NORTHERN FUNDS, 485BPOS, 1997-07-31

NORTHERN FUNDS
485BPOS, 1997-07-31

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<PAGE> 1

As filed with the Securities and Exchange Commission on July 31, 1997

Registration Nos. 33-73404
811-8236
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]

Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 16 [x]

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]

Amendment No. 16 [x]

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

Northern Funds
(Exact Name of Registrant as Specified in Charter)

207 E. Buffalo Street
Suite 400
Milwaukee, Wisconsin 53202
(Address of Principal Executive Offices)

Registrant's Telephone Number:
1-800-595-9111

Jeffrey A. Dalke, Esquire

Drinker Biddle & Reath LLP

1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)

It is proposed that this filing will become effective (check appropriate box)

[X] immediately upon filing pursuant to paragraph (b)

[ ] on (date) pursuant to paragraph (b)

[ ] 60 days after filing pursuant to paragraph (a)(i)

[ ] on (date) pursuant to paragraph (a)(i)

[ ] 75 days after filing pursuant to paragraph (a)(ii)

[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.

If appropriate, check the following box:

[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

The Registrant has previously filed a declaration of indefinite registration of
its shares of beneficial interest, $.0001 par value per share, of all classes of
the Registrant, now existing or hereafter created, under the Securities Act of
1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. Registrant's Rule 24f-2 Notice for its fiscal year ended March 31, 1997
was filed on May 29, 1997.

<PAGE> 2
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
U.S. GOVERNMENT FUND
SHORT INTERMEDIATE U.S. GOVERNMENT FUND
FIXED INCOME FUND
INTERMEDIATE TAX-EXEMPT FUND
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND
TAX-EXEMPT FUND
ARIZONA TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
INTERNATIONAL FIXED INCOME FUND
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
SMALL CAP INDEX FUND

CROSS REFERENCE SHEET

Pursuant to Rule 495(b)
under the Securities Act of 1933

Form N-1A Item Number Location

Part A Prospectus Caption

1. Cover Page.......................... Cover Page

2. Synopsis............................ Expense Summary

3. Condensed Financial Information..... Financial Highlights

4. General Description of Registrant... Cover Page; Investment
Information; Additional Investment
Information, Risks and
Considerations; Management;
Further Information

5. Management of the Fund.............. Management; Opening an
Account and Purchasing
Shares; Redeeming and
Exchanging Shares

5A. Management's Discussion of
Fund Performance................... Financial Highlights

6. Capital Stock and Other Securities Opening an Account and Purchasing
Shares; Redeeming and Exchanging
Shares; Distributions and Taxes;
Further Information

7. Purchase of Securities Being Offered Opening an Account and Purchasing
Shares; Redeeming and Exchanging
Shares

8. Redemption or Repurchase............ Redeeming and Exchanging Shares
<PAGE> 3
9. Pending Legal Proceedings........... Not Applicable
<PAGE> 4
NORTHERN FUNDS

PROSPECTUS
July 31, 1997

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
Short Intermediate U.S. Government Fund
Fixed Income Fund
Intermediate Tax-Exempt Fund
Florida Intermediate Tax-Exempt Fund
California Intermediate Tax-Exempt Fund
Tax-Exempt Fund
Arizona Tax-Exempt Fund
California Tax-Exempt Fund
International Fixed Income Fund

EQUITY FUNDS
Income Equity Fund
Stock Index Fund
Growth Equity Fund
Select Equity Fund
Small Cap Index Fund
Small Cap Fund
International Growth Equity Fund
International Select Equity Fund
Technology Fund

<PAGE> 5
NORTHERN FUNDS

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 twenty-four 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

EQUITY FUNDS:
Income Equity Fund
Stock Index Fund
Small Cap 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

FIXED INCOME FUNDS:
U.S. Government Fund
Short Intermediate U.S. Government Fund
Fixed Income Fund
Intermediate Tax-Exempt Fund
Florida Intermediate Tax-Exempt Fund
California Intermediate Tax-Exempt Fund
Tax-Exempt Fund
Arizona Tax-Exempt Fund
California Tax-Exempt Fund
International Fixed Income Fund

<PAGE> 6
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,
1997 (the "Additional Statement"), which is incorporated by reference herein.
For a free copy, write to Northern Funds' distributor, Sunstone Distribution
Services, LLC, at 207 E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202
or call 1-414-271-5885. The Securities and Exchange Commission maintains a World
Wide Web Site (http://www.sec.gov) that contains the Additional Statement and
other information regarding Northern Funds. The California Municipal Money
Market, Florida Intermediate Tax-Exempt, California Intermediate Tax-Exempt and
California Tax-Exempt Funds are 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 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.

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, 1997

<PAGE> 7
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
HIGHLIGHTS...................................................................................................... 1

EXPENSE SUMMARY................................................................................................. 8

FINANCIAL HIGHLIGHTS............................................................................................ 13

INVESTMENT INFORMATION.......................................................................................... 20
Money Market Funds..................................................................................... 20
Money Market Fund............................................................................. 20
U.S. Government Money Market Fund............................................................. 21
Municipal Money Market Fund................................................................... 21
U.S. Government Select Money Market Fund...................................................... 21
California Municipal Money Market Fund........................................................ 22
Other Information............................................................................. 22
Fixed Income Funds..................................................................................... 23
U.S. Government Fund, Short Intermediate U.S.
Government Fund and Fixed Income Fund................................................ 23
Intermediate Tax-Exempt Fund, Florida Intermediate
Tax-Exempt Fund, California Intermediate Tax-
Exempt Fund, Tax-Exempt Fund, Arizona Tax-
Exempt Fund and California Tax-Exempt Fund........................................... 24
International Fixed Income Fund............................................................... 26
Equity Funds........................................................................................... 27
Income Equity Fund............................................................................ 27
Growth Equity Fund............................................................................ 28
Select Equity Fund............................................................................ 28
Small Cap Fund................................................................................ 28
International Growth Equity Fund.............................................................. 29
International Select Equity Fund.............................................................. 30
Technology Fund............................................................................... 30
Stock Index Fund.............................................................................. 31
Small Cap Index Fund...........................................................................32
Other Information............................................................................. 35
California Funds, Florida Intermediate Tax-Exempt Fund
and Arizona Tax-Exempt Fund -- Additional Risks
and Considerations............................................................................ 35
Technology Fund -- Additional Risks and Considerations................................................. 36
International Funds -- Further Information............................................................. 37
Fundamentals of Fixed Income Investing................................................................. 38

ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS..................................................... 39
Description of Securities and Investment Techniques.................................................... 39
Investment Restrictions................................................................................ 57

OPENING AN ACCOUNT AND PURCHASING SHARES........................................................................ 59
Purchasing Shares Directly from the Funds.............................................................. 59
</TABLE>

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PHTRANS:139395_4.WP5

<PAGE> 8

<TABLE>
<CAPTION>
Page
----
<S> <C>
Purchasing Shares Through Northern Trust and Other
Institutions.................................................................................. 61
Additional Purchase Information........................................................................ 62

REDEEMING AND EXCHANGING SHARES................................................................................. 63
Redeeming and Exchanging Directly from the Funds....................................................... 63
Redeeming and Exchanging Through Northern Trust and
Other Institutions............................................................................ 66
Additional Redemption and Exchange Information......................................................... 67

DISTRIBUTIONS AND TAXES......................................................................................... 68
Distributions.......................................................................................... 68
Taxes .............................................................................................. 69
Tax Table.............................................................................................. 74

MANAGEMENT...................................................................................................... 75
Board of Trustees...................................................................................... 75
Investment Adviser, Transfer Agent and Custodian....................................................... 75
Administrator and Distributor.......................................................................... 79
Service Organizations.................................................................................. 79
Expenses .............................................................................................. 80

FURTHER INFORMATION............................................................................................. 81
Determining Share Price................................................................................ 81
Advertising Performance................................................................................ 82
Voting Rights.......................................................................................... 84
Shareholder Reports.................................................................................... 84
Retirement Plans....................................................................................... 85
Miscellaneous.......................................................................................... 85
</TABLE>

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PHTRANS:139395_4.WP5

<PAGE> 9
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
twenty-four 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.

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<PAGE> 10
SHORT INTERMEDIATE U.S. GOVERNMENT FUND seeks a high level of current
income from investment in a broad range of U.S. government securities
while maintaining a dollar-weighted average maturity between two and
five 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.

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.

CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND seeks a high level of current
income exempt from regular federal income tax and California state
personal 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.

ARIZONA TAX-EXEMPT FUND seeks a high level of current income exempt
from regular federal income tax and Arizona state personal income tax
by investing in municipal instruments while maintaining a
dollar-weighted average maturity between ten and thirty years.

CALIFORNIA TAX-EXEMPT FUND seeks a high level of current income exempt
from regular federal income tax and California state personal income
tax by investing in municipal instruments while maintaining a
dollar-weighted average maturity between ten and thirty years.

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.

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<PAGE> 11
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 investing 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, before expenses,
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").

SMALL CAP INDEX FUND seeks investment results, before expenses,
approximating the aggregate price and dividend performance of the
securities included in the Russell 2000 Small Stock Index (the "Russell
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

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<PAGE> 12
serves as the Funds' transfer agent and custodian. Northern Trust and
its affiliates administered $889.2 billion in assets as of June 30,
1997 in various capacities, including approximately $149.4 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 Distribution Services,
LLC. 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 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.

Northern Trust anticipates that each of the Short-Intermediate U.S.
Government, California Intermediate Tax Exempt, Arizona Tax-Exempt and
Small Cap Index Funds will commence operations by the end of 1997.

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."

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<PAGE> 13
Q. WHEN ARE DISTRIBUTIONS MADE?

A. Dividends from the net investment income of the Money Market Funds, the
U.S. Government Fund, the Short-Intermediate U.S. Government Fund, the
Fixed Income Fund, the Intermediate Tax-Exempt Fund, the Florida
Intermediate Tax-Exempt Fund, the California Intermediate Tax-Exempt
Fund, the Tax-Exempt Fund, the Arizona Tax-Exempt Fund and the
California Tax-Exempt Fund are declared daily and paid monthly. Until
September 27, 1997, dividends of the International Fixed Income Fund
will be declared daily and paid quarterly. Effective September 27,
1997, dividends of the International Fixed Income Fund will be declared
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,
Technology Fund and Small Cap Index 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 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"), Global Depository Receipts ("GDRs") 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

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<PAGE> 14
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, the California Intermediate Tax-Exempt Fund, the California
Tax-Exempt Fund (the "California Funds"), the Arizona Tax-Exempt 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 Funds, Arizona Tax- Exempt Fund and Florida
Intermediate Tax-Exempt Fund Additional Risks and Considerations." In
addition, the California Funds, the Arizona Tax-Exempt Fund, the
Florida Intermediate Tax-Exempt Fund and International Fixed Income
Fund are non-diversified funds, which means their portfolios can be
dependent upon the performance of securities of a smaller number of
issuers 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"

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<PAGE> 15
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."

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<PAGE> 16
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>
CALI-
U.S. FORNIA
U.S. MUNI- GOV'T MUNI-
GOV'T CIPAL SELECT CIPAL
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% 0.40% 0.40%
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% 0.55% 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................................................... $6 $6 $6 $6 $6
Three Years................................................ $18 $18 $18 $18 $18
Five Years................................................. $32 $32 $32 $32 $32
Ten Years.................................................. $71 $71 $71 $71 $71
</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.

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<PAGE> 17

Except as noted in the next sentence, the above information reflects
the expenses these Funds incurred for Northern Funds' fiscal year ended March
31, 1997. The figures shown for the U.S. Government Select Money Market and
California Municipal Money Market Funds have been restated to reflect
anticipated fees during the next twelve months. Without voluntary fee
reductions, waivers and reimbursements, "Management Fees" would have been 0.60%
for each Fund; "Other Expenses" would have been 0.30%, 0.36%, 0.30%, 0.37% 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 have been
0.90%, 0.96%, 0.90%, 0.97% 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."

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<PAGE> 18
<TABLE>
<CAPTION>
SHORT FLORIDA
U.S. INTERMEDIATE FIXED INTERMEDIATE INTERMEDIATE
GOVERNMENT U.S. GOVERNMENT INCOME TAX-EXEMPT TAX-EXEMPT
---------- --------------- ------ ------------ ------------
<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).................. 0.75% 0.75% 0.75% 0.70% 0.70%
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).......................... 0.90% 0.90% 0.90% 0.85% 0.85%
===== ===== ===== ===== =====

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
Three Years............................... $30 $30 $30 $28 $28
Five Years................................ $51 N/A $51 $48 N/A
Ten Years................................. $114 N/A $114 $108 N/A
</TABLE>

<TABLE>
<CAPTION>
CALIFORNIA
INTERMEDIATE ARIZONA CALIFORNIA INTERNATIONAL
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT FIXED INCOME
------------ ---------- ---------- ---------- ------------
<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).................. 0.70% 0.70% 0.70% 0.70% 0.90%
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% 0.25%
----- ----- ----- ----- -----

TOTAL OPERATING EXPENSES(2)
(After Fee Reductions, Waivers and
Reimbursements).......................... 0.85% 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 $12
Three Years............................... $28 $28 $28 $28 $38
Five Years................................ N/A $48 N/A N/A $65
Ten Years................................. N/A $108 N/A N/A $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.

-10-
<PAGE> 19

Except as noted below, the above information reflects the expenses
these Funds incurred for Northern Funds' fiscal year ended March 31, 1997. Since
the Florida Intermediate Tax-Exempt and California Tax-Exempt Funds did not
commence investment operations until August 15, 1996 and April 8, 1997,
respectively, and the Short-Intermediate U.S. Government, California
Intermediate Tax-Exempt and Arizona Tax-Exempt Funds had not commenced
operations as of the date of this prospectus, "Other Expenses" for those Funds
is based on estimated amounts the Fund expects to pay during the current fiscal
year. Without voluntary fee reductions, waivers and reimbursements, "Management
Fees" would have been 0.75% for the Intermediate Tax-Exempt, Florida
Intermediate Tax-Exempt, California Intermediate Tax-Exempt, Tax- Exempt,
Arizona Tax-Exempt and California Tax-Exempt Funds; "Other Expenses" would have
been 0.34%, 0.42%, 0.37%, 0.32%, 1.56%, 0.37%, 0.35%, 0.50%, 0.39% and 1.06%,
respectively, for the U.S. Government, Short Intermediate U.S. Government, Fixed
Income, Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, California
Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax- Exempt, California Tax-Exempt
and International Fixed Income Funds; and "Total Operating Expenses" would have
been 1.09%, 1.17%, 1.12%, 1.07%, 2.31%, 1.12%, 1.10%, 1.25%, 1.14% and 1.96%,
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."

<TABLE>
<CAPTION>
INTER- INTER-
NATIONAL NATIONAL SMALL
INCOME GROWTH SELECT SMALL GROWTH SELECT TECH- STOCK CAP
EQUITY EQUITY EQUITY CAP EQUITY EQUITY NOLOGY INDEX INDEX
------ ------ ------ ----- -------- -------- ------ ----- -----
<S> <C> <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 None
Sales Charge Imposed on
Reinvested Distributions........ None None None None None None None None None
Deferred Sales Charge
Imposed on Redemptions.......... None None None None None None None None None
Redemption Fees(1)............... None None None None None None None None None
Exchange Fees.................... None 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% 0.50%
12b-1 Fees....................... 0.00% 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% 0.15%
----- ----- ----- ----- ----- ----- ----- ----- -----

TOTAL OPERATING EXPENSES(2)
(After Fee Reductions,
</TABLE>

-11-
<PAGE> 20

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 $6 $7
Three Years...................... $33 $33 $33 $33 $41 $41 $41 $18 $21
Five Years....................... $57 $57 $57 $57 $71 $71 N/A N/A N/A
Ten Years........................ $126 $126 $126 $126 $155 $155 N/A N/A N/A
</TABLE>

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

Except as noted below, the above information reflects the expenses
these Funds incurred for Northern Funds' fiscal year ended March 31, 1997. Since
the Stock Index Fund did not commence investment operations until October 7,
1996 and the Small Cap Index Fund has not commenced investment operations as of
the date of this Prospectus, "Other Expenses" for those Funds is based on
estimated amounts the Fund expects to pay during the current fiscal year.
Without voluntary fee reductions, waivers and reimbursements, "Management Fees"
would have been 1.00%, 1.00%, 1.20%, 1.20%, 1.20%, 1.20%, 1.20%, .60% and .65%,
respectively, of the average daily net assets of the Income Equity, Growth
Equity, Select Equity, Small Cap, International Growth Equity, International
Select Equity, Technology, Stock Index and Small Cap Index Funds; "Other
Expenses" would have been 0.42%, 0.33%, 0.47%, 0.34%, 0.43%, 0.46%, 0.82%, 1.63%
and 0.36%, respectively; and "Total Operating Expenses" would have been 1.42%,
1.33%, 1.67%, 1.54%, 1.63%, 1.66%, 2.02%, 2.23% and 1.01%, 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."

-12-
<PAGE> 21
FINANCIAL HIGHLIGHTS

The following financial information has been derived from the financial
statements included in, or incorporated by reference into, the Additional
Statement, and has been audited by Northern Funds' independent accountant. This
financial information should be read together with those financial statements.
Further information about the performance of the Funds is contained in Northern
Funds' annual shareholder reports. Both the Additional Statement and the annual
shareholder reports 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.

-13-
<PAGE> 22
MONEY MARKET FUNDS

U.S. GOVERNMENT MUNICIPAL
MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
------------------------------- ----------------------------- ------------------------------
Year Year Period Year Year Period Year Year Period
Ended Ended Ended Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31,
1997 1996 1995(1) 1997 1996 1995(1) 1997 1996 1995(1)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Selected per share data
NET ASSET VALUE,
BEGINNING OF PERIOD.......... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00

INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........ 0.05 0.05 0.04 0.05 0.05 0.04 0.03 0.03 0.03
- -------------------------------------------------------------------------------------------------------------------------------

LESS DISTRIBUTIONS PAID:
From net investment income... (0.05) (0.05) (0.04) (0.05) (0.05) (0.04) (0.03) (0.03) (0.03)
- -------------------------------------------------------------------------------------------------------------------------------

NET ASSET VALUE,
END OF PERIOD................ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------------------------

TOTAL RETURN(4)............... 5.05% 5.57% 4.55% 4.93% 5.46% 4.47% 3.14% 3.54% 2.90%

SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period................ $1,607,187 $1,061,813 $894,279 $314,259 $207,105 $227,543$1,420,041 $1,102,789 $927,747

Ratio to average net assets of:(5)
Expenses, net of waivers
and reimbursements......... 0.55% 0.49% 0.45% 0.55% 0.49% 0.45% 0.55% 0.49% 0.45%
Expenses, before waivers
and reimbursements......... 0.90% 0.91% 0.96% 0.96% 0.94% 1.01% 0.90% 0.91% 0.95%
Net investment income,
net of waivers and
reimbursements............. 4.94% 5.42% 4.94% 4.82% 5.33% 4.93% 3.08% 3.46% 3.10%
Net investment income,
before waivers and
reimbursements............. 4.59% 5.00% 4.43% 4.41% 4.88% 4.37% 2.73% 3.04% 2.60%
</TABLE>

<TABLE>
<CAPTION>
U.S. GOVERNMENT CALIFORNIA
SELECT MUNICIPAL
MONEY MARKET MONEY MARKET
FUND FUND
----------------------------- -----------------------------
Year Year Period Year Year Period
Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, March 31,
1997 1996 1995(2) 1997 1996 1995(3)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Selected per share data
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 0.05 0.02 0.03 0.04 0.01
- ----------------------------------------------------------------------------------------

LESS DISTRIBUTIONS PAID:
From net investment income... (0.05) (0.05) (0.02) (0.03) (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)............... 5.07% 5.55% 1.75% 3.19% 3.63% 1.27%

SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period................ $168,128 $85,400 $82,162 $200,989 $165,087 $161,316

Ratio to average net assets of:(5)
Expenses, net of waivers
and reimbursements......... 0.40% 0.33% 0.30% 0.45% 0.39% 0.35%
Expenses, before waivers
and reimbursements......... 0.97% 1.00% 1.32% 0.94% 0.94% 1.07%
Net investment income,
net of waivers and
reimbursements............. 4.95% 5.43% 5.84% 3.13% 3.55% 3.78%
Net investment income,
before waivers and
reimbursements............. 4.38% 4.76% 4.82% 2.64% 3.00% 3.06%
</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.

