ARROW FUNDS, 497, 1994-11-28

ARROW FUNDS
497, 1994-11-28

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ARROW FUNDS
PROSPECTUS

Arrow Funds (the "Trust") is an open-end, management investment company (a
mutual fund). This combined prospectus offers investors interests in the
following three separate diversified investment portfolios (individually
referred to as the "Fund" or collectively as the "Funds"), each having a
distinct investment objective and policies:

- Arrow Equity Portfolio;

- Arrow Fixed Income Portfolio; and

- Arrow Municipal Income Portfolio.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF MARK
TWAIN BANK, ARE NOT GUARANTEED BY MARK TWAIN BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

This combined prospectus contains the information you should read and know
before you invest in any of the Funds. Keep this prospectus for future
reference.

Additional information about the Funds is contained in the Funds' Combined
Statement of Additional Information dated November 30, 1994, which has also been
filed with the Securities and Exchange Commission. The information contained in
the Combined Statement of Additional Information is incorporated by reference
into this prospectus. You may request a copy of the Combined Statement of
Additional Information free of charge, obtain other information, or make
inquiries about any of the Funds by writing to or calling the 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.

Prospectus dated November 30, 1994

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

SYNOPSIS 1
- ------------------------------------------------------

Risk Factors 1

EXPENSES OF THE FUNDS 2
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS 3
- ------------------------------------------------------

OBJECTIVE OF EACH FUND 6
- ------------------------------------------------------

Arrow Equity Portfolio 6
Investment Policies 6
Acceptable Investments 6
Securities of Foreign Issuers 6
Temporary Investments 7
Arrow Fixed Income Portfolio 7
Investment Policies 7
Acceptable Investments 7
U.S. Government Securities 8
Collateralized Mortgage Obligations 9
Arrow Municipal Income Portfolio 9
Investment Policies 10
Acceptable Investments 10
Characteristics 10
Participation Interests 10
Variable Rate Municipal Securities 11
Municipal Securities 11
Investment Risks 11

PORTFOLIO INVESTMENTS AND STRATEGIES 11
- ------------------------------------------------------

Borrowing Money 11
Diversification 11
Restricted and Illiquid Securities 12
Repurchase Agreements 12
Investing in Securities of Other
Investment Companies 12
When-Issued and Delayed
Delivery Transactions 13
Put and Call Options 13
Risks 13
Futures and Options on Futures 14
Risks 14
Lending of Portfolio Securities 15
Investments in Foreign Securities 15

ARROW FUNDS INFORMATION 15
- ------------------------------------------------------

Management of the Trust 15
Board of Trustees 15
Investment Adviser 15
Advisory Fees 16
Adviser's Background 16
Distribution of Shares of the Funds 17
Distribution Plan 17
Shareholder Servicing Arrangements 17
Administration of the Funds 18
Administrative Services 18
Custodian 18
Transfer Agent, Dividend Disbursing Agent
and Portfolio Recordkeeper 18
Legal Counsel 18
Independent Auditors 18
Brokerage Transactions 18
Expenses of the Funds 19

NET ASSET VALUE 19
- ------------------------------------------------------

INVESTING IN THE FUNDS 19
- ------------------------------------------------------

Share Purchases 19
Through Mark Twain 19
Minimum Investment Required 20
What Shares Cost 20
Purchases at Net Asset Value 20
Dealer Concessions 20
Reducing the Sales Charge 21
Quantity Discounts and
Accumulated Purchases 21
Letter of Intent 21
Reinvestment Privilege 22
Concurrent Purchases 22
Systematic Investment Program 22
Certificates and Confirmations 22
Dividends and Distributions 22

EXCHANGE PRIVILEGE 23
- ------------------------------------------------------

REDEEMING SHARES 23
- ------------------------------------------------------

Through Mark Twain 23
By Telephone 23
By Mail 24
Receiving Payment 25
Systematic Withdrawal Program 25
Accounts with Low Balances 25

SHAREHOLDER INFORMATION 25
- ------------------------------------------------------

Voting Rights 25
Massachusetts Partnership Law 26

EFFECT OF BANKING LAWS 26
- ------------------------------------------------------

TAX INFORMATION 27
- ------------------------------------------------------

Federal Income Tax 27
Additional Tax Information for
Municipal Income Fund 27
Other State and Local Taxes 27

PERFORMANCE INFORMATION 28
- ------------------------------------------------------

ADDRESSES 29
- ------------------------------------------------------

SYNOPSIS
- --------------------------------------------------------------------------------

The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated July 1, 1992. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be issued
in separate classes. This prospectus relates only to the three Funds described
herein. In addition, the Trust offers another investment portfolio, the Arrow
Government Money Market Portfolio. The Funds are designed for individuals and
institutions as a convenient means of accumulating interests in professionally
managed, diversified portfolios.

The following three Funds are offered in this prospectus:

- ARROW EQUITY PORTFOLIO ("EQUITY FUND")--seeks capital appreciation by
investing primarily in equity securities;

- ARROW FIXED INCOME PORTFOLIO ("FIXED INCOME FUND")--seeks current income
by investing primarily in a portfolio of U.S. government and investment
grade corporate securities; and

- ARROW MUNICIPAL INCOME PORTFOLIO ("MUNICIPAL INCOME FUND")--seeks current
income which is exempt from federal regular income tax by investing
primarily in a diversified portfolio of municipal securities.

For information on how to purchase shares of any of the Funds, please refer to
"Investing in the Funds." A minimum initial investment of $1,000 is required for
each Fund, except for investments by individual retirement accounts ("IRAs") for
which the minimum initial investment is $250. Employees of Mark Twain
Bancshares, Inc. and its subsidiaries, their spouses and children under 21 may
purchase shares with a minimum initial investment of $500. Subsequent
investments must be in amounts of at least $100. Shares of each Fund are sold at
net asset value plus any applicable sales charge, and are redeemed at net asset
value. Information on redeeming shares may be found under "Redeeming Shares."
The Funds are advised by Mark Twain Bank.

RISK FACTORS. Investors should be aware of the following general
considerations: market values of fixed-income securities, which constitute a
major part of the investments of some Funds, may vary inversely in response to
changes in prevailing interest rates. The foreign securities in which two of the
Funds may invest may be subject to certain risks in addition to those inherent
in U.S. investments. One or more of the Funds may make certain investments and
employ certain investment techniques that involve other risks, including
entering into repurchase agreements, lending portfolio securities and entering
into financial futures contracts and related options as hedges. These risks and
those associated with investing in when-issued securities, options and variable
rate securities are described under "Objective of Each Fund" and "Portfolio
Investments and Strategies."

EXPENSES OF THE FUNDS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FIXED
EQUITY INCOME MUNICIPAL
SHAREHOLDER TRANSACTION EXPENSES FUND FUND INCOME FUND
-------- -------- -----------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)(1).................................................................. 3.50% 3.50% 3.50%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of
offering price)............................................................ None None None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable)..................................... None None None
Exchange Fee................................................................. None None None
</TABLE>

ANNUAL FUND OPERATING EXPENSES*
(As a percentage of average net assets)

<TABLE>
<CAPTION>
FIXED MUNICIPAL
EQUITY INCOME INCOME
FUND FUND FUND
-------- -------- -----------
<S> <C> <C> <C>
Management Fees (after waiver)(2)............................................ 0.72% 0.59% 0.19%
12b-1 Fees(3)................................................................ 0.00% 0.00% 0.00%
Total Other Expenses(4)...................................................... 0.64% 0.56% 0.80%
Total Fund Operating Expenses(5)......................................... 1.36% 1.15% 0.99%
</TABLE>

(1) Shareholders purchasing pursuant to the wrap fee program offered by Mark
Twain Brokerage Services, Inc. are not subject to the sales load. However, an
annual fee of 2.00% will be charged to these accounts.

(2) The estimated management fee for the Municipal Income Fund has been reduced
to reflect the anticipated voluntary waiver by the investment adviser. The
adviser can terminate this voluntary waiver at any time at its sole discretion.
The management fee for the Equity Fund and the Fixed Income Fund have been
reduced to reflect the waivers by the investment adviser. With respect to the
Equity Fund, the Fixed Income Fund and the Municipal Income Fund the maximum
management fees are 0.75%, 0.60% and 0.70%, respectively.

(3) Each Fund can pay up to 0.25% of its average daily net assets as a 12b-1
fee. For the foreseeable future, each Fund plans to waive all 12b-1 fees.

(4) The maximum administrative fee per fund is the greater of $50,000, or the
charges based upon a sliding fee scale ranging from 0.075% to 0.15% of average
aggregate daily net assets of the Trust. The administrative fees of the Equity
Fund and the Fixed Income Fund are 0.16% and 0.15%, respectively. The
administrative fees of the Municipal Income Fund are estimated to be 0.20%.
Total other expenses include a fixed fee plus a charge based on assets and
accounts for transfer and dividend disbursing agent and portfolio accounting
services.

(5) The Total Fund Operating Expenses of the Equity Fund, Fixed Income Fund and
the Municipal Income Fund are 1.64%, 1.41%, and 1.66%, respectively, absent the
waivers detailed in notes (2) and (3). The Total Fund Operating Expenses of the
Municipal Income Fund are estimated to be 1.75% absent the anticipated voluntary
waivers detailed in notes (2) and (3).

* THE MUNICIPAL INCOME FUND EXPENSES IN THIS TABLE ARE ESTIMATED BASED ON
AVERAGE EXPENSES EXPECTED TO BE INCURRED DURING THE FISCAL YEAR ENDING
SEPTEMBER 30, 1995. DURING THE COURSE OF THIS PERIOD, EXPENSES MAY BE MORE OR
LESS THAN THE AMOUNT SHOWN. WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000
MAY BE SUBJECT TO ADDITIONAL FEES.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER IN THE FUNDS WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "ARROW FUNDS INFORMATION" AND "INVESTING IN THE FUNDS."

