delivered and paid for (the settlement date) are fixed at
the time the transaction is negotiated. When-issued purchases and forward
commitment transactions are normally negotiated directly with the other party.

A Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities.
If deemed advisable as a matter of investment strategy, however, a Fund may
dispose of or negotiate a commitment after entering into it. A Fund also may
sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date.

When a Fund purchases securities on a when-issued, delayed-delivery or
forward commitment basis, the Fund's custodian (or subcustodian) will maintain
in a segregated account cash, U.S. Government securities or other liquid
securities having a value (determined daily) at least equal to the amount of
the Fund's purchase commitments. In the case of a forward commitment to sell

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<PAGE> 99
portfolio securities, the custodian or subcustodian will hold the portfolio
securities themselves in a segregated account while the commitment is
outstanding. These procedures are designed to ensure that the Fund will
maintain sufficient assets at all times to cover its obligations under
when-issued purchases, forward commitments and delayed-delivery transactions.
For purposes of determining a Fund's average dollar-weighted maturity, the
maturity of when-issued, delayed-delivery or forward commitment securities will
be calculated from the commitment date.

UNITED STATES GOVERNMENT OBLIGATIONS. Examples of the types of U.S.
Government obligations that may be acquired by the Funds include U.S. Treasury
Bills, Treasury Notes and Treasury Bonds and the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association
("FNMA"), Government National Mortgage Association ("GNMA"), General Services
Administration, Student Loan Marketing Association ("SLMA"), Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
Intermediate Credit Banks and Maritime Administration.

SUPRANATIONAL BANK OBLIGATIONS. A Fund may invest in obligations of
supranational banks. Supranational banks are international banking
institutions designed or supported by national governments to promote economic
reconstruction, development or trade among nations (e.g., the International
Bank for Reconstruction and Development). Obligations of supranational banks
may be supported by appropriated but unpaid commitments of their member
countries and there is no assurance that these commitments will be undertaken
or met in the future.

STRIPPED OBLIGATIONS. Within the past several years, the Treasury
Department has facilitated transfers of ownership of zero coupon securities by
accounting separately for the beneficial ownership of particular interest
coupon and principal payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." The Funds may
purchase securities registered in the STRIPS program. Under the STRIPS
program, the Funds are able to have their beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.

In addition, the Funds, other than the U.S. Government Select Money
Market Fund, may acquire U.S. Government obligations and their unmatured
interest coupons that have been separated ("stripped") by their holder,
typically a custodian bank or

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<PAGE> 100
investment brokerage firm. Having separated the interest coupons from the
underlying principal of the U.S. Government obligations, the holder will resell
the stripped securities in custodial receipt programs with a number of
different names, including "Treasury Income Growth Receipts" ("TIGRs") and
"Certificate of Accrual on Treasury Securities" ("CATS"). The stripped coupons
are sold separately from the underlying principal, which is usually sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. The underlying U.S. Treasury bonds and notes
themselves are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are ostensibly
owned by the bearer or holder), in trust on behalf of the owners. Counsel to
the underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for federal tax purposes. Northern
Funds is unaware of any binding legislative, judicial or administrative
authority on this issue.

The Prospectus discusses other types of stripped securities that may
be purchased by the Funds, including stripped mortgage-backed securities.

ASSET-BACKED SECURITIES. To the extent described in the Prospectus,
the Funds may purchase asset-backed securities, which are securities backed by
mortgages, installment contracts, credit card receivables or other assets.
Asset-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made
periodically, thus in effect "passing through" such payments made by the
individual borrowers on the assets that underlie the securities, net of any
fees paid to the issuer or guarantor of the securities. The average life of
asset-backed securities varies with the maturities of the underlying
instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of
the mortgage pools underlying the securities as a result of mortgage
prepayments. For this and other reasons, an asset-backed security's stated
maturity may be shortened, and the security's total return may be difficult to
predict precisely. Asset-backed securities acquired by the Funds may include
collateralized mortgage obligations ("CMOs") issued by private companies.

There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities
guaranteed by GNMA include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes"), which are guaranteed as to the timely payment of principal
and

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interest by GNMA and backed by the full faith and credit of the United States.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-backed securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes"),
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States, but are supported by the right
of the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are
guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-related securities issued by FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.

MUNICIPAL INSTRUMENTS. Opinions relating to the validity of Municipal
Instruments (including California Municipal Instruments and Florida Municipal
Instruments) and to federal and state tax issues relating to these securities
are rendered by counsel to the respective issuing authorities at the time of
issuance. Such opinions may contain various assumptions, qualifications or
exceptions that are reasonably acceptable to Northern Trust. Neither Northern
Funds nor Northern Trust will review the proceedings relating to the issuance
of Municipal Instruments or the bases for such opinions.

An issuer's obligations under its Municipal Instruments are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Instruments may be
materially adversely affected by litigation or other conditions.

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From time to time proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Instruments. For example, under the Tax Reform Act of
1986 interest on certain private activity bonds must be included in an
investor's federal alternative minimum taxable income, and corporate investors
must include all tax-exempt interest in their federal alternative minimum
taxable income. Northern Funds cannot predict what legislation, if any, may be
proposed in the future in Congress as regards the federal income tax status of
interest on Municipal Instruments or which proposals, if any, might be
enacted. Such proposals, if enacted, might materially and adversely affect the
availability of Municipal Instruments for investment by the Intermediate
Tax-Exempt, Tax-Exempt, Florida Intermediate Tax-Exempt, California Municipal
Money Market and Municipal Money Market Funds and the Funds' liquidity and
value. In such an event the Board of Trustees would reevaluate the Funds'
investment objectives and policies and consider changes in their structure or
possible dissolution.

Certain of the Municipal Instruments held by a Fund may be insured as
to the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the Municipal Instrument at the time of
its original issuance. In the event that the issuer defaults on an interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect
against market fluctuations caused by changes in interest rates and other
factors. A Fund may invest more than 25% of its total assets in Municipal
Instruments covered by insurance policies.

Interest earned by the Intermediate Tax-Exempt Fund, Tax-Exempt Fund
or Florida Intermediate Tax-Exempt Fund on private activity bonds (if any) that
is treated as a specific tax preference item under the federal alternative
minimum tax will not be deemed to have been derived from Municipal Instruments
for purposes of determining whether that Fund meets its fundamental policy that
at least 80% of its annual gross income be derived from Municipal Instruments.

As described in the Prospectus, the Tax-Exempt Funds may invest in
municipal leases, which may be considered liquid under guidelines established
by Northern Funds' Board of Trustees. The guidelines will provide for
determination of the liquidity and proper valuation of a municipal lease
obligation based on factors including the following: (1) the frequency of
trades and quotes for the obligation; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; and (4)
the nature of the marketplace trades, including

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the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer. Northern Trust, under the supervision of Northern
Funds' Board of Trustees, will also consider the continued marketability of a
municipal lease obligation based upon an analysis of the general credit quality
of the municipality issuing the obligation and the essentiality to the
municipality of the property covered by the lease.

STANDBY COMMITMENTS. The California Municipal Money Market, Municipal
Money Market, Intermediate Tax-Exempt, Tax-Exempt and Florida Intermediate
Tax-Exempt Funds may enter into standby commitments with respect to Municipal
Instruments held by them. Under a standby commitment, a dealer agrees to
purchase at a Fund's option a specified Municipal Instrument. Standby
commitments may be exercisable by a Fund at any time before the maturity of the
underlying Municipal Instruments and may be sold, transferred or assigned only
with the instruments involved.

The Funds expect that standby commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Funds may pay for a standby commitment either
separately in cash or by paying a higher price for Municipal Instruments which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding standby commitments held by a Fund will not exceed 1/2
of 1% of the value of the Fund's total assets calculated immediately after each
standby commitment is acquired.

The Funds intend to enter into standby commitments only with dealers,
banks and broker-dealers which, in Northern Trust's opinion, present minimal
credit risks. The Funds will acquire standby commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. The acquisition of a standby commitment will not affect the
valuation of the underlying Municipal Instrument. The actual standby
commitment will be valued at zero in determining net asset value. Accordingly,
where a Fund pays directly or indirectly for a standby commitment, its cost
will be reflected as an unrealized loss for the period during which the
commitment is held by the Fund and will be reflected in realized gain or loss
when the commitment is exercised or expires.

WARRANTS. The Income Equity, Growth Equity, Select Equity, Small Cap,
International Growth Equity, International Select Equity and Technology Funds
may purchase warrants and similar rights, which are privileges issued by
corporations enabling the owners to subscribe to and purchase a specified
number of shares of the corporation at a specified price during a specified
period of time. The purchase of warrants involves the risk that a Fund could
lose the purchase value of a warrant if the right to subscribe to additional
shares is not exercised prior to the warrant's

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expiration. Also, the purchase of warrants involves the risk that the
effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security. A
Fund will not invest more than 5% of its total assets, taken at market value,
in warrants, or more than 2% of its total assets, taken at market value, in
warrants not listed on the New York or American Stock Exchanges or a major
foreign exchange. Warrants acquired by a Fund in shares or attached to other
securities are not subject to this restriction. The Money Market Funds and the
U.S. Government, Fixed Income, Intermediate Tax-Exempt, Tax-Exempt, Florida
Intermediate Tax-Exempt, International Fixed Income and Stock Index Funds do
not intend to invest in warrants.

FOREIGN CURRENCY TRANSACTIONS. In order to protect against a possible
loss on investments resulting from a decline or appreciation in the value of a
particular foreign currency against the U.S. dollar or another foreign currency
or for other reasons, the Fixed Income, International Fixed Income, Income
Equity, Growth Equity, Select Equity, Small Cap, International Growth Equity,
International Select Equity and Technology Funds are authorized to enter into
forward currency exchange contracts. These contracts involve an obligation to
purchase or sell a specified currency at a future date at a price set at the
time of the contract. Forward currency contracts do not eliminate fluctuations
in the values of portfolio securities but rather may allow a Fund to establish
a rate of exchange for a future point in time.

A Fund may enter into forward foreign currency exchange contracts in
several circumstances. For example, when entering into a contract for the
purchase or sale of a security, a Fund may enter into a forward foreign
currency exchange contract for the amount of the purchase or sale price to
protect against variations, between the date the security is purchased or sold
and the date on which payment is made or received, in the value of the foreign
currency relative to the U.S. dollar or other foreign currency.

In addition, when Northern Trust anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, a Fund may enter into a forward contract
to sell, for a fixed amount, the amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. Similarly, when the securities held by a Fund create a short
position in a foreign currency, a Fund may enter into a forward contract to
buy, for a fixed amount, an amount of foreign currency approximating the short
position. With respect to any forward foreign currency contract, it will not
generally be possible to match precisely the amount covered by that contract
and the value of the securities involved due to the changes in the values of
such securities resulting from market movements between the date the

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forward contract is entered into and the date it matures. While forward
contracts may offer protection from losses resulting from declines or
appreciation in the value of a particular foreign currency, they also limit
potential gains which might result from changes in the value of such currency.
A Fund will also incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars. In
addition, Northern Trust may purchase or sell forward foreign currency exchange
contracts for the International Fixed Income Fund, International Growth Equity
Fund and International Select Equity Fund (collectively, the "International
Funds") to seek to increase total return when Northern Trust anticipates that
the foreign currency will appreciate or depreciate in value, but securities
denominated in that currency do not in Northern Trust's view present attractive
investment opportunities and are not held by a Fund.

A separate account consisting of liquid assets, such as cash, U.S.
Government securities or other liquid securities, equal to the amount of a
Fund's assets that could be required to consummate forward contracts will be
established with the Fund's custodian except to the extent the contracts are
otherwise "covered." For the purpose of determining the adequacy of the
securities in the account, the deposited securities will be valued at market or
fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if a Fund owns the
currency (or securities denominated in the currency) underlying the contract,
or holds a forward contract (or call option) permitting the Fund to buy the
same currency at a price that is (i) no higher than the Fund's price to sell
the currency or (ii) greater than the Fund's price to sell the currency
provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. A forward contract to buy a foreign
currency is "covered" if a Fund holds a forward contract (or put option)
permitting the Fund to sell the same currency at a price that is (i) as high as
or higher than the Fund's price to buy the currency or (ii) lower than the
Fund's price to buy the currency provided the difference is maintained by the
Fund in liquid assets in a segregated account with its custodian.

OPTIONS. Each Non-Money Market Fund may buy put options and buy call
options and write covered call and secured put options. Such options may
relate to particular securities, securities indices, financial instruments,
foreign currencies or (in the case of the International Fixed Income Fund) the
yield differential between two securities ("yield curve options"), and may or
may not be listed on a domestic or foreign securities exchange and may or may
not be issued by the Options Clearing Corporation. Options trading is a highly
specialized activity which entails greater than

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ordinary investment risk. Options may be more volatile than the underlying
instruments, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
instruments themselves.

A call option for a particular security gives the purchaser of the
option the right to buy, and a writer the obligation to sell, the underlying
security at the stated exercise price prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is in consideration for undertaking the obligation under the option contract.
A put option for a particular security gives the purchaser the right to sell
the security at the stated exercise price prior to the expiration date of the
option, regardless of the market price of the security. Options on indices and
yield curve options provide the holder with the right to make or receive a cash
settlement upon exercise of the option. With respect to options on indices,
the amount of the settlement will equal the difference between the closing
price of the index at the time of exercise and the exercise price of the option
expressed in dollars, times a specified multiple. With respect to yield curve
options, the amount of the settlement will equal the difference between the
yields of designated securities.

The Funds will write call options only if they are "covered." In the
case of a call option on a security or currency, the option is "covered" if a
Fund owns the instrument underlying the call or has an absolute and immediate
right to acquire that instrument without additional cash consideration (or, if
additional cash consideration is required, cash, U.S. Government securities or
other liquid securities, in such amount are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Fund maintains with its
custodian a diversified portfolio of securities comprising the index or liquid
assets equal to the contract value. A call option is also covered if a Fund
holds a call on the same instrument or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call
written provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. The Funds will write put options only
if they are "secured" by liquid assets maintained in a segregated account by
the Funds' custodian in an amount not less than the exercise price of the
option at all times during the option period.

With respect to yield curve options, a call (or put) option is covered
if the International Fixed Income Fund holds another call (or put) option on
the spread between the same two securities and maintains in a segregated
account with its custodian cash or cash equivalents sufficient to cover the
Fund's net liability under the two options. Therefore, the Fund's liability
for such a covered option is generally limited to the difference between the
amount of

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the Fund's liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.

A Fund's obligation to sell an instrument subject to a covered call
option written by it, or to purchase an instrument subject to a secured put
option written by it, may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying instrument, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize
a profit on an outstanding option, to prevent an underlying instrument from
being called, to permit the sale of the underlying instrument or to permit the
writing of a new option containing different terms on such underlying
instrument. The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Fund will have incurred a loss in the transaction. There is no assurance
that a liquid secondary market will exist for any particular option. An option
writer, unable to effect a closing purchase transaction, will not be able to
sell the underlying instrument (in the case of a covered call option) or
liquidate the segregated account (in the case of a secured put option) until
the option expires or the optioned instrument or currency is delivered upon
exercise with the result that the writer in such circumstances will be subject
to the risk of market decline or appreciation in the instrument during such
period.

When a Fund purchases an option, the premium paid by it is recorded as
an asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by a Fund is included in the
liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by a Fund expires unexercised the Fund realizes a loss equal to the
premium paid. If a Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by a Fund expires on the
stipulated expiration date or if a Fund enters into

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a closing purchase transaction, it will realize a gain (or loss if the cost of
a closing purchase transaction exceeds the net premium received when the option
is sold) and the deferred credit related to such option will be eliminated. If
an option written by a Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.

There are several risks associated with transactions in options. For
example, there are significant differences between the securities, currency and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In
addition, a liquid secondary market for particular options, whether traded
over-the-counter or on an exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities or currencies; unusual or unforeseen circumstances may interrupt
normal operations on an exchange; the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
value; or one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.

FUTURES CONTRACTS AND RELATED OPTIONS. The Funds (other than the Money
Market Funds) may purchase and sell futures contracts and may purchase and sell
call and put options on futures contracts. Participation in foreign futures and
foreign options transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign boards
of trade, including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, customers who trade foreign futures or
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the Commodity Futures Trading
Commission's ("CFTC") regulations and the rules of

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the National Futures Association and any domestic exchange, including the right
to use reparations proceedings before the CFTC and arbitration proceedings
provided them by the National Futures Association or any domestic futures
exchange. In particular, the Fund's investments in foreign futures or foreign
options transactions may not be provided the same protections in respect of
transactions on United States futures exchanges. In addition, the price of any
foreign futures or foreign options contract and, therefore, the potential
profit and loss thereon may be affected by any variance in the foreign exchange
rate between the time an order is placed and the time it is liquidated, offset
or exercised. For a detailed description of futures contracts and related
options, see Appendix B to this Additional Statement.

REAL ESTATE INVESTMENT TRUSTS. The Small Cap Fund may invest in
equity real estate investment trusts ("REITs"). REITs pool investors' funds
for investment primarily in commercial real estate properties. Investments in
REITs may subject the Fund to certain risks. REITs may be affected by changes
in the value of the underlying property owned by the trust. REITs are
dependent upon specialized management skill, may not be diversified and are
subject to the risks of financing projects. REITs are also subject to heavy
cash flow dependency, defaults by borrowers, self liquidation and the
possibility of failing to qualify for the beneficial tax treatment available to
REITs under the Internal Revenue Code of 1986, as amended, and to maintain
exemption from the 1940 Act. As a shareholder in a REIT, the Fund would bear,
along with other shareholders, its pro rata portion of the REIT's operating
expenses. These expenses would be in addition to the advisory and other
expenses the Fund bears directly in connection with its own operations.

SECURITIES LENDING. Collateral for loans of portfolio securities made
by a Fund may consist of cash, securities issued or guaranteed by the U.S.
Government or its agencies or (except for the U.S. Government Money Market
Fund, U.S. Government Select Money Market Fund and U.S. Government Fund)
irrevocable bank letters of credit (or any combination thereof). The borrower
of securities will be required to maintain the market value of the collateral
at not less than the market value of the loaned securities, and such value will
be monitored on a daily basis. When a Fund lends its securities, it continues
to receive dividends and interest on the securities loaned and may
simultaneously earn interest on the investment of the cash collateral.
Although voting rights, or rights to consent, attendant to securities on loan
pass to the borrower, such loans will be called so that the securities may be
voted by a Fund if a material event affecting the investment is to occur.

INTEREST RATE AND CURRENCY SWAPS. The U.S. Government, Fixed Income,
Intermediate Tax-Exempt, Tax-Exempt, Florida Intermediate Tax-Exempt Fund,
International Fixed Income and Income Equity Funds

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may enter into interest rate swaps for hedging purposes and not for
speculation. A Fund will typically use interest rate swaps to preserve a
return on a particular investment or portion of its portfolio or to shorten the
effective duration of its portfolio investments. Interest rate swaps involve
the exchange by a Fund with another party of their respective commitments to
pay or receive interest, such as an exchange of fixed rate payments for
floating rate payments. The International Funds may also enter into currency
swaps, which involve the exchange of the rights of a Fund and another party to
make or receive payments in specific currencies.

A Fund will only enter into interest rate swaps on a net basis, i.e.
the two payment streams are netted out, with a Fund receiving or paying, as the
case may be, only the net amount of the two payments. In contrast, currency
swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Inasmuch as
these transactions are entered into for good faith hedging purposes, the Funds
and Northern Trust believe that such obligations do not constitute senior
securities as defined in the 1940 Act and, accordingly, will not treat them as
being subject to the Funds' borrowing restrictions.

The net amount of the excess, if any, of the Funds' obligations over
their entitlements with respect to each interest rate swap will be accrued on a
daily basis, and an amount of cash, U.S. Government securities or other liquid
securities, having an aggregate net asset value at least equal to such accrued
excess, will be maintained in a segregated account by the Funds' custodian.

A Fund will not enter into a currency or interest rate swap unless the
unsecured commercial paper, senior debt or the claims-paying ability of the
other party thereto is rated either A or A-1 or better by S&P, Duff or Fitch,
or A or P-1 or better by Moody's. If there is a default by the other party to
such transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid in
comparison with markets for other similar instruments which are traded in the
Interbank market.

