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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

Schedule 14a

(Rule 14a-101)

Schedule 14a Information

(Rule 14a-101)

Proxy Statement pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant x   Filed by a Party other than the Registrant ¨

Check the appropriate box:

NORTHERN FUNDS

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

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NORTHERN FUNDS

NORTHERN INSTITUTIONAL FUNDS

NORTHERN MULTI-MANAGER FUNDS

October 29, 2007

Dear Shareholder:

You are cordially invited to attend a Special Joint Meeting of Shareholders of Northern Funds, including the Northern Multi-Manager Funds, and Northern Institutional Funds (each a “Trust” and collectively the “Trusts”), to be held on January 29, 2008 at 10:00 a.m. (Central time) at the offices of The Northern Trust Company, 50 South LaSalle Street, B-4, Room 7, Chicago, Illinois 60603.

At this important meeting, you will be asked to consider and take action on the following:

We believe that these proposals are important and, if approved, will allow us to improve the Funds’ operations. You should carefully read the Proxy Statement that discusses each Proposal in detail.

The Board Members responsible for your Fund have approved the proposals and recommend that you vote “for” the proposals for your Fund.

Your vote is important. Even if you plan to attend and vote in person at the Meeting, please promptly follow the enclosed directions to submit voting instructions by telephone or over the Internet. Alternatively, you may submit voting instructions by signing and dating each proxy card that you receive, and if received by mail, returning it in the accompanying postage-paid return envelope.

If you have any questions about these proposals, please call 800-595-9111.

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IMPORTANT NOTICE

To Shareholders of Northern Funds, Northern Institutional Funds and Northern Multi-

Manager Funds

QUESTIONS & ANSWERS

Although we encourage you to read the complete Proxy Statement, for your convenience we have provided answers to some of the most frequently asked questions, including a brief summary of the issues to be voted on.

Note: If you are invested in the fund through your bank or broker/dealer, please reference the proxy card for the appropriate web address and phone number.

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Broadridge Proxy Services

PO Box 9173

Farmingdale, NY 11735-9850

Q. WHOM CAN I CALL IF I HAVE QUESTIONS?

Please vote now. Your vote is important.

To avoid the wasteful and unnecessary expense of further solicitation, we urge you to indicate your voting instructions on the proxy card, if received by mail, date and sign it and return it promptly in the envelope provided, or record your voting instructions by telephone or via the Internet, no matter how large or small your holdings may be. If your shares are held through a broker, you must provide voting instructions to your broker about how to vote your shares in order for your broker to vote your shares as you instruct at the Meeting.

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NOTICE OF SPECIAL JOINT MEETING OF SHAREHOLDERS

A Special Joint Meeting of Shareholders (the “Meeting”) of each investment portfolio (the “Funds”) of Northern Funds and Northern Institutional Funds (each a “Trust” and collectively the “Trusts”) will be held on January 29, 2008 at 10:00 a.m. (Central time) at the offices of The Northern Trust Company, 50 South LaSalle Street, B-4, Room 7, Chicago, Illinois 60603, and any adjournments or postponements thereof (the “Meeting”) for the following purposes:

Shareholders of record at the close of business on October 3, 2007 are entitled to notice of and to vote at the Meeting. The Joint Proxy Statement and accompanying material, or this Notice and Notice of Internet Availability of Proxy Materials are being mailed to shareholders on or about October 29, 2007.

YOUR TRUSTEES UNANIMOUSLY RECOMMEND THAT YOU VOTE IN FAVOR OF THE PROPOSALS RELATING TO YOUR FUND.

October 29, 2007

Even if you expect to attend the Meeting in person, please promptly follow the enclosed instructions to submit voting instructions by telephone or over the Internet. Alternatively, you may submit voting instructions by signing and dating each proxy card that you receive, and if received by mail, returning it in the accompanying postage-paid return envelope.

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NORTHERN FUNDS

NORTHERN INSTITUTIONAL FUNDS

NORTHERN MULTI-MANAGER FUNDS

SPECIAL JOINT MEETING OF SHAREHOLDERS

JANUARY 29, 2008

JOINT PROXY STATEMENT

This joint proxy statement is furnished in connection with the solicitation of proxies by and on behalf of the Boards of Trustees including, for Proposal 1, the nominees to the Boards (each a “Board” and collectively the “Boards”) of each of the Northern Funds; Northern Institutional Funds (each a “Trust” and collectively the “Trusts”); and Northern Multi-Manager International Equity, Multi-Manager Mid Cap and Multi-Manager Small Cap Funds (the “Multi-Manager Funds”). The proxies are to be voted at a Special Joint Meeting of Shareholders of the investment portfolios of each of the Trusts and the Multi-Manager Funds (together, the “Funds”). The Special Meeting will be held at the offices of The Northern Trust Company, 50 South LaSalle Street, B-4, Room 7, Chicago, Illinois 60603, on January 29, 2008, at 10:00 a.m. (Central time) for the purposes set forth in the accompanying Notice of Meeting. The Special Joint Meeting and any adjournment or postponement thereof is referred to as the “Meeting.”

Each Board of each of the Trusts and the Multi-Manager Funds has determined that the use of this Joint Proxy Statement for the Meeting is in the best interests of the Funds that it oversees and their shareholders in light of the similar matters being considered and voted on by shareholders of each of the Funds. This Joint Proxy Statement and the accompanying materials, or a Notice of Meeting and a Notice of Internet Availability of Proxy Materials, are being sent to shareholders on or about October 29, 2007.