EXAMPLE

You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return; (2) redemption at the end of each time period; and (3) payment of
the maximum sales load. The Funds charge no contingent deferred sales charge.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity Fund.......................................................... $ 48 $77 $ 107 $193
Fixed Income Fund.................................................... $ 46 $70 $ 96 $170
Municipal Income Fund................................................ $ 45 $65 $ 88 $152
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED ON DATA FOR THE PERIOD ENDING SEPTEMBER 30, 1994.

ARROW EQUITY PORTFOLIO
(FORMERLY, MARK TWAIN EQUITY PORTFOLIO)

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by KPMG Peat Marwick LLP, the Fund's
independent auditors. Their report dated November 11, 1994 on the Fund's
financial statements for the period ended September 30, 1994 and on the
following table for the period then ended is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be obtained
from the Fund.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
---------------------
1994 1993*
------- -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.02 $10.00
- ----------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------
Net investment income 0.07 0.04
- ----------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.25) 0.02
- ---------------------------------------------------------------------------- ------ ------
Total from investment operations (0.18) 0.06
- ----------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.07) (0.04)
- ---------------------------------------------------------------------------- ------ ------
Distributions to shareholders from net realized gain on
investment transactions (0.03) --
- ---------------------------------------------------------------------------- ------ ------
Total Distributions (0.10) (0.04)
- ---------------------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.74 $10.02
- ---------------------------------------------------------------------------- ------ ------
TOTAL RETURN** (1.84%) 0.60%
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------
Expenses 1.36% 1.32%(a)
- ----------------------------------------------------------------------------
Net investment income 0.74% 0.62%(a)
- ----------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.28% 0.30%(a)
- ----------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------
Net assets, end of period (000 omitted) $30,282 $31,159
- ----------------------------------------------------------------------------
Portfolio turnover rate 127% 54%
- ----------------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from January 4, 1993 (date of initial
public investment) to
September 30, 1993.

** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.

(a) Computed on an annualized basis.

(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT DATED SEPTEMBER 30, 1994, WHICH CAN BE OBTAINED FREE OF CHARGE.

ARROW FIXED INCOME PORTFOLIO
(FORMERLY, MARK TWAIN FIXED INCOME PORTFOLIO)

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------
1994 1993*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.75 $10.00
- ---------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------
Net investment income 0.59 0.44
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.41) 0.75
- --------------------------------------------------------------------------------- ------ ------
Total from investment operations (0.82) 1.19
- ---------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.59) (0.44)
- ---------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (0.03) --
- --------------------------------------------------------------------------------- ------ ------
Total distributions (0.62) (0.44)
- --------------------------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.31 $10.75
- --------------------------------------------------------------------------------- ------ ------
TOTAL RETURN** (7.85%) 12.09%
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------
Expenses 1.15% 1.05%(a)
- ---------------------------------------------------------------------------------
Net investment income 5.86% 5.71%(a)
- ---------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.26% 0.27%(a)
- ---------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $32,743 $42,715
- ---------------------------------------------------------------------------------
Portfolio turnover rate 28% 28%
- ---------------------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.

** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.

(a) Computed on an annualized basis.

(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT DATED SEPTEMBER 30, 1994, WHICH CAN BE OBTAINED FREE OF CHARGE.

ARROW MUNICIPAL INCOME PORTFOLIO
(FORMERLY, MARK TWAIN MUNICIPAL INCOME PORTFOLIO)

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
1994 1993*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.61 $10.00
- -----------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------
Net investment income 0.47 0.32
- -----------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.72) 0.61
- ----------------------------------------------------------------------------- ------ ------
Total from investment operations (0.25) 0.93
- -----------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.47) (0.32)
- -----------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.02) --
- ----------------------------------------------------------------------------- ------ ------
Total distributions (0.49) (0.32)
- ----------------------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.87 $10.61
- ----------------------------------------------------------------------------- ------ ------
TOTAL RETURN** (2.41%) 9.43%
- -----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------
Expenses 0.85% 0.72%(a)
- -----------------------------------------------------------------------------
Net investment income 4.62% 4.71%(a)
- -----------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.81% 0.85%(a)
- -----------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------
Net assets, end of period (000 omitted) $23,187 $24,087
- -----------------------------------------------------------------------------
Portfolio turnover rate 27% 14%
- -----------------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from February 1, 1993 (date of initial
public investment) to September 30, 1993.

** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.

(a) Computed on an annualized basis.

(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT DATED SEPTEMBER 30, 1994, WHICH CAN BE OBTAINED FREE OF CHARGE.

OBJECTIVE OF EACH FUND
- --------------------------------------------------------------------------------

The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.

Unless indicated otherwise, the investment policies and limitations of a Fund
may be changed by the Board of Trustees ("Trustees") without approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.

Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below, appears in
the "Portfolio Investments and Strategies" section of this prospectus and in the
Combined Statement of Additional Information.

ARROW EQUITY PORTFOLIO

The investment objective of the Fund is capital appreciation. The Fund pursues
this investment objective by investing primarily in equity securities of
companies selected on the basis of assessment of earnings and the risk and
volatility of each company's business. Other factors, such as product position
or market share, will also be considered by the Fund's investment adviser.

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS. The Fund invests primarily in equity securities of
companies selected by the Fund's investment adviser on the basis of traditional
research techniques. The equity securities in which the Fund invests are
primarily those of middle to large capitalization issuers whose shares are
listed on the New York and American Stock Exchanges. Company earnings are the
primary consideration in selecting portfolio securities. The Fund may invest in
preferred stocks, convertible securities, corporate bonds, debentures, notes,
warrants, and put and call options on stocks, although normally it will invest
at least 65% of its assets in common stocks. The lowest rated debt obligation in
which the Fund will invest will be rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch"). Securities rated Baa or BBB
by a nationally recognized statistical rating organization ("NRSRO") have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated bonds. Downgrades will be evaluated on a
case by case basis by the adviser. The adviser will determine whether or not the
security continues to be an acceptable investment. If not, the security will be
sold.

SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of
foreign issuers which are freely traded on United States securities
exchanges or in the over-the-counter market in the form of depository
receipts. Securities of a foreign issuer may present greater risks in the
form of nationalization, confiscation, domestic marketability, or other
national or international restrictions. As a matter of practice, the Fund
will not invest in the securities of a foreign issuer if any such risk
appears to the investment adviser to be substantial. The Fund may not
invest more than 5% of its

assets in securities of foreign issuers. For additional information on the
risks of foreign securities, see "Investments in Foreign Securities" under
the section "Portfolio Investments and Strategies."

TEMPORARY INVESTMENTS. In such proportions as, in the judgment of its
investment adviser, prevailing market conditions warrant, the Fund may, for
temporary defensive purposes, invest in:

- short-term money market instruments;

- securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies, or
instrumentalities; and

- repurchase agreements.

ARROW FIXED INCOME PORTFOLIO

The investment objective of the Fund is current income. The Fund pursues its
objective by investing in a portfolio of U.S. government and investment grade
corporate securities. Under normal circumstances, at least 65% of the value of
the Fund's total assets will be invested in a diversified portfolio of
investment grade fixed income securities.

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS. The Fund will only invest its assets in securities
which are rated at the time of purchase Baa or higher by Moody's or BBB or
higher by S&P or Fitch or which, if unrated, are deemed to be of comparable
quality by the Fund's investment adviser. Securities rated Baa or BBB by an
NRSRO have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated bonds. Downgrades will be evaluated on a
case by case basis by the adviser. The adviser will determine whether or not the
security continues to be an acceptable investment. If not, the security will be
sold.

The Fund's debt securities may include fixed rate, adjustable rate or stripped
bonds, debentures, notes, U.S. government securities, mortgage-related
asset-backed securities and debt securities convertible into, or exchangeable
for, preferred or common stock.

The Fund may also invest in preferred stock and units, which are debt securities
with stock or warrants to buy stock attached. In addition, the Fund may write
covered call and put options and may purchase call and put options. The Fund
will not invest in securities judged to be speculative or of poor quality, but
may invest in investment grade securities as described above.

When the adviser selects securities for the Fund, it will consider the ratings
of Moody's, S&P or Fitch assigned to various debt securities. In making its
investment decisions, the adviser also will consider many factors other than
current yield, including the preservation of capital, the potential for
realizing capital appreciation, maturity and yield to maturity. The adviser will
adjust its investments in particular securities or in types of debt securities
in response to its appraisal of changing economic conditions and trends. The
Fund may sell one security and purchase another security of comparable quality
and maturity to take advantage of what it believes to be short-term
differentials in market values or yield disparities.

The acceptable investments include, but are not limited to:

- domestic issues of corporate debt obligations having floating or fixed
rates of interest and rated at the time of purchase in one of the four
highest categories by an NRSRO (rated Aaa, Aa, A, or Baa by Moody's; AAA,
AA, A or BBB by S&P or Fitch), or which, if unrated, are of comparable
quality in the judgment of the adviser;

- mortgage-related asset-backed securities, rated in one of the three
highest categories by a NRSRO, or which are of comparable quality in the
judgment of the adviser;

- notes, bonds, and discount notes of the U.S. government or its agencies
or instrumentalities;

- commercial paper which has received ratings in one of the top two
categories by one or more NRSRO. Such ratings would include: Prime-1 or
Prime-2 by Moody's, A-1 or A-2 by S&P, or F-1 or F-2 by Fitch;

- time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund, both of which
are administered by the Federal Deposit Insurance Corporation ("FDIC"),
including certificates of deposit and other time deposits issued by
foreign branches of FDIC insured banks;

- debt securities of foreign governments, foreign governmental agencies or
supranational institutions. In addition, the Fund will also invest in
investment quality debt securities issued by foreign corporations. These
securities will be rated in one of the four highest rating categories by
the above-mentioned NRSROs, or, if unrated, will be of comparable quality
in the judgment of the adviser. (The Fund may not invest more than 10% of
its assets in foreign securities.) For additional information on the
risks of foreign securities, see "Investments in Foreign Securities"
under the section "Portfolio Investments and Strategies."; and

- repurchase agreements collateralized by eligible investments.