CONVERTIBLE SECURITIES. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible securities mature or are redeemed, converted or
exchanged. Prior to conversion, convertible securities have characteristics
similar to ordinary debt securities in that they normally provide a stable
stream of income with generally higher yields than those of common stock of the
same or similar issuers. Convertible securities rank senior to

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common stock in a corporation's capital structure and therefore generally
entail less risk than the corporation's common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to which
the convertible security sells above its value as a fixed income security.

In selecting convertible securities for the Fixed Income, Income
Equity, Growth Equity, Select Equity, Small Cap, International Growth Equity,
International Select Equity, International Fixed Income and Technology Funds,
Northern Trust will consider, among other factors: its evaluation of the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying common stocks; the prices of the securities
relative to other comparable securities and to the underlying common stocks;
whether the securities are entitled to the benefits of sinking funds or other
protective conditions; diversification of the Fund's portfolio as to issuers;
and whether the securities are rated by a rating agency and, if so, the ratings
assigned.

The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.

Capital appreciation for a Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by a
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.

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In general, investments in non-investment grade convertible securities
are subject to a significant risk of a change in the credit rating or financial
condition of the issuing entity. Investments in convertible securities of
medium or lower quality are also likely to be subject to greater market
fluctuation and to greater risk of loss of income and principal due to default
than investments of higher rated fixed-income securities. Such lower-rated
securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher rated securities, which react more
to fluctuations in the general level of interest rates. A Fund will generally
reduce risk to the investor by diversification, credit analysis and attention
to current developments in trends of both the economy and financial markets.
However, while diversification reduces the effect on a Fund of any single
investment, it does not reduce the overall risk of investing in lower rated
securities.

RISKS RELATED TO LOWER-RATED SECURITIES. While any investment carries
some risk, certain risks associated with lower-rated securities are different
than those for investment-grade securities. The risk of loss through default
is greater because lower-rated securities are usually unsecured and are often
subordinate to an issuer's other obligations. Additionally, the issuers of
these securities frequently have high debt levels and are thus more sensitive
to difficult economic conditions, individual corporate developments and rising
interest rates. Consequently, the market price of these securities may be quite
volatile and may result in wider fluctuations of a Fund's net asset value per
share.

There remains some uncertainty about the performance level of the
market for lower-rated securities under adverse market and economic
environments. An economic downturn or increase in interest rates could have a
negative impact on both the markets for lower-rated securities (resulting in a
greater number of bond defaults) and the value of lower-rated securities held
in the portfolio of investments.

The economy and interest rates can affect lower-rated securities
differently than other securities. For example, the prices of lower-rated
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher-rated investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.

If an issuer of a security defaults, a Fund may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty would
likely result in increased volatility

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for the market prices of lower-rated securities as well as a Fund's net asset
value. In general, both the prices and yields of lower-rated securities will
fluctuate.

In certain circumstances it may be difficult to determine a security's
fair value due to a lack of reliable objective information. Such instances
occur where there is not an established secondary market for the security or
the security is lightly traded. As a result, a Fund's valuation of a security
and the price it is actually able to obtain when it sells the security could
differ.

Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower-rated
convertible securities held by a Fund, especially in a thinly traded market.
Illiquid or restricted securities held by a Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.

Current laws, such as those requiring federally-insured savings and
loan associations to remove investments in lower-rated securities from their
portfolios, as well as other pending proposals, may have a material impact on
the market for lower-rated securities.

The rating assigned by a rating agency evaluates the safety of a
lower-rated security's principal and interest payments, but does not address
market value risk. Because the ratings of the rating agencies may not always
reflect current conditions and events, in addition to using recognized rating
agencies and other sources, Northern Trust performs its own analysis of the
issuers whose lower-rated securities a Fund holds. Because of this, a Fund's
performance may depend more on its adviser's credit analysis than is the case
of mutual funds investing in higher-rated securities.

INVESTMENT COMPANIES. Each Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made, not more
than 3% of the outstanding voting stock of any one investment company will be
owned by Northern Funds as a whole and their affiliated persons (as defined in
the 1940 Act). An investment company whose securities are purchased by a Fund
is not obligated to redeem such securities in an amount exceeding 1% of the
investment company's total outstanding securities during any period of less
than 30 days. Therefore, such securities that exceed the amount may be
illiquid.

YIELDS AND RATINGS. The yields on certain obligations, including the
money market instruments in which the Funds invest, are dependent on a variety
of factors, including general economic conditions, conditions in the particular
market for the obligation,

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financial condition of the issuer, size of the offering, maturity of the
obligation and ratings of the issue. The ratings of Standard & Poor's,
Moody's, Duff, Fitch and Thomson BankWatch, Inc. represent their respective
opinions as to the quality of the obligations they undertake to rate. Ratings,
however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices.

CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate
for the Funds is calculated by dividing the lesser of purchases or sales of
portfolio investments for the reporting period by the monthly average value of
the portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements
which enable the Funds to receive favorable tax treatment. For the fiscal year
ended March 31, 1996, the turnover rates with respect to the U.S. Government,
Fixed Income, Intermediate Tax-Exempt, Tax-Exempt, International Fixed Income,
Income Equity, Growth Equity, Select Equity, Small Cap, International Growth
Equity and International Select Equity Funds were 112.00%, 116.22%, 137.85%,
60.50%, 52.05%, 67.32%, 73.20%, 137.99%, 46.59%, 216.86% and 176.71%,
respectively. There was a significant variation between the portfolio turnover
rates for the fiscal year ended March 31, 1995 and the fiscal year ended March
31, 1996 for the Select Equity, U.S. Government, Fixed Income and
International Select Equity Funds due to shareholder purchase/redemption
activity, portfolio restructuring and interest rate fluctuations. The Florida
Intermediate Tax-Exempt Fund, Technology Fund and Stock Index Fund had not
commenced operations during the fiscal year ended March 31, 1996.

MISCELLANEOUS. The Funds will not normally engage in the trading of
securities for short-term profits. However, the Funds are not restricted by
policy with regard to portfolio turnover and will make changes in their
investment portfolio from time to time as business and economic conditions as
well as market prices may dictate. Securities may be purchased on margin only
to obtain such short-term credits as are necessary for the clearance of
purchases and sales of securities. The Funds will not engage in selling
securities short. The Funds may, however, make short sales against the box
although the Funds have no current intention to do so in the coming year.
"Selling short against the box" involves selling a security that a Fund owns
for delivery at a specified date in the future.

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SPECIAL RISK FACTORS AND CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL
INSTRUMENTS AND FLORIDA MUNICIPAL INSTRUMENTS

Some of the risk factors relating to investments by the California
Municipal Money Market Fund in California Municipal Instruments and investments
by the Florida Intermediate Tax-Exempt Fund in Florida Municipal Investments
are summarized below. This summary does not purport to be a comprehensive
description of all relevant factors. Although the Trust has no reason to
believe that the information summarized herein is not correct in all material
respects, this information has not been independently verified for accuracy or
thoroughness by the Trust. Rather, the information presented herein with
respect to California Municipal Instruments was culled from official statements
and prospectuses issued in connection with various securities offerings of the
State of California and local agencies in California available as of the date
of this Statement of Additional Information and, with respect to the Florida
Intermediate Tax-Exempt Fund, the information is derived principally from
official statements relating to issues of Florida Municipal Instruments
released prior to the date of this Additional Statement. Further, any
estimates and projections presented herein should not be construed as
statements of fact. They are based upon assumptions which may be affected by
numerous factors and there can be no assurance that target levels will be
achieved.

CALIFORNIA MUNICIPAL INSTRUMENTS

ECONOMIC FACTORS. Fiscal Years Prior to 1994-95. By the close of the
1989-90 Fiscal Year California's revenues had fallen below projections, so that
the State's budget reserve, the Special Fund for Economic Uncertainties (the
"Special Fund"), was fully depleted by June 30, 1990. A recession which had
begun in mid-1990, combined with higher health and welfare costs driven by the
State's rapid population growth, adversely affected General Fund revenues, and
raised expenditures above initial budget appropriations.

As a result of these factors and others, the State confronted
a period of budget imbalance lasting from the late 1980's through 1992-93.
During this difficult period, expenditures exceeded revenues in four out of six
years, and the State accumulated and sustained a budget deficit in the Special
Fund of nearly $2.8 billion at its peak on June 30, 1993. Thus, beginning with
the 1990-91 Fiscal Year and for each fiscal year thereafter, each budget
required multibillion dollar actions to bring projected revenues and
expenditures into balance. In this context, the Legislature and Governor
agreed on the following principal steps to produce Budget Acts in the years
1991-92 to 1993-94:

1. Significant cuts in health and welfare program
expenditures;

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2. Transfers of program responsibilities and funding
from the State to local governments (referred to as "realignment"), coupled
with some reduction in mandates on local government;

3. Transfer of about $3.6 billion in local property tax
revenues from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing State funding for schools under
Proposition 98;

4. Reduction in growth of support for higher education
programs, coupled with increases in student fees;

5. Revenue increases (particularly in the 1991-92 Fiscal
Year budget), most of which were for a short duration;

6. Increased reliance on aid from the federal government
to offset the costs of incarcerating, educating and providing health and
welfare services to illegal immigrants; and

7. Various one-time adjustments and accounting changes.

Despite these budget actions, the recession still produced
large, unanticipated deficits in the Special Fund. By the 1993-94 Fiscal Year,
the accumulated deficit was too large to be prudently retired in one year, so a
two-year program was implemented which used revenue anticipation warrants to
carry a portion of the deficit over the end of the fiscal year. When the
economy failed to recover sufficiently in 1993-94, a second two-year plan had
to be implemented in 1994-95.

Along with other factors such as the disbursement of funds to
local school districts "borrowed" from future fiscal years and hence not shown
in the annual budget, another consequence of the accumulated budget deficits
was to significantly reduce the State's cash resources available to pay its
ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year which would have allowed the State to carry
out its normal annual cash flow borrowing to replenish its cash reserves, the
State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992 the State Controller issued a total of approximately $3.8 billion of
registered warrants. After that date, all remaining outstanding registered
warrants (about $2.9 billion) were called for redemption from proceeds of the
issuance of 1992 Interim Notes.

In late spring of 1992, the State Controller issued revenue
anticipation warrants maturing in the following fiscal year in order to pay the
State's continuing obligations. The State was forced to rely increasingly on
external debt markets to meet its

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cash needs. Consequently, a succession of notes and warrants were issued in
the period from June 1992 to July 1994 to pay previously maturing notes or
warrants. These borrowings were used in part to spread out the repayment of
the accumulated budget deficit over the end of a fiscal year.

A key feature of the 1993-94 Budget Act was a plan to retire
the $2.8 billion budget deficit which had been accumulated by June 30, 1993
(the "Deficit Retirement Plan"). This 18-month plan used existing statutory
authority to borrow $2.8 billion externally. The 1993-94 Budget Act provided
that $1.6 billion of the deficit elimination loan would be repaid by December
23, 1993 from a portion of the proceeds of the $2.0 billion 1993 Revenue
Anticipation Warrants issued on June 23, 1993. Legislation enacted with the
1993-94 Budget Act directed the State Controller to issue $1.2 billion of
registered reimbursement warrants in the 1993-94 Fiscal Year to fund the
balance of the accumulated deficit. Pursuant to this directive, the State
issued $1.2 billion of 1994 Revenue Anticipation Warrants, Series A (the
"Series A Warrants") in February 1994, which matured on December 21, 1994. The
legislation also created a Deficit Retirement Fund within the State Treasury
and the State Controller transferred $1.2 billion from the General Fund to this
Deficit Retirement Fund to retire the Series A Warrants.

The Deficit Retirement Plan was designed to balance the budget
over the 1993-94 and 1994-95 Fiscal Years, and projected a General Fund balance
of $260 million by June 30, 1995. However, fiscal conditions did not improve
as projected and the revenue assumptions of the Deficit Retirement Plan could
not be met. Accordingly, the 1994-95 Budget Act anticipated deferring
retirement of about $1 billion of the carryover budget deficit to the 1995-96
Fiscal Year. This 22-month Deficit Reduction Plan relied on existing statutory
authority to borrow $4 billion externally, including approximately $1 billion
as carryover budget deficit. In addition, Chapter 136, Statutes of 1994,
created in the Warrant Payment Fund according to which the State Controller was
directed to transfer from the General Fund to the Warrant Payment Fund in four
equal installments the amount necessary to retire the $4.0 billion of revenue
anticipation warrants maturing on April 25, 1996.

1994-95 Fiscal Year. The 1994-95 Budget Act, signed by the
Governor on July 8, 1994, projected General Fund revenues and transfers of
$41.9 billion -- $2.1 billion more than actual revenues received in 1993-94 --
and expenditures of $40.9 billion which represented an increase of $1.6 billion
over the prior year.

As a result of the improving economy, the Department of
Finance's final estimates for the fiscal year showed revenues and transfers of
$42.7 billion and expenditures of $42.0 billion, thus

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reducing the accumulated budget deficit to about $600 million and reflecting
the Administration's forecast of an improving economy.

The principal features of the 1994-95 Budget Act were as
follows:

1. Receipt of additional federal aid of about $760
million for costs of refugee assistance and costs of incarceration and
medical care for illegal immigrants. Only about $33 million of this
amount was received, with about another $98 million scheduled to be
received in the 1995-96 Fiscal Year;

2. Reductions of approximately $1.1 billion in health
and welfare costs. A 2.3% reduction in Aid to Family with Dependent
Children payments (equal to about $56 million for the entire fiscal
year) has been temporarily suspended by court order pending appeal;

3. A General Fund increase of approximately $38 million
in support for the University of California and $65 million for
California State University, accompanied by student fee increases for
both the University of California and California State University;

4. Proposition 98 funding for K-14 schools was increased
by $526 million from 1993-94 Fiscal Year levels, representing an
increase for enrollment growth and inflation. Consistent with
previous budget agreements, Proposition 98 funding provided
approximately $4,217 per student for K-12 schools, equal to the level
in the prior three years; and

5. Additional miscellaneous cuts ($500 million), fund
transfers ($255 million), and adjustment to prior years' legislation
concerning property tax shifts for local governments ($300 million).

The 1994-95 Budget Act contained no tax increases. Under
legislation enacted for the 1993-94 Budget Act, the renters' tax credit was
suspended for two years (1993 and 1994). The Legislature enacted a further
one-year suspension of the renters' tax credit, for 1995, saving about $390
million in the 1995-96 Fiscal Year.

The State's cash flow management plan for the 1994-95 Fiscal
Year included the issuance of $4.0 billion of Revenue Anticipation Warrants,
Series C and D, to mature on April 25, 1996, as part of a two-year plan to
retire the accumulated State budget deficit. To assure repayment of these
warrants, the Legislature enacted a backup mechanism which could result in
automatic expenditure cuts if projected revenues did not meet certain targets
(the "Budget Adjustment Law").

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The third and last step in the Budget Adjustment Law process
occurred on October 16, 1995, when the State Controller issued a report (the
"October Trigger Report") reviewing the estimated cash condition of the General
Fund for the 1995-96 Fiscal Year. The State Controller estimated that the
General Fund would have at least $1.4 billion of internal cash resources on
June 30, 1996. Put another way, external borrowing would not be needed on June
30, 1996. As a result of this finding, certain provisions of the Budget
Adjustment Law, which could have ultimately led to automatic, across-the-board
cuts in the General Fund budget, will not have to be implemented. Likewise, an
earlier report issued on November 15, 1994, avoided implementation of any
automatic budget cuts in the 1994-95 fiscal year.

1995-96 Fiscal Year. With strengthening revenues and reduced
caseload growth based on an improving economy, the State entered the 1995-96
Fiscal Year budget negotiations with the smallest nominal "budget gap" to be
closed in many years. Nonetheless, serious policy differences between the
Governor and Legislature prevented timely enactment of the budget. The 1995-96
Budget Act was signed by the Governor on August 3, 1995, 34 days after the
start of the fiscal year. The Budget Act projected General Fund revenues and
transfers of $44.1 billion, a 3.5 percent increase from the prior year.
Expenditures were budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance projected that after repaying the last of the carryover
budget deficit, there would be a positive balance of $28 million in the budget
reserve on June 30, 1996. The Budget Act also projected Special Fund revenues
of $12.7 billion and appropriated Special Fund expenditures of $13.0 billion.

The following are the principal features of the 1995-96 Budget
Act:

1. Proposition 98 funding for schools and community
colleges was originally budgeted to increase by about $1.0 billion
(General Fund) and $1.2 billion total above revised 1994-95 levels.
Because of higher than projected revenues in 1994-95, an additional
$543 million ($91 per K-12 ADA) was appropriated to the 1994-95
Proposition 98 entitlement. A large part of this is a block grant of
about $54 per pupil for any onetime purpose. For the first time in
several years, a full 2.7 percent cost of living allowance was funded.
The budget compromise anticipates a settlement of the CTA v. Gould
litigation (discussed below). The Governor's 1996-97 Budget indicates
that, with revenues even higher than projected, Proposition 98
apportionments will exceed the amounts originally budgeted, reaching a
level of $4,500 per ADA;

2. Cuts in health and welfare costs totaling about $0.9
billion. Some of these cuts (totaling about $500 million)

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require federal legislative or administrative approval, which was
still pending as of January 1996.

3. A 3.5 percent increase in funding for the University
of California ($90 million General Fund) and the California State
University system ($24 million General Fund), with no increases in
student fees;

4. The Budget assumed receipt of $473 million in new
federal aid for costs of illegal immigrants, above commitments already
made by the federal government. In the Governor's 1996-97 Budget, the
Administration revised this figure downward to $278 million; and

5. General Fund support for the Department of
Corrections is increased by about eight percent over the prior year,
reflecting estimates of increased prison population, but funding is
less than proposed in the 1995 Governor's Budget.

The Governor's Budget for the 1996-97 Fiscal Year, released on
January 10, 1996, updated the current year projections, so that revenues and
transfers are estimated to be $45.0 billion, and expenditures to be $44.2
billion. The Special Fund was projected to have a positive balance of about
$50 million at June 30, 1996, and on that date available internal borrowable
resources (available cash, after payment of all obligations due) will be about
$2.2 billion. The Administration projected it would issue up to $2.0 billion
of revenue anticipation notes to mature by June 30, 1996 to assist in cash flow
management for the final two months of the year.

1996-97 FISCAL YEAR. On January 10, 1996, the Governor
released his proposed budget for the next fiscal year (the "1996-97 Budget").
Based on projected revenues and transfers of about $45.6 billion, the Governor
requested total General Fund appropriations of about $45.2 billion which would
create a $400 million budget reserve in the Special Fund at June 30, 1997. The
Governor renewed a proposal for a 15 percent phased cut in individual and
corporate tax rates over three years (the budget proposal assumes this will be
enacted, reducing revenues in 1996-97 by about $600 million). There was also a
proposal to restructure trial court funding in a way which would result in a
$300 million decrease in General Fund revenues. The Governor requested
legislation to make permanent a moratorium on cost of living increases for
welfare payments, and suspension of a renters tax credit, which otherwise would
go back into effect in the 1996-97 Fiscal Year. He further proposed additional
costs in certain health and welfare programs, and assumed that costs previously
approved by the Legislature will receive federal approval. The Governor's
Budget proposed increases in funding for K-12 schools under Proposition 98, for
State higher education systems (with a second year of no student fee
increases),

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and for corrections. The Governor's Budget projects external cash flow
borrowing of up to $3.2 billion, to mature by June 30, 1997.

THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange
County, California and its Investment Pool (the "Pool") filed for bankruptcy
under Chapter 9 of the United States Bankruptcy Code. Approximately 187
California public entities, substantially all of which are public agencies
within the County, invested funds in the Pool. Many of the agencies have
various bonds, notes or other forms of indebtedness outstanding, in some
instances the proceeds of which were invested in the Pool. Various investment
advisors were employed by the County to restructure the Pool. Such
restructuring led to the sale of substantially all of the Pool's portfolio,
resulting in losses estimated to be approximately $1.7 billion or approximately
22% of amounts deposited by the Pool investors, including the County. It is
anticipated that such losses may result in delays or failures of the County as
well as investors in the Pool to make scheduled debt service payments.
Further, the County expects substantial budget deficits to occur in Fiscal Year
1995 with possibly similar effects upon operations of investors in the Pool.