-14-
<PAGE> 23
FIXED INCOME FUNDS

<TABLE>
<CAPTION>
FIXED INTERMEDIATE
U.S. GOVERNMENT INCOME TAX-EXEMPT
FUND FUND FUND
----------------------------- ----------------------------- ------------------------------
Year Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31,
1997 1996 1995 1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Selected per share data
NET ASSET VALUE,
BEGINNING OF PERIOD......... $10.06 $9.84 $10.00 $10.10 $9.78 $10.00 $10.22 $10.03 $10.00

INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income....... 0.51 0.51 0.50 0.57 0.58 0.62 0.40 0.41 0.40
Net realized and unrealized
gains (losses) on invest-
ments, forward foreign
currency contracts and
foreign currency
transactions.............. (0.11) 0.29 (0.16) (0.12) 0.50 (0.22) (0.06) 0.26 0.03
- --------------------------------------------------------------------------------------------------------------------------

Total Income from Investment
Operations.................. 0.40 0.80 0.34 0.45 1.08 0.40 0.34 0.67 0.43
- --------------------------------------------------------------------------------------------------------------------------

LESS DISTRIBUTIONS PAID:
From net investment
income.................... (0.51) (0.51) (0.50) (0.56) (0.59) (0.62) (0.40) (0.41) (0.40)
From net realized gains..... (0.05) (0.07) -- (0.10) (0.17) -- (0.07) (0.07) --
In excess of net
investment income......... -- -- -- (0.01) -- -- -- -- --
In excess of net
realized gains............ (0.02) -- -- (0.02) -- -- (0.02) -- --
- --------------------------------------------------------------------------------------------------------------------------

Total Distributions........... (0.58) (0.58) (0.50) (0.69) (0.76) (0.62) (0.49) (0.48) (0.40)
- --------------------------------------------------------------------------------------------------------------------------

NET ASSET VALUE,
END OF PERIOD............... $9.88 $10.06 $9.84 $9.86 $10.10 $9.78 $10.07 $10.22 $10.03
- --------------------------------------------------------------------------------------------------------------------------

TOTAL RETURN(2)............... 3.98% 7.65% 3.49% 4.59% 11.18% 4.16% 3.39% 6.81% 4.38%

SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period................ $181,921 $149,062 $116,443 $122,444 $101,339 $65,929 $264,630 $244,139 $221,251

Ratio to average net assets of:(3)
Expenses, net of waivers
and reimbursements........ 0.90% 0.90% 0.90% 0.90% 0.90% 0.90% 0.85% 0.85% 0.85%
Expenses, before waivers
and reimbursements........ 1.09% 1.10% 1.12% 1.12% 1.14% 1.18% 1.07% 1.08% 1.09%
Net investment income,
net of waivers and
</TABLE>

<TABLE>
<CAPTION>
FLORIDA
INTERMEDIATE INTERNATIONAL
TAX-EXEMPT TAX-EXEMPT FIXED INCOME
FUND FUND FUND
--------- ----------------------------- -----------------------------
Period Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, March 31, March 31,
1997(1) 1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected per share data
NET ASSET VALUE,
BEGINNING OF PERIOD......... $10.00 $10.35 $10.08 $10.00 $10.62 $10.64 $10.00

INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income....... 0.24 0.50 0.48 0.48 0.56 0.78 0.58
Net realized and unrealized
gains (losses) on invest-
ments and foreign currency
transactions.............. 0.03 (0.06) 0.29 0.08 (0.40) (0.16) 0.64
- -----------------------------------------------------------------------------------------------------

Total Income from Investment
Operations.................. 0.27 0.44 0.77 0.56 0.16 0.62 1.22
- -----------------------------------------------------------------------------------------------------

LESS DISTRIBUTIONS PAID:
From net investment
income.................... (0.24) (0.47) (0.48) (0.48) (0.58) (0.62) (0.56)
From net realized gains..... -- (0.05) (0.02) -- (0.11) (0.02) --
In excess of net
investment income......... -- (0.03) -- -- -- -- (0.02)
In excess of net realized gains -- -- -- -- -- (0.01) --
- -----------------------------------------------------------------------------------------------------

Total Distributions........... (0.24) (0.55) (0.50) (0.48) (0.70) (0.64) (0.58)
- -----------------------------------------------------------------------------------------------------

NET ASSET VALUE,
END OF PERIOD............... $10.03 $10.24 $10.35 $10.08 $10.08 $10.62 $10.64
- -----------------------------------------------------------------------------------------------------

TOTAL RETURN(2)............... 2.63% 4.32% 7.80% 5.78% 1.39% 5.84% 12.77%

SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period................ $14,807 $136,372 $125,113 $118,690 $16,426 $15,665 $13,028

Ratio to average net assets of:(3)
Expenses, net of waivers
and reimbursements........ 0.85% 0.85% 0.85% 0.85% 1.15% 1.15% 1.15%
Expenses, before waivers
and reimbursements........ 2.31% 1.10% 1.10% 1.11% 1.96% 2.00% 2.42%
Net investment income,
net of waivers and
</TABLE>

-15-
<PAGE> 24

<TABLE>
<CAPTION>
FIXED INTERMEDIATE
U.S. GOVERNMENT INCOME TAX-EXEMPT
FUND FUND FUND
----------------------------- ----------------------------- ------------------------------
Year Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31,
1997 1996 1995 1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
reimbursements............ 5.19% 5.07% 5.20% 5.69% 5.79% 6.48% 3.90% 4.01% 4.09%
Net investment income
before waivers
and reimbursements........ 5.00% 4.87% 4.98% 5.47% 5.55% 6.20% 3.68% 3.78% 3.85%

PORTFOLIO TURNOVER RATE....... 83.41% 112.00% 42.29% 87.64% 116.22% 55.27% 61.39% 137.85% 78.87%
</TABLE>

<TABLE>
<CAPTION>
FLORIDA
INTERMEDIATE INTERNATIONAL
TAX-EXEMPT TAX-EXEMPT FIXED INCOME
FUND FUND FUND
--------- ----------------------------- -----------------------------
Period Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, March 31, March 31,
1997(1) 1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
reimbursements............ 3.84% 4.61% 4.62% 4.95% 5.49% 5.75% 5.96%
Net investment income
before waivers
and reimbursements........ 2.38% 4.36% 4.37% 4.69% 4.68% 4.90% 4.69%

PORTFOLIO TURNOVER RATE....... 50.77% 8.10% 60.50% 54.94% 37.76% 52.05% 43.24%
</TABLE>

(1) Commenced investment operations on August 15, 1996.
(2) Total return is not annualized for periods less than a full year.
(3) Annualized for periods less than a full year.

-16-
PHTRANS:139395_4.WP5

<PAGE> 25

EQUITY FUNDS

<TABLE>
<CAPTION>
INCOME EQUITY STOCK INDEX
FUND FUND
------------------------------ -----------
Year Year Year Period
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1997 1996 1995 1997(1)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Selected per share data

NET ASSET VALUE, BEGINNING OF PERIOD....... $11.59 $9.95 $10.00 $10.00

INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income..................... 0.44 0.34 0.29 0.08
Net realized and unrealized gains
(losses) on investments, options,
futures contracts and foreign
currency transactions................... 1.19 1.66 (0.08) 0.74
- -------------------------------------------------------------------------------------------------

Total Income from Investment
Operations.............................. 1.63 2.00 0.21 0.82
- -------------------------------------------------------------------------------------------------

LESS DISTRIBUTIONS PAID:
From net investment income................ (0.44) (0.36) (0.26) (0.07)
From net realized gains................... (0.97) -- -- (0.01)
In excess of net investment income........ -- -- -- --
In excess of accumulated net realized
gains on investment transactions........ -- -- -- --

Total Distributions....................... (1.41) (0.36) (0.26) (0.08)
- -------------------------------------------------------------------------------------------------

NET ASSET VALUE, END OF PERIOD............. $11.81 $11.59 $9.95 $10.74
- -------------------------------------------------------------------------------------------------

TOTAL RETURN(4)............................ 14.42% 20.41% 2.21% 8.21%

SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period........................... $77,102 $55,919 $38,954 $35,840
Ratio to average net assets of:(5)
Expenses, net of waivers and
reimbursements........................ 1.00% 1.00% 1.00% 0.55%
Expenses, before waivers and
reimbursements........................ 1.42% 1.48% 1.55% 2.23%
Net investment income, net of
waivers and reimbursements............ 3.71% 3.17% 3.08% 1.92%
Net investment income (loss),
before waivers and
reimbursements........................ 3.29% 2.69% 2.53% 0.24%

PORTFOLIO TURNOVER RATE.................... 72.04% 67.32% 45.68% 64.94%

AVERAGE COMMISSION PER SHARE............... $0.0583 NA NA $0.0253
</TABLE>

<TABLE>
<CAPTION>
GROWTH EQUITY SELECT EQUITY
FUND FUND
------------------------------- ------------------------------
Year Year Year Year Year Period
Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, March 31,
1997 1996 1995 1997 1996 1995(2)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Selected per share data

NET ASSET VALUE, BEGINNING OF PERIOD....... $13.15 $10.61 $10.00 $13.12 $10.77 $10.00

INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income..................... 0.08 0.08 0.08 0.02 0.02 0.06
Net realized and unrealized gains
(losses) on investments, options,
futures contracts and foreign
currency transactions................... 1.49 2.59 0.60 2.05 2.73 0.75
- ----------------------------------------------------------------------------------------------------------------------------

Total Income from Investment
Operations.............................. 1.57 2.67 0.68 2.07 2.75 0.81
- ----------------------------------------------------------------------------------------------------------------------------

LESS DISTRIBUTIONS PAID:
From net investment income................ (0.08) (0.08) (0.07) (0.02) (0.03) (0.04)
From net realized gains................... (0.71) (0.05) -- (0.62) (0.37) --
In excess of net investment income........ -- -- -- -- -- --
In excess of accumulated net realized
gains on investment transactions........ -- -- -- -- -- --

Total Distributions....................... (0.79) (0.13) (0.07) (0.64) (0.40) (0.04)
- ----------------------------------------------------------------------------------------------------------------------------

NET ASSET VALUE, END OF PERIOD............. $13.93 $13.15 $10.61 $14.55 $13.12 $10.77
- ----------------------------------------------------------------------------------------------------------------------------

TOTAL RETURN(4)............................ 11.72% 25.13% 6.90% 15.64% 25.70% 8.18%

SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period........................... $302,605 $224,571 $113,185 $63,677 $33,842 $15,123
Ratio to average net assets of:(5)
Expenses, net of waivers and
reimbursements........................ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers and
reimbursements........................ 1.33% 1.36% 1.40% 1.67% 1.91% 2.61%
Net investment income, net of
waivers and reimbursements............ 0.56% 0.70% 0.86% 0.21% 0.22% 0.82%
Net investment income (loss),
before waivers and
reimbursements........................ 0.23% 0.34% 0.46% (0.46)% (0.69)% (0.79)%

PORTFOLIO TURNOVER RATE.................... 67.34% 73.20% 82.90% 72.68% 137.99% 48.88%

AVERAGE COMMISSION PER SHARE............... $0.0630 NA NA $0.0653 NA NA
</TABLE>

-17-
<PAGE> 26
EQUITY FUNDS (CONTINUED)

<TABLE>
<CAPTION>
INTERNATIONAL
SMALL CAP GROWTH EQUITY
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,
1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Selected per share data

NET ASSET VALUE, BEGINNING OF PERIOD....... $11.58 $9.98 $10.00 $10.23 $9.61 $10.00

INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income..................... 0.07 0.05 0.11 0.09 0.17 0.04
Net realized and unrealized gains
(losses) on investments, options,
futures contracts and foreign
currency transactions................... 1.37 2.29 (0.05) 0.18 0.65 (0.31)
- -----------------------------------------------------------------------------------------------------------------

Total Income (Loss) from Investment
Operations.............................. 1.44 2.34 0.06 0.27 0.82 (0.27)
- -----------------------------------------------------------------------------------------------------------------

LESS DISTRIBUTIONS PAID:
From net investment income................ (0.06) (0.07) (0.08) (0.07) (0.11) (0.03)
From net realized gains................... (0.65) (0.67) -- (0.23) -- --
In excess of net investment income........ -- -- -- -- (0.09) --
In excess of accumulated net
realized gains on investment
transactions............................ -- -- -- (0.15) -- (0.09)
- -----------------------------------------------------------------------------------------------------------------

Total Distributions....................... (0.71) (0.74) (0.08) (0.45) (0.20) (0.12)
- -----------------------------------------------------------------------------------------------------------------

NET ASSET VALUE, END OF PERIOD............. $12.31 $11.58 $9.98 $10.05 $10.23 $9.61
- -----------------------------------------------------------------------------------------------------------------

TOTAL RETURN(4)............................ 12.48% 24.09% 0.57% 2.61% 8.61% (2.65)%

SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period........................... $197,113 $155,238 $76,627 $165,892 $181,237 $114,673
Ratio to average net assets of:(5)
Expenses, net of waivers and
reimbursements........................ 1.00% 1.00% 1.00% 1.25% 1.25% 1.25%
Expenses, before waivers and
reimbursements........................ 1.54% 1.61% 1.76% 1.63% 1.65% 1.71%
Net investment income, net of
waivers and reimbursements............ 0.54% 0.65% 1.36% 0.78% 0.92% 0.47%
Net investment income (loss),
before waivers and
reimbursements........................ 0.00% 0.04% 0.60% 0.40% 0.52% 0.01%

PORTFOLIO TURNOVER RATE.................... 18.92% 46.59% 82.46% 190.94% 216.86% 158.31%
</TABLE>

<TABLE>
<CAPTION>
INTERNATIONAL
SELECT EQUITY TECHNOLOGY
FUND FUND
------------------------------ -------------
Year Year Period Year
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1997 1996 1995(3) 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Selected per share data

NET ASSET VALUE, BEGINNING OF PERIOD....... $10.73 $9.78 $10.00 $10.00

INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income..................... 0.04 0.01 0.04 --
Net realized and unrealized gains
(losses) on investments, options,
futures contracts and foreign
currency transactions................... (0.26) 0.99 (0.23) 2.10
- ----------------------------------------------------------------------------------------------------

Total Income (Loss) from Investment
Operations.............................. (0.22) 1.00 (0.19) 2.10
- ----------------------------------------------------------------------------------------------------

LESS DISTRIBUTIONS PAID:
From net investment income................ (0.03) (0.02) (0.03) --
From net realized gains................... -- -- -- (0.15)
In excess of net investment income........ (0.03) (0.03) -- --
In excess of accumulated net
realized gains on investment
transactions............................ (0.08) -- -- --
- ----------------------------------------------------------------------------------------------------

Total Distributions....................... (0.14) (0.05) (0.03) (0.15)
- ----------------------------------------------------------------------------------------------------

NET ASSET VALUE, END OF PERIOD............. $10.37 $10.73 $9.78 $11.95
- ----------------------------------------------------------------------------------------------------

TOTAL RETURN(4)............................ (1.95)% 10.20% (1.95)% 20.82%

SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period........................... $108,944 $102,719 $71,958 $43,754
Ratio to average net assets of:(5)
Expenses, net of waivers and
reimbursements........................ 1.25% 1.25% 1.25% 1.25%
Expenses, before waivers and
reimbursements........................ 1.66% 1.71% 1.75% 2.02%
Net investment income, net of
waivers and reimbursements............ 0.47% 0.12% 0.47% (0.75)%
Net investment income (loss),
before waivers and
reimbursements........................ 0.06% (0.34)% (0.03)% (1.52)%

PORTFOLIO TURNOVER RATE.................... 97.60% 176.71% 97.69% 67.89%
</TABLE>

-18-

<PAGE> 27

- ---------------------
(1) Commenced investment operations on October 7, 1996.
(2) Commenced investment operations on April 6, 1994.
(3) Commenced investment operations on April 5, 1994.
(4) Total return is not annualized for periods less than a full year.
(5) Annualized for periods less than a full year.

NA-Disclosure not applicable to prior periods.

-19-

<PAGE> 28
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 FUNDS

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) rated and unrated corporate bonds, notes, paper and other
instruments that are of comparable quality to the commercial paper permitted to
be purchased by the Fund;

(E) asset-backed securities (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.

-20-
<PAGE> 29
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:

(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.

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) rated and unrated municipal bonds, notes, paper or other
instruments that are of comparable quality to the tax-exempt commercial paper
permitted to be purchased by the Fund; 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.

-21-
<PAGE> 30

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;

(C) rated and unrated municipal bonds, notes, paper or other
instruments that are of comparable quality to the tax-exempt commercial paper
permitted to be purchased by the Fund; 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 Money
Market Funds.

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")

-22-
<PAGE> 31
(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 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, SHORT INTERMEDIATE U.S. GOVERNMENT FUND AND FIXED INCOME
FUND. The investment objective of the U.S. Government Fund, the Short
Intermediate U.S. Government Fund and the Fixed Income Fund is to seek a high
level of current income.

-23-
<PAGE> 32

Both the U.S. Government Fund and the Short Intermediate U.S.
government Fund seek to achieve their 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 issued by agencies of the
U.S. Government. The U.S. Government Fund's dollar-weighted average maturity
will be between one and ten years. The Short Intermediate U.S. Government Fund's
dollar- weighted average maturity will be between two and five 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 will normally maintain the dollar-weighted average maturity
of its portfolio within the specified range described above. The maturities of
certain instruments, however, such as those subject to prepayment or redemption
by the issuers, are subject to estimation. There can be no assurance that the
estimations used by a Fund for such instruments will, in fact, be accurate or
that, if inaccurate, a Fund's dollar-weighted average maturity will remain
within the specified limits.

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, FLORIDA INTERMEDIATE TAX-EXEMPT FUND, CALIFORNIA
INTERMEDIATE TAX-EXEMPT FUND, TAX-EXEMPT FUND, ARIZONA TAX-EXEMPT FUND AND
CALIFORNIA TAX-EXEMPT FUND. The investment objective of the Intermediate
Tax-Exempt Fund and the Florida Intermediate Tax-Exempt Fund is to seek a high
level of current income exempt from regular federal income tax by

-24-
<PAGE> 33
investing in Municipal Instruments while maintaining a dollar- weighted average
maturity between three and ten years. The California Intermediate Tax-Exempt
Fund seeks a high level of current income exempt from regular federal income tax
and California state personal income tax by investing in Municipal Instruments
while maintaining a dollar-weighted average maturity between three and ten
years. Each of the Tax-Exempt Fund, Arizona Tax-Exempt Fund and California
Tax-Exempt Fund seeks a high level of current income exempt from regular federal
income tax and, in the case of the Arizona Tax-Exempt and California Tax-Exempt
Funds, personal income tax of the particular state in which the Fund
concentrates, by investing in Municipal Instruments while maintaining a
dollar-weighted average maturity between ten and thirty 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"), at least 65% of the
value of each of the California Intermediate Tax-Exempt and California
Tax-Exempt Funds' total assets will be invested in California Municipal
Instruments and at least 65% of the value of the Arizona Tax-Exempt Fund's total
assets will be invested in Municipal Instruments the interest on which is exempt
from Arizona state personal income tax ("Arizona Municipal Instruments"), in the
opinion of bond counsel for the issuers. These opinions may contain various
assumptions, qualifications or exceptions that are reasonably acceptable to
Northern Trust. "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

-25-
<PAGE> 34
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, California Intermediate
Tax-Exempt, Arizona Tax-Exempt and California Tax-Exempt Funds are each
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 securities of a smaller number of
issuers 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 are 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

-26-
<PAGE> 35

Information, Risks and Considerations -- Description of Securities and
Investment Techniques -- Convertible Securities." The International Fixed Income
Fund may make indirect investments in foreign securities through the purchase of
EDRs, ADRs and GDRs 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 securities of a smaller
number of issuers 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."

-27-
<PAGE> 36
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 and growth of earnings per share, consistency
of earnings per share growth and return on equity. 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 at least
five years and have stock market capitalizations in excess of $500 million. In
addition, the debt relative to capital total return is reviewed over a one-year
period.

SMALL CAP FUND. The investment objective of the Small Cap 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,

-28-
<PAGE> 37
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."

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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, 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 Morgan Stanley
High-Technology 35 Index (the "Morgan Stanley Index"), 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 or any other
comparable technology index. The Morgan Stanley Index is a broad-market
technology indicator dedicated exclusively to the electronics- based technology
sector. The 35 stocks in the Morgan Stanley Index include the most highly
capitalized American companies drawn from nine technology subsectors: computer
services/design software, server software, PC software and new media, networking
and telecom equipment, server hardware, PC hardware and peripherals, specialized
systems and semi-conductors. 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.

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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 may 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.

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<PAGE> 40

Northern Trust believes that under normal market conditions, the
quarterly performance of the Fund, before expenses, will be within a .95
correlation with the S&P 500 Index. However, there is no assurance that the Fund
will be able to do so on a consistent basis. Deviations from the performance of
the S&P 500 Index ("tracking variance") 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 variance 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.

SMALL CAP INDEX FUND. The investment objective of the Small Cap Index Fund is to
seek investment results approximating the aggregate price and dividend
performance of the securities included in the Russell Index. Under normal market
conditions, the Fund will invest at least 65% of its total assets in the
securities included in the Russell Index. The Russell Index is a market
value-weighted index comprised of the stocks of the smallest 2,000 companies in
the Russell 3000 Index, which is comprised of the stocks of 3,000 large U.S.
domiciled companies (based on market capitalization) that represent
approximately 98% of the investable U.S. equity markets. Because of its emphasis
on the smallest 2,000 companies, the Russell Index represents approximately 10%
of the total market capitalization of the Russell 3000 Index. As of January 31,
1997 the average market capitalization of the companies included in the Russell
Index was approximately $447 million. The Russell Index is reconstituted

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<PAGE> 41

annually to reflect changes in market capitalization. The primary criteria used
by Frank Russell & Company ("Russell") to determine the initial list of
securities eligible for inclusion in the Russell 3000 Index (and, accordingly,
the Russell Index) is total market capitalization adjusted for large private
holdings and cross-ownership. However, companies are not selected by Russell for
inclusion in the Russell Index because they are expected to have superior stock
price performance relative to the market in general or other stocks in
particular. Russell 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 Russell Index to track general
market performance of small capitalization stocks.

The Fund will be constructed to have aggregate investment
characteristics similar to those of the Russell Index as a whole. The Fund will
invest in securities which will be selected on the basis of such factors as
market capitalization, beta, industry sectors and economic factors. The number
of issues included will be a function of the Fund's liquidity and size. The Fund
will be restructured annually when the Russell Index is reconstituted. The Fund
will use a proprietary rebalancing algorithm that attempts to screen out
extremely illiquid issues while minimizing portfolio turnover and related
expenses.

It should be noted that small companies in which the Fund may invest
may have limited product lines, markets, or financial resources, or may be
dependent upon a small management group, and their securities may be subject to
more abrupt or erratic market movements than larger, more established companies,
both because their securities typically are traded in lower volume and because
the issuers typically are subject to a greater degree of changes in their
earnings and prospects. (See the description of the Small Cap Fund above for
more information about the risks of investigating in small companies.)

Northern Trust believes that under normal market conditions, the
quarterly performance of the Fund, before expenses, will be within a .95
correlation with the Russell Index. However, there is no assurance that the Fund
will be able to do so on a consistent basis. Deviations from the performance of
the Russell Index ("tracking variance") 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 to its investment
objective. Tracking variance 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 Russell Index or the manner in which
the Russell Index is calculated or because the

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<PAGE> 42

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 Russell Index, the Board of Trustees will evaluate the
reasons for the deviation and the availability of corrective measures. These
measures may include adjustments to Northern Trust's portfolio management
practices. 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. The Fund may also invest in certain short-term
fixed income securities as cash reserves. However, the Fund will not invest in
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, GDRs
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 GDRs, 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 FUNDS, FLORIDA INTERMEDIATE TAX-EXEMPT FUND AND ARIZONA TAX-EXEMPT
FUND -- ADDITIONAL RISKS AND CONSIDERATIONS

The investments of the California Funds in California Municipal
Instruments, the Florida Intermediate Tax-Exempt Fund in Florida Municipal
Instruments and the Arizona Tax-Exempt Fund in Arizona Municipal Instruments
raise additional considerations.

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<PAGE> 43
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 Funds' 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, the impact of these initiatives and related measures on
the ability of California governmental issuers to pay interest or repay
principal on their obligations is difficult to determine. 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.

Similarly, if Florida or Arizona or any of their respective 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 or the Arizona Tax-Exempt Fund, could be adversely affected.

In addition to the risk of nonpayment on California, Florida or Arizona
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, Florida or Arizona Municipal Instruments that are eligible for
purchase by the Funds could become inadequate at certain times.

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Investors should consider the greater risk inherent in the
concentration of the California Funds, the Florida Intermediate Tax-Exempt Fund
and the Arizona 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, Florida or Arizona 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, Florida and Arizona 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.

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

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<PAGE> 45
involves greater risk and portfolio price volatility as described above under
"Investment Information -- Small Cap Fund."

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, Czech Republic, Denmark,
Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland,
Israel, Italy, Japan, Luxembourg, Malaysia, Mexico, the Netherlands, New
Zealand, Norway, Peru, the Philippines, Poland, Portugal, 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

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<PAGE> 46
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.

ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS

DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES

CONVERTIBLE SECURITIES. Each Equity Fund (other than the Stock Index and Small
Cap Index Funds) 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

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<PAGE> 47

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 is rated "B" or higher by at least one major rating agency. As of March
31, 1997, the Income Equity Fund had the following percentages of its portfolio
assets invested in convertible securities with the following ratings: 0.0% AAA,
4.7% AA, 15.6% A, 30.0% BBB, 6.5% BB, 17.3% B and 1.1% 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 and Small Cap Index
Funds) 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

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<PAGE> 48
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, Tax-Exempt, Arizona Tax-Exempt, Municipal Money Market
and California 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 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

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<PAGE> 49
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 municipal, corporate or other 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 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

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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, the Arizona Tax-Exempt Fund and the California Funds, 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, the California Funds expect to
invest principally in California Municipal Instruments and the Arizona
Tax-Exempt Fund expects to invest principally in Arizona 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

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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.

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.

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The Money Market Fund, the Fixed Income Fund, each Equity Fund and each
International Fund may invest in foreign debt, including 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 these countries may be
undergoing significant evolution and rapid development, and these 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 may 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 these 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 emerging market
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

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<PAGE> 53
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 the 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 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."

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 and
Small Cap Index Funds) 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 and
Small Cap Index Funds) and each International Fund can also invest in EDRs and
GDRs. EDRs and GDRs are receipts issued by a non-U.S. financial institution
evidencing ownership of underlying foreign or U.S. securities and are usually
denominated in foreign currencies. EDRs and GDRs may not be denominated in the
same currency as the securities they

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represent. Generally, EDRs and GDRs are designed for use in the foreign
securities markets. be denominated in the same currency as the securities they
represent. Generally, EDRs and GDRs are designed for use in the foreign
securities markets.