U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
invests are either guaranteed or issued by the U.S. government, its agencies, or
instrumentalities. These securities include, but are not limited to:

- direct obligations of the U.S. Treasury such as U.S. Treasury bills,
notes and bonds; and

- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities such as Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Banks for
Cooperatives, Federal Farm Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, Student Loan Marketing Association, Federal Home
Loan Mortgage Corporation, or National Credit Union Administration.

Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial

support to other agencies or instrumentalities, since it is not obligated to do
so. These instrumentalities are supported by:

- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;

- the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or

- the credit of the agency or instrumentality.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are a form of asset-backed
security issued by single-purpose stand-alone finance subsidiaries or trusts of
financial institutions, government agencies, investment bankers, or companies
related to the construction industry.

The Fund will invest only in CMOs which are rated AAA by an NRSRO, and which may
be: (a) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (b) collateralized by pools of mortgages
in which payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (c) securities in
which the proceeds of the issuance are invested in mortgage securities and
payment of the principal and interest is supported by the credit of any agency
or instrumentality of the U.S. government.

Because the mortgages underlying mortgage-backed securities often may be prepaid
without penalty or premium, mortgage-backed securities are generally subject to
higher prepayment risks than most other types of debt instruments. Prepayment
risks on mortgage securities tend to increase during periods of declining
mortgage interest rates, because many borrowers refinance their mortgages to
take advantage of the more favorable rates. Depending upon market conditions,
the yield that the Fund receives from the reinvestment of such prepayments, or
any scheduled principal payments, may be lower than the yield on the original
mortgage security. As a consequence, mortgage securities may be a less effective
means of "locking in" interest rates than other types of debt securities having
the same stated maturity and may also have less potential for capital
appreciation. For certain types of asset pools, such as collateralized mortgage
obligations, prepayments may be allocated to one tranche of securities ahead of
other tranches, in order to reduce the risk of prepayment for the other
tranches. Prepayments may result in a capital loss to the Fund to the extent
that the prepaid mortgage securities were purchased at a market premium over
their stated principal amount. Conversely, the prepayment of mortgage securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be taxed
as ordinary income when distributed to the shareholders.

ARROW MUNICIPAL INCOME PORTFOLIO

The investment objective of the Fund is current income which is exempt from
federal regular income tax. Federal regular income tax does not include the
federal individual alternative minimum tax or the federal alternative minimum
tax for corporations. Interest income of the Fund that is exempt from federal
regular income tax retains its tax-free status when distributed to the Fund's
shareholders.

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
at least 80% of its total assets in a diversified portfolio of municipal
securities. The municipal securities in which the Fund invests are:

- debt obligations issued by or on behalf of any state, territory, or
possession of the United States, including the District of Columbia, or
any political subdivision of any of these; and

- participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond counsel
for the issuers or in the opinion of officers of the Fund and/or the
investment adviser to the Fund, exempt from federal regular income tax.

It is likely that shareholders who are subject to alternative minimum tax will
be required to include interest from a portion of the municipal securities owned
by the Fund in calculating the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.

CHARACTERISTICS. The municipal securities in which the Fund invests are:

- rated within the four highest ratings for municipal securities by Moody's
(Aaa, Aa, A or Baa), or by S&P or Fitch (AAA, AA, A or BBB);

- guaranteed at the time of purchase by the U.S. government as to the
payment of principal and interest;

- fully collateralized by an escrow of U.S. government or other securities
acceptable to the Fund's adviser;

- rated at the time of purchase within Moody's highest short-term municipal
obligation rating (MIG1/VMIG1), Moody's highest municipal commercial
paper rating (P-1), S&P's highest municipal commercial paper rating
(SP-1) or Fitch's highest short-term municipal obligation rating (F1+);

- unrated if, at the time of purchase, longer term municipal securities of
the issuer are rated Baa or better by Moody's or BBB or better by S&P or
Fitch; or

- determined by the Fund's investment adviser to be equivalent to municipal
securities which are rated Baa or better by Moody's or BBB or better by
S&P or Fitch.

Securities rated Baa or BBB by an NRSRO have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than higher rated
bonds. Downgrades will be evaluated on a case by case basis by the adviser. The
adviser will determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold. A description of the ratings
categories is contained in the Appendix to the Combined Statement of Additional
Information.

PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings and loan associations,
and insurance companies. These participation interests give the Fund an
undivided interest in municipal securities. The financial institutions from
which the Fund purchases participation interests frequently provide or secure
irrevocable letters of credit or guarantees to assure that the participation
interests are of high quality. The Trustees will determine that participation
interests meet the prescribed quality standards for the Fund.

VARIABLE RATE MUNICIPAL SECURITIES. Some of the municipal securities which the
Fund purchases may have variable interest rates. Variable interest rates are
normally based on a municipal interest index or a published interest rate or
interest rate index.

MUNICIPAL SECURITIES. Municipal securities are generally issued to finance
public works such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They are
also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities. Municipal securities include industrial development bonds issued by
or on behalf of public authorities to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned corporations. The
availability of this financing encourages these corporations to locate within
the sponsoring communities and thereby increases local employment. The two
principal classifications of municipal securities are "general obligation" and
"revenue" bonds. General obligation bonds are secured by the issuer's pledge of
its full faith and credit and taxing power for the payment of principal and
interest. Interest on and principal of revenue bonds, however, are payable only
from the revenue generated by the facility financed by the bond or other
specified sources of revenue. Revenue bonds do not represent a pledge of credit
or create any debt of or charge against the general revenues of a municipality
or public authority. Industrial development bonds are typically classified as
revenue bonds.

The Fund may invest more than 25% of the value of its assets in industrial
development bonds. The Fund will not invest more than 10% of its net assets in
municipal securities subject to restriction on resale.

INVESTMENT RISKS. Yields on municipal securities depend on a variety of
factors, including: the general conditions of the money market and the taxable
and municipal bond markets; the size of the particular offering; the maturity of
the obligations; and the rating of the issue. The ability of the Fund to achieve
its investment objective also depends on the continuing ability of the issuers
of municipal securities and participation interests, or the guarantors of
either, to meet their obligations for the payment of interest and principal when
due.

PORTFOLIO INVESTMENTS AND STRATEGIES
- --------------------------------------------------------------------------------

BORROWING MONEY

The Funds will not borrow money directly or through reverse repurchase
agreements (arrangements in which a Fund sells a money market instrument for a
percentage of its cash value with an agreement to buy it back on a set date) or
pledge securities except, under certain circumstances, a Fund may borrow money
up to one-third of the value of its total assets and pledge assets as necessary
to secure such borrowings. This policy cannot be changed without the approval of
holders of a majority of a Fund's shares.

DIVERSIFICATION

With respect to 75% of the value of its total assets, a Fund will not invest
more than 5% in the securities of any one issuer or acquire more than 10% of the
outstanding voting securities of any one issuer, other than cash, cash items or
securities issued or guaranteed by the government of the United States or its

agencies or instrumentalities and repurchase agreements collateralized by U.S.
government securities. This policy cannot be changed without the approval of
holders of a majority of a Fund's shares.

RESTRICTED AND ILLIQUID SECURITIES

The Funds may invest in restricted securities. Restricted securities are any
securities in which a Fund may invest pursuant to its investment objective and
policies but which are subject to restriction on resale under federal securities
law. A Fund will limit investments in illiquid securities (including certain
restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, over-the-counter options, and repurchase
agreements providing for settlement in more than seven days after notice) to no
more than 15% of its net assets.

A Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law, and is generally sold to institutional investors, such as one of the Funds,
who agree that they are purchasing the paper for investment purposes and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) commercial paper, thus
providing liquidity. The Funds believe that Section 4(2) commercial paper and
certain other restricted securities, which meet the criteria for liquidity
established by the Trustees, are quite liquid. Therefore, the Funds intend to
treat these securities as liquid and not subject to the investment limitation
applicable to illiquid securities. In addition, because these securities are
liquid, the Funds will not subject such securities to the limitation otherwise
applicable to restricted securities.

REPURCHASE AGREEMENTS

The securities in which the Funds invest may be purchased pursuant to repurchase
agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to a Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from a Fund, that Fund could
receive less than the repurchase price on any sale of such securities. The Funds
will only enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers which are deemed by the Fund's
adviser to be creditworthy pursuant to guidelines established by the Trustees.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Funds may invest in the securities of other investment companies, but a Fund
will not own more than 3% of the total outstanding voting stock of any
investment company, invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in investment
companies in general. The Funds will invest in other investment companies
primarily for the purpose of investing short-term cash which has not yet been
invested in other portfolio instruments. The adviser will waive its investment
advisory fee on assets invested in securities of open-end investment companies.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

Each Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which a Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market value of the securities purchased may vary
from the purchase prices. Accordingly, the Fund may pay more/less than the
market value of these securities on the settlement date.

The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.

PUT AND CALL OPTIONS

Each Fund may purchase put options on portfolio securities. These options will
be used as a hedge to attempt to protect securities which a Fund holds against
decreases in value. These Funds may also write covered call options on all or
any portion of their portfolio to generate income. A Fund may only write call
options on securities either held in its portfolio, or which it has the right to
obtain without payment of further consideration, or for which it has segregated
cash or U.S. government securities in the amount of any additional
consideration.

A Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by a Fund are not traded on an
exchange. A Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the investment adviser.

Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. A Fund will not buy call options
or write put options, other than to close out open option positions, without
further notification to shareholders.