Investor access to monies in the Pool subsequent to the filing
was pursuant to Court order only and severely limited. On May 2, 1995, the
Bankruptcy Court approved a comprehensive settlement agreement (the "CSA")
between the County and Pool investors which, among other things, (i)
established a formula for distribution of all available cash and securities
from the Pool to the Pool investors, including the County, (ii) established
formulas for distribution among certain settling Pool investors of several
tranches of new County obligations to be payable from, and in some instances
secured by, certain designated sources of potential recoveries on Pool related
claims, and (iii) designated certain outstanding short term note obligations of
the County to be senior to or on a parity with certain of the new County
obligations. By order dated May 22, 1995, following distribution of all
available cash and securities from the Pool to the Pool investors, including
the County, the Bankruptcy Court dismissed the bankruptcy filing of the Pool
based upon the Court's finding that the Pool was not eligible for relief under
Chapter 9 of the Bankruptcy Code because it is not a municipality and it has
not been specifically authorized to file under Chapter 9 as required by the
Bankruptcy Code.

On or about June 12, 1996 a plan of adjustment previously
confirmed by the bankruptcy court became effective for the County. Pursuant to
the plan, publicly held debt is to be paid in full, with municipal investors in
the Pool retaining an interest in litigation claims against third parties. The
plan was funded in substantial part by the sale of $900 million in new County
securities, securitizing substantially all unencumbered assets previously held
by the County.

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CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS. Certain
California constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in the adverse
effects described below.

Revenue Distribution. Certain California Municipal
Instruments may be obligations of issuers which rely in whole or in part on
California State revenues for payment of these obligations. Property tax
revenues and a portion of the State's general fund surplus are distributed to
counties, cities and their various taxing entities and the State assumes
certain obligations theretofore paid out of local funds. Whether and to what
extent a portion of the State's general fund will be distributed in the future
to counties, cities and their various entities is unclear.

Senate Bill 671. In 1988, California enacted legislation
providing for a water's-edge combined reporting method if an election fee was
paid and other conditions met. On October 6, 1993, the Governor signed Senate
Bill 671 (Alquist) which modifies the unitary tax law by deleting the
requirements that a taxpayer electing to determine its income on a water's-edge
basis pay a fee and file a domestic disclosure spreadsheet and instead
requiring an annual information return. Significantly, the Franchise Tax Board
can no longer disregard a taxpayer's election. The Franchise Tax Board is
reported to have estimated state revenue losses from the Legislation as growing
from $27 million in 1993-94 to $616 million in 1999-2000, but others, including
Former Assembly Speaker Willie Brown, disagreed with that estimate and asserted
that more revenue will be generated for California, rather than less, because
of an anticipated increase in economic activity and additional revenue
generated by the incentives in the Legislation.

Proposition 13. Certain California Municipal Instruments may
be obligations of issuers who rely in whole or in part on ad valorem real
property taxes as a source of revenue. On June 6, 1978, California voters
approved an amendment to the California Constitution known as Proposition 13,
which added Article XIIIA to the California Constitution. The effect of
Article XIIIA was to limit ad valorem taxes on real property and to restrict
the ability of taxing entities to increase real property tax revenues. On
November 7, 1978, California voters approved Proposition 8, and on June 3,
1986, the California voters approved Proposition 46, both of which amended
Article XIIIA.

Section 1 of Article XIIIA limits the maximum ad valorem tax
on real property to 1% of full cash value (as defined in Section 2), to be
collected by the counties and apportioned according to law; provided that the
1% limitation does not apply to ad valorem taxes or special assessments to pay
the interest and redemption charges on (i) any indebtedness approved by the
voters prior to July 1, 1978, or (ii) any bonded indebtedness for the
acquisition or improvement of real property approved on or after

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July 1, 1978, by two-thirds of the votes cast by the voters voting on the
proposition. Section 2 of Article XIIIA defines "full cash value" to mean "the
County Assessor's valuation of real property as shown on the 1975/76 tax bill
under `full cash value' or, thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors. The California
State Board of Equalization has adopted regulations, binding on county
assessors, interpreting the meaning of "change in ownership" and "new
construction" for purposes of determining full cash value of property under
Article XIIIA.

Legislation enacted by the California Legislature to implement
Article XIIIA (Statutes of 1978, Chapter 292, as amended) provides that
notwithstanding any other law, local agencies may not levy any ad valorem
property tax except to pay debt service on indebtedness approved by the voters
prior to July 1, 1978, and that each county will levy the maximum tax permitted
by Article XIIIA of $4.00 per $100 assessed valuation (based on the former
practice of using 25%, instead of 100%, of full cash value as the assessed
value for tax purposes). The legislation further provided that, for the
1978/79 fiscal year only, the tax levied by each county was to be apportioned
among all taxing agencies within the county in proportion to their average
share of taxes levied in certain previous years. The apportionment of property
taxes for fiscal years after 1978/79 has been revised pursuant to Statutes of
1979, Chapter 282, which provides relief funds from State moneys beginning in
fiscal year 1979/80 and is designed to provide a permanent system for sharing
State taxes and budget funds with local agencies. Under Chapter 282, cities
and counties receive more of the remaining property tax revenues collected
under Proposition 13 instead of direct State aid. School districts receive a
correspondingly reduced amount of property taxes, but receive compensation
directly from the State and are given additional relief. Chapter 282 does not
affect the derivation of the base levy ($4.00 per $100 assessed valuation) and
the bonded debt tax rate.

Proposition 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California voters,
which added Article XIIIB to the California Constitution. Under Article XIIIB,
State and local governmental entities have an annual "appropriations limit" and
are not allowed to spend certain moneys called "appropriations subject to
limitation" in an amount higher than the "appropriations limit." Article XIIIB
does not affect the appropriation of moneys which are excluded from the
definition of "appropriations subject to limitation," including debt service on
indebtedness existing or

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authorized as of January 1, 1979, or bonded indebtedness subsequently approved
by the voters. In general terms, the "appropriations limit" is required to be
based on certain 1978/79 expenditures, and is to be adjusted annually to
reflect changes in consumer prices, population and certain services provided by
these entities. Article XIIIB also provides that if these entities' revenues
in any year exceed the amounts permitted to be spent, the excess is to be
returned by revising tax rates or fee schedules over the subsequent two years.

Article XIIIB, like Article XIIIA, may require further
interpretation by both the Legislature and the courts to determine its
applicability to specific situations involving the State and local taxing
authorities. Depending upon the interpretation, Article XIIIB may limit
significantly a governmental entity's ability to budget sufficient funds to
meet debt service on bonds and other obligations.

Proposition 98. On November 8, 1988, voters of the State
approved Proposition 98, a combined initiative constitutional amendment and
statute called the "Classroom Instructional Improvement and Accountability
Act." Proposition 98 changed State funding of public education below the
university level and the operation of the State Appropriations Limit, primarily
by guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIIIB
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General
Fund revenues, plus an additional small adjustment factor. If Test 3 is used
in any year, the difference between Test 3 and Test 2 would become a "credit"
to schools which would be the basis of payments in future years when per
capital General Fund revenue growth exceeds per capita personal income growth.
Legislation adopted prior to the end of the 1988-89 Fiscal Year, implementing
Proposition 98, determined the K-14 schools' funding guarantee under Test 1 to
be 40.3 percent of the General Fund tax revenues, based on 1986-87
appropriations. However, that percent has been adjusted to approximately 35
percent to account for a subsequent redirection of local property taxes, since
such redirection directly affects the share of General Fund revenues to
schools.

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Proposition 98 permits the Legislature by two-thirds vote of
both houses, with the Governor's concurrence, to suspend the K-14 schools'
minimum funding formula for a one-year period. Proposition 98 also contains
provisions transferring certain State tax revenues in excess of the Article
XIIIB limit to K-14 schools.

During the recent recession, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from
Proposition 98 sources stayed almost constant at approximately $4,220 from
Fiscal Year 1991-92 to Fiscal Year 1993-94.

In 1992, a lawsuit was filed, California Teachers' Association
v. Gould, which challenged the validity of these off-budget loans. As part of
the negotiations leading to the 1995-96 Budget Act, an oral agreement was
reached to settle this case. It is expected that a formal settlement
reflecting these conditions will be entered into in the near future.

The oral agreement provides that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million, while
schools will repay $825 million. The State share of the repayment will be
reflected as expenditures above the current Proposition 98 base circulation.
The schools' share of the repayment will count as appropriations that count
toward satisfying the Proposition 98 guarantee, or from "below" the current
base. Repayments are spread over the eight-year period of 1994-95 through
2001-02 to mitigate any adverse fiscal impact. Once a court settlement is
reached, and the Director of Finance certifies that such a settlement has
occurred, approximately $377 million in appropriations from the 1995-96 Fiscal
Year to schools will be disbursed in August 1996.

Proposition 111. On June 30, 1989, the California Legislature
enacted Senate Constitutional Amendment 1, a proposed modification of the
California Constitution to alter the spending limit and the education funding
provisions of Proposition 98. Senate Constitutional Amendment 1, on the June
5, 1990 ballot as Proposition 111, was approved by the voters and took effect
on July 1, 1990. Among a number of important provisions, Proposition 111
recalculates spending limits for the State and for local governments, allows
greater annual increases in the limits, allows the averaging of two years' tax
revenues before requiring action regarding excess tax revenues, reduces the
amount of the funding

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guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax
revenues), removes the provision of Proposition 98 which included excess moneys
transferred to school districts and community college districts in the base
calculation for the next year, limits the amount of State tax revenue over the
limit which would be transferred to school districts and community college
districts, and exempts increased gasoline taxes and truck weight fees from the
State appropriations limit. Additionally, Proposition 111 exempts from the
State appropriations limit funding for capital outlays.

Proposition 62. On November 4, 1986, California voters
approved an initiative statute known as Proposition 62. This initiative
provides the following: (i) requires that any tax for general governmental
purposes imposed by local governments be approved by resolution or ordinance
adopted by a two-thirds vote of the governmental entity's legislative body and
by a majority vote of the electorate of the governmental entity, (ii) requires
that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) requires that any tax imposed
by a local government on or after August 1, 1985 be ratified by a majority vote
of the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) requires that, in the event a local
government fails to comply with the provisions of this measure, a reduction in
the amount of property tax revenue allocated to such local government occurs in
an amount equal to the revenues received by such entity attributable to the tax
levied in violation of the initiative, and (viii) permits these provisions to
be amended exclusively by the voters of the State of California.

In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal.
Ct. App. 1988), held that Proposition 62 is unconstitutional to the extent
that it requires a general tax by a general law city, enacted on or after
August 1, 1985 and prior to the effective date of Proposition 62, to be subject
to approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62.

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Proposition 87. On November 8, 1988, California voters
approved Proposition 87. Proposition 87 amended Article XVI, Section 16, of
the California Constitution by authorizing the California Legislature to
prohibit redevelopment agencies from receiving any of the property tax revenue
raised by increased property tax rates levied to repay bonded indebtedness of
local governments which is approved by voters on or after January 1, 1989. It
is impossible to predict whether the California Legislature will enact such a
prohibition nor is it possible to predict the impact of Proposition 87 on
redevelopment agencies and their ability to make payments on outstanding debt
obligations.

Health Care Legislation. Certain California Municipal
Instruments may be obligations which are payable solely from the revenues of
health care institutions. Certain provisions under California law may
adversely affect these revenues and, consequently, payment on those Municipal
Instruments.

The federally sponsored Medicaid program for health care
services to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-Cal program has provided for a
cost-based system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal program,
provided such hospital met applicable requirements for participation.
California law now provides that the State of California shall selectively
contract with hospitals to provide acute inpatient services to Medi-Cal
patients. Medi-Cal contracts currently apply only to acute inpatient services.
Generally, such selective contracting is made on a flat per diem payment basis
for all services to Medi-Cal beneficiaries, and generally such payment has not
increased in relation to inflation, costs or other factors. Other reductions
or limitations may be imposed on payment for services rendered to Medi-Cal
beneficiaries in the future.

Under this approach, in most geographical areas of California,
only those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual
payments only to the extent the California legislature appropriates adequate
funding therefor.

California enacted legislation in 1982 that authorizes private
health plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known
as "preferred provider organizations" ("PPOs"), which offer financial
incentives for subscribers who use only the hospitals which contract with the
plan. Under an exclusive provider plan, which includes most health maintenance
organizations ("HMOs"), private payors limit coverage

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to those services provided by selected hospitals. Discounts offered to HMOs
and PPOs may result in payment to the contracting hospital of less than actual
cost and the volume of patients directed to a hospital under an HMO or PPO
contract may vary significantly from projections. Often, HMO or PPO contracts
are enforceable for a stated term, regardless of provider losses or of
bankruptcy of the respective HMO or PPO. It is expected that failure to
execute and maintain such PPO and HMO contracts would reduce a hospital's
patient base or gross revenues. Conversely, participation may maintain or
increase the patient base, but may result in reduced payment and lower net
income to the contracting hospitals.

These California Municipal Instruments may also be insured by
the State of California pursuant to an insurance program implemented by the
Office of Statewide Health Planning and Development for health facility
construction loans. If a default occurs on insured California Municipal
Instruments, the State Treasurer will issue debentures payable out of a reserve
fund established under the insurance program or will pay principal and interest
on an unaccelerated basis from unappropriated State funds. At the request of
the Office of Statewide Health Planning and Development, Arthur D. Little,
Inc. prepared a study in December 1983, to evaluate the adequacy of the reserve
fund established under the insurance program and based on certain formulations
and assumptions found the reserve fund substantially underfunded. In September
of 1986, Arthur D. Little, Inc. prepared an update of the study and concluded
that an additional 10% reserve be established for "multi-level" facilities.
For the balance of the reserve fund, the update recommended maintaining the
current reserve calculation method. In March of 1990, Arthur D. Little, Inc.
prepared a further review of the study and recommended that separate reserves
continue to be established for "multi-level" facilities at a reserve level
consistent with those that would be required by an insurance company.

Mortgages and Deeds. Certain California Municipal Instruments
may be obligations which are secured in whole or in part by a mortgage or deed
of trust on real property. California has five principal statutory provisions
which limit the remedies of a creditor secured by a mortgage or deed of trust.
Two provisions limit the creditor's right to obtain a deficiency judgment, one
limitation being based on the method of foreclosure and the other on the type
of debt secured. Under the former, a deficiency judgment is barred when the
foreclosure is accomplished by means of a nonjudicial trustee's sale. Under
the latter, a deficiency judgment is barred when the foreclosed mortgage or
deed of trust secures certain purchase money obligations. Another California
statute, commonly known as the "one form of action" rule, requires creditors
secured by real property to exhaust their real property security by foreclosure
before bringing a personal action against the debtor. The fourth statutory
provision limits any deficiency

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judgment obtained by a creditor secured by real property following a judicial
sale of such property to the excess of the outstanding debt over the fair value
of the property at the time of the sale, thus preventing the creditor from
obtaining a large deficiency judgment against the debtor as the result of low
bids at a judicial sale. The fifth statutory provision gives the debtor the
right to redeem the real property from any judicial foreclosure sale as to
which a deficiency judgment may be ordered against the debtor.

Upon the default of a mortgage or deed of trust with respect
to California real property, the creditor's nonjudicial foreclosure rights
under the power of sale contained in the mortgage or deed of trust are subject
to the constraints imposed by California law upon transfers of title to real
property by private power of sale. During the three-month period beginning
with the filing of a formal notice of default, the debtor is entitled to
reinstate the mortgage by making any overdue payments. Under standard loan
servicing procedures, the filing of the formal notice of default does not occur
unless at least three full monthly payments have become due and remain unpaid.
The power of sale is exercised by posting and publishing a notice of sale for
at least 20 days after expiration of the three-month reinstatement period. The
debtor may reinstate the mortgage, in the manner described above, up to five
business days prior to the scheduled sale date. Therefore, the effective
minimum period for foreclosing on a mortgage could be in excess of seven months
after the initial default. Such time delays in collections could disrupt the
flow of revenues available to an issuer for the payment of debt service on the
outstanding obligations if such defaults occur with respect to a substantial
number of mortgages or deeds of trust securing an issuer's obligations.

In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could hold
that the private-right-of-sale proceedings violate the due process requirements
of the federal or state constitutions, consequently preventing an issuer from
using the nonjudicial foreclosure remedy described above.

Certain California Municipal Instruments may be obligations
which finance the acquisition of single family home mortgages for low and
moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by real
property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.

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Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on
such mortgage loans may be imposed only with respect to voluntary prepayments
made during the first five years during the term of the mortgage loan, and then
only if the borrower prepays an amount in excess of 20% of the original
principal amount of the mortgage loan in a 12-month period; a prepayment charge
cannot in any event exceed six months' advance interest on the amount prepaid
during the 12-month period in excess of 20% of the original principal amount of
the loan. This limitation could affect the flow of revenues available to an
issuer for debt service on the outstanding debt obligations which financed such
home mortgages.

FLORIDA MUNICIPAL INSTRUMENTS

The financial condition of the State of Florida may be affected by
various financial, social, economic and political factors. Those factors can
be very complex, may vary from fiscal year to fiscal year, and are frequently
the result of actions taken not only by the State and its agencies and
instrumentalities but also by entities that are not under the control of the
State. Adverse developments affecting the State's financing activities, its
agencies or its political subdivisions could adversely affect the State's
financial condition.

The State's revenues increased from $29,115,034,000 during the 1993-94
fiscal year ended June 30, 1994 to $31,178,025,000 during the fiscal year ended
June 30, 1995. The State's expenses increased from $27,878,146,000 during the
1993-94 fiscal year ended June 30, 1994 to $30,775,597,000 during the 1994-95
fiscal year ended June 30, 1995. The Florida Comptroller also projected
non-agricultural jobs to gross 3.2% and 3.0% in fiscal years 1995-96 and
1996-97, respectively.

The Constitution of the State of Florida limits the right of the State
and its local governments to tax. The Constitution requires the State to have
a balanced budget and to raise revenues to defray its operating expenses. The
State may not borrow for the purpose of maintaining ordinary operating
expenses, but may generally borrow for capital improvements.

There are a number of methods by which the State of Florida may incur
debt. The State may issue bonds backed by the State's full faith and credit to
finance or refinance certain capital projects authorized by its voters. The
State also may issue certain bonds backed by the State's full faith and credit
to finance or refinance pollution control, solid waste disposal and water
facilities for local governments, county roads, school districts and capital
public education projects without voter authorization. The State may also,
pursuant to specific constitutional authorization, directly guarantee certain

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obligations of the State's authorities, agencies and instrumentalities.
Payments of debt service on State bonds backed by the State's full faith and
credit and State-guaranteed bonds and notes are legally enforceable
obligations of the State. Revenue bonds to finance or refinance certain
capital projects also may be issued by the State of Florida without voter
authorization. However, revenue bonds are payable solely from funds derived
directly from sources other than state tax revenues.

The State of Florida currently imposes, among other taxes, an ad
valorem tax on intangible property and a corporate income tax. The Florida
Constitution prohibits the levying of a personal income tax. Certain other
taxes the State of Florida imposes include: an estate or inheritance tax which
is limited by the State's Constitution to an amount not in excess of the amount
allowed to be credited upon or deducted from federal estate taxes or the estate
taxes of another state; and a 6% sales tax on most goods and certain services
with an option for counties to impose up to an additional 1% sales tax on such
goods and services.

The Constitution reserves the right to charge an ad valorem tax on
real estate and tangible personal property to Florida's local governments. All
other forms of taxation are preempted to the State of Florida except as may be
provided by general law. Motor vehicles, boats, airplanes, trailers, trailer
coaches and mobile homes, as defined by law, may be subject to a license tax
for their operation, but may not be subject to an ad valorem tax.