FORWARD CURRENCY EXCHANGE CONTRACTS. The Equity Funds (other than the Stock
Index and Small Cap Index Funds), 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

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a highly specialized activity that entails greater than ordinary investment
risks. 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 Funds may also invest in futures contracts and
options in futures contracts to increase total return (i.e. for speculative
purposes). 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 entered into for other than bona fide hedging purposes is 5% or
less of its total 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. When used as a hedge, 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. Conversely, a Fund may
purchase a futures contract as a hedge in anticipation of purchases of
securities. 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 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 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

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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 SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. In order to protect
their value from interest rate fluctuations and to hedge against fluctuations in
the floating rate market, each Fixed Income Fund and the Income Equity Fund may
enter into interest rate swaps, and the U.S. Government, Short-Intermediate U.S.
Government, Fixed Income and International Fixed Income Funds may purchase
interest rate floors or caps. The Funds expect to enter into these hedging
transactions 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). The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor. The purchase
of an interest rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments of interest on
a notional principal amount from the party selling such interest rate cap. 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 swap,
floor or cap transaction or any 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, notes and bonds, which principally
differ only in their interest

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<PAGE> 57

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 obligated 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 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.

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

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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 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 Fund, the Short Intermediate U.S.
Government Fund and 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. The Funds
will not purchase non-mortgage asset-backed securities that are not rated
investment grade by S&P, Duff, Fitch or Moody's.

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,

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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.

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.

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. In calculating the average weighted maturity of a
Fund (other than a Money Market Fund), the maturity of asset-backed securities
will be based on estimates of average life. There can be no assurance that these
estimates will be accurate.

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

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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.

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

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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 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."

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 and long-term variable and floating
rate bonds (sometimes referred to as "Put Bonds") where the Fund obtains at the
time of purchase the right to put the bond back to the issuer or a third party
at par at a specified date. 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 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.

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."

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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 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
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, 33 1/3%
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

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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 33-1/3% 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 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,
certain GICs and other 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

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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.

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, the
Short-Intermediate U.S. Government Fund, the California Intermediate Tax-Exempt
Fund, the Arizona Tax-Exempt Fund and the California Tax-Exempt Fund) for
Northern Funds' fiscal year ended March 31, 1997 are stated under "Financial
Highlights." Northern Funds expects that the annual turnover rate of each of the
Short-Intermediate U.S. Government Fund, the California Intermediate Tax-Exempt
Fund, the Arizona Tax-Exempt Fund, the California Tax-Exempt Fund and the Small
Cap Index Fund will generally not exceed 100%.

MISCELLANEOUS. After its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the

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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 the minimum rating described
above 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.

Each Fund may also purchase other types of financial instruments,
however designated, whose investment and credit quality characteristics are
determined by Northern Trust to be substantially similar to those of any other
investment otherwise permitted by the investment policies discussed above.

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.

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 (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 total assets at the time of purchase in the securities of issuers

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principally engaged in technology business activities, other than during
temporary defensive periods;

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.

Restrictions 3 and 4 do not apply to the Florida Intermediate
Tax-Exempt Fund, the California Intermediate Tax- Exempt Fund, the Arizona
Tax-Exempt Fund, the California Tax- Exempt Fund or the International Fixed
Income Fund. Instead, as a non-fundamental investment restriction, these Funds
will not hold any securities (except U.S. Government 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 regulations (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 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 guarantees 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

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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.

Northern Trust anticipates that each of the Short- Intermediate U.S.
Government, California Intermediate Tax-Exempt, Arizona Tax-Exempt and Small Cap
Index Funds will commence operations by the end of 1997.

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 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.

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

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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 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
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.

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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
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."

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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. 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.

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

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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 Northern Funds Center at P.O. Box 75986, Chicago, Illinois 60690-6319,
calling 1-800-595- 9111, or sending an e-mail to: [email protected].

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 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.

Northern Funds imposes no charges when you redeem or exchange shares.
However, when shares of any Fund 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

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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 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.

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 "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

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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 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).

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.
Northern Funds reserves the right to modify or terminate the exchange privilege
at any time and to reject any exchange request. 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.

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.

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

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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.

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

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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. 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 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.

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.

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<PAGE> 76

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. Northern Funds also reserves the right to redeem the shares
held by any shareholder who provides incorrect or incomplete account information
or when such involuntary redemptions are necessary to avoid adverse consequences
to Northern Funds and its shareholders. 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, Short Intermediate U.S. Government, Fixed Income, Intermediate
Tax-Exempt, Florida Intermediate Tax-Exempt, California Intermediate Tax-Exempt,
Tax-Exempt, Arizona Tax-Exempt and California Tax-Exempt Funds are declared
daily on each Business Day and paid monthly. Until September 27, 1997, dividends
from the net investment income of the International Fixed Income Fund will be
declared daily on each Business Day and paid quarterly. Effective September 27,
1997, dividends of the International Fixed Income Fund will be declared and paid
quarterly. Shares of these Funds are entitled to the dividends declared by a
Fund beginning on the next Business Day after the purchase order is executed.

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<PAGE> 77
Dividends from the net investment income of the other Funds are
declared and paid as follows:

<TABLE>
<CAPTION>
DIVIDENDS
FUND DECLARED AND PAID
---- -----------------
<S> <C>
Income Equity........................................ Monthly
Growth Equity........................................ Quarterly
Select Equity........................................ Annually
Small Cap Index...................................... 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 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

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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.

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 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, Florida Intermediate Tax-Exempt, California
Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt and California
Tax-Exempt Funds 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

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<PAGE> 79
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.

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.

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
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

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<PAGE> 80
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.

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. 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 FUNDS. If, at the close of each quarter of
each of the California Funds' 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

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<PAGE> 81
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 Funds 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 a 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 California Funds.

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, 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.

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<PAGE> 82
STATE AND LOCAL TAXES -- ARIZONA TAX-EXEMPT FUND.

Individuals, trusts and estates who are subject to Arizona income tax
will not be subject to such tax on dividends paid by the Arizona Tax-Exempt
Fund, to the extent that such dividends qualify as exempt-interest dividends of
a regulated investment company under Section 852(b)(5) of the Code and are
attributable to either (i) obligations of the State of Arizona or its political
subdivisions thereof or (ii) obligations issued by the governments of Guam,
Puerto Rico, or the Virgin Islands. In addition, dividends paid by the Arizona
Tax-Exempt Fund which are attributable to interest payments on direct
obligations of the United States government will not be subject to Arizona
income tax to the extent the Arizona Tax-Exempt Fund qualifies as a regulated
investment company under Subchapter M of the Code. Other distributions from the
Arizona Tax-Exempt Fund, however, such as distributions of short-term or
long-term capital gains, will generally not be exempt from Arizona income tax.

There are no municipal income taxes in Arizona. Moreover, because
shares of the Arizona Tax-Exempt Fund are intangibles, they are not subject to
Arizona property tax. Shareholders of the Arizona Tax-Exempt Fund should consult
their tax advisors about other state and local tax consequences of their
investment in the Arizona Tax-Exempt Fund.

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.

The table below 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.

<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-$ 24,650 $ 0-$ 41,200 15% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 24,651-$ 59,750 $ 41,201-$ 99,600 28% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11%
$ 59,751-$124,650 $ 99,601-$151,750 31% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59%
$124,651-$271,050 $151,751-$271,050 36% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50%
Over $271,050 Over $271,050 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 1997 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 or Arizona state personal income
tax or the Florida intangibles tax.

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<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, 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's
transfer agency offices are located at 801 S. Canal Street, Chicago, Illinois
60607.

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, 1997, Northern Trust Corporation
had approximately $23.9 billion in assets, $15.9 billion in deposits and
employed approximately 7,200 persons.

Northern Trust and its affiliates administered in various capacities
(including as master trustee, investment manager or custodian) $889.2 billion in
assets as of June 30, 1997, including over $149.4 billion for which Northern
Trust and its affiliates 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.

As compensation for its advisory services and its assumption of related
expenses, Northern Trust is entitled to a fee,

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<PAGE> 84

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, Short-Intermediate U.S. Government,
Fixed Income, Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt,
California Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax- Exempt and
California 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; 0.60% of the average daily net
assets of the Stock Index Fund and 0.65% of the average daily net assets of the
Small Cap Index Fund.

During Northern Funds' fiscal year ended March 31, 1997, Northern Trust
received investment management fees (after waivers) at the annualized rates of
0.25% and 0.30% of the average daily net assets of the U.S. Government Select
Money Market and California Municipal Money Market Funds, respectively, and at
the annualized rates set forth above under "Expense Summary" with respect to the
other Funds that had commenced operations.

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.

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, Chief Investment Officer
since 1995 and Executive Vice President since 1996, oversees the management of
all fixed income, 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 and the
Stock Index and Small Cap Index Funds), together with information as to their
principal business occupations during the past five years, are shown below.

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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 and
a portfolio of another investment company invested in obligations of domestic
and foreign issuers. Primary responsibility for the management of the
Intermediate Tax-Exempt Fund lies with Eric Boeckmann, 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 B.S 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, California Intermediate Tax-Exempt, Arizona
Tax-Exempt and California Tax-Exempt Funds 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 Chartered Financial
Analyst and a member of 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 in Northern
Trust's Fixed Income Management Division. 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.
Primary responsibility for the management of the Short Intermediate U.S.
Government Fund lies with Steven Schafer, Second Vice President in Northern
Trust's Fixed Income Management Division. Mr. Schafer received his B.A. degree
from Duke University and his M.B.A. degree from the University of Chicago's
Graduate School of

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Business. He is a Chartered Financial Analyst and a member of the Investment
Analysts Society of Chicago. During the past five years, Mr. Schafer has managed
various fixed income portfolios, including common and collective funds and a
portfolio of 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
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. Primary responsibility for the management of the Technology Fund
lies with John B. Leo, Vice President in the Personal Investment Management
Division, and George J. Gilbert and Jim Burkart, each a Vice President in the
Investment Research Division. Mr. Leo has had such responsibility since the Fund
commenced operations in April 1996. Messrs. Gilbert and Burkhart have had such
responsibility since July 1997. 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. Mr. Gilbert received his B.A. degree from
the University of St. Thomas, his M.S. degree from the Illinois Institute of
Technology and his M.B.A. degree from the University of Chicago. Mr. Gilbert
joined Northern Trust in 1980. During the past five years, Mr. Gilbert has
co-managed a common trust technology fund, analyzed corporations and made
recommendations to portfolio managers on whether to buy, sell or hold securities
of corporations in a number of different industries. Mr. Burkart received his
A.B. degree from Indiana University. Mr. Burkart joined Northern Trust in 1991.
During

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the past five years, Mr. Burkart has co-managed a common trust technology fund,
analyzed corporations and made recommendations to portfolio managers on whether
to buy, sell or hold securities of corporations in a number of different
industries.

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 company.

Primary responsibility for the management of the International Growth
Equity Fund lies with Robert A. LaFleur, Senior Vice President in the Global
Strategy and Management Division. Mr. LaFleur has had such responsibility for
the Fund since it 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. Mr. LaFleur joined Northern Trust in 1982. Primary
responsibility for the management of the International Select Equity Fund lies
with both Robert A. LaFleur and Svein Backer, Second Vice President of the
Global Strategy and Management Division. Mr. Backer has had such responsibility
since July 1997. Mr. Backer received his B.B.A. degree in finance from Loyola
University. During the past five years, Mr. Backer has been responsible for the
stock selection and coverage of existing holdings for the United Kingdom,
Scandinavian, Australian, Canadian, South African and Emerging Market Europe
weightings in Northern Trust's international equity funds.

ADMINISTRATOR AND DISTRIBUTOR

Sunstone Financial Group, Inc. ("Sunstone"), 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202, acts as administrator and prior to January 1, 1997,
acted as distributor for Northern Funds. 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 was payable by Northern Funds to Sunstone for its
distribution services.

Effective January 1, 1997, Sunstone Distribution Services, LLC, 207 E.
Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202, an affiliate of Sunstone,
replaced Sunstone as distributor of the shares of Northern Funds. Miriam M.
Allison and Mary M. Tenwinkel, officers of Northern Funds, are also officers of
Sunstone Distribution Services, LLC. Shares of Northern Funds are sold by
Sunstone Distribution Services, LLC, as distributor,

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on a continuous basis. No compensation is payable by Northern Funds to Sunstone
Distribution Services, LLC 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.

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.

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.

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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. 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 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

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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 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 California Tax-Exempt Fund may be
compared to the Lehman Brothers California Municipal Index, performance of the
California Intermediate Tax-Exempt Fund may be compared to the Lehman Brothers
California Intermediate Index, performance of the Arizona Tax-Exempt Fund may be
compared to the Lehman Brothers Arizona Municipal Bond Index and performance of
the

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Florida Intermediate Tax-Exempt Fund may be compared to the Lehman Brothers
Florida Intermediate Municipal Bond Index. 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 Morgan Stanley Index,
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 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 analyzing 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 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

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(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

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 twenty-four
separate Funds, 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, 1997, 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.

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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, or send an e-mail
to: [email protected].

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 Funds is
registered as an open-end management investment company under the 1940 Act, and
each of the Funds (other than the California Funds, the Florida Intermediate
Tax-Exempt Fund, the Arizona 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 1997, 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

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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.

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

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

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.

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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
SHORT-INTERMEDIATE U.S GOVERNMENT FUND
FIXED INCOME FUND
INTERMEDIATE TAX-EXEMPT FUND
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND
TAX-EXEMPT FUND
ARIZONA TAX-EXEMPT FUND
CALIFORNIA 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
SMALL CAP INDEX FUND

NORTHERN FUNDS
(THE "TRUST")

This Statement of Additional Information (the "Additional Statement")
dated July 31, 1997 is not a prospectus. This Additional Statement should be
read in conjunction with the Prospectus dated July 31, 1997, 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, Short-Intermediate U.S. Government Fund,
Fixed Income Fund, Intermediate Tax-Exempt Fund, Florida Intermediate
Tax-Exempt Fund, California Intermediate Tax-Exempt Fund, Tax-Exempt Fund,
Arizona Tax-Exempt Fund, California 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

<PAGE> 96

Fund, Stock Index Fund and Small Cap 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 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> 97

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, Florida Municipal Instruments and Arizona Municipal Instruments . . . . . . . . . . . . . 27
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

ADDITIONAL TRUST INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Investment Adviser, Transfer Agent and Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Administrator and Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Counsel and Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
In-Kind Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Automatic Investing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Redemptions and Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Non-Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

AMORTIZED COST VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Federal - General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Federal - Tax-Exempt Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Taxation of Certain Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Special State Tax Considerations Pertaining to the California Funds . . . . . . . . . . . . . . . . . . 89
Special State Tax Considerations Pertaining to the Florida Intermediate Tax-Exempt Fund . . . . . . . . 91
Special State Tax Considerations Pertaining to the Arizona Tax-Exempt Fund . . . . . . . . . . . . . . . 92

DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

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

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

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<PAGE> 98
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 Fundhas 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 Fundseeks 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.

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<PAGE> 99

Short-Intermediate U.S. Government Fund seeks high
current income from a broad range of U.S. Government
securities. The Fund's dollar-weighted average
maturity is anticipated to range between two and five
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
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 and the
Short- Intermediate U.S. Government Fund.

International Fixed Income Fundseeks 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 Fundseeks high current income
exempt from regular federal income tax by investing
in a broad range of Municipal Instruments with an
expected average maturity of three to ten years.

Florida Intermediate Tax-Exempt Fundseeks high
current income exempt from regular federal income tax
by investing in Municipal Instruments with an
expected average maturity of three to ten years. The
Fund intends, but cannot guarantee, that its shares
will qualify for exemption from the Florida
intangibles tax.

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<PAGE> 100
California Intermediate Tax-Exempt Fund seeks high
current income exempt from regular federal income tax
and California state personal income tax by investing
in Municipal Instruments with an expected average
maturity of three to ten years.

Tax-Exempt Fund 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.

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

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

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
Funds' 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
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

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<PAGE> 101

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 Morgan Stanley
High-Technology 35 Index (the "Morgan Stanley
Index"), the Hambrecht and Quist Technology Index
(the "H&Q Index"), the SoundView Technology Index,
the technology grouping of the S&P 500 Index or any
other comparable index.

The Morgan Stanley Index is a broad-market technology
indicator dedicated exclusively to the
electronics-based technology sector. The 35 stocks
in the Index include the most highly capitalized
American companies drawn from nine technology
subsectors: computer services/design software,
server software, PC software and new media,
networking and telecom equipment, server hardware, PC
hardware and peripherals, specialized systems and
semi-conductors. The SoundView Technology Index
includes approximately 100 companies from the design,
automation, communications, mainframe

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<PAGE> 102

computer, microcomputer, minicomputer, peripherals,
semiconductor, software and related services
industries. 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 Morgan
Stanley, 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.

Small Cap Index Fund seeks to provide investment
results approximating the aggregate price and
dividend performance of the securities included in
the Russell 2000 Small Stock Index (the "Russell
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. 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

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<PAGE> 103
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 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 may not exist.

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

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<PAGE> 104

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 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 liquid
assets in 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 and ability to meet payment on demand. In determining weighted average
portfolio maturity, an instrument may, subject to applicable Securities and
Exchange Commission ("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

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<PAGE> 105
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 liquid assets 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 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. 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

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<PAGE> 106
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 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

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<PAGE> 107

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 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, Florida and Arizona 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.

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<PAGE> 108
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.

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, Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt,
California Municipal Money Market and California 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, Florida
Intermediate Tax-Exempt Fund, California Intermediate Tax-Exempt Fund,
Tax-Exempt Fund, Arizona Tax-Exempt Fund or California 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

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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 Intermediate Tax-Exempt, Florida
Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt, Municipal Money
Market, California Intermediate Tax-Exempt and California 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 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 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. Each Tax-Exempt Fund 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

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<PAGE> 110

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 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.

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.

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<PAGE> 111

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 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 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.

A separate account consisting of liquid assets 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, foreign and

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<PAGE> 112

domestic 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 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, liquid assets 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 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.

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<PAGE> 113

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 liquid assets 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 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

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<PAGE> 114
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 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

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<PAGE> 115

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 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,
a 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 and Small Cap Index
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
trusts. 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, U.S. Government Fund and
Short-Intermediate 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

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<PAGE> 116

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 SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. The U.S.
Government, Short Intermediate U.S. Government, Fixed Income, Intermediate
Tax-Exempt, Tax-Exempt, Florida Intermediate Tax-Exempt, California
Intermediate Tax-Exempt, California Tax-Exempt, Arizona Tax- Exempt,
International Fixed Income and Income Equity Funds may enter into interest rate
swaps for hedging purposes and not for speculation. The U.S. Government,
Short-Intermediate U.S. Government, Fixed Income and International Fixed Income
Funds may also purchase interest rate floors or caps 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 purchase of an interest rate floor or
cap entitles the purchaser to receive payments of interest on a notional
principal amount from the seller, to the extent the specified index falls below
(floor) or exceeds (cap) a predetermined interest rate. 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 or interest rate floor
or cap transactions 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 or currency swap will be
accrued on a daily basis, and an amount of liquid assets having an aggregate
net asset value at least equal to such accrued excess, will be maintained in a
segregated account by the Funds' custodian.

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A Fund will not enter into a currency or interest rate swap or
interest rate floor or cap transaction 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 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, 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

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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.

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
from 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

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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 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 ratings 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

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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. To the extent required by the 1940 Act and the
regulations and orders of the SEC thereunder, 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 total outstanding stock of any one investment company
will be owned by a Fund, the 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 or Northern Funds 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 this amount may be illiquid. Notwithstanding the
foregoing, a Fund may adhere to more restrictive limitations with respect to
its investments in securities issued by other investment companies if required
by the SEC or deemed to be in the best interests of Northern Funds, and will
comply with any fundamental investment restriction that may otherwise be
applicable to such investments. To the extent required by the 1940 Act, each
Fund expects to vote the shares of other investment companies that are held by
it in the same proportion as the vote of all other holders of such securities.

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, 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

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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, Stock Index Fund, California Intermediate Tax-Exempt Fund,
Arizona Tax-Exempt Fund and California Tax-Exempt 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.

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

Some of the risk factors relating to investments by the California,
Florida Intermediate Tax-Exempt and Arizona Tax-Exempt Funds in California,
Florida, and Arizona 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

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Intermediate Tax-Exempt and Arizona Tax-Exempt Funds, the information is
derived principally from official statements relating to issues of Florida and
Arizona 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 1996-97. 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. Beginning with the 1990-91 Fiscal Year and for
several years thereafter, the budget required multi-billion dollar actions to
bring projected revenues and expenditures into balance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the Special Fund -- approaching
$2.8 billion at its peak on June 30, 1993.

By the 1993-94 Fiscal Year, the accumulated deficit was too
large to be prudently retired in one year and a two-year program was
implemented. This program used revenue anticipation warrants to carry a
portion of the deficit over to the end of the fiscal year.

The 1994-95 Budget Act projected General Fund revenues and
transfers of $41.9 billion. Expenditures were projected to be $40.9 billion --
an increase of $1.6 billion over the prior year. As a result of the improving
economy, however, the fiscal year ultimately produced revenues and transfers of
$42.7 billion which more than offset expenditures of $42.0 billion and thereby
reduced the accumulated budget deficit.

With strengthening revenues and reduced caseload growth driven
by 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.
The 1995-96 Budget Act projected General Fund revenues and transfers of $44.1
billion, a 3.5 percent increase from the prior year, and expenditures were
budgeted at

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$43.4 billion. In addition, 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 as of June 30, 1996.

1996-97 FISCAL YEAR.

The 1996-97 Governor's Budget, released January 10, 1996,
projected General Fund revenues and transfers of $45.6 billion, a 1.3% increase
over 1995-96. The Governor's budget proposed two major initiatives, a 15%
personal and corporate income tax cuts and a revision of the trial court
funding program, which would have the effect of reducing General Fund revenues.
The Governor's Budget proposed General Fund expenditures of $45.2 billion. The
Governor's Budget also proposed Special Fund revenues equal to expenditures, at
a level of $13.3 billion.

The May Revision of the Governor's Budget, released on May 21,
1996 ("The May Revision"), updated revenue estimates for the 1996-97 Fiscal
Year, reflecting stronger economic activity in the State and thus greater
revenue growth. The revised estimate was for $47.1 billion of revenues, still
assuming the Governor's tax cut would be enacted, and $46.5 billion of
expenditures.

1996-97 Budget Act

The 1996-97 Budget Act was signed by the Governor on July 15,
1996, along with various implementing bills. The Governor vetoed about $82
million of appropriations (both General Fund and Special Fund). With the
signing of the Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriates a budget reserve
in the Special Fund of $305 million, as of June 30, 1997. The Department of
Finance projects that, on June 30, 1997, the State's available borrowable
(cash) resources will be $2.9 billion, after payment of all obligations due by
that date, so that no cross-fiscal year borrowing is anticipated.

Revenues - The Legislature rejected the Governor's proposed
15% cut in personal income taxes (to be phased in over three years), approved a
5% cut in bank and corporation taxes, to be effective for income years
commencing on January 1, 1997. As a result of the Legislature's failure to
enact the personal income tax cut, revenues for the Fiscal Year are estimated
to be $550 million higher than projected in the May Revision, and are now
estimated to total $47.643 billion, a 3.3 percent increase over the final
estimated 1995-96 revenues. Special Fund revenues are estimated to be $13.3
billion.