RISKS. When a Fund writes a call option, the Fund risks not participating in any
rise in the value of the underlying security. In addition, when a Fund purchases
puts on financial futures contracts to protect against declines in prices of
portfolio securities, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and its
corresponding put to react differently than the portfolio securities to market
changes. In addition, the Fund's investment adviser could be incorrect in its
expectations about the direction or extent of market factors such as interest
rate movements. In such an event, the Fund may lose the purchase price of the
put option. Finally, it is not certain that a secondary market for options will
exist at all times. Although the investment adviser will consider liquidity
before entering into option transactions, there is no assurance that a liquid
secondary market on an exchange

will exist for any particular option or at any particular time. The Fund's
ability to establish and close out option positions depends on this secondary
market.

FUTURES AND OPTIONS ON FUTURES

The Equity and Fixed Income Funds may purchase and sell futures contracts to
hedge against the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions. Futures contracts
call for the delivery of particular debt instruments at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.

Stock index futures contracts are based on indexes that reflect the market value
of common stock of the firms included in the indexes. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.

The Equity and Fixed Income Funds may also write call options and purchase put
options on futures contracts as a hedge to attempt to protect their portfolio
securities against decreases in value. When a Fund writes a call option on a
futures contract, it is undertaking the obligation of selling a futures contract
at a fixed price at any time during a specified period if the option is
exercised. Conversely, as purchaser of a put option on a futures contract, a
Fund is entitled (but not obligated) to sell a futures contract at the fixed
price during the life of the option.

The Equity and Fixed Income Funds may also write put options and purchase call
options on futures contracts as a hedge against rising purchase prices of
portfolio securities. The Funds will use these transactions to attempt to
protect its ability to purchase portfolio securities in the future at price
levels existing at the time it enters into the transactions. When a Fund writes
a put option on a futures contract, it is undertaking to buy a particular
futures contract at a fixed price at any time during a specified period if the
option is exercised. As a purchaser of a call option on a futures contract, the
Funds are entitled (but not obligated) to purchase a futures contract at a fixed
price at any time during the life of the option.

The Equity and Fixed Income Funds may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on a Fund's existing futures positions and premiums paid for related
options would exceed 5% of the market value of a Fund's total assets. When a
Fund purchases futures contracts, an amount of cash and cash equivalents, equal
to the underlying commodity value of the futures contracts (less any related
margin deposits), will be deposited in a segregated account with the custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contracts are unleveraged. When a Fund sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.

RISKS. When a Fund uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities in that
Fund's portfolio. This may cause the futures contract and any related options to
react differently than the portfolio securities to market changes. In addition,
the investment adviser could be

incorrect in its expectations about the direction or extent of market factors
such as stock price movements. In these events, a Fund may lose money on the
futures contract or option.

It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the investment adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. A Fund's
ability to establish and close out futures and options positions depends on this
secondary market.

LENDING OF PORTFOLIO SECURITIES

In order to generate additional income, the Equity Fund and Fixed Income Fund
may lend portfolio securities on a short-term or a long-term basis, or both, up
to one-third of the value of their total assets to broker/dealers, banks, or
other institutional borrowers of securities. This policy cannot be changed
without the approval of holders of a majority of a Fund's shares. The Funds will
only enter into loan arrangements with broker/dealers, banks, or other
institutions which the adviser has determined are creditworthy under guidelines
established by the Trustees and will receive collateral in the form of cash or
U.S. government securities equal to at least 100% of the value of the securities
loaned.

INVESTMENTS IN FOREIGN SECURITIES

Investments in foreign securities involve special risks that differ from those
associated with investments in domestic securities. The risks associated with
investments in foreign securities relate to political and economic developments
abroad, as well as those that result from the differences between the regulation
of domestic securities and issuers and foreign securities and issuers. These
risks may include, but are not limited to, expropriation, confiscatory taxation,
currency fluctuations, withholding taxes on interest, limitations on the use or
transfer of Fund assets, political or social instability and adverse diplomatic
developments. In addition, there are restrictions on foreign investments in
other jurisdictions and there tends to be difficulty in obtaining judgments from
abroad and effecting repatriation of capital invested abroad. Delays could occur
in settlement of foreign transactions, which could adversely affect shareholder
equity. Moreover, individual foreign economies may differ favorable or
unfavorably from the domestic economy in such respects as growth of gross
national product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.

ARROW FUNDS INFORMATION
- --------------------------------------------------------------------------------

MANAGEMENT OF THE TRUST

BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.

INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Funds are made by Mark Twain Bank, the Funds'
adviser (the "Adviser"), subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for

each Fund and is responsible for the purchase or sale of portfolio instruments,
for which it receives an annual fee from the assets of each Fund.

ADVISORY FEES. The Adviser receives an investment advisory fee at annual
rates equal to percentages of the relevant Fund's average daily net assets
as follows: the Fixed Income Fund-- .60%; the Municipal Income Fund--.70%;
and the Equity Fund--.75%. The fee paid by the Equity Fund, while higher
than the advisory fee paid by other mutual funds in general, is comparable
to fees paid by many mutual funds with similar objectives and policies. The
investment advisory contract provides for the voluntary waiver of expenses
by the Adviser from time to time. The Adviser has undertaken to waive up to
the amount of the advisory fee, for operating expenses, in excess of
limitations established by certain states. The Adviser may voluntarily
choose to waive a portion of its fees or reimburse the Funds for certain
other expenses, but reserves the right to terminate such waiver or
reimbursement at any time at its sole discretion.

ADVISER'S BACKGROUND. Mark Twain Bank, a Missouri state chartered bank, is
a wholly owned subsidiary of Mark Twain Bancshares, Inc., a bank holding
company organized under the laws of Missouri. Mark Twain Bank is a
commercial bank offering a wide range of banking services to its customers.
As of September 30, 1994, Mark Twain Bank managed assets in excess of $1.3
billion on a discretionary basis and provided custody services for
additional assets in excess of $1.4 billion. Mark Twain Bank has advised
the Trust since 1992. In addition to the Arrow Funds, the Trust Division
manages two commingled funds with total assets of over $18 million. As part
of their regular banking operations, Mark Twain Bank may make loans to
public companies. Thus, it may be possible, from time to time, for a Fund
to hold or acquire the securities of issuers which are also lending clients
of Mark Twain Bank. The lending relationship will not be a factor in the
selection of securities.

Carl C. Enloe has managed the Equity Fund since its inception, December
1992. Mr. Enloe joined Mark Twain Bank, the Fund's adviser, in 1987, as
head of investments. Prior to joining Mark Twain, he was head of
investments at another major Missouri bank for 17 years. He served as
senior portfolio manager at a private investment company and an analyst at
a member New York Stock Exchange firm. He is a graduate of the University
of Missouri.

Randy J. Schofield has managed the Fixed Income Fund since its inception,
December 1992. Mr. Schofield joined Mark Twain Bank in 1992 as Vice
President of the Fund's investment adviser. Prior to joining Mark Twain, he
was head of the investment department at a Missouri trust company for six
years. Mr. Schofield received his B.S. and B.A. from Central Missouri State
University.

Larry E. Kaestner has managed the Municipal Income Fund since its
inception, February 1, 1993. Mr. Kaestner joined Mark Twain Bank in 1988 as
Vice President of the Fund's investment adviser. Mr. Kaestner has in excess
of 20 years of investment advisory and portfolio management experience,
including investment positions at two other major financial institutions.
Mr. Kaestner is a graduate of Southern Illinois University.

DISTRIBUTION OF SHARES OF THE FUNDS

Federated Securities Corp. serves as the principal distributor for shares of the
Funds. It is a Pennsylvania corporation organized on November 14, 1969, and is
the distributor for a number of investment companies. Federated Securities Corp.
is a subsidiary of Federated Investors.

DISTRIBUTION PLAN. Under a distribution plan adopted in accordance with the
Investment Company Act Rule 12b-1 (the "Plan"), the Funds will pay to the
distributor an amount computed at an annual rate of 0.25 of 1% of the average
daily net asset value of each Fund's shares to finance any activity which is
principally intended to result in the sale of shares subject to the Plan.

The distributor may from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan to the extent
the expenses attributable to the shares exceed such lower expense limitation as
the distributor may, by notice to the Trust, voluntarily declare to be
effective.

The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers ("brokers")
to provide distribution and/or administrative services as agents for their
clients or customers. Administrative services may include, but are not limited
to, the following functions: providing office space, equipment, telephone
facilities, and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as may reasonably be requested.

The distributor will pay financial institutions a fee based upon shares subject
to the Plan and owned by their clients or customers. The schedules of such fees
and the basis upon which such fees will be paid will be determined from time to
time by the distributor.

The Funds' Plan is a compensation type plan. As such, the Funds make no payments
to the distributor except as described above. Therefore, the Funds do not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Funds, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Funds
under the Plan.

SHAREHOLDER SERVICING ARRANGEMENTS. The distributor may also pay administrators
a fee for providing distribution or administrative services. This fee is in
addition to the amounts paid under the Plan and, if paid, will be reimbursed by
the adviser and not the Fund.

The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.

State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.

ADMINISTRATION OF THE FUNDS

ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate each Fund.
Federated Administrative Services provides these at an annual rate as specified
below:

<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- --------------------- --------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% in excess of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may choose voluntarily to reimburse
or waive a portion of its fee at any time.

CUSTODIAN. Mark Twain Bank, St. Louis, Missouri, is custodian for the
securities and cash of the Funds.

TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO RECORDKEEPER. Federated
Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated Investors,
is transfer agent for the shares of the Funds and dividend disbursing agent for
the Funds. Federated Services Company also provides certain accounting and
recordkeeping services with respect to the portfolio investments of the Funds.

LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.

INDEPENDENT AUDITORS. The independent auditors for the Funds are KPMG Peat
Marwick LLP, Pittsburgh, Pennsylvania.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of a Fund. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Board of Trustees.