Under the Constitution, ad valorem taxes may not be levied in excess
of the following millage upon the assessed value of real estate and tangible
personal property: for all county purposes, ten mills; for all municipal
purposes, ten mills; for all school purposes, ten mills; for water management
purposes for the northwest portion of the State, .05 mills; for water
management purposes for the remaining portion of the State, one mill; and for
all other special districts a millage authorized by law and approved by
referendum. When authorized by referendum, the above millage caps may be
exceeded for up to two years. Counties, school districts, municipalities,
special districts and local governmental bodies with taxing powers may issue
bonds to finance or refinance capital projects payable from ad valorem taxes in
excess of the above millage cap when approved by referendum. It should be
noted that several municipalities and counties have charters that further limit
either ad valorem taxes or the millage that may be assessed.

The Florida legislature has passed a number of mandates which limit or
place requirements on local governments without providing the local governments
with compensating changes in their fiscal resources. The Florida legislature
enacted a comprehensive growth management act which forces local governments to
establish and implement comprehensive planning programs to guide and control
future development. This legislation prohibits public or private

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development that does not conform with the locality's comprehensive plan.
Local governments may face greater requirements for services and capital
expenditures than they had previously experienced if their locality experiences
increased growth or development. The burden for funding these potential
services and capital expenditures which has been left to the local governments
may be quite large.

The State of Florida enacted an amendment to the Florida Constitution
("Amendment 10") which limits ad valorem taxes on homestead real property,
effective as of January 1994. Beginning in 1995, Amendment 10 limits the
assessed value of homestead real property for ad valorem tax purposes to the
lower of (A) three percent (3%) of the assessed value for the prior year; or
(B) the percentage change in the Consumer Price Index for the preceding
calendar year. In addition, no such assessed value shall exceed "just value"
and such just value shall be reassessed (notwithstanding the 3% cap) as of
January 1 of the year following a change of ownership of the assessed real
property.

The payment on most Florida Municipal Instruments held by the Florida
Intermediate Tax-Exempt Fund will depend upon the issuer's ability to meet its
obligations. If the State or any of its political subdivisions were to suffer
serious financial difficulties jeopardizing their ability to pay their
obligations, the marketability of obligations issued by the State or localities
within the State, and the value of the Florida Intermediate Tax-Exempt Fund's
portfolio, could be adversely affected.

OTHER INFORMATION ON CALIFORNIA AND FLORIDA MUNICIPAL INSTRUMENTS

Northern Trust believes that it is likely that sufficient California
and Florida Municipal Instruments and certain specified federal obligations
should be available to satisfy the respective investment objectives, policies
and limitations of the California Municipal Money Market Fund and the Florida
Intermediate Tax-Exempt Fund, and with respect to the California Municipal
Money Market Fund, to enable that Fund to invest at least 50% of its assets in
California Municipal Instruments. If Northern Funds' Board of Trustees, after
consultation with Northern Trust, should for any reason determine that it is
impracticable to satisfy either Fund's investment objective, policies and
limitations, or with respect to the California Municipal Money Market Fund, to
invest at least 50% of its assets in California Municipal Instruments and such
federal obligations at the close of each fiscal quarter, the Board would
re-evaluate the particular Fund's investment objective and policies and
consider changes in its structure and name or possible dissolution.

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INVESTMENT RESTRICTIONS

The Funds are subject to the fundamental investment restrictions
enumerated below which may be changed with respect to a particular Fund only by
a vote of the holders of a majority of such Fund's outstanding shares.

No Fund may:

(1) Make loans, except (a) through the purchase of debt
obligations in accordance with the Fund's investment objective and
policies, (b) through repurchase agreements with banks, brokers,
dealers and other financial institutions, and (c) loans of securities.

(2) Mortgage, pledge or hypothecate any assets (other
than pursuant to reverse repurchase agreements) except to secure
permitted borrowings.

(3) Purchase or sell real estate or real estate limited
partnerships, but this restriction shall not prevent a Fund from
investing directly or indirectly in portfolio instruments secured by
real estate or interests therein or acquiring securities of real
estate investment trusts or other issuers that deal in real estate.

(4) Purchase or sell commodities or commodity contracts
or oil or gas or other mineral exploration or development programs or
leases, except that each Fund may, to the extent appropriate to its
investment policies, purchase securities of companies engaging in
whole or in part in such activities, and (other than the Money Market
Funds) may enter into futures contracts and related options and
forward currency exchange contracts in accordance with its investment
objective and policies.

(5) Invest in companies for the purpose of exercising
control.

(6) Act as underwriter of securities, except as a Fund
may be deemed to be an underwriter under the Securities Act of 1933
(the "1933 Act") in connection with the purchase and sale of portfolio
instruments in accordance with its investment objective and portfolio
management policies.

(7) Write puts, calls or combinations thereof, except for
transactions in options on securities, financial instruments,
currencies and indices of securities; futures contracts; options on
futures contracts; forward currency exchange contracts; short sales
against the box; interest rate and currency swaps; and pair-off
transactions.

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(8) Purchase the securities of any issuer if such
purchase would cause more than 10% of the voting securities of such
issuer to be held by the Fund, except that up to 25% of the value of
its total assets may be invested without regard to this 10%
limitation; provided that this restriction does not apply to the
International Fixed Income Fund or the Florida Intermediate Tax-
Exempt Fund.

In addition, as summarized in the Prospectus, no Fund may:

(9) Purchase securities (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements collateralized by such obligations) if,
except for the Technology Fund, such purchase would cause 25% or more
in the aggregate of the market value of the total assets of the Fund
to be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that with
respect to each Money Market Fund there is no limitation, and each
Money Market Fund reserves freedom of action, when otherwise
consistent with its investment policies, to concentrate its
investments in obligations (other than commercial paper) issued or
guaranteed by U.S. banks (including foreign branches of U.S. banks)
and U.S. branches of foreign banks and repurchase agreements and
securities loans collateralized by such bank obligations. For the
purposes of this restriction, state and municipal governments and
their agencies and authorities are not deemed to be industries; as to
utility companies, the gas, electric, water and telephone businesses
are considered separate industries; personal credit finance companies
and business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be in
the industries of their parents if their activities are primarily
related to financing the activities of their parents. The Technology
Fund may not, except during temporary defensive periods, purchase the
securities of any issuer, if, as a result of such purchase, less than
25% of the assets of the Technology Fund would be invested in the
securities of issuers principally engaged in technology business
activities.

(10) Borrow money (other than pursuant to reverse
repurchase agreements), except (a) as a temporary measure, and then
only in amounts not exceeding 5% of the value of a Fund's total assets
or (b) from banks, provided that immediately after any such borrowing
all borrowings of the Fund do not exceed one-third of the Fund's total
assets. The exceptions in (a) and (b) to this restriction are not for
investment leverage purposes but are solely for extraordinary or
emergency purposes or to facilitate management of a Fund by enabling
Northern Funds to meet redemption requests when the liquidation of
portfolio instruments is deemed to be

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disadvantageous or not possible. If due to market fluctuations or
other reasons the total assets of a Fund fall below 300% of its
borrowings, Northern Funds will reduce the borrowings of such Fund in
accordance with the 1940 Act. In addition, as a matter of fundamental
policy, the Funds may not enter into reverse repurchase agreements
exceeding in the aggregate one-third of their respective total assets.

(11) Purchase the securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, if immediately after such purchase more than 5%
of the value of such Fund's total assets would be invested in such
issuer, except that: (a) up to 50% of the value of the California
Municipal Money Market Fund's total assets (so long as no more than
25% of the value of its total assets are invested in the securities of
any one issuer) and up to 25% of the value of the total assets of each
of the other Funds may be invested in any securities without regard to
this 5% limitation; and (b) with respect to each Fund, such 5%
limitation shall not apply to repurchase agreements collateralized by
obligations of the U.S. Government, its agencies or instrumentalities.
(This restriction does not apply to the International Fixed Income
Fund and Florida Intermediate Tax-Exempt Fund.)

In addition, as a matter of fundamental policy, the Funds will not
issue senior securities except as stated in the Prospectus or this Additional
Statement.

As a non-fundamental investment restriction, the International Fixed
Income and Florida Intermediate Tax-Exempt Funds may not, at the end of any tax
quarter, hold more than 10% of the outstanding voting securities of any one
issuer, except that up to 50% of the total value of the assets of each Fund may
be invested in any securities without regard to this 10% limitation so long as
no more than 25% of the total value of its assets is invested in the securities
of any one issuer (except the U.S. Government, its agencies and
instrumentalities).

Except as otherwise provided in Investment Restriction (9), for the
purpose of such restriction in determining industry classification with respect
to the Funds other than the International Funds and the Technology Fund,
Northern Funds intends to use the industry classification titles in the
Standard Industrial Classification Manual. With respect to the International
Funds, Northern Funds intends to use the Morgan Stanley Capital International
industry classification titles. With respect to the Technology Fund, Northern
Funds intends to consider an issuer to be principally engaged in technology
business activities if such issuer is listed on the H&Q Index, the SoundView
Technology Index, the technology grouping of the S&P 500 Index or any other
comparable index. The freedom of action reserved in

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Investment Restriction (9) above with respect to U.S. branches of foreign banks
is subject to the requirement that they are subject to the same regulation as
domestic branches of U.S. banks, and such freedom with respect to foreign
branches of U.S. banks is subject to the requirement that the domestic parent
be unconditionally liable in the event that a foreign branch fails to pay on
its instruments for any reason. Securities held in escrow or separate accounts
in connection with the Funds' investment practices described in this Additional
Statement and in the Prospectus are not deemed to be mortgaged, pledged or
hypothecated for purposes of the foregoing Investment Restrictions.

A security is considered to be issued by the entity, or entities,
whose assets and revenues back the security. A guarantee of a security is not
deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by a Fund, does
not exceed 10% of the value of the Fund's total assets.

As stated in the Prospectus under "Additional Investment Information,
Risks and Considerations -- Investment Restrictions," the Money Market, U.S.
Government Money Market, U.S. Government Select Money Market, Municipal Money
Market and California Municipal Money Market Funds intend, as a non-fundamental
policy, to diversify their investments in accordance with current SEC
regulations, which are more restrictive than the Funds' fundamental investment
restrictions stated above. As further stated in the Prospectus, securities
subject to unconditional demand features acquired by the Money Market Funds
must satisfy special SEC diversification requirements. In particular, a
security that has an unconditional demand feature (as defined by SEC
regulations) which is issued by a person that, directly or indirectly, does not
control, and is not controlled by or under common control with, the issuer of
the security (an "Unconditional Demand Feature") is subject to the following
diversification requirements: Immediately after the acquisition of the
security, a Money Market Fund may not have invested more than 10% of its total
assets in securities issued by or subject to Unconditional Demand Features from
the same person, except that a Fund may invest up to 25% of its total assets in
securities subject to Unconditional Demand Features of persons that are rated
in the highest rating category as determined by two NRSROs (or one NRSRO if the
security is rated by only one NRSRO). In addition, as mentioned in the
Prospectus, the Municipal Money Market and California Municipal Money Market
Funds will limit their investments in certain conduit securities that are not
rated in the highest rating category as determined by two NRSROs (or one NRSRO
if the security is rated by only one NRSRO) or, if unrated, are not of
comparable quality, to 5% of their total assets, with investments in any one
such issuer being limited to no more than 1% of a Fund's total assets or $1
million, whichever is greater, measured at the time of purchase. Conduit
securities subject to this limitation are Municipal Instruments that are not
subject to

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an Unconditional Demand Feature and involve an arrangement whereunder a person,
other than a governmental issuer, provides for or secures repayment of the
security and are not: (i) fully and unconditionally guaranteed by a municipal
issuer; or (ii) payable from the general revenues of the municipal issuer or
other municipal issuers; or (iii) related to a project owned and operated by a
municipal issuer; or (iv) related to a facility leased to and under the control
of an industrial or commercial enterprise that is part of a public project
which, as a whole, is owned and under the control of a municipal issuer.

In addition to the foregoing, each Money Market Fund is subject to
additional diversification requirements imposed by SEC regulations on the
acquisition of securities subject to other types of demand features and puts
whereunder a Fund has the right to sell the securities to third parties.

Any restriction which involves a maximum percentage will not be
considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of, or borrowings by, the Fund.

Although the foregoing Investment Restrictions would permit the Money
Market Funds to acquire options, enter into forward currency contracts and
engage in short sales and interest rate and currency swaps, they are not
currently permitted to engage in these transactions under SEC regulations. In
addition, the U.S. Government Select Money Market Fund does not intend to
purchase any bank or corporate obligation during the current fiscal year.

In order to permit the sale of the Funds' shares in certain states,
Northern Funds may make commitments with respect to the Funds more restrictive
than the investment policies listed above and in the Prospectus. Should
Northern Funds determine that any commitment made to permit the sale of a
Fund's shares in any state is no longer in the best interests of the Fund, it
will revoke the commitment by terminating sales of a Fund's shares in the state
involved.

ADDITIONAL TRUST INFORMATION

TRUSTEES AND OFFICERS

Information pertaining to the Trustees and officers of Northern Funds
is set forth below.

Mr. Silas S. Cathcart,*,** Chairman of the Board and
President, Age 70, 222 Wisconsin Avenue, Lake Forest, Illinois 60045. Chairman
of Kidder Peabody Inc. from May 1987 until his retirement in December 1989.
Director/Trustee of General Electric

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<PAGE> 138
Co., Baxter International, Inc. (worldwide development, distribution and
manufacture of health care products, systems and services), The Quaker Oats
Co., Montgomery Ward, American Academics, Inc. Retired Director and Trustee of
Illinois Tool Works, Inc., and Bradley Trust, respectively.

Mr. James W. Cozad, Trustee, Age 69, 205 N. Michigan Avenue,
Suite 4310, Chicago, Illinois 60601. Vice Chairman of Amoco Corporation from
September 1983 to December 1989 and Chairman and CEO of Whitman Corporation
(holding company for Pepsi-Cola General Bottlers, Inc., Midas International
Corporation (automotive services) and Hussmann Corporation (refrigeration
systems and equipment) from January 1990 until his retirement in May 1992.
Director of Whitman Corporation, Eli Lilly and Company (life science products),
Inland Steel Company, Inland Steel Industries, Inc. and Sears, Roebuck &
Company. Retired Director of GATX Corporation (transportation, distribution
and warehousing).

Ms. Susan Crown,** Trustee, Age 38, 222 North LaSalle Street,
Suite 2000, Chicago, Illinois 60601. Vice President of Henry Crown and Company
(family-owned and operated company including diversified manufacturing
companies and real estate development) since 1984. Director and President of
Arie and Ida Crown Memorial (grant-making foundation), Director of Baxter
International, Inc. (worldwide development, distribution and manufacture of
health care products, systems and services) and Illinois Tool Works, Inc.

Mr. Wesley M. Dixon, Jr.,* Trustee, Age 68, 400 Skokie
Blvd., Suite 675, Northbrook, Illinois 60062. Director of Earl Kinship Capital
Corporation since 1985. Vice Chairman and Director of G.D. Searle & Co.
(manufacture and sale of food products and pharmaceuticals) from 1977 to 1983
and President of G.D. Searle & Co. prior thereto.

Mr. William J. Dolan, Jr., Trustee, Age 65, 1534 Basswood
Circle, Glenview, Illinois 60025. Partner of Arthur Andersen & Co. S.C.
(accounting firm) from 1966 until his retirement in December 1989. Financial
Consultant, Ernst & Young from 1992 to 1993, Director of Household Bank,
Federal Savings Bank.

Mr. Raymond E. George, Jr.,** Trustee, Age 65, 703 Prospect
Avenue, Winnetka, Illinois 60093. Senior Vice President

__________________________________

*. Messrs. Cathcart and Dixon are first cousins.

**. Messrs. Cathcart and George and Ms. Crown are considered to be
"interested persons" of Northern Funds as defined in the 1940 Act.

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<PAGE> 139
and Senior Fiduciary Officer of The Northern Trust Company from 1988 until his
retirement in October 1993.

Miriam M. Allison, Vice President and Treasurer, Age 48, 207
E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. President and
Director of Sunstone Financial Group, Inc. since 1990 and Vice President of
First Wisconsin Trust Company prior thereto.

Mary M. Tenwinkel, Vice President, Age 48, 207 E. Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202. Vice President of Sunstone
Financial Group, Inc. since August of 1993 and First Vice President and head
of Personal Services Group at Firstar Trust Company prior thereto.

Anita M. Zagrodnik, Assistant Treasurer, Age 36, 207 E.
Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. Assistant Treasurer.
Client Services, Accounting and Tax Manager of Sunstone Financial Group, Inc.
since 1990 and Senior Accountant at Price Waterhouse prior thereto.

Jeffrey A. Dalke, Secretary, Age 45, Philadelphia National
Bank Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107.
Secretary. Partner in the law firm of Drinker Biddle & Reath.

Certain of the Trustees and officers and the organizations with which
they are associated have had in the past, and may have in the future,
transactions with Northern Trust, Sunstone and their respective affiliates.
Northern Funds has been advised by such Trustees and officers that all such
transactions have been and are expected to be in the ordinary course of
business and the terms of such transactions, including all loans and loan
commitments by such persons, have been and are expected to be substantially the
same as the prevailing terms for comparable transactions for other customers.
Ms. Allison holds similar positions with one or more investment companies that
are distributed by Sunstone. As a result of the responsibilities assumed by
Northern Trust under its Advisory Agreement, Transfer Agency Agreement and
Custodian Agreement and by Sunstone under its Administration Agreement and
Distribution Agreement, Northern Funds itself requires no employees.

Each Trustee earns an annual fee of $15,000 and an additional fee of
$1,250 for each meeting attended, plus reimbursement of expenses incurred as a
Trustee. The Chairman of the Board earns an annual fee of $20,000 and an
additional fee of $1,250 for each meeting attended, plus reimbursement of
expenses incurred as a Trustee. Northern Funds' officers do not receive fees
from Northern Funds for services in such capacities, although Sunstone, of
which Mmes. Allison and Tenwinkel are also officers, receives fees from
Northern Funds for administrative services. Drinker

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<PAGE> 140
Biddle & Reath, of which Mr. Dalke is a partner, receives legal fees as counsel
to Northern Funds.

For the fiscal year ended March 31, 1996, the Trustees received the
following compensation:

<TABLE>
<CAPTION>
===========================================================================================
Pension or
Retirement
Benefits Total
Aggregate Accrued as Part Compensation
Compensation of Trust from the Trust*
Name of Trustee from the Trust Expense
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Silas S. Cathcart $25,000 None $25,000
- -------------------------------------------------------------------------------------------
James W. Cozad $20,000 None $20,000
- -------------------------------------------------------------------------------------------
Susan Crown $20,000 None $20,000
- -------------------------------------------------------------------------------------------
Wesley M. Dixon, Jr. $18,750 None $18,750
- -------------------------------------------------------------------------------------------
William J. Dolan, Jr. $20,000 None $20,000
- -------------------------------------------------------------------------------------------
Raymond E. George, Jr. $20,000 None $20,000
===========================================================================================
</TABLE>

* This column presents the same information as the first column because none of
the Trustees served on a board of another mutual fund related to the Trust.

INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN

Northern Trust is a wholly-owned subsidiary of The Northern Trust
Corporation, a Chicago-based multi-bank holding company with subsidiaries in
Illinois, Florida, New York, Arizona, California and Texas. Northern Trust has
for more than 100 years managed the assets of individuals, charitable
organizations, foundations and large corporate investors. One of the nation's
leading providers of trust and investment management services, Northern Trust
first entered the mutual fund business in 1983 by offering money market funds
to institutional clients. As part of its investment advisory services,
Northern Trust offers extensive research services to its clients. As of the
date of this Additional Statement, nearly 300 financial institutions nationwide
purchase Northern Trust's economic advisory services. As of June 30, 1996,
Northern Trust Corporation had approximately $21.8 billion in assets and $13.3
billion in deposits. Northern Trust and its affiliates administered in various
capacities (including as master trustee, investment manager or custodian) over
$692.9 billion in assets as of June 30, 1996, including $120 billion for which
Northern Trust had management responsibility. Northern Trust is one of the
strongest banking organizations in the United States and its clients include
public and private retirement funds, endowments, foundations, trusts,
corporations and individuals. Northern Funds

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<PAGE> 141
complements the banking and personal trust services available through Northern
Trust by allowing Northern Trust's banking and trust clients to consolidate the
management of their finances and thereby move one step closer to one-stop
financial shopping. Northern Funds utilizes a state-of-the-art investor
services center. Also, trained investment representatives are available at
Northern Trust's offices to assist investors in allocating their investments.
Northern Trust believes it has built its organization by serving clients with
integrity, a commitment to quality, and personal attention. Its stated mission
with respect to all its financial products and services is to achieve unrivaled
client satisfaction. Northern Trust manages the Funds through a team of
professionals, led by portfolio managers who follow a disciplined process to
develop investment strategies. The purpose of this approach is to promote
consistent management. The portfolio managers draw upon the resources of
Northern Trust's research department with specialists in economic analysis,
investment strategy, credit quality and tax law, and which supplies information
on interest rates, GNP growth, corporate profits and other factors.