Shareholders of record of a Fund as of the close of business on October 3, 2007 (the “Record Date”) are entitled to attend and to vote at the Meeting. Shareholders of the Funds are entitled to one vote for each share held, and each fractional share is entitled to a proportionate fractional vote, with no shares having cumulative voting rights.

Appendix A sets forth the number of shares of each Fund outstanding as of the close of business on the Record Date. Appendix B sets forth the information regarding shareholders known to beneficially own 5% or more of the outstanding shares of any class of any Fund as of the Record Date.

The Proxies will be solicited by mail and may also be solicited in person or by telephone, fax or personal interview by officers of The Northern Trust Company (“Northern Trust”). In addition, employees of Northern Trust, its affiliates, correspondent banks, brokers and similar record holders may solicit proxies by these means and may forward proxy materials and printed direction forms to the customers on whose behalf they hold record ownership of shares of the Funds.

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Please read this Joint Proxy Statement and keep it for future reference. Each Fund has previously sent its annual report and semiannual report to its shareholders. A Shareholder may request, without charge, copies of a Fund’s most recent annual or semiannual shareholder report in writing to Northern Funds, P.O. Box 75986, Chicago, Illinois 60675-5986, by telephone at 800-595-9111 or by e-mail at northern-funds@ntrs.com.

SUMMARY OF PROPOSALS AND FUNDS VOTING

The following table describes the proposals (each a “Proposal” and collectively the “Proposals”) to be considered at the Meeting and the shareholders that are entitled to vote on each Proposal:

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PROPOSAL 1 –

ELECTION OF TRUSTEES

(All Funds)

Information About Current Trustees and Nominees For Election as Trustees

Northern Funds and Northern Institutional Funds. Each of the following eight individuals currently serves on the Board of the Northern Funds and the Board of the Northern Institutional Funds: William L. Bax, Richard G. Cline, Edward J. Condon, Jr., Sharon Gist Gilliam, Sandra Polk Guthman, Michael E. Murphy, Mary Jacobs Skinner and Richard P. Strubel (each a “Trustee, collectively, the “Trustees”). Mr. Cline, Chairman of the Boards of Northern Funds and Northern Institutional Funds, will retire from the Boards pursuant to the retirement provisions of each Trust’s by-laws as of December 31, 2007 and will not be a nominee. As of January 1, 2008, Mr. Strubel will become Chairman of the Boards of Northern Funds and Northern Institutional Funds. All of the Trustees are deemed to be noninterested persons of the Trusts within the meaning of the Investment Company Act of 1940 (the “1940 Act”) except Ms. Skinner who is deemed to be an “interested person” of the Trusts because she is a partner in a law firm which provides legal services to Northern Trust Corporation and its affiliates. Six of the current Trustees have been previously elected by shareholders.

Multi-Manager Funds. The Multi-Manager Funds are overseen by a separate Board (the “Multi-Manager Board”) of seven Trustees. Each of the foregoing Trustees, with the exception of Ms. Skinner, also serves on the Multi-Manager Board (each also a “Trustee, collectively, the “Trustees” or the “Multi-Manager Trustees”). Mr. Cline, Chairman of the Board of the Multi-Manager Funds, will retire from the Multi-Manager Board pursuant to the retirement provisions of the by-laws as of December 31, 2007 and will not be a nominee. As of January 1, 2008, Mr. Strubel will become Chairman of the Multi-Manager Board. Messrs. Cline and Murphy and Ms. Guthman are each deemed interested persons of the Multi-Manager Funds because they own shares of an entity that controls an investment sub-adviser to the Multi-Manager Funds. All of the Multi-Manager Board’s current Trustees have been elected by the sole shareholder upon inception of the Multi-Manager Funds.

At their respective meetings held on August 3, 2007, each Board determined to present the election of Trustees to hold office until their respective successors are elected and qualified. The Boards of the Northern Funds and Northern Institutional Funds each nominated seven of their current Trustees and a new Trustee, Casey Sylla, and the Board of the Multi-Manager Funds nominated six of its current Trustees and Casey Sylla (together, the “Nominees”). The Boards did not nominate for election Mr. Cline for the reasons stated above. If elected, Mr. Sylla would be a noninterested Trustee of each of the Boards. Information for each of the Trustees is provided below.

Each Nominee has consented to being named in this Proxy Statement and to serve if elected. No Trust knows of any reason why the Nominees would be unable or unwilling to serve if elected.

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Each elected Trustee will hold office for an indefinite term until the earliest of:

Normally, there will be no meetings of shareholders for the purpose of electing Trustees except as required by the 1940 Act. See “Additional Information — Shareholder Proposals.” The Trustees may, as permitted by the 1940 Act, appoint additional Trustees without shareholder approval.

Board Consideration

After careful consideration, each Board concluded that it was in the best interests of shareholders to submit for their approval the election of each of the Nominees, even if previously elected. Each Board considered that the election of Trustees provided flexibility to add new Trustees to a Board. In considering the Nominees for election, the Board members took into account the qualifications of each Nominee and the concern for the continued efficient conduct of each Fund’s business. In particular, the Board members considered the requirements of the 1940 Act as they apply to the election of Trustees generally and the Nominees in particular.