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Expenditures - The Budget Act contains General Fund
appropriations totaling $47.251 billion, a 4.0 percent increase over the final
estimated 1995-96 expenditures. Special Fund expenditures are budgeted at
$12.6 billion.

The following are principal features of the 1996-97 Budget
Act:

1. Proposition 98 funding for schools and community
college districts increased by almost $1.6 billion (General Fund) and $1.65
billion above revised 1995-96 levels. Almost half of this money was budgeted
to fund class-size reductions in kindergarten and grades 1- 3. Also, for the
second consecutive year, the full cost of living allowance (3.2 percent) was
funded. Proposition 98 increases have brought K- 12 expenditures to almost
$4,800 per pupil (also called ADA, or Average Daily Attendance), an almost 15%
increase over the level prevailing during the recession years. Out of this
$1.6 billion total community colleges will receive an increase in funding of
$157 million for 1996-97.

Due to higher than projected revenues in 1995-96, an
additional $1.1 billion ($190 per K-12 ADA and $145 million for community
colleges) was appropriated and retroactively applied towards the 1995-96
Proposition 98 guarantee, bringing K-12 expenditures in that year to over
$4,600 per ADA. Similar retroactive increases totaling $230 million, based on
final figures on revenues and State population growth, were made to the 1991-92
and the 1994-95 Proposition 98 guarantees, most of which was allocated to each
school site.

2. The Budget Act assumed savings of approximately $660
million in health and welfare costs which required changes in federal law,
including federal welfare reform. The Budget Act further assumed federal law
changes in August 1996 which would allow welfare cash grant levels to be
reduced by October 1, 1996. These cuts totaled approximately $163 million of
the anticipated $660 million savings. See "Federal Welfare Reform".

3. A 4.9 percent increase in funding for the University
of California ($130 million General Fund) and the California State University
system ($101 million General Fund), with no increases in student fees.

4. The Budget Act assumed the federal government will
provide approximately $700 million in new aid for incarceration and health care
costs of illegal immigrants. These funds reduce appropriations in these
categories that would otherwise have to be paid from the General Fund. (For
purposes of cash flow projections, the Department of Finance expects $540
million of this amount to be received during the 1996-97 fiscal year.)

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5. General Fund support for the Department of
Corrections was increased by about 7 percent over the prior year, reflecting
estimates of increased prison population.

6. With respect to aid to local governments, the
principal new programs included in the Budget Act are $100 million in grants to
cities and counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile crime.

The Budget Act did not contain any tax increases. As noted,
there was a reduction in bank and corporate taxes. In addition, the
Legislature approved another one-year suspension of the Renters Tax Credit,
saving $520 million in expenditures.

Federal Welfare Reform - Following enactment of the 1996-97
Budget Act, Congress passed and the President signed (on August 22, 1996) the
Personal Responsibility and Work Opportunity Act of 1996 (P.L. 104-193, the
"Law") making a fundamental reform of the current welfare system. Among many
provisions, the Law includes: (i) conversion of Aid to Families with Dependent
Children from an entitlement program to a block grant titled Temporary
Assistance for Needy Families (TANF), with lifetime time limits on TANF
recipients, work requirements and other changes; (ii) provisions denying
certain federal welfare and public benefits to legal noncitizens, allowing
states to elect to deny additional benefits (including TANF) to legal
noncitizens, and generally denying almost all benefits to illegal immigrants;
and (iii) changes in the Food Stamp program, including reducing maximum
benefits and imposing work requirements.

The Law requires states to implement the new TANF program not
later than July 1, 1997 and provides California approximately $3.7 billion in
block grant funds for FY 1996-97. States are allowed to implement TANF as soon
as possible and will receive a prorated block grant effective the date of
application. The California State Plan is to be submitted in time to allow
grant reductions to be implemented effective January 1, 1997 (allowing $92
million of the $163 million referred to in paragraph 2 above to be saved) and
to allow the State to capture approximately $267 million in additional federal
block grant funds over the currently budgeted level. None of the other federal
changes needed to achieve the balance of the $660 million cost savings were
enacted. Thus in lieu of the $660 million savings initially assumed to be
saved, it is now projected that savings will total approximately $360 million.

A preliminary analysis of the Law by the Legislative Analyst's
Office indicated that an overall assessment of how these changes will affect
the State's General Fund will not be known for some time, and will depend on
how the State implements the Law.

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There are many choices including how quickly the State implements the Law; the
degree to which the State elects to make up for cuts in federal aid; provide
more aid to counties, or cut some of its own existing programs for noncitizens;
and the State's ability to avoid certain penalties written into the Law.

1997-98 FISCAL YEAR PROPOSED BUDGET.

On January 9, 1997, the Governor released his proposed budget
for the 1997-98 Fiscal Year (the "Governor's Budget"). The Governor's Budget
projects General Fund revenues and transfers in 1997-98 of $50.7 billion, a
4.6% increase from revised 1996-97 figures. The Governor proposes expenditures
of $50.3 billion, a 3.9% increase from 1996-97. The Governor's Budget projects
a balance in the SFEU of $553 million on June 30, 1998. The Governor's Budget
also anticipates about $3 billion of external borrowing for cash flow purposes
during the year, with no requirement for cross-fiscal year borrowing.

Among the major initiatives and features of the Governor's
Budget are the following:

1. A proposed 10% cut in the Bank and Corporation Tax
rate, to be phased in over two years.

2. Proposition 98 funding for K-14 schools will be
increased again, as a result of stronger revenues. Per-pupil funding for K-12
schools will reach $5,010, compared to $4,220 as recently as the 1993-94 Fiscal
Year. Part of the new funding is proposed to be dedicated to the completion of
the current program to reduce class size to 20 pupils in lower elementary
grades, and to expand the program by one grade, so that it will cover K-3rd
grade.

3. Funding for higher education will be increased
consistent with a four-year "compact" established in 1995-96. There is not
projected to be any increase in student fees at any of the three levels of the
State higher education system.

4. The 1997-98 proposed Governor's Budget assumes
approximately $500 million in savings contingent upon federal action. The
Budget assumes that federal law will be enacted to remove the
maintenance-of-effect requirement for Supplemental Security Income (SSI)
payments, thereby enabling the state to reduce grant levels pursuant to
previously enacted state law ($279 million). The Budget also assumes the
federal government will fund $216 million in costs of health care for illegal
immigrants.

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

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Bankruptcy Code. The subsequent restructuring led to the sale of substantially
all of the Pool's portfolio and resulted in losses estimated to be
approximately $1.7 billion (or approximately 22% of amounts deposited by the
Pool investors). Approximately 187 California public entities -- substantially
all of which are public agencies within the county -- had various bonds, notes
or other forms of indebtedness outstanding. In some instances the proceeds of
such indebtedness were invested in the Pool.

In April, 1996, the County emerged from bankruptcy after
closing on a $900 million recovery bond transaction. At that time, the County
and its financial advisors stated that the County had emerged from the
bankruptcy without any structural fiscal problems and assured that the County
would not slip back into bankruptcy. However, for many of the cities, schools
and special districts that lost money in the County portfolio, repayment
remains contingent on the outcome of litigation which is pending against
investment firms and other finance professionals. Thus, it is impossible to
determine the ultimate impact of the bankruptcy and its aftermath on these
various agencies and their claims.

CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS.

Certain California constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives
could produce the adverse effects described below, among others.

REVENUE DISTRIBUTION. Certain Debt Obligations in the
Portfolio 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.

HEALTH CARE LEGISLATION. Certain Debt Obligations in the
Portfolio 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 Debt
Obligations.

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

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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 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 Debt Obligations 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 Debt Obligations, 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

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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 Debt Obligations in the
Portfolio 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 statutes 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 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.

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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 Debt Obligations in the Portfolio 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.

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.

PROPOSITION 13. Certain of the Debt Obligations 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.

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Section 1 of Article XIIIA, as amended, limits the maximum ad
valorem tax on real property to 1% of full cash value to be collected by the
counties and apportioned according to law. The 1% limitation does not apply to
ad valorem taxes or special assessments to pay the interest and redemption
charges on any bonded indebtedness for the acquisition or improvement of real
property approved 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.

Legislation enacted by the California Legislature to implement
Article XIIIA 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.

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 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.

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

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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 XIII B
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 capita
General Fund revenue growth exceeds per capita personal income growth.

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
XIII B limit to K-14 schools.

During the recession years of the early 1990s, 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. In 1992, a lawsuit was filed,
California Teachers' Association v. Gould, which challenged the validity of
these off-budget loans. During the course of this litigation, a trial court
determined that almost $2 billion in "loans" which had been provided to school
districts during the recession violated the constitutional protection of
support for public education. A settlement was reached on April 12, 1996 which
ensures that future school funding will not be in jeopardy over repayment of
these so-called loans.

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
recalculated spending limits for the State and for local

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governments, allowed greater annual increases in the limits, allowed the
averaging of two years' tax revenues before requiring action regarding excess
tax revenues, reduced the amount of the funding 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), removed 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, limited
the amount of State tax revenue over the limit which would be transferred to
school districts and community college districts, and exempted increased
gasoline taxes and truck weight fees from the State appropriations limit.
Additionally, Proposition 111 exempted 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
provided the following:

1. 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;

2. 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;

3. Restricts the use of revenues from a special tax to
the purposes or for the service for which the special tax was imposed;

4. Prohibits the imposition of ad valorem taxes on real
property by local governmental entities except as permitted by Article
XIIIA;

5. Prohibits the imposition of transaction taxes and
sales taxes on the sale of real property by local governments;

6. 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;

7. 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

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by such entity attributable to the tax levied in violation of the
initiative; and

8. 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
impossible 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. The
California Court of Appeal in City of Woodlake v. Logan, (1991) 230 Cal.App.3d
1058, subsequently held that Proposition 62's popular vote requirements for
future local taxes also provided for an unconstitutional referenda. The
California Supreme Court declined to review both the City of Westminster and
the City of Woodlake decisions.

In Santa Clara Local Transportation Authority v. Guardino,
(Sept. 28, 1995) 11 Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12
Cal.4th 344e, the California Supreme Court upheld the constitutionality of
Proposition 62's popular vote requirements for future taxes, and specifically
disapproved of the City of Woodlake decision as erroneous. The Court did not
determine the correctness of the City of Westminster decision, because that
case appeared distinguishable, was not relied on by the parties in Guardino,
and involved taxes not likely to still be at issue. It is impossible to
predict the impact of the Supreme Court's decision on charter cities or on
taxes imposed in reliance on the City of Woodlake case.

Senate Bill 1590 (O'Connell), introduced February 16, 1996,
would make the Guardino decision inapplicable to any tax first imposed or
increased by an ordinance or resolution adopted before December 14, 1995. The
California State Senate passed the Bill on May 16, 1996 and it is currently
pending in the California State Assembly. It is not clear whether the Bill, if
enacted, would be constitutional as a non-voted amendment to Proposition 62 or
as a non-voted change to Proposition 62's operative date.

PROPOSITION 218. On November 5, 1996,the voters of the State
approved Proposition 218, a constitutional initiative, entitled the "Right to
Vote on Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C
and XIII D to the California

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Constitution and contains a number of interrelated provisions affecting the
ability of local governments to levy and collect both existing and future
taxes, assessments, fees and charges. Proposition 218 became effective on
November 6, 1996. The Sponsors are unable to predict whether and to what
extent Proposition 218 may be held to be constitutional or how its terms will
be interpreted and applied by the courts. However, if upheld, Proposition 218
could substantially restrict certain local governments' ability to raise future
revenues and could subject certain existing sources of revenue to reduction or
repeal, and increase local government costs to hold elections, calculate fees
and assessments, notify the public and defend local government fees and
assessments in court.

Article XIII C of Proposition 218 requires majority voter
approval for the imposition, extension or increase of general taxes and
two-thirds voter approval for the imposition, extension or increase of special
taxes, including special taxes deposited into a local government's general
fund. Proposition 218 also provides that any general tax imposed, extended or
increased without voter approval by any local government on or after January 1,
1995 and prior to November 6, 1996 shall continue to be imposed only if
approved by a majority vote in an election held within two years of November 6,
1996.

Article XIII C of Proposition 218 also expressly extends the
initiative power to give voters the power to reduce or repeal local taxes,
assessments, fees and charges, regardless of the date such taxes, assessments,
fees or charges were imposed. This extension of the initiative power to some
extent constitutionalizes the March 6, 1995 State Supreme Court decision in
Rossi v. Brown, which upheld an initiative that repealed a local tax and held
that the State constitution does not preclude the repeal, including the
prospective repeal, of a tax ordinance by an initiative, as contrasted with the
State constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi
v. Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.

The initiative power granted under Article XIII C of
Proposition 218, by its terms, applies to all local taxes, assessments, fees
and charges and is not limited to local taxes, assessments, fees and charges
that are property related.

Article XIII D of Proposition 218 adds several new
requirements making it generally more difficult for local agencies

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to levy and maintain "assessments" for municipal services and programs.
"Assessment" is defined to mean any levy or charge upon real property for a
special benefit conferred upon the real property.

Article XIII D of Proposition 218 also adds several provisions
affecting "fees" and "charges" which are defined as "any levy other than an ad
valorem tax, a special tax, or an assessment, imposed by a local government
upon a parcel or upon a person as an incident of property ownership, including
a user fee or charge for a property related service." All new and, after June
30, 1997, existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which (i)
generate revenues exceeding the funds required to provide the property related
service, (ii) are used for any purpose other than those for which the fees and
charges are imposed, (iii) are for a service not actually used by, or
immediately available to, the owner of the property in question, or (iv) are
used for general governmental services, including police, fire or library
services, where the service is available to the public at large in
substantially the same manner as it is to property owners. Further, before any
property related fee or charge may be imposed or increased, written notice must
be given to the record owner of each parcel of land affected by such fee or
charges. The local government must then hold a hearing upon the proposed
imposition or increase of such property based fee, and if written protests
against the proposal are presented by a majority of the owners of the
identified parcels, the local government may not impose or increase the fee or
charge. Moreover, except for fees or charges for sewer, water and refuse
collection services, no property related fee or charge may be imposed or
increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.

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.

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

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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 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.

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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
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

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(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.

ARIZONA MUNICIPAL INSTRUMENTS

Under its constitution, the State of Arizona is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to annual
renewal at the option of the State. Local governmental units in the State are
also authorized to incur indebtedness. The major source of financing for such
local government indebtedness is an ad valorem property tax. In addition, in
order to finance public projects, local governments in the State can issue
revenue bonds payable from the revenues of a utility or enterprise or from the
proceeds of an excise tax, or assessment bonds payable from special proceeds of
an excise tax, or assessment bonds payable from special assessments. Arizona
local governments have also financed public projects through leases which are
subject to annual appropriation at the option of the local government.

There is a statutory restriction on the amount of annual increases in
taxes that can be levied by the various taxing jurisdictions in the State
without electoral approval. This restriction does not apply to taxes levied to
pay general obligation debt.

There are periodic attempts in the form of voter initiatives and
legislative proposals to further limit the amount of annual increases in taxes
that can be levied by the various taxing jurisdictions without voter approval.
It is possible that if such a proposal were enacted, there would be an adverse
impact on State or local government financing. It is not possible to predict
whether any such proposals will be enacted in the future or what would be their
possible impact on state or local government financing.

Arizona is required by law to maintain a balanced budget. To achieve
this objective, the State has, in the past, utilized a combination of spending
reductions and tax increases. In recent

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years, the State's fiscal situation has improved, even while tax reduction
measures have been enacted each year since 1992. In 1992, Arizona voters
passed a measure that requires a two-thirds vote of the legislature to increase
state taxes. Accordingly, it will be more difficult to reverse tax reductions,
which may adversely affect state fund balances and fiscal conditions.

Arizona state government general fund revenue growth for fiscal years
1996, 1997 and 1998 is forecast to increase 4.1%, 3.7% and 3.2%, respectively,
although growth would be projected at 10.9%, 4.8% and 7.6%, respectively, for
the three years but for legislative changes, principally income and property
tax reduction measures as described below. The 5.5% increase in sales and use
tax revenue adjusted for reductions resulting from legislature changes,
reflects continued strong economic growth in the state. With revenue growth
outpacing increased expenditures, the state general fund is projected to end
fiscal year 1997 with a total general fund balance of approximately $431
million. The amount of this balance is approximately 8.9% of total general
fund revenue for fiscal year 1997. Included in the total balance is a general
fund ending balance of approximately $190 million, and a budget stabilization
("rainy day") fund balance of approximately $241 million.

The fiscal year 1997 budget adopted by the legislature assumed that
the total general fund balance carried forward from fiscal year 1996 would be
drawn down by approximately $157 million during the course of fiscal year 1997.
Based on this assumption and state projections, the total general fund balance
at the end of fiscal year 1997 will be lower than for fiscal year 1996.

Additionally, the 1995 legislature enacted a $200 million income tax
reduction package, the 1996 legislature enacted a $200 million property tax
reduction package, and the 1997 legislature enacted a $110 million income tax
reduction package. There may be additional legislative action during 1998 in
the area of tax and school reform, and the 1998 general election ballot may
include one or more questions related to these issues and the state's tax
structure generally. The outcomes of any legislative actions or ballot
questions may adversely affect state fund balances and fiscal conditions.

Arizona has a diversified economic base which is not dependent on any
single industry. Principal economic sectors include services, manufacturing,
mining, tourism, and the military. Agriculture, which was at one time a major
sector, now plays a much smaller role in the State's economy. For several
decades, the population of the State has grown at a substantially higher rate
than the population of the United States. While the State's economy flourished
during the early 80's, a substantial amount of

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overbuilding occurred, adversely affecting Arizona-based financial
institutions, many of which were placed under the control of the Resolution
Trust Corporation. The spillover effects produced further weakening in the
State's economy. The Arizona economy has begun to grow again, albeit at a
slower pace than experienced before the real estate collapse. The Northern
American Free Trade Agreement is generally viewed as beneficial to the State.
However, further proposed reductions in Federal military expenditures may
adversely affect the Arizona economy.

OTHER INFORMATION ON CALIFORNIA, FLORIDA AND ARIZONA MUNICIPAL INSTRUMENTS

Northern Trust believes that it is likely that sufficient California,
Florida and Arizona Municipal Instruments and certain specified federal
obligations should be available to satisfy the respective investment
objectives, policies and limitations of the California, Florida Intermediate
Tax-Exempt and the Arizona Tax-Exempt Funds and, with respect to the California
Funds, to enable those Funds to invest at least 50% of their respective 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 a Fund's investment objective, policies and
limitations because of the unavailability of suitable investments, the Board
would re-evaluate the particular Fund's investment objective and policies and
consider changes in its structure and name or possible dissolution.

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

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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.

(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, the Florida Intermediate Tax-Exempt
Fund, the California Intermediate Tax-Exempt Fund, the Arizona
Tax-Exempt Fund or the California 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

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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 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

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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, the Florida Intermediate Tax-Exempt Fund, the California
Intermediate Tax-Exempt Fund, the Arizona Tax-Exempt Fund and the
California 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, Florida Intermediate Tax-Exempt, California Intermediate Tax-Exempt,
Arizona Tax-Exempt and California 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 in the Morgan Stanley Index, 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
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.

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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 guarantees acquired by the Money Market Funds must
satisfy special SEC diversification requirements. In particular, a security
that has an unconditional guarantee (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 Guarantee") 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 Guarantees from the same
person, except that a Fund may invest up to 25% of its total assets in
securities subject to Unconditional Guarantees 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 an Unconditional Guarantee 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.

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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.

Each Investment Restriction which involves a maximum percentage (other
than the restriction set forth above in Investment Restriction (10)) 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 the Fund. The 1940 Act requires that if the asset coverage for borrowings
at any time falls below the limits described in Investment Restriction (10),
the Fund involved will, within three days thereafter (not including Sundays and
holidays), reduce the amount of its borrowings to an extent that the net asset
coverage of such borrowings shall conform to such limits.

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.

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 71, 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 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 70, 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.

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<PAGE> 147
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).

Mr. Wesley M. Dixon, Jr.,* Trustee, Age 69, 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, from ________ to ________.

Mr. Raymond E. George, Jr.,** Trustee, Age 67, 703 Prospect
Avenue, Winnetka, Illinois 60093. Senior Vice President 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 50, 207
E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. President and
Director of Sunstone Financial Group, Inc. since 1990, President and Member of
Sunstone Investor Services, LLC and Sunstone Distribution Services, LLC since
August 1996 and October 1996 respectively, and Vice President of Firstar Trust
Company prior thereto.

Mary M. Tenwinkel, Vice President, Age 49, 207 E. Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202. Vice President of Sunstone
Financial Group, Inc. since August of 1993 and Senior Vice President since
January, 1996, Vice President of Sunstone Distribution Services, LLC since
October 1996, and First Vice President and head of Personal Services Group at
Firstar Trust Company prior thereto.

Anita M. Zagrodnik, Assistant Treasurer, Age 37, 207 E.
Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. Vice President,
Accounting and Tax Services of Sunstone Financial

__________________________________

*. Messrs. Cathcart and Dixon are first cousins.

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

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<PAGE> 148

Group, Inc. since 1994, Client Services Manager of Sunstone Financial Group,
Inc. from 1990 to 1994, Vice President of Sunstone Investor Services, LLC since
January 1997, and Senior Accountant at Price Waterhouse prior thereto.

Jeffrey A. Dalke, Secretary, Age 46, Philadelphia National
Bank Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107. Partner
in the law firm of Drinker Biddle & Reath LLP.

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

For the fiscal year ended March 31, 1997, the Trustees received the
following compensation:

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<PAGE> 149

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

In addition, for the fiscal year ended March 31, 1997, the Trust paid $18,750
to a former Trustee of 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, 1997,
Northern Trust Corporation had approximately $23.9 billion in assets and $15.9
billion in deposits. Northern Trust and its affiliates administered in various
capacities (including as master trustee, investment manager or custodian) $889
billion in assets as of June 30, 1997, including $149 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 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.

-55-
<PAGE> 150

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.

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.

-56-
<PAGE> 151

Supplemental research information so received is in addition to, and
not in lieu of, services required to be performed by Northern Trust and does
not reduce the advisory fees payable to Northern Trust by the Funds. The
Trustees will periodically review the commissions paid by the Funds to consider
whether the commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Funds. It is possible
that certain of the supplementary research or other services received will
primarily benefit one or more other investment companies or other accounts for
which investment discretion is exercised. Conversely, a Fund may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment company.

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

<TABLE>
<CAPTION>
Fiscal Year or Period
Fiscal Year Ended Fiscal Year Ended Ended
March 31, 1997 March 31, 1996 March 31, 1995(1)
<S> <C> <C> <C>
Income Equity Fund $ 67,369 $ 39,293 $ 17,411
- --------------------------------------------------------------------------------------------------------------------
Growth Equity Fund $ 364,847 $ 305,583 $ 237,069
- --------------------------------------------------------------------------------------------------------------------
Select Equity Fund $ 96,747 $ 82,834 $ 30,268
- --------------------------------------------------------------------------------------------------------------------
Small Cap Fund $ 170,785 $ 303,800 $ 29,741
- --------------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $2,043,586 $2,216,573 $1,091,058
- --------------------------------------------------------------------------------------------------------------------
International Select Equity Fund $ 634,588 $1,189,658 $ 523,082
- --------------------------------------------------------------------------------------------------------------------
Technology Fund $ 40,228 N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Stock Index Fund $ 27,972 N/A N/A

</TABLE>

1. The Select Equity, International Select Equity, Technology and Stock
Index Funds commenced operations on April 6, 1994, April 5, 1994,
April 1, 1996 and October 7, 1996, 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

-57-
<PAGE> 152

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, 1997, the Growth Equity Fund
did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1997, the Income Equity Fund
acquired and sold securities of NationsBank, its regular broker- dealer. As of
March 31, 1997, the Income Equity Fund owned securities of NationsBank in the
amount of $1,254,000.