Notwithstanding the foregoing, to the extent consistent with applicable
provisions of the Investment Company Act of 1940, Rule 17e-1, and other rules
and exemptions adopted by the Securities and Exchange Commission (the "SEC")
under that Act, the Board of Trustees of the Trust has determined that all
orders for transactions in securities or options on behalf of the Equity Fund
will be placed by

Mark Twain Bank with broker/dealers selected by Mark Twain Bank, including Mark
Twain Brokerage Services, Inc. and other affiliated brokers. The Equity Fund may
use a Mark Twain Brokerage Services, Inc. affiliated broker in a portfolio
transaction when Mark Twain Bank believes that the affiliated broker's charge
for the transaction does not exceed usual and customary levels and is likely to
result in price and execution at least as favorable as those of other qualified
broker/dealers.

EXPENSES OF THE FUNDS

Each Fund pays all of its own expenses and its allocable share of the Trust's
expenses. The expenses for each Fund include, but are not limited to, the cost
of: organizing the Trust and continuing its existence; Trustees' fees;
investment advisory and administrative services; printing prospectuses and other
Fund documents for shareholders; registering the Trust, the Funds and shares of
the Funds; taxes and commissions; issuing, purchasing, repurchasing, and
redeeming shares; fees for custodians, transfer agents, dividend disbursing
agents, shareholder servicing agents, and registrars; printing, mailing,
auditing, accounting, and legal expenses; reports to shareholders and
governmental agencies; meetings of Trustees and shareholders and proxy
solicitations therefor; insurance premiums; association membership dues; and
such nonrecurring and extraordinary items as may arise. It should be noted that
investment companies incur certain expenses such as management fees, and,
therefore, any investment by the Funds in shares of another investment company
would be subject to such duplicate expenses. To the extent that the Funds invest
in the securities of other investment companies, the adviser will waive its
advisory fee on assets invested in open-end management companies.

NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset value per share of each Fund fluctuates. It is determined by
dividing the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.

INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------

SHARE PURCHASES

Shares of the Funds are sold on days on which the New York Stock Exchange and
the Federal Reserve Wire System are open for business. A customer of Mark Twain
Bancshares, Inc. may purchase shares of the Funds through the appropriate
subsidiary of Mark Twain Bancshares, Inc. as described below. In connection with
the sale of shares of the Funds, the distributor may from time to time offer
certain items of nominal value to any shareholder or investor. The Funds reserve
the right to reject any purchase request.

THROUGH MARK TWAIN. To place an order for shares, customers of the Mark Twain
Bank Trust Division may telephone their Mark Twain Trust Officer. Customers of
Mark Twain Brokerage Services, Inc. should contact their individual Mark Twain
broker. Texas residents may telephone Federated Services Company at
1-800-618-8573. Other customers may telephone Mark Twain Brokerage Services,
Inc. at 1-800-866-6040.

Purchase orders must be received by Mark Twain before 3:00 p.m. (St. Louis time)
in order for shares to be purchased at that day's price. Payment may be made to
Mark Twain either by check or federal funds. Purchases by check are considered
received after payment by check is converted into federal funds and received by
Mark Twain. When payment is made with federal funds, the order is considered
received when federal funds are received by Mark Twain. Investors not purchasing
through Mark Twain should consult their financial institutions for wiring
instructions.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in a Fund by an investor is $1,000 unless the
investment is in an IRA, in which case the minimum initial investment is $250.
Employees of Mark Twain Bancshares, Inc. and its subsidiaries, their spouses and
children under 21 may purchase shares with a minimum initial investment of $500.
Subsequent investments must be in amounts of at least $100.

WHAT SHARES COST

Shares of the Funds are sold at their net asset value next determined after an
order is received, plus a sales charge as follows:

<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
- ---------------------------------------------- ------------------------ ---------------------
<S> <C> <C>
Less than $100,000............................ 3.50% 3.63%
$100,000 but less than $250,000............... 2.50% 2.56%
$250,000 but less than $1 million............. 1.50% 1.52%
$1 million or more............................ 0.00% 0.00%
</TABLE>

The net asset value for each of the Funds is determined at the close of trading
on the New York Stock Exchange, currently 4:00 p.m. (New York time) Monday
through Friday, except on: (i) days on which there are not sufficient changes in
the value of a Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

PURCHASES AT NET ASSET VALUE. Shares of the Funds may be purchased at net asset
value, without a sales charge, by current and retired employees of Mark Twain
Bancshares, Inc. and its subsidiaries, Arrow Funds' Trustees, and their spouses
and children under 21, and all qualified retirement plans administered by Mark
Twain Bank. In addition, no sales charge is imposed for Fund shares purchased
through the Mark Twain Bank Trust Department or on customers purchasing pursuant
to a Mark Twain Brokerage Services, Inc. wrap fee program. Shareholders who wish
to obtain more information about the wrap fee program may contact Mark Twain
Brokerage Services, Inc.

DEALER CONCESSIONS. For sales of shares of a Fund, a dealer will normally
receive up to 88% of the applicable sales charge. Any portion of the sales
charge which is not paid to a dealer will be retained by the distributor.
However, the distributor will, periodically, uniformly offer to pay additional
amounts in the form of cash, or promotional incentives consisting of trips to
sales seminars at luxury resorts, tickets or other items, to all dealers selling
shares of a Fund. Such payments, all or a portion of which may be

paid from the sales charge the distributor normally retains or any other source
available to it, will be predicated upon the amount of shares of a Fund that are
sold by that dealer.

The sales charge for shares sold other then through registered broker/dealers
will be retained by the distributor. The distributor may pay fees to banks out
of the sales charge in exchange for sales and/or administrative services
performed on behalf of the bank's customers in connection with the initiation of
customer accounts and purchases of shares.

REDUCING/ELIMINATING THE SALES CHARGE

The sales charge can be reduced or eliminated on the purchase of shares through:

- quantity discounts and accumulated purchases;

- signing a 13-month letter of intent;

- using the reinvestment privilege; or

- concurrent purchases.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases of a Fund's shares reduce the sales charge paid. The
distributor will combine purchases made on the same day by the investors, their
spouses, and the investor's children under age 21 when it calculates the sales
charge. In addition, the sales charge, if applicable, is reduced for purchases
made at one time by a trustee or fiduciary for a single trust estate or a single
fiduciary account.

If an additional purchase of shares of a Fund is made, the distributor will
aggregate such additional purchases with previous purchases of shares of the
Fund, provided the prior purchase is still invested in this Fund. For example,
if a shareholder already owns shares having a current value at the public
offering price of $90,000 and he purchases $10,000 more at the current public
offering price, the sales charge on the additional purchase according to the
schedule now in effect would be 2.50%, not 3.50%.

To receive the sales charge reduction, the distributor must be notified in
writing by the shareholder or by Mark Twain Brokerage Services, Inc. at the time
the purchase is made that Fund shares are already owned or that purchases are
being combined. The Fund will reduce the sales charge after it confirms the
purchase.

LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
Fund shares over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a provision
for a sales charge adjustment depending on the amount actually purchased within
the 13-month period and a provision for the Funds' custodian to hold up to 3.50%
of the total amount intended to be purchased in escrow (in shares of the Fund)
until such purchase is completed.

The amount held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.

This letter of intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. The letter may be dated
as of a prior date to include any purchases made within the past 90 days.

REINVESTMENT PRIVILEGE. If shares in a Fund have been redeemed, the shareholder
has a one-time right, within six months, to reinvest the redemption proceeds at
the next-determined net asset value without any sales charge. The distributor
must be notified by the shareholder in writing or by Mark Twain Brokerage
Services, Inc. of the reinvestment, in order to eliminate a sales charge. If the
shareholder redeems his shares in a Fund, there may be tax consequences.

CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or more
Funds in the Trust, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in shares of one of the
Funds of the Trust with a sales charge, and $70,000 in shares of another Fund
with a sales charge, the sales charge would be reduced on both purchases.

To receive this sales charge reduction, Mark Twain Brokerage Services, Inc. or
the distributor must be notified by the shareholders in writing at the time the
concurrent purchases are made. The Funds will reduce the sales charge after they
confirm the purchases.

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received by the Fund, plus any applicable sales charge. A shareholder may apply
for participation in this program through Mark Twain Brokerage Services, Inc. or
directly through the Fund.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund in writing.

Detailed statements that include account balances, information on each purchase
or redemption, and a report of dividends paid are sent to shareholders not less
frequently than quarterly.

DIVIDENDS AND DISTRIBUTIONS

With respect to the Fixed Income Fund and the Municipal Income Fund, dividends
are declared daily and paid monthly. With respect to the Equity Fund, dividends
are declared and paid quarterly.

Dividends are declared just prior to determining net asset value. Capital gains
realized by a Fund, if any, will be distributed at least once every 12 months.
Dividends and capital gains will be reinvested in additional shares on payment
dates at the ex-dividend date net asset value without a sales charge unless cash
payments are requested by shareholders by writing to the appropriate Fund or
Mark Twain, as appropriate.

EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------

A shareholder may exchange shares of one Fund for shares of any of the other
Funds in the Trust by calling or sending a written request to Mark Twain
Brokerage Services, Inc.

Orders to exchange shares of one Fund for shares of any of the other Funds will
be executed by redeeming the shares owned at net asset value and purchasing
shares of any of the other Funds at the net asset value determined after the
exchange request is received. Orders for exchanges received by a Fund prior to
3:00 p.m. (St. Louis time) on any day that the Fund is open for business will be
executed as of the close of business that day. Orders for exchanges received
after 3:00 p.m. (St. Louis time) on any business day will be executed at the
close of the next business day. Telephone exchange instructions may be recorded.

When exchanging into and out of shares of the Funds in the Trust, shareholders
who have paid a sales load once upon purchasing shares of any Fund, including
those shares obtained through the reinvestment of dividends, will not have to
pay a sales load again on an exchange.