The proxies will vote for the election of each applicable Nominee unless you withhold authority to vote for any or all of them in the proxy. If an executed proxy card is received without voting instructions, the shares will be voted for the Nominees named on the proxy card. If a Nominee withdraws from the election or is otherwise unable to serve, the named proxies will vote for the election of such substitute Nominee as the applicable Board may recommend, unless the Board decides to reduce the number of Trustees serving on the Board.

Proposals 1(a) and 1(b) – Nominees for Board of Northern Funds, except the Multi-Manager Funds, and Northern Institutional Funds

The following table sets forth certain information about the Nominees for the Boards of the Northern Funds, except the Multi-Manager Funds, and Northern Institutional Funds. The Northern Funds Complex consists of each Trust.

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NOMINEES FOR ELECTION AS NONINTERESTED TRUSTEES

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NOMINEE FOR ELECTION AS INTERESTED TRUSTEE

Required Vote

Because your Fund is a portfolio of either the Northern Funds or Northern Institutional Funds, your vote will be counted together with the votes of shareholders of the other portfolios of that Trust, voting as a single class in the election of Trustees, except the Multi-Manager Funds will vote separately for their Board, as discussed below. Election of each Nominee requires a plurality of the shares voted at the Meeting. The eight Nominees to each Board who receive the highest number of votes cast at the Meeting will be elected as Trustees, provided that there is a sufficient number of shares represented in person or by proxy to meet that Trust’s quorum requirements. Cumulative voting is not permitted.

THE TRUSTEES OF EACH TRUST, INCLUDING THE INDEPENDENT TRUSTEES, RECOMMEND THAT THE SHAREHOLDERS VOTE “FOR” EACH NOMINEE LISTED ABOVE.

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Proposal 1(c) – Nominees for Election to the Multi-Manager Board

The following table sets forth certain information about the Nominees for the Multi-Manager Board.

NOMINEES FOR ELECTION AS NONINTERESTED TRUSTEES

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NOMINEES FOR ELECTION AS INTERESTED TRUSTEES

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Required Vote

Shareholders of the Multi-Manager International Equity, Multi-Manager Mid Cap and Multi-Manager Small Cap Funds will vote together as a single class in the election of Trustees to the Board of the Multi-Manager Funds. Election of each Nominee requires a plurality of the shares voted at the Meeting. The seven Nominees who receive the highest number of votes cast at the Meeting will be elected as Trustees, provided that there is a sufficient number of shares represented in person or by proxy to meet the quorum requirements. Cumulative voting is not permitted.

THE TRUSTEES, INCLUDING THE INDEPENDENT TRUSTEES, RECOMMEND THAT THE

SHAREHOLDERS VOTE “FOR” EACH NOMINEE LISTED ABOVE.

Additional Information

The following table sets forth information regarding the officers of each Trust. The Officers are appointed by each Board and hold office at the pleasure of the Board of Trustees until the next annual meeting of the Trust or until their successors are duly elected and qualified, or until they die, resign, are removed or become disqualified. Certain officers hold comparable positions with certain other investment companies of which Northern Trust Corporation, PFPC or an affiliate thereof is the investment adviser, custodian, transfer agent, administrator and/or distributor.

OFFICERS OF THE TRUSTS

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Remuneration of the Trustees and Officers

Each Trust pays the fees of its respective Trustees. The Trusts’ officers do not receive fees from the Trusts for services in such capacities, although PFPC, of which Mses. Hoard and

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O’Shaughnessy are also officers, receives fees from the Trusts for administrative services. Drinker Biddle & Reath LLP, of which Ms. McCarthy is a partner, receives fees from the Trusts for legal services. Northern Trust Corporation and/or its affiliates, of which Mses. Hill and Mairs and Messrs. Ovaert, Rein, Schweitzer and Wennlund are officers, receive fees from the Trusts as Investment Adviser, Co-Administrator, Custodian, Transfer Agent, Securities Lending Agent and/or shareholder servicing fees.

Trustees are paid an annual retainer plus chairperson fees, both at the Board and Committee levels, in addition to any travel and other expenses incurred in attending Board and Committee meetings. The Trusts do not provide pension or retirement benefits to the Trustees. The Trusts’ officers who are employees of Northern Trust or its affiliates are paid by Northern Trust or its affiliates.

Effective October 29, 2002, each Trustee became entitled to participate in the Northern Funds Deferred Compensation Plan (the “Plan”). Under the Plan, a Trustee may elect to have his or her deferred fees treated as if they had been invested by the Trust in the shares of the Diversified Assets Portfolio of Northern Institutional Funds and/or at the discretion of the Trust, another money market fund selected by the Trust that complies with the provisions of Rule 2a-7 under the 1940 Act or one or more short-term fixed income instruments selected by the Trust that are “eligible securities” as defined by that rule. The amount paid to the Trustees under the Plan will be determined based upon the performance of such investments. Deferral of Trustees’ fees will not obligate the Trust to retain the service of any Trustee or obligate a Fund to any level of compensation to the Trustee. The Trusts may invest in underlying securities without shareholder approval.

The compensation paid by each Trust to its Trustees is set forth in Appendix D.

Trustee Ownership of Fund Shares

The following table shows the dollar range of the value of shares of each Fund, and the dollar value of the shares of all Funds in the Northern Funds Complex, owned directly or beneficially by the Trustees, including the Nominees, as of December 31, 2006. The Northern Funds Complex consists of the Trusts.