During the fiscal year ended March 31, 1997, the Small Cap Fund did
not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1997, the Select Equity Fund
did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1997, the International Select
Equity Fund did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1997, the International Growth
Equity Fund did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1997, the International Fixed
Income Fund did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1997, the U.S. Government Fund
did not acquire or sell securities of its regular broker-dealers.

During the fiscal year ended March 31, 1997, the Fixed Income Fund
acquired and sold securities of Donaldson, Lufkin & Jenrette, its regular
broker-dealer. As of March 31, 1997, the Fixed Income Fund owned securities of
Donaldson, Lufkin & Jenrette in the amount of $201,000.

During the fiscal year ended March 31, 1997, the Tax Exempt Fund did
not acquire or sell securities of its regular broker-dealers.

-58-
<PAGE> 153

During the fiscal year ended March 31, 1997, the Intermediate Tax
Exempt Fund did not acquire or sell securities of its regular broker- dealers.

During the fiscal year ended March 31, 1997, the California Municipal
Money Market Fund did not acquire or sell securities of its regular
broker-dealers.

During the fiscal year ended March 31, 1997, the Municipal Money
Market Fund did not acquire or sell securities of its regular broker- dealers.

During the fiscal year ended March 31, 1997, 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, 1997, the Money Market Fund
acquired and sold securities of Associates Corp. of North America, Bear Stearns
& Co., Inc., Donaldson, Lufkin & Jenrette, Goldman, Sachs & Co., J.P. Morgan
Securities, Inc., Lehman Brothers, Nomura Securities, Swiss Bank and UBS
Securities. As of March 31, 1997, the Money Market Fund owned securities of
Associates Corp. of North America in the amount of $24,893,000.

During the fiscal year ended March 31, 1997, the U.S. Government Money
Market Fund did not acquire or sell securities of its regular broker-dealer.

During the fiscal year ended March 31, 1997, the Short-Intermediate
U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona
Tax-Exempt Fund, California Tax-Exempt Fund and Small Cap Index Fund had not
yet commenced operations.

During the fiscal year ending March 31, 1997, 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, $7,565,536 in research commission transactions and $13,826
in research commissions; for the Growth Equity Fund, $177,647,068 in research
commission transactions and $226,834 in research commissions; for the Select
Equity Fund, $53,350,979 in research commission transactions and $78,039 in
research commissions; for the Small Cap Fund, $9,475,429 in research commission
transactions and $12,908 in research commissions; for the International Growth
Equity Fund, $59,277,753 in research commission transactions and $174,772 in
research commissions; for the International Select Equity Fund, $19,359,762 in
research commission transactions and $63,112 in research commissions; for the
Technology Fund, $19,777,619 in research commission transactions and $29,502 in
research commissions; and for the Stock Index Fund, $56,333,955 in research
commission transactions and $27,964 in research commissions.

-59-
<PAGE> 154

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
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.

-60-

<PAGE> 155

For the fiscal years or periods indicated, Northern Trust received
advisory fees, after fee waivers, as follows:

<TABLE>
<CAPTION>
Fiscal Year or Fiscal Year or
Period Ended Fiscal Year Ended Period Ended
March 31, 1997(2) March 31, 1996 March 31, 1995(1)
--------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $5,197,260 $3,642,012 $1,679,646
- ------------------------------------------------------------------------------------------------------
U.S. Government Money $ 950,352 $ 863,091 $ 428,631
Market Fund
- ------------------------------------------------------------------------------------------------------
Municipal Money Market $4,796,468 $3,667,465 $1,985,324
Fund
- ------------------------------------------------------------------------------------------------------
U.S. Government Select $ 297,792 $ 844,168 $ 33,404
Money Market Fund
- ------------------------------------------------------------------------------------------------------
California Municipal $ 494,616 $ 379,811 $ 102,198
Money Market Fund
- ------------------------------------------------------------------------------------------------------
U.S. Government Fund $1,199,667 $ 974,550 $ 808,240
- ------------------------------------------------------------------------------------------------------
Fixed Income Fund $ 779,240 $ 626,406 $ 473,782
- ------------------------------------------------------------------------------------------------------
Intermediate Tax- $1,741,679 $1,603,749 $1,586,107
Exempt Fund
- ------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $ 874,423 $ 818,528 $ 903,489
- ------------------------------------------------------------------------------------------------------
International Fixed $ 111,384 $ 101,335 $ 79,136
Income Fund
- ------------------------------------------------------------------------------------------------------
Income Equity Fund $ 519,235 $ 353,591 $ 285,142
- ------------------------------------------------------------------------------------------------------
Growth Equity Fund $2,267,044 $1,386,300 $ 742,399
- ------------------------------------------------------------------------------------------------------
Select Equity Fund $ 369,460 $ 150,939 $ 70,398
- ------------------------------------------------------------------------------------------------------
Small Cap Fund $1,468,705 $ 991,788 $ 472,444
- ------------------------------------------------------------------------------------------------------
International Growth $1,817,708 $1,557,622 $ 910,038
Equity Fund
- ------------------------------------------------------------------------------------------------------
International Select $1,111,449 $ 844,168 $ 666,020
Equity Fund
- ------------------------------------------------------------------------------------------------------
Technology Fund $ 198,909 N/A N/A
- ------------------------------------------------------------------------------------------------------
</TABLE>

-61-
<PAGE> 156

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.

2. The Technology Fund commenced operations on April 1, 1996; the Florida
Intermediate Tax-Exempt Fund commenced operations on August 15, 1996;
and the Stock Index Fund commenced operations on October 7, 1996.

For the fiscal years or periods indicated, Northern Trust voluntarily
waived and reimbursed advisory fees for each of the Funds as follows:

-62-
<PAGE> 157

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 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.

-63-
<PAGE> 158

For the fiscal years or periods indicated, the amount of transfer
agency fees incurred by each of the Funds was as follows:

<TABLE>
<CAPTION>
Fiscal Year or
Fiscal Year or Period Fiscal Year Ended Period Ended
Ended March 31, 1997(2) March 31, 1996 March 31, 1995(1)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $1,299,295 $ 989,707 $ 478,656
- ---------------------------------------------------------------------------------------------------------------
U.S. Government Money Market $ 244,185 $ 238,819 $ 122,466
Fund
- ---------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $1,199,098 $ 998,815 $ 567,232
- ---------------------------------------------------------------------------------------------------------------
U.S. Government Select Money $ 119,115 $ 96,072 $ 16,702
Market Fund
- ---------------------------------------------------------------------------------------------------------------
California Municipal Money $ 164,871 $ 141,916 $ 40,879
Market Fund
- ---------------------------------------------------------------------------------------------------------------
U.S. Government Fund $ 164,123 $ 134,900 $ 107,766
- ---------------------------------------------------------------------------------------------------------------
Fixed Income Fund $ 108,797 $ 88,800 $ 63,170
- ---------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $ 251,858 $ 232,809 $ 226,584
- ---------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $ 129,549 $ 121,479 $ 129,068
- ---------------------------------------------------------------------------------------------------------------
Technology Fund $ 23,916 N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax- $ 6,302 N/A N/A
Exempt Fund
- ---------------------------------------------------------------------------------------------------------------
International Fixed Income $ 16,224 $ 15,121 $ 8,793
Fund
- ---------------------------------------------------------------------------------------------------------------
Income Equity Fund $ 65,560 $ 46,345 $ 33,546
- ---------------------------------------------------------------------------------------------------------------
Growth Equity Fund $ 270,025 $ 168,369 $ 87,340
- ---------------------------------------------------------------------------------------------------------------
Select Equity Fund $ 48,045 $ 22,952 $ 8,282
- ---------------------------------------------------------------------------------------------------------------
Small Cap Fund $ 175,244 $ 122,166 $ 55,371
- ---------------------------------------------------------------------------------------------------------------
International Growth Equity $ 181,765 $ 155,762 $ 91,003
Fund
- ---------------------------------------------------------------------------------------------------------------
International Select Equity $ 111,143 $ 84,415 $ 66,601
Fund
- ---------------------------------------------------------------------------------------------------------------
Stock Index Fund $ 8,670 N/A N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

_______________

-64-
<PAGE> 159

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 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.

-65-
<PAGE> 160

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 Fund's average daily net assets and 1/100th of 1%
of each Fund's average daily net assets in excess of $50 million.

-66-
<PAGE> 161
For the fiscal years or periods indicated, the amount of custody and
fund accounting fees incurred by each of the Funds was as follows:

<TABLE>
<CAPTION>
Fiscal Year or Fiscal Year or
Period Ended Fiscal Year Ended Period Ended
March 31, 1997(2) March 31, 1996 March 31, 1995(1)
--------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Money Market Fund $319,698 $254,569 $147,500
- ---------------------------------------------------------------------------------------------------
U.S. Government Money $ 90,285 $ 90,960 $ 69,155
Market Fund
- ---------------------------------------------------------------------------------------------------
Municipal Money Market $280,150 $258,554 $157,767
Fund
- ---------------------------------------------------------------------------------------------------
U.S. Government Select $ 61,237 $ 57,944 $ 16,895
Money Market Fund
- ---------------------------------------------------------------------------------------------------
California Municipal Money $ 72,486 $ 68,080 $ 20,111
Market Fund
- ---------------------------------------------------------------------------------------------------
U.S. Government Fund $ 65,101 $ 58,756 $ 54,735
- ---------------------------------------------------------------------------------------------------
Fixed Income Fund $ 57,834 $ 54,631 $ 50,201
- ---------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt $ 87,303 $ 85,022 $ 82,728
Fund
- ---------------------------------------------------------------------------------------------------
Tax-Exempt Fund $ 60,461 $ 59,343 $ 62,415
- ---------------------------------------------------------------------------------------------------
International Fixed Income $ 75,592 $ 74,119 $ 69,688
Fund
- ---------------------------------------------------------------------------------------------------
Income Equity Fund $ 54,136 $ 51,559 $ 49,607
- ---------------------------------------------------------------------------------------------------
Growth Equity Fund $ 92,102 $ 75,707 $ 57,187
- ---------------------------------------------------------------------------------------------------
Select Equity Fund $ 51,726 $ 53,054 $ 52,479
- ---------------------------------------------------------------------------------------------------
Small Cap Fund $ 88,231 $ 93,498 $105,362
- ---------------------------------------------------------------------------------------------------
International Growth $239,257 $213,761 $147,708
Equity Fund
- ---------------------------------------------------------------------------------------------------
International Select $168,250 $146,744 $123,823
Equity Fund
- ---------------------------------------------------------------------------------------------------
Technology Fund $ 63,987 N/A N/A
- ---------------------------------------------------------------------------------------------------
Florida Intermediate Tax- $ 31,173 N/A N/A
Exempt Fund
- ---------------------------------------------------------------------------------------------------
Stock Index Fund $ 64,425 N/A N/A
- ---------------------------------------------------------------------------------------------------
</TABLE>

_______________

-67-
<PAGE> 162

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.

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, 1998, 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 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 "Description of Shares").
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

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<PAGE> 163

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."

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
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

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<PAGE> 164

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, 1998, and thereafter
for successive 12-month periods, provided that the agreement is approved
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 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 received, after waivers, administrative fees as
follows:

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<PAGE> 165

For the fiscal years or periods indicated, Sunstone waived
administrative fees with respect to each Fund as follows:

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<PAGE> 166

<TABLE>
<CAPTION>
Fiscal Year or Fiscal Year or
Period Ended Fiscal Year Ended Period Ended
March 31, 1997(2) March 31, 1996 March 31, 1995(1)
---------------------------------------------------------------
<S> <C> <C> <C>
Municipal Money Market $727,816 $719,057 $341,501
Fund
- -------------------------------------------------------------------------------------------------
U.S. Government Select $155,378 $143,942 $ 16,860
Money Market Fund
- -------------------------------------------------------------------------------------------------
California Municipal $166,479 $148,632 $ 41,983
Money Market Fund
- -------------------------------------------------------------------------------------------------
U.S. Government Fund $ 51,170 $ 40,693 $ 56,080
- -------------------------------------------------------------------------------------------------
Fixed Income Fund $ 34,026 $ 27,055 $ 31,175
- -------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt $ 77,538 $ 64,892 $109,298
Fund
- -------------------------------------------------------------------------------------------------
Tax-Exempt Fund $ 39,928 $ 30,843 $ 62,980
- -------------------------------------------------------------------------------------------------
International Fixed $ 4,953 $ 3,684 $ 3,274
Income Fund
- -------------------------------------------------------------------------------------------------
Income Equity Fund $ 20,875 $ 14,066 $ 17,111
- -------------------------------------------------------------------------------------------------
Growth Equity Fund $ 85,494 $ 63,595 $ 48,472
- -------------------------------------------------------------------------------------------------
Select Equity Fund $ 15,958 $ 9,481 $ 2,842
- -------------------------------------------------------------------------------------------------
Small Cap Fund $ 55,295 $ 47,153 $ 31,190
- -------------------------------------------------------------------------------------------------
International Growth $ 54,062 $ 45,554 $ 51,702
Equity Fund
- -------------------------------------------------------------------------------------------------
International Select $ 33,602 $ 22,936 $ 37,502
Equity Fund
- -------------------------------------------------------------------------------------------------
Technology Fund $ 8,821 N/A N/A
- -------------------------------------------------------------------------------------------------
Florida Intermediate $ 2,308 N/A N/A
Tax-Exempt Fund
- -------------------------------------------------------------------------------------------------
Stock Index $ 3,836 N/A N/A
- -------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE> 167

Northern Funds has also entered into a Distribution Agreement under
which Sunstone Distribution Services, LLC, as agent, sells shares of each Fund
on a continuous basis. Sunstone Distribution Services, LLC pays the cost of
printing and distributing prospectuses to persons who are not shareholders of
Northern Funds (excluding preparation and typesetting expenses) and of certain
other distribution efforts. No compensation is payable by Northern Funds to
Sunstone Distribution Services, LLC for such distribution services. Sunstone
Distribution Services, LLC is an affiliate of Sunstone. Miriam M. Allison,
Vice President and Treasurer of Northern Funds, and Mary M. Tenwinkel, Vice
President of Northern Funds, have been President and Vice President,
respectively, of Sunstone Distribution Services, LLC since October 1996.

The Administration Agreement and the Distribution Agreement provide
that Sunstone and Sunstone Distribution Services, LLC, respectively, may render
similar services to others so long as its services under the respective
Agreement are not impaired thereby. The Administration and Distribution
Agreements provide that Northern Funds will indemnify Sunstone and Sunstone
Distribution Services, LLC, respectively, 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.
<PAGE> 168
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 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, 1997, the Municipal Money Market
Fund and the U.S. Government Money Market Fund paid fees of $98 and $59,754
respectively. No other Funds under the Service Plan paid fees under either
Plan.

COUNSEL AND AUDITORS

Drinker Biddle & Reath LLP, 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, 1997, 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.

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<PAGE> 169
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.

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> 170
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, 1997, the 7-day
yields for the Money Market Funds, after fee waivers, were as follows: Money
Market Fund, 5.07%; U.S. Government Money Market Fund, 5.00%; Municipal Money
Market Fund, 3.03%; U.S.

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<PAGE> 171

Government Select Money Market Fund, 5.03%; and California Municipal Money
Market Fund, 3.03%. For the period ended March 31, 1997, the 7-day yields for
the Money Market Funds, absent fee waivers, were as follows: Money Market Fund,
4.93%; U.S. Government Money Market Fund, 4.81%; Municipal Money Market Fund,
2.90%; U.S. Government Select Money Market Fund, 4.72%; and California
Municipal Money Market Fund, 2.63%.

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, 1997, the 7-day effective yields for the Money Market Funds, after fee
waivers, were as follows: Money Market Fund, 5.20%; U.S. Government Money
Market Fund, 5.12%; Municipal Money Market Fund, 3.08%; U.S. Government Select
Money Market Fund, 5.16%; and California Municipal Money Market Fund, 3.08%.

"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, 1997, and using a federal income tax rate of 31%, the
7-day tax-equivalent yields, after fee waivers, were 4.39% and 4.39% for the
Municipal Money Market and California Municipal Money Market Funds,
respectively.

A Money Market Fund may also quote, from time to time, total return
information using the formula described in the following section.

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);

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<PAGE> 172
P = hypothetical initial payment of $1,000; and

n = period covered by the computation,
expressed in years.

Based on the foregoing calculations, the average annual total returns
for the Non-Money Market Funds for the one year period ended March 31, 1997 and
for the period from the respective dates they commenced operations to March 31,
1997, were as follows: U.S. Government Fund, 3.98% and 5.02%; Fixed Income
Fund, 4.59% and 6.59%; Intermediate Tax-Exempt Fund, 3.39% and 4.84%;
Tax-Exempt Fund, 4.32% and 5.95%; International Fixed Income Fund, 1.39% and
6.56%; Income Equity Fund, 14.42% and 12.07%; Growth Equity Fund, 11.72% and
14.36%; Select Equity Fund, 15.64% and 16.35%; Small Cap Fund, 12.48% and
11.95%; International Growth Equity Fund, 2.61% and 2.75%; International Select
Equity Fund, -1.95% and 1.95%; and Technology Fund, 20.82% and 20.82%. The
Short-Intermediate U.S. Government Fund, California Intermediate Tax- Exempt
Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund and Small Cap Index
Fund had not commenced operations during these periods. 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, 1997, were as follows:
U.S. Government Fund, 15.85%; Fixed Income Fund, 21.12%; Intermediate
Tax-Exempt Fund, 15.26%; Tax-Exempt Fund, 18.97%; International Fixed Income
Fund, 21.01%; Income Equity Fund, 40.81%; Growth Equity Fund, 49.62%; Select
Equity Fund, 57.25%; Small Cap Fund, 40.36%; International Growth Equity Fund,
8.49%; and International Select Equity Fund, 5.93%. Based on the foregoing
calculations, the aggregate total return for the Technology Fund for the period
April 1, 1996 (commencement of operations) to

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<PAGE> 173

March 31, 1997 was 20.82%, the aggregate total return for the Florida
Intermediate Tax-Exempt Fund for the period August 15, 1996 (commencement of
operations) to March 31, 1997 was 2.63% and the aggregate total return for the
Stock Index Fund for the period October 7, 1996 (commencement of operations) to
March 31, 1997 was 8.21%. The Short-Intermediate U.S. Government Fund,
California Intermediate Tax-Exempt Fund, Arizona Tax- Exempt Fund, California
Tax-Exempt Fund and Small Cap Index Fund had not commenced operations during
these periods. 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]

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, 1997, the yields for the U.S Government, Fixed Income, Intermediate
Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt and International Fixed
Income Funds, after fee waivers, were 5.65%, 5.98%, 3.80%, 4.13%, 4.55% and
4.52%, respectively. Also for the 30-day period ended March 31, 1997, the
yields for the U.S Government, Fixed Income, Intermediate Tax-Exempt, Florida
Intermediate Tax-Exempt, Tax-Exempt and International Fixed Income Funds,
absent fee waivers, were 5.41%, 5.75%, 3.62%, 3.10%, 4.31% and 2.68%,
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, 1997, and using
a federal income tax rate of 31%, the 30-day tax-equivalent yields, after fee
waivers, were 5.51%, 5.99% and 6.59% for the

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<PAGE> 174

Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt and Tax-Exempt Funds,
respectively.

GENERAL INFORMATION

The performance information set forth above includes the reinvestment
of dividends and distributions and reflects fee waivers in effect; in the
absence of fee waivers, performance would be reduced. 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 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

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<PAGE> 175
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 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

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<PAGE> 176
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 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

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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 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.

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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 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.

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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.

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

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portion of the dividends paid by the Income Equity Fund, Stock Index Fund,
Growth Equity Fund, Select Equity Fund, Small Cap Fund, Technology Fund and
Small Cap Index 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 marginal 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 marginal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum marginal rate of 35% although surtaxes apply to ordinary income at
specified levels.

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 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,
Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona
Tax-Exempt and California 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.

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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, Intermediate Tax-Exempt,
Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt or California
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 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-

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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 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

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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.

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

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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
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 FUNDS

Assuming each of the California Funds 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. Each of the California Funds may be taxed on its
undistributed taxable income. If for any year one of the California Funds does
not qualify as a regulated investment company, all of that Fund's taxable
income (including

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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, if held by an
individual, is exempt from taxation by California ("California Municipal
Instruments") and (ii) certain U.S. Government and U.S. possession obligations
("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. Each of the California Funds intends to qualify under the above
requirements so that it can pay California exempt-interest dividends. If one
of the California Funds fails to so qualify, no part of that Fund's dividends
to shareholders will be exempt from the California state personal income tax.
Each of the California Funds 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, each of the
California Funds 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-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 one of the
California Funds, 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

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"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 shares of one of
the California Funds is not deductible for California state personal income tax
purposes if that Fund distributes California exempt-interest dividends during
the shareholder's 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
Funds and their shareholders. No attempt is made to present a detailed
explanation of the California state personal income tax treatment of the
California Funds or their shareholders, and this discussion is not intended as
a substitute for careful planning. Further, it should be noted that the
portion of a 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 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 one of the California Funds, 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

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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.

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.

SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE ARIZONA TAX-EXEMPT FUND

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of Guam, Puerto Rico, or the Virgin Islands. In addition, dividends paid by
the Arizona Tax-Exempt Fund which are attributable to interest payments on
direct obligations of the United States government will not be subject to
Arizona income tax to the extent the Arizona Tax-Exempt Fund qualifies as a
regulated investment company under Subchapter M of the Code. Other
distributions from the Arizona Tax-Exempt Fund, however, such as distributions
of short-term or long-term capital gains, will generally not be exempt from
Arizona income tax.

There are no municipal income taxes in Arizona. Moreover, because
shares of the Arizona Tax-Exempt Fund are intangibles, they are not subject to
Arizona property tax. Shareholders of the Arizona Tax-Exempt Fund should
consult their tax advisors about other state and local tax consequences of
their investment in the Arizona Tax-Exempt Fund.

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 twenty-four 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

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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.

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

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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 17, 1997, 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 60675, and its affiliate banks held as beneficial owner five percent
or more of 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 July 17, 1997, the names and share ownership of the entities or
individuals which held of record or beneficially more than 5% of the
outstanding shares of any Fund were as follows: Money Market Fund: Northern
Trust Bank - Miami on behalf of its customers, 28.14%; U.S. Government Money
Market Fund: Northern Trust Bank - Miami on behalf of its customers, 11.47%,
and Sahara Enterprises, Inc. Fixed Income Portfolio, 9.96%; Municipal Money
Market Fund: Northern Trust Bank - Miami on behalf of its customers, 24.39%;
U.S. Government Select Money Market Fund: Frank Hood Trane Revocable Trust,
7.52%, and Northern Trust Bank - Miami on behalf of its customers, 21.74%;
Select Equity Fund: Donaldson Lufkin & Jenrette Securities Corp., 8.14%;
International Select Equity Fund: James L. Knight 1969 Trust Sub-Account,
5.70%; Florida Intermediate Tax-Exempt Fund: Abraham General Partnership,
11.32%, Richard Coren, 5.71%, Donaldson, Lufkin & Jenrette Securities Corp.,
6.97%, and Northern Trust Bank - Miami on behalf of its customers, 5.68%;
California Municipal Money Market Fund: Lesher-Wells Fargo, 7.96%, Lauralee K.
Bell 1993 Trust, 6.34%, and Northern Trust Bank - M&I Sweep Account, 5.93%;
California Tax-Exempt Fund: Sheridan Family Trust, 12.03%, and Stephen & Jerri
Harrison Trust, 5.13%; and International Fixed Income Fund: Jeffrey Hutchens,
6.74%. The address of all of the above persons is c/o The Northern Trust Bank,
50 S. LaSalle Street, Chicago, Illinois 60675.