Subject to the general supervision of the Board of Trustees, Northern
Trust makes decisions with respect to and places orders for all purchases and
sales of portfolio securities for the Funds, and also provides certain
ancillary services. Northern Trust's Advisory Agreement with Northern Funds
has been approved by the Board of Trustees, including the "non-interested"
Trustees, and the initial shareholder of Northern Funds. The Advisory
Agreement provides that in executing portfolio transactions and in selecting
brokers or dealers (a) with respect to common and preferred stocks, Northern
Trust shall use its best judgment to obtain the best overall terms available,
and (b) with respect to other securities, Northern Trust shall attempt to
obtain best net price and execution. Transactions on U.S. stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers.

For the fiscal years or periods indicated, the amount of commissions
paid by each Fund was as follows:

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<PAGE> 142
<TABLE>
<CAPTION>
===========================================================
Fiscal Year Ended Fiscal Year or Period Ended
March 31, 1996 March 31, 19951
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
International Growth Equity Fund $2,216,573 $1,091,058
- -------------------------------------------------------------------------------------------------------------
International Select Equity Fund $1,189,658 $523,082
=============================================================================================================
</TABLE>

1. The Select Equity and International Select Equity Funds commenced
operations on April 6 and April 5, 1994, respectively.

No commissions were paid by the Funds to any "affiliated" persons (as
defined in the 1940 Act) of the Funds. Transactions on foreign stock exchanges
involve payment for brokerage commissions which are generally fixed.
Over-the-counter issues, including corporate debt and government securities,
are normally traded on a "net" basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. With respect to over-the-counter transactions, Northern Trust will
normally deal directly with dealers who make a market in the instruments
involved except in those circumstances where more favorable prices and
execution are available elsewhere. The cost of foreign and domestic securities
purchased from underwriters includes an underwriting commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down.

Northern Funds is required to identify any securities of its "regular
brokers or dealers" or their parents which Northern Funds acquired during its
most recent fiscal year.

During the fiscal year ended March 31, 1996, the Growth Equity Fund
did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1996, the Income Equity Fund
acquired and sold securities of Nations Bank, its regular broker-dealer. As of
March 31, 1996, the Income Equity Fund did not own securities issued by its
regular broker-dealers.

During the fiscal year ended March 31, 1996, the Small Cap Fund did
not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1996, the Select Equity Fund
did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1996, the International Select
Equity Fund did not acquire or sell securities of its regular broker-dealers.

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<PAGE> 143
During the fiscal year ended March 31, 1996, the International Growth
Equity Fund did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1996, the International Fixed
Income Fund did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1996, the U.S. Government Fund
did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1996, the Fixed Income Fund
acquired and sold securities of Salomon Brothers, Inc. its regular
broker-dealer. As of March 31, 1996, the Fixed Income Fund owned securities of
Salomon Brothers, Inc. in the amount of $3,636,000.

During the fiscal year ended March 31, 1996, the Tax Exempt Fund did
not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1996, the Intermediate Tax
Exempt Fund did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1996, the California Municipal
Money Market Fund did not acquire or sell securities of its regular
broker-dealers.

During the fiscal year ended March 31, 1996, the Municipal Money
Market Fund did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1996, the U.S. Government
Select Money Market Fund did not acquire or sell securities of its regular
broker-dealers.

During the fiscal year ended March 31, 1996, the Money Market Fund
acquired and sold securities of Lehman Brothers, Swiss Bank Corp., J.P. Morgan
Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., First Boston
Corp., UBS Securities Inc., Chase Manhattan and Bear, Stearns & Co., Inc., its
regular broker-dealers. As of March 31, 1996, the Money Market Fund owned
securities of Bear, Stearns & Co., Inc. in the amount of $40,000,000.

During the fiscal year ended March 31, 1996, the U.S. Government Money
Market Fund acquired and sold securities of United Bank of Switzerland, J.P.
Morgan Securities Inc., First Boston Corp., Swiss Bank Corp., Goldman, Sachs &
Co., Donaldson Lufkin & Jenrette Securities Corp., Merrill Lynch, Pierce,
Fenner & Smith, Inc. and Bear, Stearns & Co., Inc., its regular broker-dealers.
As of March 31,

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<PAGE> 144
1996, the U.S. Government Money Market Fund owned securities of Donaldson,
Lufkin & Jenrette Securities Corp. in the amount of $15,000,000 and Bear
Stearns in the amount of $20,000,000.

During the fiscal year ended March 31, 1996, the Florida Intermediate
Tax-Exempt Fund, Technology Fund and Stock Index Fund had not yet commenced
operations.

During the fiscal year ending March 31, 1996, Northern Funds directed
brokerage transactions to brokers because of research services provided. The
amount of such transactions and related commissions were as follows: for the
Income Equity Fund, $20,307,086.10 in research commission transactions and
$29,633.56 in research commissions; for the Growth Equity Fund, $169,902,642.59
in research commission transactions and $232,359.36 in research commissions;
for the Select Equity Fund, $41,570,004.54 in research commission transactions
and $50,423.56 in research commissions; for the Small Cap Fund, $73,462,398.08
in research commission transactions and $157,626.70 in research commissions;
for the International Growth Equity Fund, $175,280,598.64 in research
commission transactions and $716,645.17 in research commissions; and for the
International Select Equity Fund, $93,051,336.94 in research commission
transactions and $493,910.30 in research commissions.

The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when Northern Trust
believes such practice to be in the Funds' interests.

Northern Trust's investment advisory duties for Northern Funds are
carried out through its Trust Department. On occasions when Northern Trust
deems the purchase or sale of a security to be in the best interests of a Fund
as well as other fiduciary or agency accounts managed by it (including any
other portfolio, investment company or account for which Northern Trust acts as
adviser), the Agreement provides that Northern Trust, to the extent permitted
by applicable laws and regulations, may aggregate the securities to be sold or
purchased for such Fund with those to be sold or purchased for such other
accounts in order to obtain the best overall terms available with respect to
common and preferred stocks and the best net price and execution with respect
to other securities. In such event, allocation of the securities so purchased
or sold, as well as the expenses incurred in the transaction, will be made by
Northern Trust in the manner it considers to be most equitable and consistent
with its fiduciary obligations to the Fund and other accounts involved. In
some instances, this procedure may adversely affect the size of the position
obtainable for the Fund or the amount of the securities that are able to be
sold for the Fund. To the extent that the execution and price available from
more than one broker or dealer are believed to be comparable, the Agreement

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<PAGE> 145
permits Northern Trust, at its discretion but subject to applicable law, to
select the executing broker or dealer on the basis of Northern Trust's opinion
of the reliability and quality of such broker or dealer.

The Advisory Agreement provides that Northern Trust may render similar
services to others so long as its services under such Agreement are not
impaired thereby. The Advisory Agreement also provides that Northern Funds
will indemnify Northern Trust against certain liabilities (including
liabilities under the federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
the Agreement) or, in lieu thereof, contribute to resulting losses.

From time to time, Northern Trust may voluntarily waive a portion or
all of its fees otherwise payable to it with respect to the Funds.

For the fiscal years or periods indicated, Northern Trust earned
advisory fees, after fee waivers, as follows:

<TABLE>
<CAPTION>
===========================================================
Fiscal Year Ended Fiscal Year or Period Ended
March 31, 1996 March 31, 1995(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Fund $3,642,012 $1,679,646
- -------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $863,091 $428,631
- -------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $3,667,465 $1,985,324
- -------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market $844,168 $33,404
Fund
- -------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund $379,811 $102,198
- -------------------------------------------------------------------------------------------------------------
U.S. Government Fund $974,550 $808,240
- -------------------------------------------------------------------------------------------------------------
Fixed Income Fund $626,406 $473,782
- -------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $1,603,749 $1,586,107
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $818,528 $903,489
- -------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $101,335 $79,136
- -------------------------------------------------------------------------------------------------------------
Income Equity Fund $353,591 $285,142
- -------------------------------------------------------------------------------------------------------------
Growth Equity Fund $1,386,300 $742,399
- -------------------------------------------------------------------------------------------------------------
Select Equity Fund $150,939 $70,398
- -------------------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE> 146
<TABLE>
<CAPTION>
===========================================================
Fiscal Year Ended Fiscal Year or Period Ended
March 31, 1996 March 31, 1995(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Small Cap Fund $991,788 $472,444
- -------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $1,557,622 $910,038
- -------------------------------------------------------------------------------------------------------------
International Select Equity Fund $844,168 $666,020
=============================================================================================================
</TABLE>

1. The Money Market, U.S. Government Money Market and Municipal Money
Market Funds commenced operations on April 11, 1994; the U.S.
Government Select and California Municipal Money Market Funds
commenced operations on December 12, and December 29, 1994,
respectively; and the Select Equity and International Select Equity
Funds commenced operations on April 6 and April 5, 1994, respectively.

For the fiscal years or periods indicated, Northern Trust voluntarily
waived and reimbursed advisory fees for each of the Funds as follows:

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<PAGE> 147
<TABLE>
<CAPTION>
------------------------------------------------------------
Fiscal Year Ended Fiscal Year or Period Ended
March 31, 1996 March 31, 1995(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Fund $2,296,290 $1,499,610
- -------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $569,924 $421,351
- -------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $2,325,487 $1,743,115
- -------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market Fund $370,057 $119,739
- -------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund $471,687 $192,882
- -------------------------------------------------------------------------------------------------------------
U.S. Government Fund $37,209 $18,482
- -------------------------------------------------------------------------------------------------------------
Fixed Income Fund $39,601 $31,397
- -------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $142,338 $115,115
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $92,578 $82,456
- -------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $34,758 $31,208
- -------------------------------------------------------------------------------------------------------------
Income Equity Fund $109,869 $85,791
- -------------------------------------------------------------------------------------------------------------
Growth Equity Fund $297,405 $158,096
- -------------------------------------------------------------------------------------------------------------
Select Equity Fund $124,497 $70,398
- -------------------------------------------------------------------------------------------------------------
Small Cap Fund $474,217 $231,924
- -------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $311,526 $184,206
- -------------------------------------------------------------------------------------------------------------
International Select Equity Fund $168,832 $135,054
- -------------------------------------------------------------------------------------------------------------
</TABLE>

Under its Transfer Agency Agreement with Northern Funds, Northern
Trust has undertaken, among other things, to perform the following services:
(1) answer shareholder inquiries and respond to requests for information
regarding Northern Funds; (2) process purchase and redemption transactions; (3)
establish and maintain shareholder accounts and subaccounts; (4) furnish
confirmations in accordance with applicable law, and provide periodic account
statements to each shareholder; (5) furnish proxy statements and

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<PAGE> 148
proxies, annual and semi-annual financial statements, and dividend,
distribution and tax notices to shareholders; (6) act as income disbursing
agent; and (7) maintain appropriate records relating to its services. Northern
Trust may appoint one or more sub-transfer agents in the performance of its
services.

As compensation for the services rendered by Northern Trust under the
Transfer Agency Agreement and the assumption by Northern Trust of related
expenses, Northern Trust is entitled to a fee from Northern Funds, payable
monthly, at an annual rate of .10% of the average daily net asset value of each
of the Funds.

For the fiscal years or periods indicated, the amount of transfer
agency fees incurred by each of the Funds was as follows:

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<PAGE> 149
<TABLE>
<CAPTION>
------------------------------------------------------------
Fiscal Year Ended Fiscal Year or Period Ended
March 31, 1996 March 31, 1995(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Fund $989,707 $478,656
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $238,819 $122,466
- ------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $998,815 $567,232
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market Fund $96,072 $16,702
- ------------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund $141,916 $40,879
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Fund $134,900 $107,766
- ------------------------------------------------------------------------------------------------------------------
Fixed Income Fund $88,800 $63,170
- ------------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $232,809 $226,584
- ------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $121,479 $129,068
- ------------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $15,121 $8,793
- ------------------------------------------------------------------------------------------------------------------
Income Equity Fund $46,345 $33,546
- ------------------------------------------------------------------------------------------------------------------
Growth Equity Fund $168,369 $87,340
- ------------------------------------------------------------------------------------------------------------------
Select Equity Fund $22,952 $8,282
- ------------------------------------------------------------------------------------------------------------------
Small Cap Fund $122,166 $55,371
- ------------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $155,762 $91,003
- ------------------------------------------------------------------------------------------------------------------
International Select Equity Fund $84,415 $66,601
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

_______________

Northern Trust maintains custody of the assets of the Funds (other
than the International Funds) pursuant to the terms of its Custodian Agreement
with Northern Funds. Northern Trust maintains custody of the assets of the
International Funds pursuant to the terms of its Foreign Custody Agreement
with Northern Funds. Under each of these agreements, Northern Trust (l) holds
each Fund's cash

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<PAGE> 150
and securities, (2) maintains such cash and securities in separate accounts in
the name of the Fund, (3) makes receipts and disbursements of funds on behalf
of the Fund, (4) receives, delivers and releases securities on behalf of the
Fund, (5) collects and receives all income, principal and other payments in
respect of the Fund's investments held by Northern Trust under the agreement,
and (6) maintains the accounting records of Northern Funds. Northern Trust may
employ one or more subcustodians under the Custody Agreement, provided that
Northern Trust shall have no more responsibility or liability to Northern Funds
on account of any action or omission of any subcustodian so employed than such
subcustodian has to Northern Trust and that the responsibility or liability of
the subcustodian to Northern Trust shall conform to the resolution of the
Trustees of Northern Funds authorizing the appointment of the particular
subcustodian. Northern Trust may also appoint an agent to carry out such of
the provisions of the Custody Agreement as Northern Trust may from time to time
direct. Under its Foreign Custody Agreement, Northern Trust has entered into
agreements with financial institutions and depositories located in foreign
countries with respect to the custody of the International Funds' foreign
securities.

As compensation for the services rendered to each Fund (other than the
International Funds) under the Custodian Agreement, and the assumption by
Northern Trust of certain related expenses, Northern Trust is entitled to
payment from each of the Funds as follows: (a) a basic custodial fee of (i)
$18,000 annually for each Fund, plus (ii) 1/100th of 1% annually of each Fund's
average daily net assets to the extent they exceed $100 million, plus (b) a
basic accounting fee of (i) $25,000 annually for each Fund, plus (ii) 1/100th
of 1% annually of each Fund's average daily net assets to the extent they
exceed $50 million, plus (c) a fixed dollar fee for each trade in portfolio
securities, plus (d) a fixed dollar fee for each time that Northern Trust as
Custodian receives or transmits funds via wire, plus (e) reimbursement of
expenses incurred by Northern Trust as Custodian for telephone, postage,
courier fees, office supplies and duplicating. The fees referred to in clauses
(c) and (d) are subject to annual upward adjustments based on increases in the
Consumer Price Index for All Urban Consumers, provided that Northern Trust may
permanently or temporarily waive all or any portion of any upward adjustment.

As compensation for the services rendered to the International Funds
under the Foreign Custody Agreement, and the assumption by Northern Trust of
certain related expenses, Northern Trust is entitled to payment from each of
those Funds as follows: (i) $35,000 annually for each Fund, plus (ii) 9/100th
of 1% annually of each Fund's average daily net assets, plus (iii)
reimbursement for fees incurred by Northern Trust as foreign Custodian for
telephone, postage, courier fees, office supplies and duplicating. As
compensation for basic accounting services rendered to the International Funds
by Northern Trust, Northern Trust is entitled to receive $25,000 for the first
$50 million of each of those

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<PAGE> 151
Fund's average daily net assets and 1/100th of 1% of each Fund's average daily
net assets in excess of $50 million.

For the fiscal years or periods indicated, the amount of custody and
fund accounting fees incurred by each of the Funds was as follows:

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<PAGE> 152
<TABLE>
<CAPTION>
------------------------------------------------------------
Fiscal Year Ended Fiscal Year or Period Ended
March 31, 1996 March 31, 1995(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Fund $254,569 $147,500
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $90,960 $69,155
- ------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $258,554 $157,767
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market Fund $57,944 $16,895
- ------------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund $68,080 $20,111
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Fund $58,756 $54,735
- ------------------------------------------------------------------------------------------------------------------
Fixed Income Fund $54,631 $50,201
- ------------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $85,022 $82,728
- ------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $59,343 $62,415
- ------------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $74,119 $69,688
- ------------------------------------------------------------------------------------------------------------------
Income Equity Fund $51,559 $49,607
- ------------------------------------------------------------------------------------------------------------------
Growth Equity Fund $75,707 $57,187
- ------------------------------------------------------------------------------------------------------------------
Select Equity Fund $53,054 $52,479
- ------------------------------------------------------------------------------------------------------------------
Small Cap Fund $93,498 $105,362
- ------------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $213,761 $147,708
- ------------------------------------------------------------------------------------------------------------------
International Select Equity Fund $146,744 $123,823
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________

Unless sooner terminated, each of the Advisory Agreement, Transfer
Agency Agreement, Custodian Agreement and Foreign Custody Agreement between
Northern Trust and Northern Funds will continue in effect with respect to a
particular Fund until March 31, 1997, and thereafter for successive 12-month
periods, provided that the continuance is approved at least annually (a) by the
vote of a majority of the Trustees who are not parties to the agreement or
"interested persons" (as such term is defined in the 1940 Act) of any party
thereto, cast in person at a meeting called for the

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<PAGE> 153
purpose of voting on such approval and (b) by the Trustees or by the vote of a
majority of the outstanding shares of the Fund (as defined under "Organization"
in the Prospectus). Each agreement is terminable at any time without penalty
by Northern Funds (by specified Trustee or shareholder action) on 60 days'
written notice to Northern Trust and by Northern Trust on 60 days' written
notice to Northern Funds.

Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company
continuously engaged in the issuance of its shares, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to
such an investment company, or from purchasing shares of such a company as
agent for and upon the order of customers. Northern Trust believes that it may
perform the services contemplated by its agreements with Northern Funds without
violation of such banking laws or regulations, which are applicable to it. It
should be noted, however, that future changes in either federal or state
statutes and regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, as well as future judicial or administrative
decisions or interpretations of current and future statutes and regulations,
could prevent Northern Trust from continuing to perform such services for
Northern Funds.

Should future legislative, judicial or administrative action prohibit
or restrict the activities of Northern Trust in connection with the provision
of services on behalf of Northern Funds, Northern Funds might be required to
alter materially or discontinue its arrangements with Northern Trust and change
its method of operations. It is not anticipated, however, that any change in
Northern Funds' method of operations would affect the net asset value per share
of any Fund or result in a financial loss to any shareholder. Moreover, if
current restrictions preventing a bank from legally sponsoring, organizing,
controlling or distributing shares of an open-end investment company were
relaxed, Northern Funds expects that Northern Trust would consider the
possibility of offering to perform some or all of the services now provided by
Sunstone. It is not possible, of course, to predict whether or in what form
such restrictions might be relaxed or the terms upon which Northern Trust might
offer to provide services for consideration by the Trustees.

In the Advisory Agreement, Northern Trust agrees that the name
"Northern" may be used in connection with Northern Funds' business on a
royalty-free basis. Northern Trust has reserved to itself the right to grant
the non-exclusive right to use the name "Northern" to any other person. The
Advisory Agreement provides that at such time as the Agreement is no longer in
effect, Northern Funds will cease using the name "Northern."