An excessive number of exchanges may be disadvantageous to the Trust. Therefore
the Trust, in addition to its right to reject any exchange, reserves the right
to modify or terminate the exchange privilege of any shareholder who makes more
than six exchanges of shares of the Funds in a year, or three in a calendar
quarter. Shareholders would be notified prior to any modification or
termination.

An exchange order must comply with the requirements for a redemption and must
specify the dollar value or number of shares to be exchanged. Exchanges are
subject to the minimum initial investment requirement of the Fund being
acquired. An exchange constitutes a sale for federal income tax purposes.

The exchange privilege is only available in states where shares of the Fund
being acquired may legally be sold. Before the exchange, a shareholder must
receive a prospectus of the Fund for which the exchange is being made.

If reasonable procedures are not followed by the Funds, they may be liable for
losses due to unauthorized or fraudulent telephone instructions.

REDEEMING SHARES
- --------------------------------------------------------------------------------

Each Fund redeems shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes its net asset value. Telephone or written requests for redemption
must be received in proper form as described below and can be made through Mark
Twain by its respective customers or directly through the Fund by all other
investors.

THROUGH MARK TWAIN

BY TELEPHONE. A shareholder who is a customer of the Mark Twain Bank Trust
Division may telephone their Mark Twain Bank Trust Officer. Customers of Mark
Twain Brokerage Services, Inc.

should contact their individual Mark Twain broker. Other shareholders may
telephone Mark Twain Brokerage Services, Inc. at 1-800-866-6040. Telephone
redemption instructions may be recorded.

For calls received before 3:00 p.m. (St. Louis time), proceeds will normally be
wired within five business days to the shareholder's account at Mark Twain Bank,
or a check will be sent to the address of record. In no event will proceeds be
wired or a check sent more than seven days after a proper request for redemption
has been received. If at any time a Fund shall determine it necessary to
terminate or modify this method of redemption, shareholders would be promptly
notified.

An authorization form permitting a Fund to accept telephone requests must first
be completed. Authorization forms and information on this service are available
from Mark Twain Brokerage Services, Inc. or the distributor.

In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.

If reasonable procedures are not followed by the Funds, they may be liable for
losses due to unauthorized or fraudulent telephone instructions.

BY MAIL. A shareholder who is a customer of Mark Twain Brokerage Services, Inc.
may redeem shares by sending a written request to:

Mark Twain Brokerage Services, Inc.
Attn: Arrow Funds
1630 South Lindebergh
St. Louis, MO 63131

The written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested and the proper
endorsement. If share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail with the written
request. Shareholders should call Mark Twain Brokerage Services, Inc. for
assistance in redeeming by mail.

Shareholders requesting a redemption of $50,000 or more, a redemption of any
amount to be sent to an address other than that on record with the appropriate
Fund, or a redemption payable other than to the shareholder of record must have
signatures on written redemption requests guaranteed by:

- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");

- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;

- a savings and loan association or a savings bank whose deposits are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC; or

- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.

The Funds do not accept signatures guaranteed by a notary public.

The Funds and their transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantors to institutions that are members
of a signature guarantee program. The Funds and their transfer agent reserve the
right to amend these standards at any time without notice.

RECEIVING PAYMENT. Normally, a check for the proceeds is mailed to the
shareholder within one business day, but in no event more than seven days, after
receipt of a proper written redemption request.

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments, the
amount of dividends paid and capital gains distributions with respect to Fund
shares, and the fluctuation of the net asset value of Fund shares redeemed under
this program, redemptions may reduce, and eventually deplete, the shareholder's
investment in a Fund. For this reason, payments under this program should not be
considered as yield or income on the shareholder's investment in a Fund. To be
eligible to participate in this program, a shareholder must have an account
value of at least $10,000. A shareholder may apply for participation in this
program through Mark Twain Brokerage Services, Inc. Due to the fact that shares
are sold with a sales charge, it is not advisable for shareholders to be
purchasing shares while participating in this program.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000.

Before redeeming shares to close an account, a Fund will notify the shareholder
in writing and allow the shareholder 30 days to purchase additional shares to
meet the minimum requirement.

SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

Each share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each Fund in the
Trust have equal voting rights, except that in matters affecting only a
particular Fund, only shares of that Fund are entitled to vote. As a
Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or a Fund's operation and for the election of Trustees
under certain circumstances. As of November 14, 1994, the Trust Division of Mark
Twain Bank, acting in various capacities for numerous accounts, was the owner of
record of 2,992,126 shares (94.78%) of the Equity Fund, and therefore, may, for
certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders. As of November
14, 1994, the Trust Division of Mark Twain Bank, acting in various

capacities for numerous accounts, was the owner of record of 3,414,802 shares
(98.15%) and 2,107,579 shares (96.77%) of the Fixed Income Fund and the
Municipal Income Fund, respectively, and therefore, may, for certain purposes,
be deemed to control the respective Funds and be able to affect the outcome of
certain matters presented for a vote of shareholders.

Trustees may be removed by a two-thirds vote of the number of Trustees prior to
such removal or by a two-thirds vote of the shareholders at a special meeting.
The Trustees shall call a special meeting of shareholders upon the written
request of shareholders owning at least 10% of the Trust's outstanding shares of
all series entitled to vote.

MASSACHUSETTS PARTNERSHIP LAW

Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require inclusion of this disclaimer in each agreement, obligation, or
instrument the Trust or its Trustees enter into or sign.

In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.

EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------

The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
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 their customers. The Funds' adviser, Mark Twain Bank, is
subject to such banking laws and regulations.

Mark Twain Bank believes that it may perform the investment advisory services
for any Fund contemplated by its advisory agreement with the Trust without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent
Mark Twain Bank from continuing to perform all or a part of the above services
for its customers and/or a Fund. In such event, changes in the operation of a
Fund may occur, including the possible alteration or termination of any
automatic or other Fund share investment or redemption services then being
provided by Mark Twain, and the Trustees would consider alternative investment

advisers and other means of continuing available investment services. It is not
expected that a Fund's shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Mark Twain Bank is
found) as a result of any of these occurrences.

TAX INFORMATION
- --------------------------------------------------------------------------------

FEDERAL INCOME TAX

The Funds will pay no federal income tax because each Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.

Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by a Fund
will not be combined for tax purposes with those realized by any of the other
Funds.

Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares.

Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.

ADDITIONAL TAX INFORMATION FOR MUNICIPAL INCOME FUND

Shareholders are not required to pay the federal regular income tax on any
dividends received from the Fund that represent net interest on tax-exempt
municipal bonds. However, under the Tax Reform Act of 1986, dividends
representing net interest earned on certain "private activity" bonds issued
after August 7, 1986, may be included in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for corporations.
The Fund may purchase all types of municipal bonds, including private activity
bonds.

The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular taxable
income of the taxpayer increased by certain "tax preference" items not included
in regular taxable income and reduced by only a portion of the deductions
allowed in the calculation of the regular tax.

Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.

These tax consequences apply whether dividends are received in cash or as
additional shares.

OTHER STATE AND LOCAL TAXES. Distributions representing net interest received
on tax-exempt municipal securities are not necessarily free from income taxes of
any state or local taxing authority. State laws differ on this issue and
shareholders are urged to consult their own tax advisers.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time the Funds may advertise total return and yield. In addition,
the Municipal Income Fund may advertise its tax-equivalent yield.

Total return represents the change, over a specified period of time, in the
value of an investment in a Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.

The yield of each Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by each Fund
over a thirty-day period by the maximum offering price per share of each Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
each Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.

For the Municipal Income Fund, the tax-equivalent yield is calculated similarly
to the yield, but is adjusted to reflect the taxable yield that the Fund would
have had to earn to equal its actual yield, assuming a specific tax rate.

The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return, yield, and tax-equivalent yield.

From time to time, the Funds may advertise their performance using certain
financial publications and/or compare their performance to certain indices.

ADDRESSES
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
Arrow Equity Portfolio Federated Investors Tower
Arrow Fixed Income Portfolio Pittsburgh, Pennsylvania 15222-3779
Arrow Municipal Income Portfolio
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Mark Twain Bank 8820 Ladue Road
St. Louis, Missouri 63124
- ------------------------------------------------------------------------------------------------
Custodian
Mark Twain Bank 8820 Ladue Road
St. Louis, Missouri 63124
- ------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent
and Portfolio Recordkeeper
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick LLP One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>

ARROW FUNDS
ARROW EQUITY PORTFOLIO
ARROW FIXED INCOME PORTFOLIO
ARROW MUNICIPAL
INCOME PORTFOLIO

Prospectus

NOVEMBER 30, 1994

Federated Securities Corp., Distributor.
042749101
042749200
042749309
2110904A (11/94)

ARROW FUNDS
COMBINED STATEMENT OF ADDITIONAL INFORMATION

This Combined Statement of Additional Information relates only to the following
three portfolios (the "Funds") of Arrow Funds (the "Trust"):

Arrow Equity Portfolio;
Arrow Fixed Income Portfolio; and
Arrow Municipal Income Portfolio.

This Combined Statement of Additional Information should be read with the
combined prospectus of the Funds dated November 30, 1994. This Statement is not
a prospectus itself. To receive a copy of the prospectus, write or call the
Funds.