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.

Under Massachusetts law, there is a possibility that shareholders of a
business trust could, under certain

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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" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.

"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."

"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.

"B" - Issues are regarded as having only a speculative capacity
for timely payment.

"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.

"D" - Issues are in payment default.

Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:

"Prime-1" - Issuers or related supporting institutions have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will often 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.

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"Prime-2" - Issuers or related supporting institutions have a
strong ability for repayment of senior short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.

"Prime-3" - Issuers or related supporting institutions have an
acceptable ability for repayment of senior short-term promissory obligations.
The effects of industry characteristics and market compositions 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" - Issuers do 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

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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.

"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"
ratings.

"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

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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 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.

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"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.

"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 and is
currently highly vulnerable to nonpayment.

"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

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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 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 are considered as 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.

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"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates 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 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.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.

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.

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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 ratings used by Fitch for
corporate and municipal bonds:

"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.

"BB" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over time by
adverse economic changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its debt service
requirements.

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"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the instrument.

"CCC" - Bonds have certain identifiable characteristics that,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.

"CC" - Bonds are minimally protected. Default in payments of
interest seems probable over time.

"C" - Bonds are in imminent default in payment of interest or
principal.

"DDD," "DD" and "D" - Bonds are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these securities, and "D" represents the lowest potential for
recovery.

To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.

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 a strong
capacity to pay principal and interest. Those issues determined to possess
very strong 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.

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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 three 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.
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 a Fund, by using
futures contracts.

Interest rate future contracts can also be used by a Fund for
non-hedging (speculative) purposes to increase total return.

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

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the rules of the exchange on which the futures contract sale or purchase was
made.

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's 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. To the extent consistent with its

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investment objective, a Fund may also engage 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).

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.

Index futures contracts may also be used by a Fund for
non-hedging (speculative) purposes to increase total return.

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 purchases 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 or sub-custodian an amount of liquid
assets, 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

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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 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. 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

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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
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

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<PAGE> 208
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 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,

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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 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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PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements:

(1) Included in Part A: Financial Highlights with respect to
the Money Market, U.S. Government Money Market, Municipal
Money Market, U.S. Government Select Money Market,
California Municipal Money Market, U.S. Government, Fixed
Income, Intermediate Tax-Exempt, Tax-Exempt, Florida
Intermediate Tax-Exempt, International Fixed Income, Income
Equity, Stock Index, Growth Equity, Select Equity, Small
Cap, International Growth Equity, International Select
Equity and Technology Funds for the fiscal year ended March
31, 1997.

(2) Incorporated by reference into Part B with respect to the
above-referenced Funds:

- Statements of Assets and Liabilities as of March 31,
1997;

- Statements of Operations for the fiscal year ended
March 31, 1997;

- Statements of Changes in Net Assets for the fiscal
years ended March 31, 1997 and 1996;

- Schedules of Investments as of March 31, 1997;

- Notes to financial statements; and

- Report of Independent Public Accountants.

(b) Exhibits:

The following exhibits are incorporated herein by reference:

1(a) - Agreement and Declaration of Trust dated October 12, 1993
filed as Exhibit 1(a) to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, filed on
July 29, 1996 ("PEA No. 11").

1(b) - Amendment No. 1 to Agreement and Declaration of Trust filed
as Exhibit 1(b) to PEA No. 11.

1(c) - Amendment No. 2 to Agreement and Declaration of Trust filed
as Exhibit 1(c) to PEA No. 11.

1(d) - Amendment No. 3 to Agreement and Declaration of Trust filed
as Exhibit 1(d) to PEA No. 11.

1(e) - Amendment No. 4 to Agreement and Declaration of Trust filed
as Exhibit 1(e) to PEA No. 11.

1(f) - Amendment No. 5 to Agreement and Declaration of Trust
dated May 26, 1995 filed as Exhibit 1(f) to Post-Effective
Amendment No. 9 to Registrant's Registration Statement on
Form N-1A, filed on June 12, 1996 ("PEA No. 9").

1(g) - Amendment No. 6 to Agreement and Declaration of Trust dated
August 6, 1996 filed as Exhibit 1(g) to Post-Effective
<PAGE> 211
Amendment No. 12 to Registrant's Registration Statement on
Form N-1A, filed on October 30, 1996 ("PEA No. 12").

1(h) - Amendment No. 7 to Agreement and Declaration of Trust dated
August 6, 1996 filed as Exhibit 1(h) to PEA No. 12.

1(i) - Amendment No. 8 to Agreement and Declaration of Trust dated
February 12, 1996 filed as Exhibit 1(i) to Post-Effective
Amendment No. 15 to Registrant's Registration Statement on
Form N-1A, filed on February 26, 1997 ("PEA No. 15").

2 - By-Laws filed as Exhibit 2 to PEA No. 11.

2(a) - Amendment to the By-Laws dated August 4, 1994 filed as
Exhibit 2(a) to PEA No. 11.

3 - Not Applicable.

4 - Not Applicable.

5 - Investment Advisory and Ancillary Services Agreement between
Registrant and The Northern Trust Company dated April 1, 1994
("Investment Advisory Agreement") filed as Exhibit 5 to PEA
No. 11.

5(a) - Addendum No. 1 to the Investment Advisory Agreement dated
November 29, 1994 filed as Exhibit 5(a) to PEA No. 11.

5(b) - Addendum No. 2 to the Investment Advisory Agreement dated
March 29, 1996 filed as Exhibit 5(b) to PEA No. 9.

5(c) - Addendum No. 3 to the Investment Advisory Agreement dated
August 7, 1996 filed as Exhibit 5(c) to PEA No. 12.

5(d) - Form of Addendum No. 5 to the Investment Advisory Agreement
filed as Exhibit 5(e) to PEA No. 15.

6 - Distribution Agreement between Registrant and Sunstone
Distribution Services, LLC dated January 1, 1997
("Distribution Agreement") filed as Exhibit 6(e) to Post-
Effective Amendment No. 14 to Registrant's Registration
Statement on Form N-1A, filed on January 27, 1997 ("PEA No.
14").

6(a) - Form of Amended and Restated Schedule A to the Distribution
Agreement between Registrant and Sunstone Distribution
Services, LLC filed as Exhibit 6(f) to PEA No. 15.

7 - Not Applicable.

8(a) - Custodian Agreement between Registrant and The Northern
Trust Company dated April 1, 1994 ("Custodian Agreement")
filed as Exhibit 8(a) to PEA No. 11.

8(b) - Transfer Agency Agreement between Registrant and The
Northern Trust Company dated April 1, 1994 ("Transfer Agency
Agreement") filed as Exhibit 8(b) to PEA No. 11.

8(c) - Addendum No. 1 to the Transfer Agency Agreement dated
November 29, 1994 filed as Exhibit 8(c) to PEA No. 11.

8(d) - Addendum No. 1 to the Custodian Agreement dated November 29,
1994 filed as Exhibit 8(d) to PEA No. 11.

8(e) - Addendum No. 2 to the Transfer Agency Agreement dated
March 29, 1996 filed as Exhibit 8(e) to PEA No. 9.
<PAGE> 212
8(f) - Addendum No. 2 to the Custodian Agreement dated March 29,
1996 filed as Exhibit 8(f) to PEA No. 9.

8(g) - Foreign Custody Agreement between the Registrant and The
Northern Trust Company dated April 1, 1994 filed as Exhibit
8(g) to PEA No. 11.

8(h) - Addendum No. 3 to the Transfer Agency Agreement dated August
7, 1996 filed as Exhibit 8(h) to PEA No. 12.

8(i) - Addendum No. 3 to the Custodian Agreement dated August 7,
1996 filed as Exhibit 8(i) to PEA No. 12.

8(j) - Addendum No. 4 to the Custodian Agreement dated August 7,
1996 filed as Exhibit 8(j) to PEA No. 12.

8(k) - Form of Addendum No. 5 to the Transfer Agency Agreement
filed as Exhibit 8(m) to PEA No. 15.

8(l) - Form of Addendum No. 6 to the Custodian Agreement filed as
Exhibit 8(n) to PEA No. 15.

9(a) - Administration Agreement between Registrant and Sunstone
Financial Group, Inc. dated April 1, 1994 ("Administration
Agreement") filed as Exhibit 9(a) to PEA No. 11.

9(b) - Service Plan and Related Agreement filed as Exhibit 9(b) to
PEA No. 9.

9(c) - Form of Amended and Restated Schedule A to the Administration
Agreement filed as Exhibit 9(g) to PEA No. 15.

* 10 - Opinion and Consent of Counsel.

12 - Not Applicable.

13(a) - Purchase Agreement between Registrant and The Northern Trust
Company dated March 31, 1994 filed as Exhibit 13(a) to PEA
No. 11.

13(b) - Purchase Agreement between Registrant and Miriam M. Allison
dated March 14, 1994 filed as Exhibit 13(b) to PEA No. 11.

14 - Not Applicable.

15 - Distribution and Service Plan and Related Agreement filed as
Exhibit 15 to PEA No. 9.

16 - Schedule of Computation of Performance Quotations for the
Money Market, U.S. Government Money Market, Municipal Money
Market, U.S. Government, Fixed Income, Intermediate
Tax-Exempt, Tax-Exempt, International Fixed Income, Income
Equity, Growth Equity, Select Equity, Small Cap Growth,
International Growth Equity and International Select Equity
Funds filed as Exhibit 16 to PEA No. 11.

16(a) - Schedule of Computation of Performance Quotations for the
California Municipal Money Market and U.S. Government Select
Money Market Funds filed as Exhibit 16(a) to PEA No. 11.

16(b) - Schedule for Computation of Performance Quotations for the
Technology Fund filed as Exhibit 16(b) to PEA No. 12.

- --------
* Filed under Rule 24f-2 as part of Registrant's Rule 24f-2 Notice.
<PAGE> 213
16(c) - Schedule for Computation of Performance Quotations for the
Florida Intermediate Tax-Exempt and Stock Index Funds filed
as Exhibit 16(c) to PEA No. 14.

18 - Not Applicable.

The following exhibits are filed herewith:

1(j) - Amendment No. 9 to Agreement and Declaration of Trust dated
February 12, 1997.

2(b) - Amendment No. 2 to the By-Laws dated May 22, 1997.

5(d) - Addendum No. 4 to the Investment Advisory Agreement dated
March 24, 1997.

6(b) - Amended and Restated Schedule A to Distribution Agreement
between Registrant and Sunstone Distribution Services, LLC
dated March 24, 1997.

8(m) - Addendum No. 4 to the Transfer Agency Agreement dated March
24, 1997.

8(n) - Addendum No. 5 to the Custodian Agreement dated March 24,
1997.

9(d) - Amended and Restated Schedule A to the Administration
Agreement dated March 24, 1997.

11(a) - Consent of Drinker Biddle & Reath LLP.

11(b) - Consent of Independent Accountant.

17 - Financial Data Schedules with respect to the Money Market,
U.S. Government Money Market, Municipal Money Market, U.S.
Government Select Money Market, California Municipal Money
Market, U.S. Government, Fixed Income, Intermediate Tax-
Exempt, Tax-Exempt, Florida Intermediate Tax-Exempt,
International Fixed Income, Income Equity, Stock Index,
Growth Equity, Select Equity, Small Cap, International
Growth Equity, International Select Equity and Technology
Funds.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Registrant is controlled by its Board of Trustees.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES

NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS JUNE 30, 1997
-------------- ----------------
<S> <C>
Money Market Fund............................. 7,791
U.S. Government Money Market Fund............. 1,007
Municipal Money Market Fund................... 3,653
U.S. Government Select Money Market Fund...... 853
California Municipal Money Market Fund........ 813
U.S. Government Fund.......................... 2,056
Fixed Income Fund............................. 2,097
Intermediate Tax-Exempt Fund.................. 1,968
Florida Intermediate Tax-Exempt Fund.......... 734
California Tax-Exempt Fund.................... 74
Tax-Exempt Fund............................... 1,300
International Fixed Income Fund............... 937
Income Equity Fund............................ 2,146
</TABLE>

<PAGE> 214

<TABLE>
<S> <C>
Stock Index Fund.............................. 792
Growth Equity Fund............................ 4,680
Select Equity Fund............................ 2,575
Small Cap Fund................................ 5,281
International Growth Equity Fund.............. 4,584
International Select Equity Fund.............. 2,638
Technology Fund............................... 2,156
</TABLE>

ITEM 27. INDEMNIFICATION

Section 7 of the Investment Advisory and Ancillary Services
Agreement between the Registrant and The Northern Trust Company ("Northern")
provides for indemnification of Northern or, in lieu thereof, contribution by
Registrant, in connection with certain claims and liabilities to which Northern,
in its capacity as Registrant's Adviser, may be subject. A copy of the
Investment Advisory and Ancillary Services Agreement is incorporated by
reference herein as Exhibit 5.

Section 5 of the Administration Agreement between the Registrant and
Sunstone Financial Group, Inc. ("Sunstone") provides for indemnification of
Sunstone in connection with certain claims and liabilities to which Sunstone, in
its capacity as Registrant's Administrator, may be subject. A copy of the
Administration Agreement is incorporated by reference herein as Exhibit 9(a).

Section 2.8 of the Distribution Agreement between the Registrant and
Sunstone Distribution Services, LLC provides for indemnification of Sunstone
Distribution Services, LLC, an affiliate of Sunstone, in connection with certain
claims and liabilities to which Sunstone Distribution Services, LLC, in its
capacity as Registrant's Distributor, may be subject. A copy of the Distribution
Agreement is incorporated by reference herein as Exhibit 6.

In addition, Section 6.3 of Registrant's Agreement and Declaration
of Trust, a copy of which is incorporated by reference herein as Exhibit 1(a),
provides for indemnification of shareholders as follows:

6.3 Indemnification of Shareholders. No Shareholder shall be subject
to any personal liability whatsoever to any person in connection
with property of the Trust or the acts, obligations or affairs of
the Trust or any Series thereof. The Trust shall indemnify and hold
each Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by reason
of his being or having been a Shareholder, and shall reimburse such
Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a
corporation or other entity, its corporate or other general
successor) out of the property of the Trust for all legal and other
expenses reasonably incurred by him in connection with any such
claim or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of assets of the
one or more Series whose Shares were held by said Shareholder at the
time the act or event occurred which gave rise to the claim against
or liability of said Shareholder. The rights accruing to a
Shareholder under this Section shall not impair any other right to
which such Shareholder may be lawfully entitled, nor shall anything
herein contained restrict the right of the Trust or any Series
thereof to indemnify or reimburse a Shareholder in any appropriate
situation even though not specifically provided herein.
<PAGE> 215

Section 6.4 of Registrant's Agreement and Declaration of Trust, a
copy of which is incorporated by reference herein as Exhibit 1(a), provides for
indemnification of Trustees and officers, as follows:

6.4 Indemnification of Trustees, Officers, etc. The Trust shall
indemnify each of its Trustees and officers and persons who serve at
the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a shareholder,
creditor or otherwise (hereinafter referred to as a "Covered
Person") against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and expenses, including reasonable accountants' and
counsel fees, incurred by any Covered Person in connection with the
defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have
been involved as a party or otherwise or with which such person may
be or may have been threatened, while in office or thereafter, by
reason of being or having been such a Trustee or officer, director
or trustee, except that no Covered Person shall be indemnified
against any liability to the Trust or its Shareholders to which such
Covered Person would otherwise be subject by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of such Covered Person's office
(such wilful misfeasance, bad faith, gross negligence or reckless
disregard being referred to herein as "Disabling Conduct").
Expenses, including accountants' and counsel fees so incurred by any
such Covered Person (but excluding amounts paid in satisfaction of
judgments, in compromise or as fines or penalties), may be paid from
time to time by the Trust in advance of the final disposition of any
such action, suit or proceeding upon receipt of (a) an undertaking
by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of
such expenses is not authorized under this Article VI and either (b)
such Covered Person provides security for such undertaking, (c) the
Trust is insured against losses arising by reason of such payment,
or (d) a majority of a quorum of disinterested, non-party Trustees,
or independent legal counsel in a written opinion, determines, based
on a review of readily available facts, that there is reason to
believe that such Covered Person ultimately will be found entitled
to indemnification.

Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to Trustees, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a Trustee, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a
<PAGE> 216
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

The Northern Trust Company, Registrant's investment adviser, is a
full service commercial bank and also provides a full range of trust and
fiduciary services. Set forth below is a list of all of the directors, senior
officers and those officers primarily responsible for Registrant's affairs of
The Northern Trust Company and, with respect to each such person, the name and
business address of the company (if any) with which such person has been
connected at any time since July 1, 1995, as well as the capacity in which such
person was connected.

<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- ------------------
<S> <C> <C>
Gregg D. Behrens
Executive Vice President None

J. David Brock
Executive Vice President None

Duane L. Burnham Abbott Laboratories Chairman and Chief
Director 100 Abbott Park Road Executive Officer
Abbott Park, IL 60064-3500

Dolores E. Cross Northern Trust Corporation Director
Director

Chicago State University President
95th Street at King Drive
Chicago, IL 60643

Susan Crown Henry Crown & Co. Vice President
Director 222 North LaSalle Street
Suite 2000
Chicago, IL 60601

John R. Goodwin None
Senior Vice President

Robert S. Hamada The University of Chicago Edward Eagle Brown
Director Graduate School of Business Distinguished Service
1101 East 58th Street Professor of Finance
Chicago, IL 60637 and Dean

Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675

A.M. Castle & Co. Director
3400 North Wolf Road
Franklin Park, IL 60131

Chicago Board of Trade Director
141 West Jackson Boulevard
Chicago, IL 60604

Barry G. Hastings Northern Trust Corporation President and Chief
President, Chief 50 South LaSalle Street Operating Officer
Operating Officer Chicago, IL 60675 and Director
and Director and Former
Vice Chairman and Senior
</TABLE>

<PAGE> 217
<TABLE>
<S> <C> <C>
Executive Vice
President

Northern Trust Securities, Inc. Director
50 South LaSalle Street
Chicago, IL 60675

Northern Trust of California Director
Corporation
355 South Grand Avenue
Los Angeles, CA 90017

Northern Trust of Florida Chairman of the
Corporation Board and Director
700 Brickell Avenue
Miami, FL 33131

Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675

Robert A. Helman Mayer, Brown & Platt Partner
Director 190 South LaSalle Street
Chicago, IL 60603

Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675

The Horsham Corporation Director
24 Hazelton Avenue
Toronto, Ontario, Canada
M5R 2E2

Brambles USA, Inc. Director
400 North Michigan Avenue
Chicago, IL 60611

Chicago Stock Exchange Governor
One Financial Plaza
440 South LaSalle Street
Chicago, IL 60605

Alberta Natural Gas Director
Company Ltd.
2900, 240 Fourth Avenue, NW
Calgary, Alberta, Canada
T2P4L7

Arthur L. Kelly KEL Enterprises L.P. Managing Partner
Director 135 South LaSalle Street
Chicago, IL 60603

Bayerische Motoren Werke (BMW) A.G. Director
BMW Haus
Petuelring 130
Postfach 40 02 40
D-8000
Munich 40 Germany
</TABLE>
<PAGE> 218

<TABLE>
<CAPTION>
NAME AND POSITION
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -----------------
<S> <C> <C>
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675

Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198

Snap-on Incorporated Director
2801 80th Street
Kenosha, WI 53140

Tejas Gas Corporation Director
1301 McKinney Street
Houston, TX 77010

Deere & Company Director
John Deere Road
Moline, IL 61265

Frederick A. Krehbiel Molex Incorporated Chairman, Chief
Director 2222 Wellington Court Executive Officer
Lisle, IL 60532-1682 and Former Vice
Chairman

Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675

Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198

Tellabs, Inc. Director
4951 Indiana Avenue
Lisle, IL 60532

Robert A. LaFleur None
Senior Vice President

Thomas L. Mallman None
Senior Vice President

John V.N. McClure None
Executive Vice President

James J. Mitchell The Northern Trust Company Director
Executive Vice President of New York
80 Broad Street
19th Floor
New York, NY 10004

William G. Mitchell Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
</TABLE>

<PAGE> 219

<TABLE>
<CAPTION>
NAME AND POSITION
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -----------------
<S> <C> <C>
The Interlake Corporation Director
7701 Harger Road
Oak Brook, IL 60521-1488

Peoples Energy Corporation Director
122 South Michigan Avenue
Chicago, IL 60603

The Sherwin-Williams Company Director
101 Prospect Avenue, N.W.
Cleveland, OH 44115-1075

Edward J. Mooney Nalco Chemical Company Chairman, Chief
Director One Nalco Center Executive Officer,
Naperville, IL 60563-1198 President and
Director

J. Terrance Murray None
Executive Vice President

Morton International, Inc. Director
100 North Riverside Plaza
Chicago, IL 60606

William A. Osborn Northern Trust Corporation Director
Chairman and Chief 50 South LaSalle Street
Executive Officer, Chicago, IL 60675
Former President
and Chief
Operating Officer, Nortrust Realty Management, Inc. Director
Former Senior Executive 50 South LaSalle Street
Vice President Chicago, IL 60675

Northern Trust of Director and Former
California Corporation Chairman of the Board
355 South Grand Avenue
Los Angeles, CA 90017

Northern Futures Corporation Director
50 South LaSalle Street
Chicago, IL 60675

Sheila A. Penrose RCB International Inc Director
Executive Vice President 29 Federal Street
Stamford, CT 06901

Perry R. Pero Northern Futures Corporation Director
Senior Executive Vice 50 South LaSalle Street
President and Chief Chicago, IL 60675
Financial Officer
Northern Investment Corporation President and,
50 South LaSalle Street Director and
Chicago IL 60675 Former Chairman
and Treasurer

RCB International Inc. Director
29 Federal Street
Stamford, CT 06901
</TABLE>

<PAGE> 220

<TABLE>
<CAPTION>
NAME AND POSITION
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -----------------
<S> <C> <C>
Northern Trust Securities, Inc. Director
50 South LaSalle Street
Chicago, IL 60675

Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675

Donald L. Raiff None
Senior Vice President

Peter L. Rossiter Schiff, Hardin & Waite Former Partner
Executive Vice President, 7200 Sears Tower
General Counsel and Chicago, IL 60606
Secretary
Tanglewood Bancshares Inc. Former Vice President
600 Bering Drive and Director
Houston, TX 77057

Consolidated Communications, Inc. Director
Illinois Consolidated Telephone
Company
121 South 17th Street
Mattoon, IL 61938

Northern Trust Corporation Executive Vice
50 South LaSalle Street President, Secretary,
Chicago, IL 60675 and General Counsel

Harold B. Smith Illinois Tool Works Inc. Chairman of the
Director 3600 West Lake Avenue Executive Committee
Glenview, IL 60025-5811 and a Director

Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675

W. W. Grainger, Inc. Director
5500 West Howard Street
Skokie, IL 60077

Northwestern Mutual Life Trustee
Insurance Co.
720 East Wisconsin Avenue
Milwaukee, WI 53202

William D. Smithburg The Quaker Oats Company Chairman, President
Director 321 North Clark Street and Chief Executive
Chicago, IL 60610 Officer and Director

Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675

Abbott Laboratories Director
One Abbott Park Road
Abbott Park, IL 60064-3500

Corning Incorporated Director
Corning, NY 14831
</TABLE>

<PAGE> 221

<TABLE>
<CAPTION>
NAME AND POSITION
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -----------------
<S> <C> <C>
Prime Capital Corporation Director
P.O. Box 8460
Rolling Meadows, IL 60008

James M. Snyder None
Executive Vice President

Mark Stevens Northern Trust Corporation Executive Vice
Executive Vice President 50 South LaSalle Street President
Chicago, IL 60675

Bide L. Thomas Commonwealth Edison Company Former President and a
Director One First National Plaza Former Director
Chicago, IL 60603

Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675

R. R. Donnelley & Sons Company Director
77 West Wacker Drive
Chicago, IL 60601

MYR Group Inc. Director
*(formerly L.E. Myers Company)
2550 West Golf Road
Rolling Meadows, IL 60008

* Name change

William S. Trukenbrod Northern Trust Corporation Executive Vice
Executive Vice President 50 South LaSalle Street President
Chicago, IL 60675

Jeffrey H. Wessel None
Executive Vice President
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITER

(a) Sunstone Distribution Services, LLC currently serves as
distributor of the shares of The Haven Capital Management Trust, The
Garzarelli Funds, Green Century Funds and First Omaha Funds, Inc.