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<PAGE> 154
ADMINISTRATOR AND DISTRIBUTOR

Under its Administration Agreement, Sunstone has agreed, subject to
the direction and control of Northern Funds' Board of Trustees and utilizing
information provided by Northern Funds and its agents, to (1) provide office
space, facilities, equipment and personnel to carry out its services; (2)
compile data for and prepare with respect to the Funds timely Notices to the
Securities and Exchange Commission ("SEC") required pursuant to Rule 24f-2
under the 1940 Act and Semi-Annual Reports on Form N-SAR; (3) prepare for
execution by Northern Funds and file all federal income and excise tax returns
and state income tax returns (and such other required tax filings as may be
agreed to by the parties) other than those required to be made by Northern
Funds' custodian and transfer agent; (4) prepare compliance filings relating to
the registration of the securities of the Funds pursuant to state securities
laws with the advice of Northern Funds' counsel; (5) assist the Fund
accountants with preparing the Annual and Semi-Annual Reports required pursuant
to Section 30(d) under the 1940 Act; (6) assist to the extent requested by
Northern Funds with the preparation of the Registration Statement for the Funds
(on Form N-1A or any replacement therefor) and any amendments thereto, and
proxy materials; (7) prepare and monitor each Fund's expense accruals and
cause all appropriate expenses to be paid from Fund assets on proper
authorization from the Fund; (8) assist in the acquisition of the Funds'
fidelity bond required by the 1940 Act, monitor the amount of the bond and make
the necessary SEC filings related thereto; (9) from time to time as Northern
Funds may reasonably request or as Sunstone deems appropriate, check each
Fund's compliance with the policies and limitations relating to portfolio
investments as set forth in the Prospectus, Additional Statement and
Declaration of Trust and monitor each Fund's status as a regulated investment
company under Subchapter M of the Internal Revenue Code, as amended (but this
function shall not relieve the Fund's investment adviser of its day-to-day
responsibility for such compliance); (10) maintain, and/or coordinate with the
other service providers the maintenance of, the accounts, books and other
documents required pursuant to Rule 31a-1(a) and (b) under the 1940 Act; and
(11) generally assist in each Fund's administrative operations. In addition,
Sunstone has agreed to monitor Northern Funds' arrangements with respect to
services provided by Service Organizations. Under the Administration
Agreement, Sunstone is not liable for any error of judgment or mistake of law
or for any loss suffered by the Funds in connection with the performance of the
Administration Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of Sunstone in the performance of its
duties or from its reckless disregard of its duties and obligations under the
Agreement.

Unless sooner terminated the Administration Agreement will continue in
effect with respect to a particular Fund until March 31, 1997, and thereafter
for successive 12-month periods, provided that the agreement is approved
annually (a) by the vote of a

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<PAGE> 155
majority of the Trustees who are not parties to the agreement or "interested
persons" (as such term is defined by the 1940 Act) of any party thereto, cast
in person at a meeting called for the purpose of voting on such approval, and
(b) by the Trustees or by the vote of a majority of the outstanding shares of
such Fund (as defined under "Description of Shares"). Notwithstanding the
foregoing, the Administration Agreement shall continue automatically for an
indefinite period unless the Board of Trustees shall have provided Sunstone
with at least 90 days' written notice of its determination not to renew the
Agreement.

For its administrative services, Sunstone is entitled to an
administration fee, computed daily and payable monthly, at the annual rate of
0.15% of the Funds' average aggregate daily net assets. For the fiscal years
or periods indicated, Sunstone earned, after waivers, administrative fees as
follows:

<TABLE>
<CAPTION>
------------------------------------------------------------
Fiscal Year Ended Fiscal Year or Period Ended
March 31, 1996 March 31, 1995(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Fund $754,629 $414,361
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $197,052 $105,624
- ------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $779,183 $509,356
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market Fund $0 $8,192
- ------------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund $64,242 $19,336
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Fund $161,659 $105,568
- ------------------------------------------------------------------------------------------------------------------
Fixed Income Fund $106,147 $63,582
- ------------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $284,325 $230,585
- ------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $151,378 $130,624
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE> 156
<TABLE>
<CAPTION>
------------------------------------------------------------
Fiscal Year Ended Fiscal Year or Period Ended
March 31, 1996 March 31, 1995(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
International Fixed Income Fund $18,998 $10,062
- ------------------------------------------------------------------------------------------------------------------
Income Equity Fund $55,453 $33,207
- ------------------------------------------------------------------------------------------------------------------
Growth Equity Fund $188,961 $82,540
- ------------------------------------------------------------------------------------------------------------------
Select Equity Fund $24,949 $9,581
- ------------------------------------------------------------------------------------------------------------------
Small Cap Fund $136,098 $52,182
- ------------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $188,090 $86,317
- ------------------------------------------------------------------------------------------------------------------
International Select Equity Fund $103,687 $63,788
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________

For the fiscal years or periods indicated, Sunstone waived
administrative fees with respect to each Fund as follows:

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<PAGE> 157
<TABLE>
<CAPTION>
------------------------------------------------------------
Fiscal Year Ended Fiscal Year or Period Ended
March 31, 1996 March 31, 1995(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Fund $729,948 $305,490
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $161,180 $78,076
- ------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $719,057 $341,501
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market Fund $143,942 $16,860
- ------------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund $148,632 $41,983
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Fund $40,693 $56,080
- ------------------------------------------------------------------------------------------------------------------
Fixed Income Fund $27,055 $31,175
- ------------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $64,892 $109,298
- ------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $30,843 $62,980
- ------------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $3,684 $3,274
- ------------------------------------------------------------------------------------------------------------------
Income Equity Fund $14,066 $17,111
- ------------------------------------------------------------------------------------------------------------------
Growth Equity Fund $63,595 $48,472
- ------------------------------------------------------------------------------------------------------------------
Select Equity Fund $9,481 $2,842
- ------------------------------------------------------------------------------------------------------------------
Small Cap Fund $47,153 $31,190
- ------------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $45,554 $51,702
- ------------------------------------------------------------------------------------------------------------------
International Select Equity Fund $22,936 $37,502
==================================================================================================================
</TABLE>

Northern Funds has also entered into a Distribution Agreement under
which Sunstone, as agent, sells shares of each Fund on a continuous basis.
Sunstone pays the cost of printing and distributing prospectuses to persons who
are not shareholders of Northern Funds (excluding preparation and typesetting
expenses) and

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<PAGE> 158
of certain other distribution efforts. No compensation is payable by Northern
Funds to Sunstone for such distribution services.

The Administration Agreement and the Distribution Agreement provide
that Sunstone may render similar services to others so long as its services
under the Agreements are not impaired thereby. The Administration and
Distribution Agreements provide that Northern Funds will indemnify Sunstone
against certain liabilities (including liabilities under the federal securities
laws relating to untrue statements or omissions of material fact and actions
that are in accordance with the terms of such Agreements) under certain
circumstances.

SERVICE ORGANIZATIONS

As stated in the Funds' Prospectus, the Funds may enter into
agreements from time to time with Service Organizations providing for support
and/or distribution services to customers of the Service Organizations who are
the beneficial owners of Fund shares. Under the agreements, the Funds may pay
Service Organizations up to .25% (on an annualized basis) of the average daily
net asset value of the shares beneficially owned by their customers. Support
services provided by Service Organizations under their agreements may include:
(a) processing dividend and distribution payments from a Fund; (b) providing
information periodically to customers showing their share positions; (c)
arranging for bank wires; (d) responding to customer inquiries; (e) providing
subaccounting with respect to shares beneficially owned by customers or the
information necessary for subaccounting; (f) forwarding shareholder
communications; (g) assisting in processing share purchase, exchange and
redemption requests from customers; (h) assisting customers in changing
dividend options, account designations and addresses; and (i) other similar
services requested by the Funds. In addition, Service Organizations may
provide assistance (such as the forwarding of sales literature and advertising
to their customers) in connection with the distribution of Fund shares.

The Funds' arrangements with Service Organizations under the
agreements are governed by two Plans (a Service Plan and a Distribution and
Service Plan), which have been adopted by the Board of Trustees and (in the
case of the Distribution and Service Plan) by the initial shareholder of
Northern Funds. Because the Distribution and Service Plan contemplates the
provision of services related to the distribution of Fund shares (in addition
to support services), that Plan has been adopted in accordance with Rule 12b-1
under the 1940 Act. In accordance with the Plans, the Board of Trustees
reviews, at least quarterly, a written report of the amounts expended in
connection with the Funds' arrangements with Service Organizations and the
purposes for which the expenditures were made. In addition, the Funds'
arrangements with Service Organizations must be approved annually by a majority
of the Trustees, including a majority of the Trustees who are not "interested
persons" of the Funds as defined in the 1940 Act and

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<PAGE> 159
have no direct or indirect financial interest in such arrangements (the
"Disinterested Trustees").

The Board of Trustees believes that there is a reasonable likelihood
that their arrangements with Service Organizations will benefit each Fund and
its shareholders. Any material amendment to the arrangements with Service
Organizations under the agreements must be approved by a majority of the Board
of Trustees (including a majority of the Disinterested Trustees), and any
amendment to increase materially the costs under the Distribution and Service
Plan with respect to a Fund must be approved by the holders of a majority of
the outstanding shares of the Fund involved. So long as the Distribution and
Service Plan is in effect, the selection and nomination of the members of the
Board of Trustees who are not "interested persons" (as defined in the 1940 Act)
of the Northern Funds will be committed to the discretion of such disinterested
Trustees.

For the fiscal period ended March 31, 1996, none of the Funds paid
fees with respect to either of the Plans.

COUNSEL AND AUDITORS

Drinker Biddle & Reath, with offices at Suite 1100, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107, serve as counsel to Northern Funds.

Arthur Andersen LLP, independent accountants, 33 West Monroe Street,
Chicago, Illinois 60603-5385 serve as auditors for Northern Funds. The
financial statements dated March 31, 1996, incorporated by reference into this
Additional Statement have been incorporated in reliance on the report of Arthur
Andersen LLP given on the authority of said firm as experts in auditing and
accounting.

IN-KIND PURCHASES

Payment for shares of a Fund may, in the discretion of Northern Trust,
be made in the form of securities that are permissible investments for the Fund
as described in the Prospectus. For further information about this form of
payment, contact the Transfer Agent. In connection with an in-kind securities
payment, a Fund will require, among other things, that the securities be valued
on the day of purchase in accordance with the pricing methods used by the Fund
and that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form for transfer to the Fund; and that adequate information be provided
concerning the basis and other tax matters relating to the securities. In
addition, so long as shares in a Fund are offered or sold in Texas, any
securities that are accepted as payment for the shares of the Fund will be
limited to securities that are issued in transactions that involve a bona fide
reorganization or

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<PAGE> 160
statutory merger, or will be limited to other acquisitions of portfolio
securities (except for municipal debt securities issued by state political
subdivisions or their agencies or instrumentalities) that: (a) meet the
investment objective and policies of the Portfolio; (b) are acquired for
investment and not for resale; (c) are liquid securities that are not
restricted as to transfer either by law or liquidity of market; and (d) have a
value that is readily ascertainable (and not established only by evaluation
procedures) as evidenced by a listing on the American Stock Exchange, New York
Stock Exchange or Nasdaq or as evidenced by their status as U.S. Government
Securities, bank certificates of deposit, banker's acceptances, corporate and
other debt securities that are actively traded, money market securities and
other like securities with a readily ascertainable value.

AUTOMATIC INVESTING PLAN

The Automatic Investing Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market
performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help investors reduce their average cost per share because
the agreed upon fixed investment amount allows more shares to be purchased
during periods of lower share prices and fewer shares during periods of higher
share prices. In order to be effective, Dollar Cost Averaging should usually
be followed on a sustained, consistent basis. Investors should be aware,
however, that shares bought using Dollar Cost Averaging are purchased without
regard to their price on the day of investment or to market trends. Dollar
Cost Averaging does not assure a profit and does not protect against losses in
a declining market. In addition, while investors may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if an investor
ultimately redeems his shares at a price which is lower than their purchase
price. An investor may want to consider his financial ability to continue
purchases through periods of low price levels.

REDEMPTIONS AND EXCHANGES

Exchange requests received on a Business Day prior to the time shares
of the Funds involved in the request are priced will be processed on the date
of receipt. "Processing" a request means that shares in the Fund from which
the shareholder is withdrawing an investment will be redeemed at the net asset
value per share next determined on the date of receipt. Shares of the new Fund
into which the shareholder is investing will also normally be purchased at the
net asset value per share next determined coincident to or after the time of
redemption. Exchange requests received on a Business Day after the time shares
of the Funds involved in the request are priced will be processed on the next
Business Day in the manner described above.

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<PAGE> 161
Northern Funds reserves the right to make payment for redemptions in
readily marketable securities. If this occurred, a shareholder would bear any
brokerage or other transaction costs incurred in converting the securities so
received to cash. Northern Funds also reserves the right to require a
shareholder to redeem involuntarily shares in a Fund if the balance held of
record by the shareholder drops below $750 and the shareholder does not
increase such balance to $1,000 or more upon 30 days' notice. Northern Funds
will not require a shareholder to redeem shares of a Fund if the balance held
of record by the shareholder is less than $750 solely because of a decline in
the net asset value of the Fund's shares or because the shareholder has made an
initial investment in a lower amount in accordance with the Automatic
Investment Plan. Northern Funds may also redeem shares involuntarily if the
redemption is appropriate to carry out Northern Funds' responsibilities under
the 1940 Act (see, e.g., "Amortized Cost Valuation").

Northern Funds may redeem shares involuntarily to reimburse a Fund for
any loss sustained by reason of the failure of a shareholder to make full
payment for shares purchased by the shareholder or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to Fund shares as provided in the Funds' Prospectus from time to
time.

PERFORMANCE INFORMATION

MONEY MARKET FUNDS

From time to time Northern Funds may advertise quotations of "yields"
and "effective yields" with respect to each Money Market Fund, and
"tax-equivalent yields" with respect to shares of the Municipal Money Market
Fund and the California Municipal Money Market Fund, computed in accordance
with a standardized method based upon the seven-day period ended on the date of
calculation. In arriving at quotations as to "yield," Northern Funds first
determines the net change during the period in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period (such net change being inclusive of the value of any additional shares
issued in connection with distributions of net investment income as well as net
investment income accrued on both the original share and any such additional
shares, but exclusive of realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), then divides such net change by
the value of the account at the beginning of the period to obtain the base
period return, and then multiplies the base period return by 365/7. Based on
the foregoing calculations, for the period ended March 31, 1996, the 7-day
yields for the Money Market Funds, after fee waivers, were as follows: Money
Market Fund, 4.90%; U.S. Government Money Market Fund, 4.78%; Municipal Money
Market Fund, 3.05%; U.S. Government Select Money Market Fund, 4.91%; and
California Municipal Money Market Fund, 3.08%. For the period ended March 31,
1996, the 7-day yields for

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<PAGE> 162
the Money Market Funds, absent fee waivers, were as follows: Money Market Fund,
4.73%; U.S. Government Money Market Fund, 4.50%; Municipal Money Market Fund,
2.86%; U.S. Government Select Money Market Fund, 4.71%; and California
Municipal Money Market Fund, 2.98%.

The "effective yield" with respect to the shares of a Money Market
Fund is computed by adding 1 to the base period return (calculated as above),
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from
the result. Based on the foregoing calculations, for the period ended March
31, 1996, the 7-day effective yields for the Money Market Funds, after fee
waivers, were as follows: Money Market Fund, 5.02%; U.S. Government Money
Market Fund, 4.90%; Municipal Money Market Fund, 3.09%; U.S. Government Select
Money Market Fund, 5.03%; and California Municipal Money Market Fund, 3.13%.

"Tax-equivalent yield" is computed by dividing the tax-exempt portion
of the yield by 1 minus a stated income tax rate and then adding the product to
the taxable portion of the yield, if any. There may be more than one
tax-equivalent yield if more than one stated income tax rate is used. For the
period ended March 31, 1996, and using a federal income tax rate of 31%, the
7-day tax-equivalent yields, after fee waivers, were 4.42% and 4.46% for the
Municipal Money Market and California Municipal Money Market Funds,
respectively.

NON-MONEY MARKET FUNDS

A Non-Money Market Fund calculates its "average annual total return"
by determining the average annual compounded rate of return during specified
periods that equates the initial amount invested to the ending redeemable value
of such investment according to the following formula:

ERV 1/n
T = [(-----)-1]
P

Where: T = average annual total return;

ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year (or other) periods at the end
of the applicable period (or a fractional
portion thereof);

P = hypothetical initial payment of $1,000; and

n = period covered by the computation, expressed
in years.

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<PAGE> 163
Based on the foregoing calculations, the average annual total returns
for the Non-Money Market Funds for the fiscal year ended March 31, 1996 and for
the period from the respective dates they commenced operations to March 31,
1996, were as follows: U.S. Government Fund, 7.65% and 5.54%; Fixed Income
Fund, 11.18% and 7.60%; Intermediate Tax-Exempt Fund, 6.81% and 5.58%;
Tax-Exempt Fund, 7.80% and 6.78%; International Fixed Income Fund, 5.84% and
9.23%; Income Equity Fund, 20.41% and 10.92%; Growth Equity Fund, 25.13% and
15.63%; Select Equity Fund, 25.70% and 16.71%; Small Cap Fund, 24.09% and
11.69%; International Growth Equity Fund, 8.61% and 2.82%; and International
Select Equity Fund, 10.20% and 3.96%. The Florida Intermediate Tax-Exempt
Fund, Technology Fund and Stock Index Fund had not commenced operations during
the fiscal year ended March 31, 1996. During these periods, Northern Trust and
Sunstone waived a portion of their fees.

A Non-Money Market Fund calculates its "aggregate total return" by
determining the aggregate compounded rates of return during specified periods
that likewise equate the initial amount invested to the ending redeemable value
of such investment. The formula for calculating aggregate total return is as
follows:

ERV
Aggregate Total Return = [(-----) - 1]
P

The calculations are made assuming that (a) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, and (b) all recurring fees charged to
all shareholder accounts are included. The ending redeemable value (variable
"ERV" in the formula) is determined by assuming complete redemption of the
hypothetical investment after deduction of all nonrecurring charges at the end
of the measuring period. Based on the foregoing calculations, the aggregate
total return for the Non-Money Market Funds for the periods from the respective
dates they commenced operations to March 31, 1996, were as follows: U.S.
Government Fund, 11.41%; Fixed Income Fund, 15.81%; Intermediate Tax-Exempt
Fund, 11.48%; Tax-Exempt Fund, 14.04%; International Fixed Income Fund, 19.41%;
Income Equity Fund, 23.07%; Growth Equity Fund, 33.93%; Select Equity Fund,
35.98%; Small Cap Fund, 24.79%; International Growth Equity Fund, 5.73%; and
International Select Equity Fund, 8.04%. The Florida Intermediate Tax-Exempt
Fund, Technology Fund and Stock Index Fund had not commenced operations during
the fiscal year ended March 31, 1996. During these periods, Northern Trust and
Sunstone waived a portion of their fees.

A Non-Money Market Fund calculates its 30-day (or one month) standard
yield in accordance with the method prescribed by the SEC for mutual funds:

a - b 6
-----
Yield = 2[(cd + 1) - 1]

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<PAGE> 164
Where: a = dividends and interest earned during the period;

b = expenses accrued for the period (net of
reimbursements);

c = average daily number of shares outstanding during the
period entitled to receive dividends; and

d = net asset value per share on the last day of the
period.

Based on the foregoing calculations, for the 30-day period ended March
31, 1996, the yields for the U.S Government, Fixed Income, Intermediate
Tax-Exempt, Tax-Exempt and International Fixed Income Funds, after fee waivers,
were 5.11%, 5.56%, 3.67%, 4.39% and 5.49%, respectively. Also for the 30-day
period ended March 31, 1996, the yields for the U.S Government, Fixed Income,
Intermediate Tax-Exempt, Tax-Exempt and International Fixed Income Funds,
absent fee waivers, were 4.91%, 5.31%, 3.50%, 4.19% and 4.59%, respectively.

A Non-Money Market Fund's "tax-equivalent" yield is computed by: (a)
dividing the portion of the Fund's yield (calculated as above) that is exempt
from federal income tax by one minus a stated federal income tax rate; and (b)
adding the quotient to that portion, if any, of the Fund's yield that is not
exempt from federal income tax. For the period ended March 31, 1996, and using
a federal income tax rate of 31%, the 30-day tax-equivalent yields, after fee
waivers, were 5.32% and 6.36% for the Intermediate Tax-Exempt and Tax-Exempt
Funds, respectively.