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Interests of Certain Noninterested Nominees

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 Corporation, PFPC, Northern Funds Distributors, LLC and their respective affiliates. The Trusts have 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. As a result of the responsibilities assumed by the Trusts’ service providers, the Trusts themselves require no employees.

As of October 3, 2007, the Trust’s Trustees and officers as a group owned beneficially less than 1% of the outstanding shares of each Fund.

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Board Meetings, Committees and Other Related Matters

Each Board is responsible for overseeing generally the operation of its respective Funds, including reviewing and approving the Funds’ contracts with its investment advisers. The officers are responsible for the day-to-day management and administration of the Funds’ operations. The Northern Funds Board met five times during the year ended December 31, 2006. The Northern Institutional Funds Board met four times during the year ended December 31, 2006. The Northern Multi-Manager Funds Board met three times during the year ended December 31, 2006. Each Trustee attended or participated telephonically in at least 75% of all applicable Board and Committee meetings. None of the Boards has a policy regarding Trustee attendance at special meetings of shareholders. A shareholder may send communications to a Board by writing the Board c/o Secretary of the Trust (Diana E. McCarthy, Drinker Biddle & Reath LLP, One Logan Square, 18^th and Cherry Streets, Philadelphia, PA 19103).

Committees of each Board, other than the Northern Multi-Manager Board

The Board of the Northern Funds and the Board of the Northern Institutional Funds each has established standing Audit, Governance and Valuation Committees.

Each Audit Committee currently consists of four members: Messrs. Condon (Chairperson), Bax and Strubel and Ms. Gilliam. The Audit Committee of each Board oversees the audit process and provides assistance to the full Board of Trustees for fund accounting, tax compliance and financial statement matters. In performing its responsibilities, the Audit Committee selects and recommends annually to the entire Board of Trustees an independent registered public accounting firm to audit the books and records of the Trust for the ensuing year, and reviews with the firm the scope and results of each audit. The Audit Committee also is designated as the Qualified Legal Compliance Committee. The Audit Committee convenes at least four times each year to meet with the independent registered public accounting firm to review the scope and results of the audit and to discuss other nonaudit matters as requested by the Board’s Chairperson, the Committee Chairperson or the independent registered public accounting firm. During the fiscal year ended March 31, 2007, the Audit Committee of the Northern Funds convened five times. During the fiscal year ended November 30, 2006, the Audit Committee of the Northern Institutional Funds convened five times.

Each Governance Committee consists of three noninterested members: Ms. Guthman (Chairperson) and Messrs. Bax and Strubel. The functions performed by each Governance Committee include, among other things, selecting and nominating candidates to serve as Trustees, reviewing and making recommendations regarding Trustee compensation, developing policies regarding Trustee education and, subject to Board oversight, supervising the Trust’s CCO. During the fiscal years ended March 31, 2007 and November 30, 2006, respectively, the Governance Committee of the applicable Trust convened three times. A copy of the Boards’ Governance Committee Charter is attached as Appendix E.

In connection with the selection and nomination of candidates to the Board of Trustees, the Committee is required to evaluate the qualifications of candidates for Board membership and,

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for Independent Trustees, their independence from the Trust’s investment advisers and other principal service providers. Persons selected as Independent Trustees must be independent in terms of both the letter and the spirit of the 1940 Act. The Committee is also required to consider the effect of any relationships beyond those delineated in that Act that might impair independence (for example, business, financial or family relationships with the investment advisers or other service providers). In filling Board vacancies, the Governance Committee will consider nominees recommended by shareholders. Nominee recommendations should be submitted to the Trust at its mailing address and should be directed to the attention of Northern Funds or Northern Institutional Funds Governance Committee, as the case may be. The applicable Governance Committee has selected and nominated the Nominees for election at the Meeting.

Each Valuation Committee consists of three members: Messrs. Murphy (Chairperson) and Strubel and Ms. Skinner. Each Valuation Committee is authorized to act for the respective Board in connection with the valuation of portfolio securities of the respective Trust’s non-money market Funds in accordance with the Trust’s valuation procedures. During the fiscal years ended March 31, 2007, and November 30, 2006, respectively, the Valuation Committee of the applicable Trust convened four times.

Committees of the Northern Multi-Manager Board

The Northern Multi-Manager Board has one standing committee, the Audit Committee.

The Audit Committee currently consists of four members: Messrs. Condon (Chairperson), Bax and Strubel and Ms. Gilliam. The Audit Committee oversees the audit process and provides assistance to the full Board of Trustees for fund accounting, tax compliance and financial statement matters. In performing its responsibilities, the Audit Committee selects and recommends annually to the entire Multi-Manager Board of Trustees an independent registered public accounting firm to audit the books and records of the Trust for the ensuing year, and reviews with the firm the scope and results of each audit. The Audit Committee also is designated as the Qualified Legal Compliance Committee. The Audit Committee convenes at least four times each year to meet with the independent registered public accounting firm to review the scope and results of the audit and to discuss other nonaudit matters as requested by the Board’s Chairperson, the Committee Chairperson or the independent registered public accounting firm. During the fiscal year ended March 31, 2007, the Multi-Manager Board’s Audit Committee convened three times.