(b) To the best of Registrant's knowledge, the directors and
executive officers of Sunstone Distribution Services, LLC, distributor for
Registrant, are as follows:

<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH POSITIONS AND
NAME AND PRINCIPAL SUNSTONE DISTRIBUTION OFFICES WITH
BUSINESS ADDRESS SERVICES, LLC REGISTRANT
- ------------------ --------------------- -------------
<S> <C> <C>
Miriam M. Allison President and Member Vice President
207 E. Buffalo Street and Treasurer
Suite 400
Milwaukee, WI 53202
</TABLE>
<PAGE> 222
<TABLE>
<S> <C> <C>
Daniel S. Allison Secretary None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202

Mary M. Tenwinkel Vice President Vice President
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
</TABLE>

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

The Agreement and Declaration of Trust, By-laws and minute books of
the Registrant are in the physical possession of Drinker Biddle & Reath LLP,
1100 Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107. Records relating to Sunstone Financial Group, Inc.'s
functions as administrator, and Sunstone Distribution Services, LLC's functions
as distributor, for the Registrant are located at 207 E. Buffalo Street, Suite
400, Milwaukee, Wisconsin 53202. All other accounts, books and other documents
required to be maintained under Section 31(a) of the Investment Company Act of
1940 and the Rules promulgated thereunder are in the physical possession of The
Northern Trust Company, 50 S. LaSalle Street, Chicago, Illinois 60675 or 801 S.
Canal Street, Chicago, Illinois 60607 (relating to transfer agent).

ITEM 31. MANAGEMENT SERVICES

(a) Not Applicable.

ITEM 32. UNDERTAKINGS

(a) (i) Registrant hereby undertakes to file a Post-Effective
Amendment, using financial statements which need not be certified, within four
to six months from the effective date of Registrant's Post-Effective Amendment
No. 14 for the Short-Intermediate U.S. Government Fund, California Intermediate
Tax-Exempt Fund, Arizona Tax-Exempt Fund and California Tax-Exempt Fund.

(ii) Registrant hereby undertakes to file a Post-Effective
Amendment, using financial statements which need not be certified, within four
to six months from the effective date of Registrant's Post-Effective Amendment
No. 15 for the Small Cap Index Fund.

(b) Registrant undertakes to provide its Annual Report to
Shareholders upon request without charge to any recipient of a Prospectus for
the U.S. Government Fund, Short-Intermediate U.S. Government Fund, Fixed Income
Fund, Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund,
California Intermediate Tax-Exempt Fund, Tax-Exempt Fund, Arizona Tax-Exempt
Fund, California Tax-Exempt Fund, International Fixed Income Fund, 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 and Small Cap Index Fund.

<PAGE> 223
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment No. 16 to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Milwaukee and State of Wisconsin on the 31st day of
July, 1997.

NORTHERN FUNDS

By: /s/ Miriam M. Allison
-----------------------------------
Miriam M. Allison
Treasurer

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 16 to Registrants' Registration Statement has been
signed below by the following persons in the capacities and on the date
indicated.

Name Title Date
---- ----- ----

/*/ Silas S. Cathcart* Trustee and July 31, 1997
- ------------------------------- President (Chief
Silas S. Cathcart Executive Officer)

/s/ Miriam M. Allison Treasurer July 31, 1997
- ------------------------------- (Chief Financial
Miriam M. Allison and Accounting
Officer)

/*/ James W. Cozad* Trustee July 31, 1997
- -------------------------------
James W. Cozad

/*/ Wesley M. Dixon, Jr.* Trustee July 31, 1997
- -------------------------------
Wesley M. Dixon, Jr.

/*/ William J. Dolan, Jr.* Trustee July 31, 1997
- -------------------------------
William J. Dolan, Jr.

/*/ Raymond E. George, Jr.* Trustee July 31, 1997
- -------------------------------
Raymond E. George, Jr.

*By:/s/ Miriam M. Allison July 31, 1997
---------------------------
Miriam M. Allison,
Attorney-in-fact

<PAGE> 224
NORTHERN FUNDS

(A Massachusetts Business Trust)

CERTIFICATE OF SECRETARY

The foregoing resolution was duly adopted by the Board of Trustees
of Northern Funds at a Meeting of the Board of Trustees held on May 22, 1997,
and remains in effect on the date hereof:

RESOLVED, that the trustees and officers of Northern Funds who may
be required to execute any amendment to the Registration Statement of
Northern Funds be, and each of them hereby is, authorized to execute a
Power of Attorney appointing Jeffrey A. Dalke and Miriam M. Allison,
either of them, their true and lawful attorney or attorneys, to execute in
their name, place and stead, in their capacity as trustee or officer, or
both, of the Northern Funds, any and all amendments to said Registration
Statement, and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange
Commission; and either of said attorneys shall have full power and
authority to do in the name and on behalf of said trustees and officers,
or any or all of them, in any and all capacities, every act whatsoever
requisite or necessary to be done in the premises, as fully and to all
intents and purposes as each of said trustees or officers, or any or all
of them, might or could do in person, said acts of said attorneys, or
either of them, being hereby ratified and approved.

IN WITNESS WHEREOF, I have hereunto set my hand this 31st day of
July, 1997.

NORTHERN FUNDS

/s/ Jeffrey A. Dalke
---------------------------
Jeffrey A. Dalke
Secretary
<PAGE> 225
NORTHERN FUNDS

POWER OF ATTORNEY

Know All Men by These Presents, that the undersigned, Miriam M.
Allison, hereby constitutes and appoints Jeffrey A. Dalke her true and lawful
attorney, to execute in her name, place, and stead, in her capacity as officer
of the Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and said attorney shall have
full power of substitution and resubstitution; and said attorney shall have full
power and authority to do and perform in her name and on her behalf, in any and
all capacities, every act whatsoever requisite or necessary to be done, as fully
and to all intents and purposes as she might or could do in person, said acts of
said attorney being hereby ratified and approved.

DATED: March 7, 1994

/s/ Miriam M. Allison
- ----------------------------
Miriam M. Allison
<PAGE> 226
NORTHERN FUNDS

POWER OF ATTORNEY

Know All Men by These Presents, that the undersigned, Silas S.
Cathcart, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M. Allison
and either of them, his true and lawful attorney, to execute in his name, place,
and stead, in his capacity as Trustee or officer, or both, of the Trust, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and each of said attorneys shall have full power of
substitution and resubstitution; and each of said attorneys shall have full
power and authority to do and perform in his name and on his behalf, in any and
all capacities, every act whatsoever requisite or necessary to be done, as fully
and to all intents and purposes as he might or could do in person, said acts of
each of the said attorneys being hereby ratified and approved.

DATED: October 13, 1993

/s/ Silas S. Cathcart
- ---------------------------
Silas S. Cathcart
<PAGE> 227
NORTHERN FUNDS

POWER OF ATTORNEY

Know All Men by These Presents, that the undersigned, James W.
Cozad, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M. Allison
and either of them, his true and lawful attorney, to execute in his name, place,
and stead, in his capacity as Trustee or officer, or both, of the Trust, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and each of said attorneys shall have full power of
substitution and resubstitution; and each of said attorneys shall have full
power and authority to do and perform in his name and on his behalf, in any and
all capacities, every act whatsoever requisite or necessary to be done, as fully
and to all intents and purposes as he might or could do in person, said acts of
each of the said attorneys being hereby ratified and approved.

DATED: October 13, 1993

/s/ James W. Cozad
- ----------------------------
James W. Cozad
<PAGE> 228
NORTHERN FUNDS

POWER OF ATTORNEY

Know All Men by These Presents, that the undersigned, Wesley M.
Dixon, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and each of said attorneys shall have full
power of substitution and resubstitution; and each of said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, said
acts of each of the said attorneys being hereby ratified and approved.

DATED: February 24, 1994

/s/ Wesley M. Dixon, Jr.
- -----------------------------
Wesley M. Dixon, Jr.
<PAGE> 229
NORTHERN FUNDS

POWER OF ATTORNEY

Know All Men by These Presents, that the undersigned, William J.
Dolan, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and each of said attorneys shall have full
power of substitution and resubstitution; and each of said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, said
acts of each of the said attorneys being hereby ratified and approved.

DATED: February 28, 1994

/s/ William J. Dolan, Jr.
- ---------------------------------
William J. Dolan, Jr.
<PAGE> 230
NORTHERN FUNDS

POWER OF ATTORNEY

Know All Men by These Presents, that the undersigned, Raymond E.
George, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and each of said attorneys shall have full
power of substitution and resubstitution; and each of said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, said
acts of each of the said attorneys being hereby ratified and approved.

DATED: February 23, 1994

/s/ Raymond E. George, Jr.
- --------------------------------
Raymond E. George, Jr.
<PAGE> 231
NORTHERN FUNDS

EXHIBIT INDEX

EXHIBITS

1(j) - Amendment No. 9 to Agreement and Declaration of Trust dated
February 12, 1997.

2(b) - Amendment No. 2 to the By-Laws dated May 22, 1997.

5(d) - Addendum No. 4 to the Investment Advisory Agreement dated
March 24, 1997.

6(b) - Amended and Restated Schedule A to Distribution Agreement
between Registrant and Sunstone Distribution Services, LLC
dated March 24, 1997.

8(m) - Addendum No. 4 to the Transfer Agency Agreement dated March
24, 1997.

8(n) - Addendum No. 5 to the Custodian Agreement dated March 24,
1997.

9(d) - Amended and Restated Schedule A to the Administration
Agreement dated March 24, 1997.

11(a) - Consent of Drinker Biddle & Reath LLP.

11(b) - Consent of Independent Accountant.

<PAGE> 1
EXHIBIT 1(j)

NORTHERN FUNDS

AMENDMENT NO. 9 TO AGREEMENT AND DECLARATION OF TRUST

WHEREAS, Section 4.1 of the Agreement and Declaration of Trust dated
October 12, 1993 (the "Declaration") of Northern Funds (the "Trust") provides
that the Declaration may be amended to establish and designate new Series or
Classes of Shares by an instrument in writing executed by a majority of the
Trustees of the Trust and setting forth such establishment and designation and
the relative rights and preferences of such Series or Classes;

NOW THEREFORE, the undersigned, being a majority of the Trustees of
the Trust, hereby:

(1) amend the Declaration by designating and establishing an
additional Series and Class of Shares to be known as the Initial Class of
the "Small Cap Index Fund," such Additional Series and Class to have the
relative rights and preferences set forth in Section 4.2(a) through (m) of
the Declaration; and

(2) determine that pursuant to Section 7.3 of the Declaration the
foregoing amendment shall be effective as of the date set forth below.

WITNESS our hands as of this 12th day of February, 1997.

/s/ Silas S. Cathcart /s/ Wesley M. Dixon, Jr.
- -------------------------- -----------------------------
Silas S. Cathcart Wesley M. Dixon, Jr.

/s/ James W. Cozad /s/ William J. Dolan, Jr.
- -------------------------- -----------------------------
James W. Cozad William J. Dolan, Jr.

/s/ Raymond E. George, Jr.
- --------------------------
Raymond E. George, Jr.

<PAGE> 1
EXHIBIT 2(b)

NORTHERN FUNDS

BY-LAW AMENDMENT NO. 2
ADOPTED ON MAY 22, 1997

ARTICLE 3

OFFICERS AND TRUSTEES

* * *

3.10 Trustee Qualification. A Trustee shall cease to serve as a Trustee
effective as of the last calendar day in the semi-annual fiscal period of the
Trust (currently these periods end on March 31 and September 30) in which the
earlier of the following events occurs: (a) the date such Trustee attains the
age of seventy-three years; and (b) the twelfth anniversary of the date of such
Trustee's written acceptance to serve as a trustee pursuant to Article III
Section 3.1(f) of the Declaration of Trust.

<PAGE> 1
EXHIBIT 5(d)

NORTHERN FUNDS

ADDENDUM NO. 4 TO THE INVESTMENT ADVISORY AGREEMENT

This Addendum, dated as of the 24th day of March, 1997, is entered
into between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and
THE NORTHERN TRUST COMPANY (the "Investment Adviser"), an Illinois state bank.

WHEREAS, the Trust and the Investment Adviser have entered into an
Investment Advisory and Ancillary Services Agreement dated as of April 1, 1994
as amended by Addendum No. 1 dated November 29, 1994, by Addendum No. 2 dated
March 29, 1996 and by Addendum No. 3 dated August 7, 1996 (the "Advisory
Agreement") pursuant to which the Trust has appointed the Investment Adviser to
act as investment adviser to the Trust 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, U.S.
Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, 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, Stock Index Fund and Florida
Intermediate Tax-Exempt Fund; and

WHEREAS, Section 1(b) of the Advisory Agreement provides that in the
event the Trust establishes one or more additional investment portfolios with
respect to which it desires to retain the Investment Adviser to act as
investment adviser under the Advisory Agreement, the Trust shall so notify the
Investment Adviser in writing and if the Investment Adviser is willing to render
such services it shall notify the Trust in writing, and the compensation to be
paid to the Investment Adviser shall be that which is agreed to in writing by
the Trust and the Investment Adviser; and

WHEREAS, pursuant to Section 1(b) of the Advisory Agreement, the
Trust has notified the Investment Adviser that it is establishing the Arizona
Tax-Exempt Fund, the California Intermediate Tax-Exempt Fund, the California
Tax-Exempt Fund and the Short-Intermediate U.S. Government Fund (each a "Fund"),
and that it desires to retain the Investment Adviser to act as the investment
adviser for each Fund, and the Investment Adviser has notified the Trust that it
is willing to serve as investment adviser for each Fund;

NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
<PAGE> 2
1. Appointment. The Trust hereby appoints the Investment Adviser to
act as investment adviser to the Trust for each Fund in accordance with the
terms set forth in the Advisory Agreement. The Investment Adviser hereby accepts
such appointment and agrees to render the services set forth in the Advisory
Agreement for the compensation herein provided.

2. Compensation. For the services provided and the expenses assumed
pursuant to the Advisory Agreement regarding each Fund, the Trust will pay the
Investment Adviser, and the Investment Adviser will accept as full compensation
therefor from the Trust, a fee at the annual rate of each of .75% of respective
average net assets of each of the Arizona Tax-Exempt, California Intermediate
Tax-Exempt, California Tax-Exempt and Short-Intermediate U.S. Government Funds.

3. Capitalized Terms. From and after the date hereof, the term
"Current Funds" as used in the Advisory Agreement shall be deemed to include
each Fund. Capitalized terms used herein and not otherwise defined shall have
the meanings ascribed to them in the Advisory Agreement.

4. Miscellaneous. The initial term of the Advisory Agreement with
respect to each Fund shall continue, unless sooner terminated in accordance with
the Advisory Agreement, until March 31, 1998. Except to the extent supplemented
hereby, the Advisory Agreement shall remain unchanged and in full force and
effect, and is hereby ratified and confirmed in all respects as supplemented
hereby.

All signatures need not appear on the same copy of this Addendum.

IN WITNESS WHEREOF, the undersigned have executed this Addendum as
of the date and year first above written.

NORTHERN FUNDS

Attest: By: /s/ Miriam M. Allison
------------------ ---------------------------------
Title: Vice President
------------------------------

THE NORTHERN TRUST COMPANY

Attest: By: /s/ Lloyd A. Wennlund
------------------ ---------------------------------
Title: Senior Vice President
------------------------------

<PAGE> 1
EXHIBIT 6(b)

AMENDED AND RESTATED
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE DISTRIBUTION SERVICES, LLC
DATED MARCH 24, 1997

Intending to be legally bound, the undersigned hereby amend and restate Schedule
A to the aforesaid Agreement to include the following investment portfolios:

<TABLE>
<S> <C>
Growth Equity Fund Intermediate Tax-Exempt Fund
Income Equity Fund Tax-Exempt Fund
Small Cap Fund Money Market Fund
Select Equity Fund U.S. Government Money Market Fund
International Growth Equity Fund International Fixed Income Fund
International Select Equity Fund California Municipal Money Market Fund
Technology Fund Stock Index Fund
Municipal Money Market Fund Florida Intermediate Tax-Exempt Fund
U.S. Government Select Money Market Fund Arizona Tax-Exempt Fund
Fixed Income Fund California Intermediate Tax-Exempt Fund
U.S. Government Fund California Tax-Exempt Fund
Short-Intermediate U.S. Government Fund
</TABLE>

All signatures need not appear on the same copy of this Amended and Restated
Schedule A.

NORTHERN FUNDS

By: /s/ Silas S. Cathcart
-----------------------------------
Title: Chairman
--------------------------------
Date: March 24, 1997
---------------------------------

SUNSTONE FINANCIAL GROUP, INC.

By: /s/ Miriam M. Allison
-----------------------------------
Title: President
--------------------------------
Date: March 24, 1997
---------------------------------

<PAGE> 1
EXHIBIT 8(m)

NORTHERN FUNDS

ADDENDUM NO. 4 TO THE TRANSFER AGENCY AGREEMENT

This Addendum, dated as of the 24th day of March, 1997, is entered into
between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and THE
NORTHERN TRUST COMPANY, an Illinois state bank (the "Transfer Agent").

WHEREAS, the Trust and the Transfer Agent have entered into a Transfer
Agency Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated
November 29, 1994, by Addendum No. 2 dated March 29, 1996 and by Addendum No. 3
dated August 7, 1996 (the "Transfer Agency Agreement") pursuant to which the
Trust has appointed the Transfer Agent to act as transfer agent to the Trust 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, U.S. Government Fund, Fixed Income Fund, Intermediate Tax-Exempt
Fund, 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, Stock Index Fund
and Florida Intermediate Tax-Exempt Fund; and

WHEREAS, the Trust is establishing the Arizona Tax-Exempt Fund, the
California Intermediate Tax-Exempt Fund, the California Tax-Exempt Fund and the
Short-Intermediate U.S. Government Fund (each a "Fund"), and the Trust desires
to retain the Transfer Agent under the terms of the Transfer Agency Agreement to
render transfer agency and other services with respect to each Fund and the
record and/or beneficial owners of each Fund, and the Transfer Agent is willing
to render such services.

NOW THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:

1. Appointment. The Trust hereby appoints the Transfer Agent as
transfer agent with respect to each Fund in accordance with
the terms set forth in the Transfer Agency Agreement. The
Transfer Agent hereby accepts such appointment and agrees to
render the services and perform the duties set forth in the
Transfer Agency Agreement for the compensation therein
provided.

2. Capitalized Terms. From and after the date hereof, the term
"Current Funds" as used in the Transfer Agency Agreement shall
be deemed to include each Fund. Capitalized terms used herein
and not otherwise defined shall have the meanings ascribed to
them in the Transfer Agency Agreement.
<PAGE> 2
3. Miscellaneous. The initial term of the Transfer Agency
Agreement with respect to each Fund shall continue, unless
sooner terminated in accordance with the Transfer Agency
Agreement, until March 31, 1998. Except to the extent
supplemented hereby, the Transfer Agency Agreement shall
remain unchanged and in full force and effect, and is hereby
ratified and confirmed in all respects as supplemented hereby.

IN WITNESS WHEREOF, the undersigned have executed this Addendum as of the
date and year first above written.

All signatures need not appear on the same copy of this Addendum.

NORTHERN FUNDS

Attest: By: /s/ Miriam M. Allison
------------------------- ------------------------------
Title: Vice President
---------------------------

Attest: THE NORTHERN TRUST COMPANY
-------------------------
By: /s/ Lloyd A. Wennlund
------------------------------
Title: Senior Vice President
---------------------------

<PAGE> 1
EXHIBIT 8(n)

NORTHERN FUNDS

ADDENDUM NO. 5 TO THE CUSTODIAN AGREEMENT

This Addendum, dated as of the 24th day of March, 1997, is
entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business
trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank ("Northern").

WHEREAS, the Trust and Northern have entered into a Custodian
Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated November
29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3 dated August
7, 1996 and by Addendum No. 4 dated August 6, 1996 (the "Custodian Agreement")
pursuant to which the Trust has appointed Northern to act as custodian to the
Trust 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, U.S. Government Fund, Fixed Income Fund,
Intermediate Tax-Exempt Fund, Tax-Exempt Fund, Income Equity Fund, Growth Equity
Fund, Select Equity Fund, Small Cap Fund, Technology Fund, Stock Index Fund and
Florida Intermediate Tax-Exempt Fund; and

WHEREAS, the Trust is establishing the Arizona Tax-Exempt
Fund, the California Intermediate Tax-Exempt Fund, the California Tax-Exempt
Fund and the Short-Intermediate U.S. Government Fund (each a "Fund"), and the
Trust desires to retain Northern under the terms of the Custodian Agreement to
act as the custodian for each Fund, and Northern is willing to so act.

NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:

1. Appointment. The Trust hereby appoints Northern custodian to
the Trust for each Fund in accordance with the terms set forth
in the Custodian Agreement. Northern hereby accepts such
appointment and agrees to render the services set forth in the
Custodian Agreement for the compensation therein provided.

2 Capitalized Terms. From and after the date hereof, the term
"Funds" as used in the Custodian Agreement shall be deemed to
include each Fund. Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to them in
the Custodian Agreement.
<PAGE> 2
3 Miscellaneous. The initial term of the Custodian Agreement
with respect to each Fund shall continue, unless sooner
terminated in accordance with the Custodian Agreement, until
March 31, 1998. Except to the extent supplemented hereby, the
Custodian Agreement shall remain unchanged and in full force
and effect, and is hereby ratified and confirmed in all
respects as supplemented hereby.

IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.

All signatures need not appear on the same copy of this Addendum.

NORTHERN FUNDS

Attest: By: /s/ Miriam M. Allison
--------------------- -------------------------------------
Title: Vice President
----------------------------------

THE NORTHERN TRUST COMPANY

Attest: By: /s/ Lloyd A. Wennlund
--------------------- -------------------------------------
Title: Senior Vice President
----------------------------------

<PAGE> 1
Exhibit 9(d)

AMENDED AND RESTATED
SCHEDULE A
TO THE
ADMINISTRATION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
DATED MARCH 24, 1997

Intending to be legally bound, the undersigned hereby amend and restate Schedule
A to the aforesaid Agreement to include the following investment portfolios:

Growth Equity Fund Intermediate Tax-Exempt Fund
Income Equity Fund Tax-Exempt Fund
Small Cap Fund Money Market Fund
Select Equity Fund U.S. Government Money Market Fund
International Growth Equity Fund International Fixed Income Fund
International Select Equity Fund California Municipal Money Market
Technology Fund Fund
Municipal Money Market Fund Stock Index Fund
U.S. Government Select Money Market Florida Intermediate Tax-Exempt Fund
Fund Arizona Tax-Exempt Fund
Fixed Income Fund California Intermediate Tax-Exempt
U.S. Government Fund Fund
California Tax-Exempt Fund
Short-Intermediate U.S. Government
Fund

All signatures need not appear on the same copy of this Amended and Restated
Schedule A.