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated November 30, 1994

FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------

Distributor

A subsidiary of FEDERATED INVESTORS

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

GENERAL INFORMATION ABOUT THE TRUST 1
- ---------------------------------------------------------------

INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS 1
- ---------------------------------------------------------------

Types of Investments 1
Portfolio Investments and Strategies 4
Futures and Options Transactions 4
Futures Contracts 4
Stock Index Options 4
Put Options on Financial Futures Contracts 4
Call Options on Financial Futures Contracts 5
"Margin" in Futures Transactions 5
Purchasing Put Options on Portfolio Securities 5
Writing Covered Call Options on Portfolio
Securities 5
Over-the-Counter Options 6
Restricted and Illiquid Securities 6
Temporary Investments 6
Repurchase Agreements 6
Reverse Repurchase Agreements 6
When-Issued and Delayed Delivery
Transactions 7
Lending of Portfolio Securities 7
Investments in Foreign Securities 7
Portfolio Turnover 7
Investment Limitations 7

ARROW FUNDS MANAGEMENT 10
- ---------------------------------------------------------------

Officers and Trustees 10
The Funds 13
Fund Ownership 13
Trustee Liability 13

INVESTMENT ADVISORY SERVICES 13
- ---------------------------------------------------------------

Adviser to the Funds 13
Advisory Fees 14

ADMINISTRATIVE SERVICES 14
- ---------------------------------------------------------------

CUSTODIAN 14
- ---------------------------------------------------------------

SHAREHOLDER SERVICING ARRANGEMENTS 14
- ---------------------------------------------------------------

BROKERAGE TRANSACTIONS 15
- ---------------------------------------------------------------

PURCHASING SHARES 15
- ---------------------------------------------------------------

Distribution Plan 16
Conversion to Federal Funds 16

DETERMINING NET ASSET VALUE 16
- ---------------------------------------------------------------

Determining Market Value of Securities 16

REDEEMING SHARES 17
- ---------------------------------------------------------------

Redemption in Kind 17

TAX STATUS 17
- ---------------------------------------------------------------

The Funds' Tax Status 17
Shareholders' Tax Status 17
Capital Gains 17

TOTAL RETURN 17
- ---------------------------------------------------------------

YIELD 18
- ---------------------------------------------------------------

TAX-EQUIVALENT YIELD 18
- ---------------------------------------------------------------

Tax-Equivalency Table 18

PERFORMANCE COMPARISONS 19
- ---------------------------------------------------------------

FINANCIAL STATEMENTS 19
- ---------------------------------------------------------------

APPENDIX 20
- ---------------------------------------------------------------

GENERAL INFORMATION ABOUT THE TRUST
- --------------------------------------------------------------------------------

The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated July 1, 1992, under the name Mark Twain Funds. Effective October
1, 1994, the Trust changed its name to Arrow Funds and each of the three Funds
to which this Combined Statement of Additional Information relates changed their
respective names from the Mark Twain Equity Portfolio, the Mark Twain Fixed
Income Portfolio and the Mark Twain Municipal Income Portfolio to the Arrow
Equity Portfolio ("Equity Fund"), the Arrow Fixed Income Portfolio ("Fixed
Income Fund") and the Arrow Municipal Income Portfolio ("Municipal Income
Fund"), respectively. This Combined Statement of Additional Information relates
only to the Equity Fund, Fixed Income Fund, and Municipal Income Fund.

INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
- --------------------------------------------------------------------------------

The combined prospectus discusses the objective of each Fund and the policies it
employs to achieve that objective. The following discussion supplements the
description of the Funds' investment policies in the prospectus. The Funds'
respective investment objectives cannot be changed without approval of
shareholders. Unless otherwise indicated, the investment policies described
below may be changed by the Board of Trustees ("Trustees") without shareholder
approval. Shareholders will be notified before any material change in these
policies becomes effective.

TYPES OF INVESTMENTS

EQUITY FUND

The Equity Fund invests primarily in equity securities of companies selected by
the Fund's adviser on the basis of assessment of earnings and the risk and
volatility of each company's businesses.

CONVERTIBLE SECURITIES

The Equity Fund may invest in convertible securities.

The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock when, in the
investment adviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its investment
objective. Otherwise the Fund may hold or trade convertible securities.
In selecting convertible securities for the Fund, the Fund's adviser
evaluates the investment characteristics of the convertible security as a
fixed income instrument, and the investment potential of the underlying
equity security for capital appreciation. In evaluating these matters
with respect to a particular convertible security, the Fund's adviser
considers numerous factors, including the economic and political outlook,
the value of the security relative to other investment alternatives,
trends in the determinants of the issuer's profits, and the issuer's
management capability and practices.

WARRANTS

The Equity Fund may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the
market value of the optioned common stock at issuance) valid for a
specific period of time. Warrants may have a life ranging from less than
a year to twenty years or may be perpetual. However, most warrants have
expiration dates after which they are worthless. In addition, if the
market price of the common stock does not exceed the warrant's exercise
price during the life of the warrant, the warrant will expire as
worthless. Warrants have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in the market
price of the optioned common stock.

FIXED INCOME FUND

The Fixed Income Fund invests primarily in a portfolio of investment grade
bonds. The Fund will only invest its assets in securities which are rated at the
time of purchase in one of the four highest categories by a nationally
recognized statistical rating organization [Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's"), AAA, AA, A or BBB by Standard & Poor's
Ratings Group ("S&P"), or Fitch Investors Service, Inc. ("Fitch")]. The
investment portfolio consists of the following securities:

- - corporate debt securities such as bonds, notes, and debentures;

- - U.S. government securities, including U.S. Treasury bills, notes, and bonds,
and securities issued by agencies and instrumentalities of the U.S.
government;

- - commercial paper; and

- - repurchase agreements.

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

MORTGAGE-RELATED ASSET-BACKED SECURITIES

The Fund may also invest in various mortgage-related asset-backed
securities. These types of investments may include adjustable rate
mortgage securities, CMOs, real estate mortgage investment conduits, or
other securities collateralized by or representing an interest in real
estate mortgages (collectively, "mortgage securities"). The mortgage
securities primarily will have interest rates which reset at least
annually and generally will be issued or guaranteed by government
agencies.

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")

ARMS are pass-through mortgage securities with adjustable rather than
fixed interest rates. The ARMS in which the Fund invests are issued by
the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), and the Federal Home Loan
Mortgage Corporation ("FHLMC") and are actively traded. The underlying
mortgages which collateralize ARMS issued by GNMA are fully guaranteed by
the Federal Housing Administration ("FHA") or Veterans Administration
("VA"), while those collateralizing ARMS issued by FHLMC or FNMA are
typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.

Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the
Fund, would receive monthly scheduled payments of principal and interest,
and may receive unscheduled principal payments representing prepayments
on the underlying mortgages. At the time that a holder of the ARMS
reinvests the payments and any unscheduled prepayments of principal that
it receives, the holder may receive a rate of interest which is actually
lower than the rate of interest paid on the existing ARMS. As a
consequence, ARMS may be a less effective means of "locking in" long-term
interest rates than other types of U.S. government securities.

Like other U.S. government securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the
market value of ARMS generally declines when interest rates rise and
generally rises when interest rates decline.

While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g. investments with
comparable maturities) because as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to
the extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as
ordinary income when distributed to shareholders.

RESETS OF INTEREST

The interest rates paid on the ARMS and CMOs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment
over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include the
one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the National Median Cost of Funds, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime
rate of a specific bank, or commercial paper rates. Some indices, such as
the one-year constant maturity Treasury Note rate, closely mirror changes
in market interest rate levels. Others tend to lag behind changes in
market rate levels and tend to be somewhat less volatile.

CAPS AND FLOORS

The underlying mortgages which collateralize the ARMS and CMOs in which
the Fund invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may
change up or down: (1) per reset or adjustment interval, and (2) over the
life of the loan. Some residential mortgage loans restrict periodic
adjustments by limiting changes in the borrower's monthly principal and
interest payments rather than limiting interest rate changes. These
payment caps may result in negative amortization.

The value of mortgage securities in which the Fund invests may be
affected if market interest rates rise or fall faster and farther than
the allowable caps or floors on the underlying residential mortgage
loans. Additionally, even though the interest rates on the underlying
residential mortgages are adjustable,

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amortization and prepayments may occur, thereby causing the effective
maturities of the mortgage securities in which the Fund invests to be
shorter than the maturities stated in the underlying mortgages.

MUNICIPAL INCOME FUND

CHARACTERISTICS OF INVESTMENTS

The municipal securities in which the Fund invests have the
characteristics set forth in the prospectus.

An unrated municipal security will be determined by the Fund's adviser to
meet the quality standards established by the Trustees if it is of
comparable quality to municipal securities within the Fund's rating
requirements. The Trustees and/or the adviser consider the
creditworthiness of the issuer of a municipal security, the issuer of a
participation interest if the Fund has the right to demand payment from
such issuer, or the guarantor of payment by either of those issuers. The
Fund is not required to sell a municipal security if the security's
rating is reduced below the required minimum subsequent to its purchase
by the Fund. The investment adviser considers this event, however, in its
determination of whether the Fund should continue to hold the security in
its portfolio. If ratings made by Moody's, S&P, or Fitch change because
of changes in those organizations or in their rating systems, the Fund
will try to use comparable ratings as standards in accordance with the
investment policies described in the Fund's prospectus.

TYPES OF ACCEPTABLE INVESTMENTS

Examples of municipal securities are:

- municipal notes and bonds and tax-exempt commercial paper;

- serial notes and bonds sold with a series of maturity dates;

- tax anticipation notes and bonds sold to finance working capital needs
of municipalities in anticipation of receiving taxes at a later date;

- bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;

- prerefunded municipal bonds refundable at a later date (payment of
principal and interest on prerefunded bonds are assured through the
first call date by the deposit in escrow of U.S. government
securities); and

- general obligation bonds secured by a municipality's pledge of
taxation.

PARTICIPATION INTERESTS

The financial institutions from which the Fund purchases participation
interests frequently provide or secure from other financial institutions
irrevocable letters of credit or guarantees and give the Fund the right
to demand payment on specified notice (normally with thirty days) from
the issuer of the letter of credit or guarantee. These financial
institutions may charge certain fees in connection with their repurchase
commitments, including a fee equal to the excess of the interest paid on
the municipal securities over the negotiated yield at which the
participation interests were purchased by the Fund. By purchasing a
participation interest, the Fund is buying a security meeting the
maturity and quality requirements of the Fund and is also receiving the
tax-free benefits of the underlying securities.

