Lee, who made 196 appearances for Chelsea and represented seven other clubs, replaces Malcolm Crosby who departed Sixfields along with several players in May.
Cobblers boss Gary Johnson told the club`s official website: "He started his coaching career at Swindon before I managed to get him to Bristol City as a development coach.
"He is a good coach, he is ambitious and I enjoy his company as I am sure the players will. I think he will be a big asset and I am delighted to be able to appoint him as my number two.
"I had to bring someone in who would fit in well with the players and the club and I am pleased we have been able to get him to Northampton Town."