GENERAL INFORMATION

Any fees imposed by Northern Trust or other Service Organizations on
their customers in connection with investments in the Funds are not reflected
in Northern Funds' calculations of performance for the Funds.

Each Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates,
portfolio expenses and other factors. Performance is one basis investors may
use to analyze a Fund as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing

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<PAGE> 165
their portfolio instruments, computing net asset value and determining
performance.

From time to time, a Fund's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals.
For example, a Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on
the basis of risk-adjusted performance. Rankings that compare the performance
of the Funds to one another in appropriate categories over specific periods of
time may also be quoted in advertising.

Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including
common stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and
combinations of various capital markets. The performance of these capital
markets is based on the returns of different indices. The Funds may use the
performance of these capital markets in order to demonstrate general
risk-versus-reward investment scenarios. Performance comparisons may also
include the value of a hypothetical investment in any of these capital markets.
The risks associated with the security types in any capital market may or may
not correspond directly to those of the Funds. The Funds may also compare
performance to that of other compilations or indices that may be developed and
made available in the future.

The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original investment in the Fund, but also of the additional Fund shares
received through reinvestment.

The Funds may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification,
risk tolerance, and goal setting, questionnaires designed to help create a
personal financial profile, worksheets used to project savings needs based on
assumed rates of inflation and hypothetical rates of return and action plans
offering investment alternatives), investment management techniques, policies
or investment suitability of a Fund (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer, automatic
account rebalancing, the advantages and disadvantages of investing in tax-
deferred and taxable investments), economic and political conditions, the
relationship between sectors of the economy and the

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<PAGE> 166
economy as a whole, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks, bonds and Treasury
bills. From time to time advertisements, sales literature, communications to
shareholders or other materials may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund), as well as the views of Northern Trust as to current market, economic,
trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Fund. In addition, selected indices may be used to illustrate
historic performance of selected asset classes. The Funds may also include in
advertisements, sales literature, communications to shareholders or other
materials, charts, graphs or drawings which illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, treasury bills and shares of a Fund. In addition,
advertisements, sales literature, communications to shareholders or other
materials may include a discussion of certain attributes or benefits to be
derived by an investment in a Fund and/or other mutual funds, shareholder
profiles and hypothetical investor scenarios, timely information on financial
management, tax and retirement planning and investment alternative to
certificates of deposit and other financial instruments. Such sales
literature, communications to shareholders or other materials may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.

Materials may include lists of representative clients of Northern
Trust. Materials may refer to the CUSIP numbers of the Funds and may
illustrate how to find the listings of the Funds in newspapers and periodicals.
Materials may also include discussions of other Funds, products, and services.

The Funds may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Funds may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data.

The Fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating
such a plan, investors should consider

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their ability to continue purchasing shares during periods of low price levels.

A Fund may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.

Advertisements and sales materials relating to a Fund may include
information regarding the background and experience of its portfolio managers.

AMORTIZED COST VALUATION

As stated in the Prospectus, each Money Market Fund seeks to maintain
a net asset value of $1.00 per share and, in this connection, values its
instruments on the basis of amortized cost pursuant to Rule 2a-7 under the 1940
Act. This method values a security at its cost on the date of purchase and
thereafter assumes a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price a Fund would receive if the Fund sold the
instrument. During such periods the yield to investors in the Fund may differ
somewhat from that obtained in a similar entity which uses available
indications as to market value to value its portfolio instruments. For
example, if the use of amortized cost resulted in a lower (higher) aggregate
Fund value on a particular day, a prospective investor in the Fund would be
able to obtain a somewhat higher (lower) yield and ownership interest than
would result from investment in such similar entity and existing investors
would receive less (more) investment income and ownership interest. However,
Northern Funds expects that the procedures and limitations referred to in the
following paragraphs of this section will tend to minimize the differences
referred to above.

Under Rule 2a-7, Northern Funds' Board of Trustees, in supervising the
Funds' operations and delegating special responsibilities involving portfolio
management to Northern Trust, has established procedures that are intended,
taking into account current market conditions and the Funds' investment
objectives, to stabilize the net asset value of each Money Market Fund, as
computed for the purposes of purchases and redemptions, at $1.00 per share.
The Trustees' procedures include periodic monitoring of the difference (the
"Market Value Difference") between the amortized cost value per share and the
net asset value per share based upon available indications of market value.
Available indications of market value consist of actual market quotations or
appropriate substitutes which reflect current market conditions and

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include (a) quotations or estimates of market value for individual portfolio
instruments and/or (b) values for individual portfolio instruments derived from
market quotations relating to varying maturities of a class of money market
instruments. In the event the Market Value Difference exceeds 1/2 of 1%, the
Trustees' procedures provide that the Trustees will take such steps as they
consider appropriate (e.g., selling portfolio instruments to shorten average
portfolio maturity or to realize capital gains or losses, reducing or
suspending shareholder income accruals, redeeming shares in kind, or utilizing
a net asset value per share based upon available indications of market value
which under such circumstances would vary from $1.00) to eliminate or reduce to
the extent reasonably practicable any material dilution or other unfair results
to investors or existing shareholders which might arise from Market Value
Differences. In particular, if losses were sustained by a Fund, the number of
outstanding shares might be reduced in order to maintain a net asset value per
share of $1.00. Such reduction would be effected by having each shareholder
proportionately contribute to the Fund's capital the necessary shares to
restore such net asset value per share. Each shareholder will be deemed to
have agreed to such contribution in these circumstances by investing in the
Fund.

Rule 2a-7 requires that each Money Market Fund limit its investments
to instruments which Northern Trust determines to present minimal credit risks
and which are "Eligible Securities" as defined by the SEC and described in the
Prospectus. The Rule also requires that each Money Market Fund maintain a
dollar-weighted average portfolio maturity (not more than 90 days) appropriate
to its policy of maintaining a stable net asset value per share and precludes
the purchase of any instrument deemed under the Rule to have a remaining
maturity of more than 397 days. Should the disposition of a portfolio security
result in a dollar-weighted average portfolio maturity of more than 90 days,
the Rule requires a Money Market Fund to invest its available cash in such a
manner as to reduce such maturity to the prescribed limit as soon as reasonably
practicable.

TAXES

The following summarizes certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Funds or their shareholders, and the discussions here and
in the Prospectus are not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference
to their own tax situations.

The discussions of federal and state tax consequences in the
Prospectus and this Additional Statement are based on the Code and the laws and
regulations issued thereunder as in effect on the date

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of this Additional Statement. Future legislative or administrative changes or
court decisions may significantly change the conclusions expressed herein, and
any such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.

FEDERAL - GENERAL INFORMATION

Each Fund intends to qualify as a regulated investment company under
Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal Revenue Code of
1986, as amended (the "Code"). As a regulated investment company, each Fund is
generally exempt from federal income tax on its net investment income and
realized capital gains which it distributes to shareholders, provided that it
distributes an amount equal to at least the sum of 90% of its tax-exempt income
and 90% of its investment company taxable income (net investment income and the
excess of net short-term capital gain over net long-term capital loss), if any,
for the year (the "Distribution Requirement") and satisfies certain other
requirements of the Code that are described below.

In addition to satisfaction of the Distribution Requirement, each Fund
must derive with respect to a taxable year at least 90% of its gross income
from dividends, interest, certain payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or foreign
currencies, or from other income derived with respect to its business of
investing in such stock, securities, or currencies (the "Income Requirement")
and derive less than 30% of its gross income from the sale or other disposition
of securities and certain other investments held for less than three months
(the "Short-Short Test"). Interest (including original issue discount and
accrued market discount) received by a Fund at maturity or on disposition of a
security held for less than three months will not be treated as other income
which is attributable to realized market appreciation, but will be treated as
gross income from the sale or other disposition of securities for this purpose.

In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of each Fund's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which a Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Fund does not hold more than 10% of
the outstanding voting securities of such issuer) and no more than 25% of the
value of each Fund's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which such Fund controls and
which are engaged in the same or similar trades or businesses.

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Each Fund intends to distribute to shareholders any excess of net
long-term capital gain over net short-term capital loss ("net capital gain")
for each taxable year. Such gain is distributed as a capital gain dividend and
is taxable to shareholders as long-term capital gain, regardless of the length
of time the shareholder has held the shares, whether such gain was recognized
by the Fund prior to the date on which a shareholder acquired shares of the
Fund and whether the distribution was paid in cash or reinvested in shares. In
addition, investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent of any capital gain dividends that have
been paid with respect to such shares.

In the case of corporate shareholders, distributions of a Fund for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" from domestic corporations
received by the Fund for the year. A dividend usually will be treated as a
"qualifying dividend" if it has been received from a domestic corporation. A
portion of the dividends paid by the Income Equity Fund, Growth Equity Fund,
Select Equity Fund and Small Cap Fund may constitute "qualifying dividends."
The other Funds, however, are not expected to pay qualifying dividends.

Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable
and the phase-out of personal exemptions, the maximum effective marginal rate
of tax for some taxpayers may be higher. An individual's long-term capital
gains are currently taxable at a maximum nominal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35% (an effective marginal rate of 39% applies in the
case of corporations with taxable incomes between $100,000 and $335,000, and an
effective marginal rate of 38% applies in the case of corporations with taxable
incomes between $15 million and $18,333,333).

If for any taxable year any Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In
such event, all distributions (whether or not derived from exempt-interest
income) would be taxable as ordinary income to the extent of such Fund's
current and accumulated earnings and profits and would be eligible for the
dividends received deduction in the case of corporate shareholders.

The Code imposes a non-deductible 4% excise tax on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to
make sufficient distributions or

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deemed distributions of its ordinary taxable income and capital gain net income
each calendar year to avoid liability for this excise tax.

Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each Fund
may be subject to the tax laws of such states or localities.

FEDERAL - TAX-EXEMPT INFORMATION

As described in the Prospectus, the Municipal Money Market, California
Municipal Money Market, Intermediate Tax-Exempt, Tax-Exempt and Florida
Intermediate Tax-Exempt Funds are designed to provide investors with tax-exempt
interest income. The Funds are not intended to constitute a balanced
investment program and are not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Funds would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, would
not gain any additional benefit from the Funds' dividends being tax-exempt. In
addition, the Funds may not be an appropriate investment for persons or
entities that are "substantial users" of facilities financed by private
activity bonds or "related persons" thereof. "Substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person which regularly
uses a part of such facilities in its trade or business and whose gross
revenues derived with respect to the facilities financed by the issuance of
bonds are more than 5% of the total revenues derived by all users of such
facilities, which occupies more than 5% of the usable area of such facilities
or for which such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" include certain related natural
persons, affiliated corporations, a partnership and its partners and an S
corporation and its shareholders.

In order for the Municipal Money Market, California Municipal Money
Market, Intermediate Tax-Exempt, Tax-Exempt or Florida Intermediate Tax-Exempt
Funds to pay federal exempt-interest dividends with respect to any taxable
year, at the close of each taxable quarter at least 50% of the aggregate value
of the Fund must consist of tax-exempt obligations. An exempt-interest
dividend is any dividend or part thereof (other than a capital gain dividend)
paid by a Fund and designated as an exempt-interest dividend in a written
notice mailed to shareholders not later than 60 days after the close of the
Fund's taxable year. However, the

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aggregate amount of dividends so designated by a Fund cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code
received by the Fund during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. The percentage of
total dividends paid by a Fund with respect to any taxable year which qualifies
as federal exempt-interest dividends will be the same for all shareholders
receiving dividends from the Fund with respect to such year.

Interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares generally is not deductible for federal income tax purposes.
If a shareholder holds Fund shares for six months or less, any loss on the sale
or exchange of those shares will be disallowed to the extent of the amount of
exempt-interest dividends earned with respect to the shares. The Treasury
Department, however, is authorized to issue regulations reducing the six-month
holding requirement to a period of not less than the greater of 31 days or the
period between regular distributions for investment companies that regularly
distribute at least 90% of its net tax-exempt interest. No such regulations
had been issued as of the date of this Additional Statement.

Shareholders will be advised annually as to the federal income tax
consequences of distributions made by the Funds.

TAXATION OF CERTAIN FINANCIAL INSTRUMENTS

Special rules govern the federal income tax treatment of financial
instruments that may be held by the Funds. These rules may have a particular
impact on the amount of income or gain that the Funds must distribute to their
respective shareholders to comply with the Distribution Requirement, on the
income or gain qualifying under the Income Requirement and on their ability to
comply with the Short-Short Test described above.

Generally, futures contracts, options on futures contracts and certain
foreign currency contracts held by a Fund (collectively, the "Instruments") at
the close of its taxable year are treated for federal income tax purposes as
sold for their fair market value on the last business day of such year, a
process known as "mark-to-market." Forty percent of any gain or loss resulting
from such constructive sales is treated as short-term capital gain or loss and
60% of such gain or loss is treated as long-term capital gain or loss without
regard to the period the Fund holds the Instruments ("the 40-60 rule"). The
amount of any capital gain or loss actually realized by the Fund in a
subsequent sale or other disposition of those Instruments is adjusted to
reflect any capital gain or loss taken into account by the Fund in a prior year
as a result of the constructive sale of the Instruments. Losses with respect
to Instruments that are regarded as parts of a "mixed straddle" because their
values fluctuate inversely to the values of

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specific securities held by the Fund are subject to certain loss deferral rules
which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any)
with respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which are also applicable, the holding
period of the securities forming part of the straddle will (if they have not
been held for the long-term holding period) be deemed not to begin prior to
termination of the straddle. With respect to certain Instruments, deductions
for interest and carrying charges may not be allowed. Notwithstanding the
rules described above, with respect to Instruments that are part of a "mixed
straddle" and are properly identified as such, a Fund may make an election
which will exempt (in whole or in part) those identified Instruments from the
rules of Section 1256 of the Code including "the 40-60 rule" and the
mark-to-market on gains and losses being treated for federal income tax
purposes as sold on the last business day of the Fund's taxable year, but gains
and losses will be subject to such short sales, wash sales and loss deferral
rules and the requirement to capitalize interest and carrying charges. Under
Temporary Regulations, a Fund would be allowed (in lieu of the foregoing) to
elect either (a) to offset gains or losses from portions which are part of a
mixed straddle by separately identifying each mixed straddle to which such
treatment applies, or (b) to establish a mixed straddle account for which gains
and losses would be recognized and offset on a periodic basis during the
taxable year. Under either election, "the 40-60 rule" will apply to the net
gain or loss attributable to the Instruments, but in the case of a mixed
straddle account election, not more than 50% of any net gain may be treated as
long-term and no more than 40% of any net loss may be treated as short-term.
Options on futures contracts generally receive federal tax treatment similar to
that described above.

With respect to futures contracts and other financial instruments
subject to the mark-to-market rules, the Internal Revenue Service has ruled in
private letter rulings that a gain realized from such a futures contact or
financial instrument will be treated as being derived from a security held for
three months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale under
the mark-to-market rules, and will be treated as being derived from a security
held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date. In determining
whether the Short-Short Test is met for a taxable year, increases and decreases
in the value of the Fund's futures contacts and other investments that qualify
as part of a "designated hedge," as defined in the Code, may be netted.

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A foreign currency contract must meet the following conditions in
order to be subject to the marking-to-market rules described above: (1) the
contract must require delivery of a foreign currency of a type in which
regulated futures contracts are traded or upon which the settlement value of
the contract depends; (2) the contract must be entered into at arm's length at
a price determined by reference to the price in the interbank market; and (3)
the contract must be traded in the interbank market. The Treasury Department
has broad authority to issue regulations under the provisions respecting
foreign currency contracts. As of the date of this Additional Statement, the
Treasury Department has not issued any such regulations. Other foreign
currency contracts entered into by a Fund may result in the creation of one or
more straddles for federal income tax purposes, in which case certain loss
deferral, short sales, and wash sales rules and the requirement to capitalize
interest and carrying charges may apply.

Some of the non-U.S. dollar denominated investments that certain Funds
may make, such as foreign debt securities and foreign currency contracts, may
be subject to the provisions of Subpart J of the Code, which govern the federal
income tax treatment of certain transactions denominated in terms of a currency
other than the U.S. dollar or determined by reference to the value of one or
more currencies other than the U.S dollar. The types of transactions covered
by these provisions include the following: (1) the acquisition of, or becoming
the obligor under, a bond or other debt instrument (including, to the extent
provided in Treasury regulations, preferred stock); (2) the accruing of certain
trade receivables and payables; and (3) the entering into or acquisition of any
forward contract, futures contract, option and similar financial instrument.
The disposition of a currency other than the U.S. dollar by a U.S. taxpayer
also is treated as a transaction subject to the special currency rules.
However, regulated futures contracts and nonequity options are generally not
subject to the special currency rules if they are or would be treated as sold
for their fair market value at year-end under the marking-to-market rules,
unless an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and
is normally taxable as ordinary gain or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. In
accordance with Treasury regulations, certain transactions that are part of a
"Section 988 hedging transaction" (as defined in the Code and Treasury
regulations) may be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the marking-to-market or loss deferral rules
under the Code. Gain or loss attributable to the foreign currency component of
transactions

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engaged in by the Fund which are not subject to the special currency rules
(such as foreign equity investments other than certain preferred stocks) is
treated as capital gain or loss and is not segregated from the gain or loss on
the underlying transaction.

Certain of the Funds may be subject to U.S. federal income tax on a
portion of any "excess distribution" from or a gain from the disposition of
shares of a passive foreign investment company.

SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE CALIFORNIA MUNICIPAL MONEY
MARKET FUND

Assuming the California Municipal Money Market Fund qualifies as a
regulated investment company, it will be relieved of liability for California
state franchise and corporate income tax to the extent its earnings are
distributed to its shareholders. The Fund may be taxed on its undistributed
taxable income. If for any year the California Municipal Money Market Fund
does not qualify as a regulated investment company, all of the Fund's taxable
income (including interest income on California Municipal Instruments for
franchise tax purposes only) may be subject to California state franchise or
income tax at regular corporate rates.

If, at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company, or series
thereof, consists of (i) obligations the interest on which is exempt from
taxation under the California Constitution or any California statute
("California Municipal Instruments") and (ii) obligations of the United States
the interest on which is exempt from state income taxation under the United
States Constitution or the laws of the United States ("Federal Obligations"),
then a regulated investment company, or series thereof, will be qualified to
pay dividends exempt from California state personal income tax to its
non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). "Series" of a regulated investment company is
defined as a segregated portfolio of assets, the beneficial interest in which
is owned by the holders of an exclusive class or series of stock of the
company. The California Municipal Money Market Fund intends to qualify under
the above requirements so that it can pay California exempt-interest dividends.
If the California Municipal Money Market Fund fails to so qualify, no part of
its dividends to shareholders will be exempt from the California state personal
income tax. The California Municipal Money Market Fund may reject purchase
orders for shares if it appears desirable to avoid failing to so qualify.

Within 60 days after the close of its taxable year, the California
Municipal Money Market Fund will notify each shareholder of the portion of the
dividends paid by the Fund to the shareholder with respect to such taxable year
which is exempt from California state personal income tax. The total amount of
California exempt-

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interest dividends paid by the Fund with respect to any taxable year cannot
exceed the excess of the amount of interest received by the Fund for such year
on California Municipal Instruments and Federal Obligations over any amounts
that, if the Fund were treated as an individual, would be considered expenses
related to tax-exempt income or amortizable bond premium and would thus not be
deductible under federal income or California state personal income tax law.
The percentage of total dividends paid by the Fund with respect to any taxable
year which qualifies as California exempt-interest dividends will be the same
for all shareholders receiving dividends from the Fund with respect to such
year.

In cases where shareholders are "substantial users" or "related
persons" with respect to California Municipal Instruments held by the
California Municipal Money Market Fund, such shareholders should consult their
tax advisers to determine whether California exempt-interest dividends paid by
the Fund with respect to such obligations retain California state personal
income tax exclusion. In this connection, rules similar to those regarding the
possible unavailability of federal exempt-interest dividend treatment to
"substantial users" are applicable for California state tax purposes. See
"Federal - Tax-Exempt Information" above.