The Multi-Manager Board determined that a standing nominating committee is unnecessary and that the Independent Trustees will carry out the functions of a nominating committee. In connection with the selection and nomination of candidates to the Board, the Independent Trustees of the Multi-Manager Board evaluate the qualifications of candidates for Board membership and, for the Independent Trustees, their independence from the Trust’s investment advisers, sub-advisers and other principal service providers. Persons selected as Independent Trustees must be independent in terms of both the letter and the spirit of the 1940 Act. The Committee also considers the effect of any relationships beyond those delineated in

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that Act that might impair independence (for example, business, financial or family relationships with the investment advisers or other service providers). In filling Board vacancies, the Independent Trustees will consider nominees recommended by shareholders. Nominee recommendations should be submitted to the Trust at its mailing address and should be directed to the attention of the Secretary. The Independent Trustees have selected and nominated the Nominees for election to the Multi-Manager Board at the Meeting.

THE TRUSTEES RECOMMEND THAT SHAREHOLDERS VOTE “FOR” EACH NOMINEE LISTED ABOVE.

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PROPOSAL 2 –

APPROVAL OF AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENTS

(All Funds except the Multi-Manager Funds)

Overview

Each Fund’s current investment advisory agreements (“Advisory Agreements”) state that they will continue in effect for each Fund for successive 12-month periods, provided that the continuance is approved at least annually by a certain date (“Renewal Date”) of each year. The Renewal Date currently specified in the Advisory Agreements is March 31 for the Northern Funds, other than the Northern Multi-Manager Funds, and April 30 for the Northern Institutional Funds. After careful consideration, the Trustees concluded that it would be in the best interests of shareholders to amend and restate the Advisory Agreements with respect to all Funds (except the Multi-Manager Funds) to change the Renewal Date to June 30 for each Fund, and submit the proposed amended and restated investment advisory agreements (“Proposed Amended and Restated Advisory Agreements”) to each applicable Fund’s shareholders for their approval. The Trustees considered that such a change would allow for more time for management to assemble calendar year-end information as part of the materials for their consideration of the continuation of the Advisory Agreements. They also determined that, although there were a number of changes to update the Proposed Amended and Restated Advisory Agreements, the only change of substance was the change of the Renewal Date to June 30. The Trustees considered that the Renewal Date change would not affect the compensation paid to the Investment Advisers nor the level and quality of services provided to the Funds. If shareholders approve this Proposal, each Fund’s agreement will terminate by June 30 of each year unless the continuation of the agreement is approved by such date. If a Fund’s shareholders do not approve this Proposal for their Fund, none of the Funds will enter into the Amended and Restated Advisory Agreements — the practical effect of which will be that the Renewal Date for your Fund will remain March 31 or April 30, as the case may be.

The Proposed Amended and Restated Advisory Agreements for the applicable Funds are attached to this Proxy Statement as Appendices G-I. The Proposed Amended and Restated Advisory Agreements contain a number of changes to update the Agreements, but the only change of substance is the change of the Renewal Date to June 30. Both the Trusts’ Advisory Agreements and the Proposed Amended and Restated Advisory Agreements: (1) continue in effect for a Fund from year to year so long as such continuance is approved annually by the majority of the Trusts’ Independent Trustees and by either a majority of the outstanding voting shares of the Funds or the Trustees; (2) may be terminated without payment of penalty by the Trust or by the Investment Adviser on 60 days’ notice, and terminates automatically in the event of its assignment; and (c) may not be amended without the approval of the majority of Trusts’ Trustees, including a majority of the Independent Trustees, and to the extent required by the 1940 Act, a majority of the outstanding voting shares of the Funds.

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Information Regarding the Investment Advisers

Currently, Northern Trust Investments, N.A. (“NTI”) and Northern Trust Global Investments Limited (“NTGIL”), (each an “Investment Adviser” and collectively, the “Investment Advisers”) serve jointly as the investment advisers of the International Growth Equity Fund and the International Growth Portfolio under the respective Advisory Agreements with the Trusts. NTI serves as the investment adviser of each of the other Funds under the respective Advisory Agreements with the Trusts. Under the Advisory Agreements, each Investment Adviser, subject to the general supervision of the Trusts’ Board of Trustees, is responsible for making investment decisions for the Funds and for placing purchase and sale orders for portfolio securities.

Each Investment Adviser is a wholly-owned subsidiary of The Northern Trust Company (“TNTC”), an Illinois state chartered banking organization and a member of the Federal Reserve System. Formed in 1889, it administers and manages assets for individuals, personal trusts, defined contribution and benefit plans and other institutional and corporate clients. TNTC is the principal wholly-owned subsidiary of Northern Trust Corporation, a financial holding company. As of June 30, 2007, Northern Trust Corporation had assets under custody of $4 trillion, and assets under investment management of $767 billion. NTI is located at 50 South LaSalle Street, Chicago, IL 60603, and NTGIL is located at 50 Bank Street, Canary Wharf, London, E145NT, United Kingdom.

Attached as Appendix F is information about NTI and NTGIL’s principal executive officers and directors.

The Amended and Restated Investment Advisory Agreements

The Advisory Agreements were approved by the sole shareholder of each Fund upon the Fund’s inception.