NORTHERN FUNDS

By: /s/ Silas S. Cathcart
-----------------------------------
Title: Chairman
--------------------------------
Date: March 24, 1997
---------------------------------

SUNSTONE FINANCIAL GROUP, INC.

By: /s/ Miriam M. Allison
-----------------------------------
Title: President
--------------------------------
Date: March 24, 1997
---------------------------------

<PAGE> 1
EXHIBIT 11(a)

CONSENT OF COUNSEL

We hereby consent to the use of our name and to the references to
our Firm under the caption "Additional Trust Information - Counsel and Auditors"
in the Statement of Additional Information included in Post-Effective Amendment
No. 16 to the Registration Statement (1933 Act No. 33-73404; 1940 Act No.
811-8236) on Form N-1A under the Securities Act of 1933, as amended, of Northern
Funds. This consent does not constitute a consent under section 7 of the
Securities Act of 1933, and in consenting to the use of our name and the
references to our Firm under such caption we have not certified any part of the
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under said section 7 or the rules and
regulations of the Securities and Exchange Commission thereunder.

/s/ Drinker Biddle & Reath LLP
------------------------------------
Drinker Biddle & Reath LLP

Philadelphia, Pennsylvania
July 31, 1997

<PAGE> 1
EXHIBIT 11(b)

ARTHUR ANDERSEN LLP

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
dated May 16, 1997, and to all references to our firm included in or made a part
of this amendment to the registration statement on Form N-1A of Northern Funds
(a Massachusetts business trust consisting of 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, U.S.
Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Florida
Intermediate Tax-Exempt Fund, Tax-Exempt Fund, International Fixed Income Fund,
Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select Equity Fund,
Small Cap Fund, International Growth Equity Fund, International Select Equity
Fund and Technology Fund).

/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP

Chicago, Illinois
July 18, 1997

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 1
<NAME> MONEY MARKET FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 1,618,144
<INVESTMENTS-AT-VALUE> 1,618,144
<RECEIVABLES> 41,206
<ASSETS-OTHER> 76
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,659,426
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 52,239
<TOTAL-LIABILITIES> 52,239
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,607,109
<SHARES-COMMON-STOCK> 1,607,182
<SHARES-COMMON-PRIOR> 1,061,810
<ACCUMULATED-NII-CURRENT> 77
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,607,187
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 71,471
<OTHER-INCOME> 0
<EXPENSES-NET> (7,146)
<NET-INVESTMENT-INCOME> 64,325
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 64,326
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (64,325)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,318,021
<NUMBER-OF-SHARES-REDEEMED> 6,779,419
<SHARES-REINVESTED> 6,771
<NET-CHANGE-IN-ASSETS> 545,374
<ACCUMULATED-NII-PRIOR> 53
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,819
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,754
<AVERAGE-NET-ASSETS> 1,302,739
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 2
<NAME> U.S. GOVERNMENT MONEY MARKET FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 315,162
<INVESTMENTS-AT-VALUE> 315,162
<RECEIVABLES> 4,537
<ASSETS-OTHER> 32
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 319,731
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,472
<TOTAL-LIABILITIES> 5,472
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 314,238
<SHARES-COMMON-STOCK> 314,259
<SHARES-COMMON-PRIOR> 207,105
<ACCUMULATED-NII-CURRENT> 21
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 314,259
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,162
<OTHER-INCOME> 0
<EXPENSES-NET> (1,343)
<NET-INVESTMENT-INCOME> 11,819
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 11,819
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11,819)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,755,453
<NUMBER-OF-SHARES-REDEEMED> 1,650,983
<SHARES-REINVESTED> 2,684
<NET-CHANGE-IN-ASSETS> 107,154
<ACCUMULATED-NII-PRIOR> 15
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,470
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,346
<AVERAGE-NET-ASSETS> 244,863
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 3
<NAME> MUNICIPAL MONEY MARKET FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 1,412,986
<INVESTMENTS-AT-VALUE> 1,412,986
<RECEIVABLES> 54,385
<ASSETS-OTHER> 82
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,467,453
<PAYABLE-FOR-SECURITIES> 1,198
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 46,214
<TOTAL-LIABILITIES> 47,412
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,419,997
<SHARES-COMMON-STOCK> 1,420,080
<SHARES-COMMON-PRIOR> 1,102,719
<ACCUMULATED-NII-CURRENT> 153
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (109)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,420,041
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 43,646
<OTHER-INCOME> 0
<EXPENSES-NET> (6,598)
<NET-INVESTMENT-INCOME> 37,048
<REALIZED-GAINS-CURRENT> (109)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 36,939
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (37,048)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,319,359
<NUMBER-OF-SHARES-REDEEMED> 6,004,649
<SHARES-REINVESTED> 2,651
<NET-CHANGE-IN-ASSETS> 317,252
<ACCUMULATED-NII-PRIOR> 106
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,214
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,840
<AVERAGE-NET-ASSETS> 1,202,051
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 4
<NAME> U.S. GOVERNMENT FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 182,165
<INVESTMENTS-AT-VALUE> 180,144
<RECEIVABLES> 2,094
<ASSETS-OTHER> 40
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 182,278
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 357
<TOTAL-LIABILITIES> 357
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 184,330
<SHARES-COMMON-STOCK> 18,420
<SHARES-COMMON-PRIOR> 14,812
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (94)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (294)
<ACCUM-APPREC-OR-DEPREC> (2,021)
<NET-ASSETS> 181,921
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,017
<OTHER-INCOME> 0
<EXPENSES-NET> (1,477)
<NET-INVESTMENT-INCOME> 8,540
<REALIZED-GAINS-CURRENT> (347)
<APPREC-INCREASE-CURRENT> (1,738)
<NET-CHANGE-FROM-OPS> 6,455
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,550)
<DISTRIBUTIONS-OF-GAINS> (1,140)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,159
<NUMBER-OF-SHARES-REDEEMED> 1,695
<SHARES-REINVESTED> 144
<NET-CHANGE-IN-ASSETS> 32,859
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,140
<OVERDISTRIB-NII-PRIOR> (40)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,231
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,788
<AVERAGE-NET-ASSETS> 165,706
<PER-SHARE-NAV-BEGIN> 10.06
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> (0.11)
<PER-SHARE-DIVIDEND> (0.51)
<PER-SHARE-DISTRIBUTIONS> (0.07)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.88
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> FIXED INCOME FUND
<SERIES>
<NUMBER> 5
<NAME> FIXED INCOME FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 123,484
<INVESTMENTS-AT-VALUE> 121,471
<RECEIVABLES> 4,215
<ASSETS-OTHER> 39
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 125,725
<PAYABLE-FOR-SECURITIES> 2,888
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 393
<TOTAL-LIABILITIES> 3,281
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 124,773
<SHARES-COMMON-STOCK> 12,416
<SHARES-COMMON-PRIOR> 10,035
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (100)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (216)
<ACCUM-APPREC-OR-DEPREC> (2,013)
<NET-ASSETS> 122,444
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,189
<OTHER-INCOME> 0
<EXPENSES-NET> (980)
<NET-INVESTMENT-INCOME> 6,209
<REALIZED-GAINS-CURRENT> (226)
<APPREC-INCREASE-CURRENT> (1,313)
<NET-CHANGE-FROM-OPS> 4,670
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,250)
<DISTRIBUTIONS-OF-GAINS> (1,317)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,239
<NUMBER-OF-SHARES-REDEEMED> 2,080
<SHARES-REINVESTED> 222
<NET-CHANGE-IN-ASSETS> 21,105
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,316
<OVERDISTRIB-NII-PRIOR> (55)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 816
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,217
<AVERAGE-NET-ASSETS> 110,086
<PER-SHARE-NAV-BEGIN> 10.10
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> (0.12)
<PER-SHARE-DIVIDEND> (0.57)
<PER-SHARE-DISTRIBUTIONS> (0.12)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.86
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 6
<NAME> INTERMEDIATE TAX-EXEMPT FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 259,469
<INVESTMENTS-AT-VALUE> 260,707
<RECEIVABLES> 4,101
<ASSETS-OTHER> 56
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 264,864
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 234
<TOTAL-LIABILITIES> 234
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 263,792
<SHARES-COMMON-STOCK> 26,279
<SHARES-COMMON-PRIOR> 23,890
<ACCUMULATED-NII-CURRENT> 40
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (440)
<ACCUM-APPREC-OR-DEPREC> 1,238
<NET-ASSETS> 264,630
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,989
<OTHER-INCOME> 0
<EXPENSES-NET> (2,142)
<NET-INVESTMENT-INCOME> 9,847
<REALIZED-GAINS-CURRENT> (441)
<APPREC-INCREASE-CURRENT> (1,011)
<NET-CHANGE-FROM-OPS> 8,395
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,864)
<DISTRIBUTIONS-OF-GAINS> (2,292)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,072
<NUMBER-OF-SHARES-REDEEMED> 4,928
<SHARES-REINVESTED> 245
<NET-CHANGE-IN-ASSETS> 20,491
<ACCUMULATED-NII-PRIOR> 39
<ACCUMULATED-GAINS-PRIOR> 2,293
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,895
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,712
<AVERAGE-NET-ASSETS> 253,487
<PER-SHARE-NAV-BEGIN> 10.22
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> (0.06)
<PER-SHARE-DIVIDEND> (0.40)
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.07
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 7
<NAME> TAX-EXEMPT FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 132,058
<INVESTMENTS-AT-VALUE> 134,341
<RECEIVABLES> 2,134
<ASSETS-OTHER> 40
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 136,515
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 143
<TOTAL-LIABILITIES> 143
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 134,177
<SHARES-COMMON-STOCK> 13,319
<SHARES-COMMON-PRIOR> 12,083
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (88)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,283
<NET-ASSETS> 136,372
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,082
<OTHER-INCOME> 0
<EXPENSES-NET> (1,101)
<NET-INVESTMENT-INCOME> 5,981
<REALIZED-GAINS-CURRENT> 248
<APPREC-INCREASE-CURRENT> (786)
<NET-CHANGE-FROM-OPS> 5,443
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,324)
<DISTRIBUTIONS-OF-GAINS> (665)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,592
<NUMBER-OF-SHARES-REDEEMED> 1,436
<SHARES-REINVESTED> 80
<NET-CHANGE-IN-ASSETS> 11,259
<ACCUMULATED-NII-PRIOR> 26
<ACCUMULATED-GAINS-PRIOR> 563
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 974
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,430
<AVERAGE-NET-ASSETS> 130,230
<PER-SHARE-NAV-BEGIN> 10.35
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> (0.06)
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> (0.05)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.24
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 8
<NAME> INTERNATIONAL FIXED INCOME FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 16,135
<INVESTMENTS-AT-VALUE> 15,905
<RECEIVABLES> 418
<ASSETS-OTHER> 187
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,510
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84
<TOTAL-LIABILITIES> 84
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,483
<SHARES-COMMON-STOCK> 1,630
<SHARES-COMMON-PRIOR> 1,475
<ACCUMULATED-NII-CURRENT> 196
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (259)
<NET-ASSETS> 16,426
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,081
<OTHER-INCOME> 0
<EXPENSES-NET> (187)
<NET-INVESTMENT-INCOME> 894
<REALIZED-GAINS-CURRENT> 97
<APPREC-INCREASE-CURRENT> 794
<NET-CHANGE-FROM-OPS> 197
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (868)
<DISTRIBUTIONS-OF-GAINS> (27)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 416
<NUMBER-OF-SHARES-REDEEMED> (289)
<SHARES-REINVESTED> 28
<NET-CHANGE-IN-ASSETS> 761
<ACCUMULATED-NII-PRIOR> 206
<ACCUMULATED-GAINS-PRIOR> 62
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 146
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 318
<AVERAGE-NET-ASSETS> 16,337
<PER-SHARE-NAV-BEGIN> 10.62
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> (0.40)
<PER-SHARE-DIVIDEND> (0.59)
<PER-SHARE-DISTRIBUTIONS> (0.11)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.08
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 9
<NAME> INCOME EQUITY FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 72,182
<INVESTMENTS-AT-VALUE> 76,691
<RECEIVABLES> 667
<ASSETS-OTHER> 27
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 77,385
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 283
<TOTAL-LIABILITIES> 283
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 69,397
<SHARES-COMMON-STOCK> 6,529
<SHARES-COMMON-PRIOR> 4,826
<ACCUMULATED-NII-CURRENT> 57
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,139
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,509
<NET-ASSETS> 77,102
<DIVIDEND-INCOME> 1,495
<INTEREST-INCOME> 1,597
<OTHER-INCOME> 0
<EXPENSES-NET> (656)
<NET-INVESTMENT-INCOME> 2,436
<REALIZED-GAINS-CURRENT> 6,869
<APPREC-INCREASE-CURRENT> (774)
<NET-CHANGE-FROM-OPS> 8,531
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,419)
<DISTRIBUTIONS-OF-GAINS> (5,420)
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<NUMBER-OF-SHARES-SOLD> 2,128
<NUMBER-OF-SHARES-REDEEMED> 875
<SHARES-REINVESTED> 450
<NET-CHANGE-IN-ASSETS> 21,183
<ACCUMULATED-NII-PRIOR> 36
<ACCUMULATED-GAINS-PRIOR> 1,690
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 935
<AVERAGE-NET-ASSETS> 66,454
<PER-SHARE-NAV-BEGIN> 11.59
<PER-SHARE-NII> 0.44
<PER-SHARE-GAIN-APPREC> 1.19
<PER-SHARE-DIVIDEND> (0.44)
<PER-SHARE-DISTRIBUTIONS> (0.97)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.81
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 10
<NAME> GROWTH EQUITY FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 259,167
<INVESTMENTS-AT-VALUE> 305,568
<RECEIVABLES> 731
<ASSETS-OTHER> 34
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 306,333
<PAYABLE-FOR-SECURITIES> 3,054
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 674
<TOTAL-LIABILITIES> 3,728
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 251,016
<SHARES-COMMON-STOCK> 21,723
<SHARES-COMMON-PRIOR> 17,075
<ACCUMULATED-NII-CURRENT> 37
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,109
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46,443
<NET-ASSETS> 302,605
<DIVIDEND-INCOME> 3,496
<INTEREST-INCOME> 708
<OTHER-INCOME> 0
<EXPENSES-NET> (2,700)
<NET-INVESTMENT-INCOME> 1,504
<REALIZED-GAINS-CURRENT> 8,004
<APPREC-INCREASE-CURRENT> 18,160
<NET-CHANGE-FROM-OPS> 27,668
<EQUALIZATION> 0
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<DISTRIBUTIONS-OF-GAINS> (13,887)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,478
<NUMBER-OF-SHARES-REDEEMED> 2,752
<SHARES-REINVESTED> 922
<NET-CHANGE-IN-ASSETS> 78,034
<ACCUMULATED-NII-PRIOR> 46
<ACCUMULATED-GAINS-PRIOR> 10,992
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,707
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,587
<AVERAGE-NET-ASSETS> 272,834
<PER-SHARE-NAV-BEGIN> 13.15
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 1.49
<PER-SHARE-DIVIDEND> (0.08)
<PER-SHARE-DISTRIBUTIONS> (0.71)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.93
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 11
<NAME> SELECT EQUITY FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 57,822
<INVESTMENTS-AT-VALUE> 63,783
<RECEIVABLES> 375
<ASSETS-OTHER> 22
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 64,180
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 503
<TOTAL-LIABILITIES> 503
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 55,459
<SHARES-COMMON-STOCK> 4,376
<SHARES-COMMON-PRIOR> 2,580
<ACCUMULATED-NII-CURRENT> 70
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,187
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,961
<NET-ASSETS> 63,677
<DIVIDEND-INCOME> 514
<INTEREST-INCOME> 70
<OTHER-INCOME> 0
<EXPENSES-NET> 480
<NET-INVESTMENT-INCOME> 104
<REALIZED-GAINS-CURRENT> 2,763
<APPREC-INCREASE-CURRENT> 2,605
<NET-CHANGE-FROM-OPS> 5,472
<EQUALIZATION> 0
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<DISTRIBUTIONS-OF-GAINS> (2,185)
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<NUMBER-OF-SHARES-SOLD> 2,494
<NUMBER-OF-SHARES-REDEEMED> 823
<SHARES-REINVESTED> 125
<NET-CHANGE-IN-ASSETS> 29,835
<ACCUMULATED-NII-PRIOR> 25
<ACCUMULATED-GAINS-PRIOR> 1,611
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 579
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 805
<AVERAGE-NET-ASSETS> 49,372
<PER-SHARE-NAV-BEGIN> 13.12
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 2.05
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> (0.62)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.55
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 12
<NAME> SMALL CAP FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 178,013
<INVESTMENTS-AT-VALUE> 197,186
<RECEIVABLES> 6,759
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<TOTAL-ASSETS> 203,975
<PAYABLE-FOR-SECURITIES> 6,520
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<TOTAL-LIABILITIES> 6,862
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 171,686
<SHARES-COMMON-STOCK> 16,007
<SHARES-COMMON-PRIOR> 13,401
<ACCUMULATED-NII-CURRENT> 263
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,320
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,844
<NET-ASSETS> 197,113
<DIVIDEND-INCOME> 2,287
<INTEREST-INCOME> 418
<OTHER-INCOME> 0
<EXPENSES-NET> 1,752
<NET-INVESTMENT-INCOME> 953
<REALIZED-GAINS-CURRENT> 12,542
<APPREC-INCREASE-CURRENT> 6,088
<NET-CHANGE-FROM-OPS> 19,583
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (833)
<DISTRIBUTIONS-OF-GAINS> (9,182)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,424
<NUMBER-OF-SHARES-REDEEMED> 2,534
<SHARES-REINVESTED> 716
<NET-CHANGE-IN-ASSETS> 41,875
<ACCUMULATED-NII-PRIOR> 123
<ACCUMULATED-GAINS-PRIOR> 2,976
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,109
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,710
<AVERAGE-NET-ASSETS> 117,813
<PER-SHARE-NAV-BEGIN> 11.58
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 1.37
<PER-SHARE-DIVIDEND> (0.06)
<PER-SHARE-DISTRIBUTIONS> (0.65)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.31
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 13
<NAME> INTERNATIONAL GROWTH EQUITY FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 161,432
<INVESTMENTS-AT-VALUE> 164,616
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<TOTAL-ASSETS> 171,873
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 172
<TOTAL-LIABILITIES> 5,981
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 164,507
<SHARES-COMMON-STOCK> 16,509
<SHARES-COMMON-PRIOR> 17,712
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (8)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1,770)
<ACCUM-APPREC-OR-DEPREC> 3,184
<NET-ASSETS> 165,892
<DIVIDEND-INCOME> 3,215
<INTEREST-INCOME> 482
<OTHER-INCOME> 0
<EXPENSES-NET> 2,272
<NET-INVESTMENT-INCOME> 1,425
<REALIZED-GAINS-CURRENT> 5,757
<APPREC-INCREASE-CURRENT> (2,647)
<NET-CHANGE-FROM-OPS> 4,535
<EQUALIZATION> 0
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<DISTRIBUTIONS-OF-GAINS> (6,567)
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<NUMBER-OF-SHARES-SOLD> 3,091
<NUMBER-OF-SHARES-REDEEMED> 4,935
<SHARES-REINVESTED> 641
<NET-CHANGE-IN-ASSETS> (15,345)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,354)
<OVERDISTRIB-NII-PRIOR> (302)
<OVERDIST-NET-GAINS-PRIOR> (456)
<GROSS-ADVISORY-FEES> 2,186
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,963
<AVERAGE-NET-ASSETS> 181,669
<PER-SHARE-NAV-BEGIN> 10.23
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> 0.18
<PER-SHARE-DIVIDEND> (0.07)
<PER-SHARE-DISTRIBUTIONS> (0.38)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.05
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 14
<NAME> INTERNATIONAL SELECT EQUITY FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 99,818
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<TOTAL-ASSETS> 109,185
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<TOTAL-LIABILITIES> 241
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 108,399
<SHARES-COMMON-STOCK> 10,510
<SHARES-COMMON-PRIOR> 9,577
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (494)
<ACCUMULATED-NET-GAINS> (6,497)
<OVERDISTRIBUTION-GAINS> (901)
<ACCUM-APPREC-OR-DEPREC> 8,437
<NET-ASSETS> 108,944
<DIVIDEND-INCOME> 1,630
<INTEREST-INCOME> 287
<OTHER-INCOME> 0
<EXPENSES-NET> 1,389
<NET-INVESTMENT-INCOME> 528
<REALIZED-GAINS-CURRENT> (5,977)
<APPREC-INCREASE-CURRENT> 3,052
<NET-CHANGE-FROM-OPS> (2,397)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (692)
<DISTRIBUTIONS-OF-GAINS> (901)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,161
<NUMBER-OF-SHARES-REDEEMED> 2,310
<SHARES-REINVESTED> 82
<NET-CHANGE-IN-ASSETS> 6,225
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,041)
<OVERDISTRIB-NII-PRIOR> (226)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,336
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,847
<AVERAGE-NET-ASSETS> 111,585
<PER-SHARE-NAV-BEGIN> 10.73
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> (0.26)
<PER-SHARE-DIVIDEND> (0.06)
<PER-SHARE-DISTRIBUTIONS> (0.08)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.37
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 15
<NAME> U.S. GOVERNMENT SELECT MONEY MARKET FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 174,156
<INVESTMENTS-AT-VALUE> 174,156
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<TOTAL-ASSETS> 175,909
<PAYABLE-FOR-SECURITIES> 5,964
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<OTHER-ITEMS-LIABILITIES> 1,817
<TOTAL-LIABILITIES> 7,781
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 168,119
<SHARES-COMMON-STOCK> 168,128
<SHARES-COMMON-PRIOR> 85,399
<ACCUMULATED-NII-CURRENT> 10
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<ACCUMULATED-NET-GAINS> (1)
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<NET-ASSETS> 168,128
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<INTEREST-INCOME> 6,400
<OTHER-INCOME> 0
<EXPENSES-NET> (476)
<NET-INVESTMENT-INCOME> 5,924
<REALIZED-GAINS-CURRENT> (1)
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<NET-CHANGE-FROM-OPS> 5,923
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,924)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 483,126
<NUMBER-OF-SHARES-REDEEMED> 402,489
<SHARES-REINVESTED> 2,092
<NET-CHANGE-IN-ASSETS> 82,728
<ACCUMULATED-NII-PRIOR> 6
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 718
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,158
<AVERAGE-NET-ASSETS> 119,468
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
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<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0
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</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 16
<NAME> CALIFORNIA MUNICIPAL MONEY MARKET FUND
<MULTIPLIER> 1000

<S> <C>
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<PERIOD-END> MAR-31-1997
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</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 17
<NAME> TECHNOLOGY FUND
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<S> <C>
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</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 18
<NAME> FLORIDA INTERMEDIATE TAX-EXEMPT FUND
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<S> <C>
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</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 19
<NAME> STOCK INDEX FUND
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<S> <C>
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</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 20
<NAME> SHORT INTERMEDIATE U.S. GOVERNMENT
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<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 21
<NAME> CALIFORNIA INTERMEDIATE TAX-EXEMPT
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</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 22
<NAME> ARIZONA TAX-EXEMPT
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</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 23
<NAME> CALIFORNIA TAX-EXEMPT
<MULTIPLIER> 1000

</TABLE>

<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 24
<NAME> SMALL CAP INDEX
<MULTIPLIER> 1000

</TABLE>