To the extent any dividends paid to shareholders are derived from the
excess of net long-term capital gains over net short-term capital losses, such
dividends will not constitute California exempt-interest dividends and will
generally be taxed as long-term capital gains under rules similar to those
regarding the treatment of capital gain dividends for federal income tax
purposes. See "Federal - General Information" above. Moreover, interest on
indebtedness incurred by a shareholder to purchase or carry California
Municipal Money Market Fund shares is not deductible for California state
personal income tax purposes if the Fund distributes California exempt-interest
dividends during the taxable year.

California may tax income derived from repurchase agreements involving
federal obligations because such income represents a premium paid at the time
the government obligations are repurchased rather than interest paid by the
issuer of the obligations.

The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the California
Municipal Money Market Fund and its shareholders. No attempt is made to
present a detailed explanation of the California state personal income tax
treatment of the Fund or its shareholders, and this discussion is not intended
as a substitute for careful planning. Further, it should be noted that the
portion of the Fund's dividends constituting California exempt-interest
dividends is excludable from income for California state personal income tax
purposes only. Any dividends paid to shareholders subject to California state
franchise tax or

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California state corporate income tax may therefore be taxed as ordinary
dividends to such purchasers notwithstanding that all or a portion of such
dividends is exempt from California state personal income tax. Accordingly,
potential investors in the Fund, including, in particular, corporate investors
which may be subject to either California franchise tax or California corporate
income tax, should consult their tax advisers with respect to the application
of such taxes to the receipt of Fund dividends and as to their own California
state tax situation, in general.

SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE FLORIDA INTERMEDIATE
TAX-EXEMPT FUND

The State of Florida does not currently impose an income tax on
individuals. Thus, individual shareholders of the Florida Intermediate
Tax-Exempt Fund will not be subject to any Florida income tax on distributions
received from the Fund. However, Florida does currently impose an income tax
on certain corporations. Consequently, distributions may be taxable to
corporate shareholders.

The State of Florida currently imposes an "intangibles tax" at the
annual rate of 2 mills or 0.20% on certain securities and other intangible
assets owned by Florida residents. With respect to the first mill, or first
.10%, of the intangibles tax, every natural person is entitled each year to an
exemption of the first $20,000 of the value of the property subject to the tax.
A husband and wife filing jointly will have an exemption of $40,000. With
respect to the last 1 mill, or last .10%, of the intangibles tax, every natural
person is entitled each year to an exemption of the first $100,000 of the value
of the property subject to the tax. A husband and wife filing jointly will
have an exemption of $200,000. Notes, bonds and other obligations issued by
the State of Florida or its municipalities, counties, and other taxing
districts, or by the United States Government, its agencies and certain U.S.
territories and possessions (such as Guam, Puerto Rico and the Virgin Islands)
as well as cash are exempt from this intangibles tax. If on December 31 of any
year the portfolio of the Florida Tax-Exempt Fund consists solely of such
exempt assets, then the Fund's shares will be exempt from the Florida
intangibles tax payable in the following year.

In order to take advantage of the exemption from the intangibles tax
in any year, the Fund must sell any non-exempt assets held in its portfolio
during the year and reinvest the proceeds in exempt assets including cash prior
to December 31. Transaction costs involved in restructuring the portfolio in
this fashion would likely reduce the Fund's investment return and might exceed
any increased investment return the Fund achieved by investing in non-exempt
assets during the year.

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Outside the State of Florida, income distributions may be taxable to
shareholders under state or local law as dividend income even though all or a
portion of such distributions may be derived from interest on tax-exempt
obligations or U.S. Government obligations which, if realized directly, would
be exempt from such income taxes. Shareholders are advised to consult their
tax advisers concerning the application of state and local taxes.

DESCRIPTION OF SHARES

The Trust Agreement permits Northern Funds' Board of Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of one
or more separate series representing interests in different investment
portfolios. Northern Funds may hereafter create series in addition to Northern
Funds' existing series, which represent interests in nineteen portfolios, each
of which is discussed in this Additional Statement. Under the terms of the
Trust Agreement, each share of each Fund has a par value of $.0001, represents
a proportionate interest in the particular Fund with each other share of its
class and is entitled to such dividends and distributions out of the income
belonging to the Fund as are declared by the Trustees. Upon any liquidation of
a Fund, shareholders of each class of a Fund are entitled to share pro rata in
the net assets belonging to that class available for distribution. Shares do
not have any preemptive or conversion rights. The right of redemption is
described under "Redeeming and Exchanging Shares" in the Prospectus. Pursuant
to the terms of the 1940 Act, the right of a shareholder to redeem shares and
the date of payment by a Fund may be suspended for more than seven days (a) for
any period during which the New York Stock Exchange is closed, other than the
customary weekends or holidays, or trading in the markets the Fund normally
utilizes is closed or is restricted as determined by the SEC, (b) during any
emergency, as determined by the SEC, as a result of which it is not reasonably
practicable for the Fund to dispose of instruments owned by it or fairly to
determine the value of its net assets, or (c) for such other period as the SEC
may by order permit for the protection of the shareholders of the Fund.
Northern Funds may also suspend or postpone the recordation of the transfer of
its shares upon the occurrence of any of the foregoing conditions. In
addition, Northern Funds reserves the right to adopt, by action of the
Trustees, a policy pursuant to which it may, without shareholder approval,
redeem upon not less than 30 days' notice all of a Fund's shares if such shares
have an aggregate value below a designated amount and if the Trustees determine
that it is not practical, efficient or advisable to continue the operation of
such Fund and that any applicable requirements of the 1940 Act have been met.
Shares when issued as described in the Prospectus are validly issued, fully
paid and nonassessable, except as stated below.

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The proceeds received by each Fund for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and
proceeds thereof, subject only to the rights of creditors, will be specifically
allocated to and constitute the underlying assets of that Fund. The underlying
assets of each Fund will be segregated on the books of account, and will be
charged with the liabilities in respect to that Fund and with a share of the
general liabilities of Northern Funds. Expenses with respect to the portfolios
of Northern Funds are normally allocated in proportion to the net asset value
of the respective portfolios except where allocations of direct expenses can
otherwise be fairly made.

Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as Northern Funds shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each investment portfolio affected by such matter. Rule 18f-2
further provides that an investment portfolio shall be deemed to be affected by
a matter unless the interests of each investment portfolio in the matter are
substantially identical or the matter does not affect any interest of the
investment portfolio. Under the Rule, the approval of an investment advisory
agreement, a distribution plan subject to Rule 12b-1 under the 1940 Act or any
change in a fundamental investment policy would be effectively acted upon with
respect to an investment portfolio only if approved by a majority of the
outstanding shares of such investment portfolio. However, the Rule also
provides that the ratification of the appointment of independent accountants,
the approval of principal underwriting contracts and the election of Trustees
may be effectively acted upon by shareholders of Northern Funds voting together
in the aggregate without regard to a particular investment portfolio.

The term "majority of the outstanding shares" of either Northern Funds
or a particular Fund or investment portfolio means, with respect to the
approval of an investment advisory agreement, a distribution plan or a change
in a fundamental investment policy, the vote of the lesser of (i) 67% or more
of the shares of Northern Funds or such Fund or portfolio present at a meeting,
if the holders of more than 50% of the outstanding shares of Northern Funds or
such Fund or portfolio are present or represented by proxy, or (ii) more than
50% of the outstanding shares of Northern Funds or such Fund or portfolio.

As of July 15, 1996, Northern and its affiliates held of record
substantially all of the outstanding shares of the Non-Money Market Funds as
agent, custodian, trustee or investment adviser on behalf of their customers.
At such date, The Northern Trust Company, 50 S. LaSalle Street, Chicago,
Illinois 60657, and its affiliate banks held as beneficial owner five percent
or more of

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the outstanding shares of the Non-Money Market Funds because they possessed
sole or shared voting or investment power with respect to such shares. As of
June 30, 1996, the name and share ownership of the entities or individuals
which held of record or beneficially more than 5% of the outstanding shares of
the Money Market Fund were as follows: Northern Trust Bank FL M&I Sweep
Account, 6.79%. As of June 30, 1996, the name and share ownership of the
entities or individuals which held of record or beneficially more than 5% of
the outstanding shares of the U.S. Government Money Market Fund were as
follows: Sunstone Financial Group, Inc. for Van Wagoner Funds, 32.14%; KPMG
Peat Marwick, 18.08%; Mid-West Automation Systems, 16.57%; and Sunstone
Financial Group, Inc. for Wasatch Funds, 5.19%. As of June 30, 1996, the name
and share ownership of the entities or individuals which held of record or
beneficially more than 5% of the outstanding shares of the Municipal Money
Market Fund were as follows: Northern Trust Bank FL M&I Sweep Account, 11.44%;
Harve A. Ferrill TRST Harve A. Ferrill TR, 6.15%; and Richard M. Hamlin, 7.36%.
As of June 30, 1996, the name and share ownership of the entities or
individuals which held of record or beneficially more than 5% of the
outstanding shares of the U.S. Government Select Money Market Fund were as
follows: Edith B. Jacobs TRST Edith B. Jacobs TRUST DTD 4/8/76, 5.18% and
Peapod LP, 30.29%. As of June 30, 1996, the name and share ownership of the
entities or individuals which held of record or beneficially more than 5% of
the outstanding shares of the California Municipal Money Market Fund were as
follows: Rosalind K. Robbins TRST Rosalind K. Robbins 1987 Inter VIVDS TR
12/27/87, 6.19%; Brian S. Bean and Kathleen T. Bean JT TEN, 5.72%, Ray S.
Edwards, Jr., 18.34%; and Michael Foley and Pamela Foley TRST Foley Family
Trust, 12.04%. As of June 30, 1996, the name and share ownership of other
entities or individuals which held of record or beneficially more than 5% of
the outstanding shares of the International Select Equity Fund were as follows:
James L. Knight 1969 TRST SUB ACCT TRUST CASH PROCESSING UNIT-MIAMI, 5.63%. As
of June 30, 1996, the name and share ownership of other entities or individuals
which held of record or beneficially more than 5% of the outstanding shares of
the Technology Fund were as follows: Paul T. Delaney, 5.52%. The address of
all of the above persons is c/o The Northern Trust Bank, 50 S. LaSalle Street,
Chicago, Illinois 60657.

As a general matter, Northern Funds does not hold annual or other
meetings of shareholders. This is because the Trust Agreement provides for
shareholder voting only for the election or removal of one or more Trustees, if
a meeting is called for that purpose, and for certain other designated matters.
Each Trustee serves until the next meeting of shareholders, if any, called for
the purpose of considering the election or reelection of such Trustee or of a
successor to such Trustee, and until the election and qualification of his
successor, if any, elected at such meeting, or until such Trustee sooner dies,
resigns, retires or is removed by the shareholders or two-thirds of the
Trustees.

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Under Massachusetts law, there is a possibility that shareholders of a
business trust could, under certain circumstances, be held personally liable as
partners for the obligations of the trust. The Trust Agreement contains an
express disclaimer of shareholder (as well as Trustee and officer) liability
for acts or obligations of Northern Funds and requires that notice of such
disclaimer be given in each contract, undertaking or instrument entered into or
executed by Northern Funds or the Trustees. The Trust Agreement provides for
indemnification out of Trust property of any shareholder charged or held
personally liable for the obligations or liabilities of Northern Funds solely
by reason of being or having been a shareholder of Northern Funds and not
because of such shareholder's acts or omissions or for some other reason. The
Trust Agreement also provides that Northern Funds shall, upon proper and timely
request, assume the defense of any charge made against any shareholder as such
for any obligation or liability of Northern Funds and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which Northern Funds
itself would be unable to meet its obligations.

The Trust Agreement provides that each Trustee of Northern Funds will
be liable for his own wilful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
Trustee ("disabling conduct"), and for nothing else, and will not be liable for
errors of judgment or mistakes of fact or law. The Trust Agreement provides
further that Northern Funds will indemnify Trustees and officers of Northern
Funds against liabilities and expenses incurred in connection with litigation
and other proceedings in which they may be involved (or with which they may be
threatened) by reason of their positions with Northern Funds, except that no
Trustee or officer will be indemnified against any liability to Northern Funds
or its shareholders to which he would otherwise be subject by reason of
disabling conduct.

The Trust Agreement provides that each shareholder, by virtue of
becoming such, will be held to have expressly assented and agreed to the terms
of the Trust Agreement and to have become a party thereto.

FINANCIAL STATEMENTS

The audited financial statements and related report of the Trust's
independent auditors, contained in the annual report to shareholders for the
fiscal year ended March 31, 1996 (the "Annual Report"), are hereby incorporated
herein by reference. No other part of the Annual Report is incorporated by
reference herein. Copies of the Annual Report may be obtained by writing to
the Transfer Agent by writing to the Northern Funds Center, P.O. Box 75986,
Chicago, Illinois 60690-9069 or by calling 1-800-595-9111.

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OTHER INFORMATION

The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by Northern Funds' Prospectus.
Certain portions of the Registration Statement have been omitted from the
Prospectus and this Additional Statement pursuant to the rules and regulations
of the SEC. The Registration Statement, including the exhibits filed
therewith, may be examined at the office of the SEC in Washington, D.C.

Statements contained in the Prospectus or in this Additional Statement
as to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.

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APPENDIX A

COMMERCIAL PAPER RATINGS

A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:

"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."

"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."

"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.

"B" - Issue has only a speculative capacity for timely
payment.

"C" - Issue has a doubtful capacity for payment.

"D" - Issue is in payment default.

Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:

"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.

"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings

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trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.

"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.

"Not Prime" - Issuer does not fall within any of the Prime
rating categories.

The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:

"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.

"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.

"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.

"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.

"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.

"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.

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"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.

Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:

"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.

"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."

"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.

"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.

"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.

"D" - Securities are in actual or imminent payment default.

Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.

Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:

"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of

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likelihood that principal and interest will be paid on a timely basis.

"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."

"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.

"TBW-4" - This designation indicates that the debt is regarded
as non- investment grade and therefore speculative.

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:

"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.

"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.

"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.

"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.

"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.

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"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.

"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.

"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.

"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.

"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.

"CI" - This rating is reserved for income bonds on which no
interest is being paid.

"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.

PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.

"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns

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due to non-credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities, or
currencies; certain swaps and options; and interest only and principal only
mortgage securities. The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in
total return.

The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.

"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.

"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.

"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.

Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are

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rated conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.

(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.

The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:

"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.

"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.

"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.

"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.

"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.

To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.

The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:

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"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.

"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."

"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.

"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.

To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "BBB" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within these major
rating categories.

"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.

MUNICIPAL NOTE RATINGS

A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:

"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest.

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Those issues determined to possess overwhelming safety characteristics are
given a plus (+) designation.

"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.

"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.

Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:

"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.

"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.

"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be less
well established.

"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.

"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.

Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.

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APPENDIX B

As stated in the Prospectus, the Funds (other than the Money
Market Funds) may enter into certain futures transactions. Such transactions
are described in this Appendix.

I. Interest Rate Futures Contracts

Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash
market, bonds are purchased and sold with payment for the full purchase price
of the bond being made in cash, generally within five business days after the
trade. In the futures market, only a contract is made to purchase or sell a
bond in the future for a set price on a certain date. Historically, the prices
for bonds established in the futures markets have tended to move generally in
the aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.

A Fund presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures
market, the protection is more likely to be achieved, perhaps at a lower cost
and without changing the rate of interest being earned by the Fund, by using
futures contracts.

Description of Interest Rate Futures Contracts. An interest
rate futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase
would create an obligation by a Fund, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.

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Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery of securities. Closing out a futures contract sale is effected by the
Fund entering into a futures contract purchase for the same aggregate amount of
the specific type of financial instrument and the same delivery date. If the
price of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Fund entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.

Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges -- principally, the Chicago
Board of Trade, the Chicago Mercantile Exchange and the New York Futures
Exchange. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the
exchange membership.

A public market now exists in futures contracts covering
various financial instruments including long-term U.S. Treasury Bonds and
Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage backed securities; three-month U.S. Treasury Bills; and ninety-day
commercial paper. The Funds may trade in any interest rate futures contracts
for which there exists a public market, including, without limitation, the
foregoing instruments.

II. Index Futures Contracts

General. A stock or bond index assigns relative values to the
stocks or bonds included in the index, which fluctuates with changes in the
market values of the stocks or bonds included. Some stock index futures
contracts are based on broad market indexes, such as Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures contracts on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market indexes, such as Standard
& Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Futures contracts are traded on organized exchanges regulated by
the commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract. With regard to each Fund, to the extent consistent
with its investment objective, Northern Trust anticipates engaging in
transactions, from time to time, in foreign stock index futures such as the
ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).

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A Fund may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise
result from a market decline. A Fund may do so either to hedge the value of
its portfolio as a whole, or to protect against declines, occurring prior to
sales of securities, in the value of the securities to be sold. Conversely, a
Fund will purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.

In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
A Fund may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.

III. Futures Contracts on Foreign Currencies

A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by a Fund
to hedge against exposure to fluctuations in exchange rates between the U.S.
dollar and other currencies arising from multinational transactions.

IV. Margin Payments

Unlike purchase or sales of portfolio securities, no price is
paid or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker or in a
segregated account with a custodian an amount of cash or cash equivalents,
known as initial margin, based on the value of the contract. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when a particular Fund
has purchased a futures contract and the

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price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the future contract has declined in response to a decrease in
the underlying instruments, the position would be less valuable and the Fund
would be required to make a variation margin payment to the broker. Prior to
expiration of the futures contract, Northern Trust may elect to close the
position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.

V. Risks of Transactions in Futures Contracts

There are several risks in connection with the use of futures
by a Fund as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of the hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the
instruments which are the subject of the hedge, the hedge will not be fully
effective but, if the price of the instruments being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had
not hedged at all. If the price of the instruments being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
futures. If the price of the futures moves more than the price of the hedged
instruments, the Fund involved will experience either a loss or gain on the
futures which will not be completely offset by movements in the price of the
instruments which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of instruments being hedged and
movements in the price of futures contracts, a Fund may buy or sell futures
contracts in a greater dollar amount than the dollar amount of instruments
being hedged if the volatility over a particular time period of the prices of
such instruments has been greater than the volatility over such time period of
the futures, or if otherwise deemed to be appropriate by Northern Trust.
Conversely, a Fund may buy or sell fewer futures contracts if the volatility
over a particular time period of the prices of the instruments being hedged is
less than the volatility over such time period of the futures contract being
used, or if otherwise deemed to be appropriate by Northern Trust. It is also
possible that, where a Fund has sold futures to hedge its portfolio against a
decline in the market, the market may advance and the value of instruments held
in the Fund may decline. If this occurred, the Fund would

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lose money on the futures and also experience a decline in value in its
portfolio securities.

When futures are purchased to hedge against a possible
increase in the price of securities or a currency before a Fund is able to
invest its cash (or cash equivalents) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest
its cash at that time because of concern as to possible further market decline
or for other reasons, the Fund will realize a loss on the futures contract that
is not offset by a reduction in the price of the instruments that were to be
purchased.

In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the cash market and movements in the price
of futures, a correct forecast of general market trends or interest rate
movements by the adviser may still not result in a successful hedging
transaction over a short time frame.

Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although
the Funds intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not
be possible to close a futures investment position, and in the event of adverse
price movements, a Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have
been used to hedge portfolio securities, such securities will not be sold until
the futures contract can be terminated. In such circumstances, an increase in
the price of the securities, if any, may partially or completely offset losses
on the futures contract. However, as

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described above, there is no guarantee that the price of the securities will in
fact correlate with the price movements in the futures contract and thus
provide an offset on a futures contract.

Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered into
at a price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation
margin payments.

Successful use of futures by a Fund is also subject to
Northern Trust's ability to predict correctly movements in the direction of the
market. For example, if a particular Fund has hedged against the possibility
of a decline in the market adversely affecting securities held by it and
securities prices increase instead, the Fund will lose part or all of the
benefit to the increased value of its securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.

VI. Options on Futures Contracts

A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss. A Fund will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial

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margin deposits. As an example, in anticipation of a decline in interest
rates, a Fund may purchase call options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund intends to purchase. Similarly, if the
value of the securities held by a Fund is expected to decline as a result of an
increase in interest rates, the Fund might purchase put options or sell call
options on futures contracts rather than sell futures contracts.

Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar
to those risks relating to the sale of futures contracts.

VII. Other Matters

Accounting for futures contracts will be in accordance with
generally accepted accounting principles.

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