Northern Funds currently has two agreements that govern the investment advisory services provided to its portfolios. The first agreement is the Investment Advisory and Ancillary Services Agreement, dated July 31, 2000, as amended from time to time, among Northern Funds, NTI and NTGIL. Pursuant to that agreement, Northern Funds has appointed NTI and NTGIL to act as co-investment advisers to the International Growth Equity Fund, and NTI to act as investment adviser to the Arizona Tax-Exempt Fund, California Intermediate Tax-Exempt Fund, California Municipal Money Market Fund, California Tax-Exempt Fund, Fixed Income Fund, Global Fixed Income Fund, Growth Equity Fund, High Yield Fixed Income Fund, High Yield Municipal Fund, Income Equity Fund, Intermediate Tax-Exempt Fund, Mid Cap Growth Fund, Money Market Fund, Municipal Money Market Fund, Select Equity Fund, Short-Intermediate U.S. Government Fund, Small Cap Growth Fund, Small Cap Index Fund, Small Cap Value Fund, Stock Index Fund, Tax-Exempt Fund, Technology Fund, U.S. Government Fund, U.S. Government Money Market Fund and U.S. Government Select Money Market Fund.

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The second agreement is the Investment Advisory and Ancillary Services Agreement, dated August 2, 2000, as amended from time to time, between Northern Funds and NTI. Pursuant to that agreement, Northern Funds has appointed NTI to act as investment adviser to the Bond Index Fund, Emerging Markets Equity Fund, Enhanced Large Cap Fund, Global Real Estate Index Fund, International Equity Index Fund, Large Cap Value Fund, Mid Cap Index Fund and Short-Intermediate Tax-Exempt Fund. These two Investment Advisory and Ancillary Services Agreements have been consolidated into one amended and restated agreement, a form of which is included in Appendix G.

Northern Institutional Funds currently has three agreements that govern the investment advisory services provided to its portfolios. The first agreement is the Investment Advisory Agreement, dated March 31, 1998, as amended from time to time, among Northern Institutional Funds, NTI and NTGIL. Pursuant to that agreement, Northern Institutional Funds has appointed NTI and NTGIL to act as co-investment advisers to the International Growth Portfolio, and NTI to act as investment adviser to the Balanced Portfolio, Bond Portfolio, Diversified Assets Portfolio, Diversified Growth Portfolio, Equity Index Portfolio, Focused Growth Portfolio, Government Portfolio, Government Select Portfolio, Intermediate Bond Portfolio, International Equity Index Portfolio, Mid Cap Growth Portfolio, Municipal Portfolio, Short Bond Portfolio, Small Company Growth Portfolio, Small Company Index Portfolio, Tax-Exempt Portfolio, U.S. Government Securities Portfolio and U.S. Treasury Index Portfolio.

The second agreement is the Investment Advisory Agreement, dated March 1, 2001, as amended from time to time, between Northern Institutional Funds and NTI. Pursuant to that agreement, Northern Institutional Funds has appointed NTI to act as investment adviser to the Core Bond Portfolio and Prime Obligations Portfolio. These two Investment Advisory Agreements have been consolidated into one amended and restated agreement, a form of which is included in Appendix H.

The third agreement is the Investment Advisory Agreement, dated July 31, 2001, between Northern Institutional Funds and NTI. Pursuant to that agreement, Northern Institutional Funds has appointed NTI to act as investment adviser to the Liquid Assets Portfolio. A form of the amended and restated agreement for the Liquid Assets Portfolio is included as Appendix I.

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Compensation to Investment Advisers

As compensation for advisory services and the assumption of related expenses, the Investment Advisers are entitled to an advisory fee, computed daily and payable monthly, at annual rates set forth in the table below (expressed as a percentage of each Fund’s respective average daily net assets).

Northern Funds

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Northern Institutional Funds

The following tables show the dollar amount of fees payable to the Investment Advisers for their services for each Fund, after voluntary fee waivers and/or expense reimbursements by the Investment Advisers, if any, for the Northern Funds’ and Northern Institutional Funds’ fiscal years ended March 31, 2007, and November 30, 2006, respectively. The Investment Advisers may, at their discretion, voluntarily waive all or any portion of their advisory fees for any Fund or voluntarily reimburse expenses of the Funds. The Investment Advisers did not waive any portion of their advisory fees for any of the Northern Funds portfolios during the fiscal year ended March 31, 2007. However, the Investment Advisers voluntarily reimbursed expenses of the Northern Funds in the amounts shown below. The Investment Advisers waived their advisory fees for or reimbursed expenses of the Northern Institutional Funds portfolios in the amounts shown below.

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Northern Funds

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Northern Institutional Funds

During the fiscal years ended March 31, 2007, and November 30, 2006, respectively, no commissions were paid to affiliated brokers by any Northern Funds or Northern Institutional Funds. During the fiscal years ended March 31, 2007, and November 30, 2006, NTI provided Co-Administration and TNTC provided Transfer Agency, Custodial and Foreign Custodial services to the Trusts and received the fees set forth in Appendix J. During this same period, TNTC acted as securities lending agent for Northern Institutional Funds and received fees for these services as set forth in Appendix J. It is anticipated that NTI and TNTC will continue to provide all of the foregoing services to the Funds after the date of approval of Proposal 2.

Each Board Evaluation and Recommendation

At the August 2 – 3, 2007, quarterly meeting of the Board of Trustees, and after careful consideration, the Trustees approved the Proposed Amended and Restated Advisory Agreements, subject to shareholder approval. The Trustees determined that it would be in the best interest of shareholders if the Renewal Date was changed from March 31 (for Northern Funds) and April 30 (for Northern Institutional Funds) to June 30. The Trustees considered that such a change would allow for more time for management to assemble calendar year-end information as part of the materials for their consideration of the continuation of the Advisory Agreements. They also determined that, although there were a number of changes to update the Proposed Amended and Restated Advisory Agreements, the only change of substance was the change of the Renewal Date to June 30. The Trustees considered that the Renewal Date change would not affect the compensation paid to the Investment Advisers nor the level and quality of services provided to the Funds.

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The Trustees last approved the continuation of the Advisory Agreements of Northern Funds and Northern Institutional Funds at a meeting held on February 15, 2007. A discussion regarding each Board’s basis for approving the respective Funds’ Advisory Agreements is available in the Northern Funds’ annual report to shareholders dated March 31, 2007, and in the Northern Institutional Funds’ semiannual report to shareholders dated May 31, 2007, as applicable. To request a copy of these reports without charge, write to Northern Funds, P.O. Box 75986, Chicago, Illinois 60675-5986 or telephone 800-595-9111 or e-mail northern-funds@ntrs.com.

THE TRUSTEES UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS VOTE “FOR” THE AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENTS.

Required Vote

Approval of the Proposed Amended and Restated Advisory Agreements as to each Fund requires the affirmative vote of a majority of the outstanding shares (as defined with respect to voting securities by the 1940 Act) of each Fund. For this purpose, a majority of the outstanding shares of a Fund means the vote of the lesser of (1) 67% or more of the shares of the Fund present at the Meeting, if the holders of more than 50% of the shares of the Fund are present or represented by proxy, or (2) more than 50% of the outstanding shares of the Fund.

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ADDITIONAL INFORMATION

Other Business

As of the date of this Proxy Statement, the Trustees are not aware of any matters to be presented for action at the Meeting other than those described above. Should other business properly be brought before the Meeting, it is intended that the accompanying Proxy will be voted thereon in accordance with the judgment of the persons named as proxies.

Proxies and Voting at the Meeting

A Proxy is revocable by a shareholder at any time before it is exercised by written notice to the Trust (addressed to the Secretary at the Trust’s principal office), by executing a superseding Proxy or by attending the Meeting and voting in person. All valid Proxies received prior to the Meeting (including any adjournment thereof) will be voted at the Meeting. Matters on which a choice has been provided will be voted as indicated on a Proxy and, if no instruction is given, the persons named as proxies will vote the shares represented thereby in favor of the matters set forth in each proposal and will use their best judgment in connection with the transaction of such other business as may properly come before the Meeting.

In the event that at the time any session of the Meeting is called to order a quorum is not present in person or by proxy, the persons named as proxies may vote those Proxies that have been received to adjourn the Meeting to a later date. In the event that a quorum is present but sufficient votes in favor of any of the proposals have not been received, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of Proxies with respect to such proposals. Any such adjournment will require the affirmative vote of a majority of the shares of a Trust (or the affected Fund) present and voting in person or by proxy at the session of the Meeting to be adjourned. The persons named as proxies will vote those Proxies that they are entitled to vote in favor of any such proposal in favor of such an adjournment, and will vote those Proxies required to be voted against any such proposal against any such adjournment. A shareholder vote may be taken on one or more of the proposals in this Proxy Statement for one or more Funds prior to such adjournment if sufficient votes for their approval have been received and it is otherwise appropriate.

A majority of the shares entitled to vote with respect to a proposal will be a quorum for the transaction of business with respect to that proposal at the Meeting, but any lesser number will be sufficient for adjournments. Abstentions will be treated as shares that are present at the Meeting, but will not be counted as a vote at the Meeting. Accordingly, an abstention from voting on a proposal will have no effect on Proposal 1 but will have the same effect as a vote against Proposal 2. If a broker or nominee holding shares in “street name” indicates on the Proxy that it does not have discretionary authority to vote as to a particular proposal, those shares will be considered as present at the Meeting with respect to the proposal. Accordingly, a “broker nonvote” will not affect the Trust’s ability to achieve a quorum at the Meeting, but will have the same effect as a vote against Proposal 2.

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Share Ownership Information

Appendix B sets forth the persons who owned beneficially more than 5% of the shares of any Fund as of the Record Date for the Meeting. For purposes of the 1940 Act, any person who owns directly or through one or more controlled companies more than 25% of the voting securities of a company is presumed to “control” such company.

As of the Record Date, Northern Trust and/or certain of its affiliates have discretionary authority over the voting of more than 50% of each Northern Fund’s shares, except for five money market funds, through Northern Trust customer accounts. As of the Record Date, Northern Trust and/or certain of its affiliates have discretionary authority over the voting of [                        ] of each Northern Institutional Fund’s shares. The approximate percentage of outstanding shares of Northern Funds (including the Multi-Manager Funds) and Northern Institutional Funds over which Northern Trust has discretionary voting and/or investment power is set forth in Appendix C. Northern Trust has advised the Funds that it intends to vote the shares over which it has voting power “FOR” and “WITHHOLD ALL” in the election of each Nominee named in Proposal 1 in the same proportions as the total votes that are cast “FOR” and “WITHHOLD ALL” in such election by the other shareholders of a Trust. Northern Trust has further advised the Trusts that it intends to vote the shares over which it has voting power with respect to Proposal 2 according to a recommendation of Institutional Shareholder Services (“ISS”) consistent with Northern Trust’s Proxy Voting Policies. ISS, in its sole discretion, will determine how a large portion of Fund shares will be voted on Proposal 2, without any solicitation of voting instructions from the beneficial owner. The approximate percentage of outstanding shares of each Fund that is subject to this ISS arrangement is set forth in the table in Appendix C. In the case of a number of Funds, the shares that will be voted per the ISS determination constitutes an outright majority of that Fund’s shares and, therefore, the ISS determination will be dispositive for that Fund’s approval or disapproval of Proposal 2.

Manner and Cost of Proxy Solicitation

Proxies will be solicited by mail and may also be solicited in person or by telephone, fax, Internet or personal interview by officers of Northern Trust. In addition, employees of Northern Trust, its affiliates, correspondent banks, brokers and similar record holders may solicit proxies by these means, and may forward proxy materials and printed direction forms to the customers on whose behalf they hold record ownership of shares of the Funds.

Each Fund will bear its allocable portion of proxy solicitation expenses, including the cost of preparing and assembling materials used in connection with the solicitation of proxies and holding the shareholder meeting. Northern Trust and other financial intermediaries that have entered into shareholder servicing agreements with the Funds will bear all other mailing expenses associated with the solicitation of proxies. Northern Trust will reimburse correspondent banks, brokers and other similar record holders who have not entered into shareholder servicing agreements for their reasonable expenses incurred in forwarding proxy materials to beneficial owners.

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Multiple Shareholders in a Household

If you are a member of a household in which multiple shareholders of a Fund share the same address, and the Fund or your broker or bank (for “street name” accounts) has received consent to household material, then the Fund or your broker or bank may have sent to your household only one copy of this Proxy Statement or the Notice of Internet Availability of Proxy Materials (“Proxy Materials”), unless the Fund or your broker or bank previously received contrary instructions from a shareholder in your household. If you are part of a household that has received only one copy of the Proxy Materials, the Fund will deliver promptly a separate copy of the Proxy Materials to you upon written or oral request.

To receive a separate copy of the Proxy Materials, or if you would like to receive a separate copy of future proxy statements, prospectuses or annual reports, please contact Northern Funds or Northern Institutional Funds by calling 800-595-9111, by mail at Northern Funds or Northern Institutional Funds, P.O. Box 75986, Chicago, Illinois 60675-5986 or by e-mail at northern-funds@ntrs.com. On the other hand, if you are now receiving multiple copies of these documents and would like to receive a single copy in the future, please contact Northern Funds at the telephone number or address stated above. If your shares are held in street name, please contact your broker or bank.

Shareholder Proposals

Neither Trust is required, nor does it intend, to hold annual meetings of shareholders each year for the election of Trustees and other business. Instead, meetings will be held only when and if required (for example, whenever less than a majority of the Board of Trustees holding office has been elected by the shareholders or when the Trustees have received a written request to call a meeting for the purpose of voting on the question of the removal of any Trustee from the holders of record of at least 10% of the outstanding shares). Any shareholders desiring to present a proposal for consideration at the next meeting for shareholders of their Fund must submit the proposal in writing so that it is received by the appropriate Fund within a reasonable time before any meeting. These proposals should be sent to the Trust at its address stated below under “Information About the Trusts.”

Information About Distributor and Co-Administrator

Northern Funds Distributors, LLC, with principal offices at 301 Bellevue Parkway, Wilmington, DE 19809, serves as the Funds’ distributor.

NTI, located at 50 South LaSalle Street, Chicago, Illinois 60603, and PFPC, located at 99 High Street, Boston, Massachusetts 02110, act as co-administrators for the Funds.

Information About the Trusts

Each Trust currently has its principal office at 50 South LaSalle Street, Chicago, Illinois 60603.

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* * *

Even if you expect to attend the Meeting in person, please promptly follow the enclosed directions to submit voting instructions by telephone or over the Internet. Alternatively, you may submit voting instructions by signing and dating each proxy card that you receive, and if received by mail, returning it in the accompanying postage paid return envelope.

IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.

October 29, 2007

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APPENDIX A

OUTSTANDING SHARES

NORTHERN FUNDS

As of October 3, 2007, each Northern Fund had the following number of shares outstanding and net assets:

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APPENDIX A (Continued)

OUTSTANDING SHARES

NORTHERN INSTITUTIONAL FUNDS

As of October 3, 2007, each Northern Institutional Fund had the following number of shares outstanding and net assets:

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APPENDIX B

5% SHARE OWNERSHIP

The following persons or entities, in addition to Northern Trust and/or its affiliates, are known to own beneficially more than 5% of the outstanding shares of the following Funds as of October 3, 2007. Appendix C sets out information about beneficial ownership by Northern Trust and/or its affiliates:

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APPENDIX C

NORTHERN TRUST’S VOTING AND/OR INVESTMENT POWER OF FUND SHARES

As of October 3, 2007, The Northern Trust Company and/or its affiliates, 50 South LaSalle Street, Chicago, IL 60603, possessed sole or shared voting and/or investment power for its customer accounts with respect to the outstanding shares of each Fund as follows:

NORTHERN FUNDS

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APPENDIX C (Continued)

NORTHERN INSTITUTIONAL FUNDS

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APPENDIX D

TRUSTEE COMPENSATION

NORTHERN FUNDS

The following tables set forth certain information with respect to the compensation of each Trustee of the Northern Funds for the fiscal year ended March 31, 2007.

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APPENDIX D (Continued)

TRUSTEE COMPENSATION

NORTHERN FUNDS