In the acquisition of participation interests, the Fund's investment
adviser will consider the following quality factors:

- a high-quality underlying municipal security (of which the Fund takes
possession); or

- a high-quality issuer of the participation interest; or

- a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.

VARIABLE RATE MUNICIPAL SECURITIES

Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations.

Many municipal securities with variable interest rates purchased by the
Fund are subject to repayment of principal (usually within seven days) on
the Fund's demand. The terms of these variable rate demand
instruments require payment of principal and accrued interest from the
issuer of the municipal obligations, the issuer of the participation
interest or a guarantor of either issuer.

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PORTFOLIO INVESTMENTS AND STRATEGIES

FUTURES AND OPTIONS TRANSACTIONS

The Fixed Income and Equity Funds may engage in futures and options transactions
as described below.

As a means of reducing fluctuations in the net asset value of shares of the
Funds, the Funds may attempt to hedge all or a portion of their portfolio
through the purchase of put options on portfolio securities and put options on
financial futures contracts for portfolio securities. The Funds may attempt to
hedge all or a portion of their portfolio by buying and selling financial
futures contracts, and writing call options on futures contracts. The Funds may
also write covered call options on portfolio securities to attempt to increase
current income.

The Funds will maintain their position in securities, options and segregated
cash subject to puts and calls until the options are exercised, closed, or have
expired. An option position may be closed out over-the-counter or on an exchange
which provides a secondary market for options of the same series.

FUTURES CONTRACTS

The Funds may enter into futures contracts. A futures contract is a firm
commitment by two parties: the seller who agrees to sell a specific type of
security called for in the contract ("going short") and the buyer who agrees to
purchase the security ("going long") at a certain time in the future.

Financial futures contracts call for the delivery of particular debt instruments
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government at a certain time in the future. Stock
index futures contracts are similar to financial futures contracts, but their
price is based upon fluctuations in a particular index of stock prices during a
specified period, such as the S&P 500 Index. No physical delivery of the
underlying securities in the index is made.

The purpose of the acquisition or sale of a futures contract by a Fund is to
protect it from fluctuations in the value of securities caused by unanticipated
changes in interest rates or stock prices without necessarily buying or selling
securities. For example, in the fixed income securities market, price moves
inversely to interest rates. A rise in rates means a drop in price. Conversely,
a drop in rates means a rise in price. In order to hedge its holdings of fixed
income securities against a rise in market interest rates, a Fund could enter
into contracts to "go short" to protect itself against the possibility that the
prices of its fixed income securities may decline during the Fund's anticipated
holding period. The Fund would "go long" to hedge against a decline in market
interest rates.

STOCK INDEX OPTIONS

The Funds may purchase put options on stock indexes listed on national
securities exchanges or traded in the over-the-counter market. A stock index
fluctuates with changes in the market values of the stocks included in the
index.

The effectiveness of purchasing stock index options will depend upon the extent
to which price movements in the Funds' portfolio correlate with price movements
of the stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether the Funds will realize a gain or loss from the purchase of options on an
index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Funds of options on stock indexes will be subject to the
ability of the adviser to predict correctly movements in the direction of the
stock market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual stocks.

PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS

The Funds may purchase and write listed put options on financial futures
contracts. The Funds would use these options only to protect portfolio
securities against decreases in value resulting from market factors such as
anticipated increases in interest rates.

Unlike entering directly into a futures contract, which requires the purchaser
to buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related futures contracts
will also decrease in value and the option will increase in value. In such an
event, a Fund will normally close out its option by
selling an identical option. If the hedge is successful, the proceeds received
by a Fund upon the sale of the second option will be large enough to offset both
the premium paid by a Fund for the original option plus the realized decrease in
value of the hedged securities.

Alternatively, a Fund may exercise its put option to close out the position. To
do so, it would simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of the option) and

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exercise the option. A Fund would then deliver the futures contract in return
for payment of the strike price. If a Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option contract, and
only the premium paid for the contract will be lost.

CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS

In addition to purchasing put options on futures, a Fund may write listed call
options on financial futures contracts or over-the-counter call options on
futures contracts, to hedge their portfolios against an increase in market
interest rates. When a Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures position (selling a
futures contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise and cause the
price of futures to decrease, a Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing the value of
a Fund's call option position to increase.

In other words, as the underlying future's price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that a
Fund keeps the premium received for the option. This premium can help
substantially offset the drop in value of a Fund's portfolio securities.

Prior to the expiration of a call written by a Fund, or exercise of it by the
buyer, a Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the premium
received by a Fund for the initial option. The net premium income of a Fund will
then substantially offset the realized decrease in value of the hedged
securities.

A Fund will not maintain open positions in futures contracts it has sold or call
options it has written on financial futures contracts if, in the aggregate, the
value of the open positions (marked to market) exceeds the current market value
of its securities portfolio plus or minus the unrealized gain or loss on those
open positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, a Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.

"MARGIN" IN FUTURES TRANSACTIONS

Unlike the purchase or sale of a security, the Funds do not pay or receive money
upon the purchase or sale of a futures contract. Rather, the Funds are required
to deposit an amount of "initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that a futures contract's initial margin does not involve the borrowing by a
Fund to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to a
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied.

A futures contract held by a Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day a Fund pays or receives
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by a Fund but is instead settlement
between a Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value, a Fund will
mark to market its open futures positions.

The Funds are also required to deposit and maintain margin when they write call
options on futures contracts.

PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES

The Funds, including the Municipal Income Fund, may purchase put options on
portfolio securities to protect against price movements in particular securities
in their respective portfolios. A put option gives a Fund, in return for a
premium, the right to sell the underlying security to the writer (seller) at a
specified price during the term of the option.

WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES

The Funds may also write covered call options to generate income. As the writer
of a call option, a Fund has the obligation, upon exercise of the option during
the option period, to deliver the underlying security upon payment of the
exercise price. A Fund may sell call options either on securities held in its
portfolio or on securities which it has the right to obtain without payment of
further consideration (or securities for which it has segregated cash in the
amount of any additional consideration).

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OVER-THE-COUNTER OPTIONS

The Funds may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
for those options on portfolio securities held by a Fund and not traded on an
exchange.

RESTRICTED AND ILLIQUID SECURITIES

The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Funds believe that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities (eligible for resale under Rule 144A) to
the Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:

- - the frequency of trades and quotes for the security;

- - the number of dealers willing to purchase or sell the security and the number
of other potential buyers;

- - dealer undertakings to make a market in the security; and

- - the nature of the security and the nature of the marketplace trades.

TEMPORARY INVESTMENTS

The Equity and Municipal Income Funds may also invest in temporary investments
from time to time for defensive purposes.

MONEY MARKET INSTRUMENTS

The Funds may invest in the following money market instruments:

- instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or
if the principal amount of the instrument is insured in full by the
Bank Insurance Fund ("BIF"), which is administered by the Federal
Deposit Insurance Corporation ("FDIC"), or the Savings Association
Insurance Fund ("SAIF"), which is administered by the FDIC; and

- prime commercial paper (rated A-1 by S&P, Prime-1 by Moody's, or F-1 by
Fitch).

U.S. GOVERNMENT OBLIGATIONS

The types of U.S. government obligations in which the Funds may invest
are described in the combined prospectus under "U.S. Government
Securities" and in the section entitled "U.S. Government Obligations"
under the Fixed Income Fund in this Combined Statement of Additional
Information.

REPURCHASE AGREEMENTS

The Funds require their custodian to take possession of the securities subject
to repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities from a
Fund, a Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
a Fund and allow retention or disposition of such securities. The Funds will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the adviser to be
creditworthy pursuant to guidelines established by the Trustees.

REVERSE REPURCHASE AGREEMENTS

The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement a Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future it will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable a Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that a Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.

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When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated on the applicable Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

These transactions are made to secure what is considered to be an advantageous
price or yield for a Fund.

No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the applicable Fund sufficient to make payment for the
securities to be purchased are segregated on the Fund's records at the trade
date. These assets are marked to market daily and are maintained until the
transaction has been settled. The Funds do not intend to engage in when-issued
and delayed delivery transactions to an extent that would cause the segregation
of more than 20% of the total value of their respective assets.

LENDING OF PORTFOLIO SECURITIES

The collateral received when a Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of a Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. A Fund would not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.

INVESTMENTS IN FOREIGN SECURITIES

In addition to the risks associated with foreign securities disclosed in the
combined prospectus under "Investments in Foreign Securities," additional
differences exist between investing in foreign and domestic securities. Examples
of such differences include:

- - less publicly available information about foreign issuers;

- - credit risks associated with certain foreign governments;

- - the lack of uniform financial accounting standards applicable to foreign
issuers;

- - less readily available market quotations on foreign issues;

- - the likelihood that securities of foreign issuers may be less liquid or more
volatile;

- - generally higher foreign brokerage commissions; and

- - unreliable mail service between countries.

PORTFOLIO TURNOVER

Although the Funds do not intend to invest for the purpose of seeking short-term
profits, securities in their portfolios will be sold whenever the adviser
believes it is appropriate to do so in light of the Funds' investment objective,
without regard to the length of time a particular security may have been held.
During the fiscal year ended September 30, 1994, and for the period from
November 24, 1992 (the Trust's effective date) to September 30, 1993, the
Equity, Fixed Income, and Municipal Income Funds' portfolio turnover rates were
127%, 28%, and 27%, and 54%, 28%, and 14%, respectively.

INVESTMENT LIMITATIONS

ISSUING SENIOR SECURITIES AND BORROWING MONEY

The Funds will not issue senior securities, except that a Fund may borrow
money directly or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amount
borrowed; and except to the extent that a Fund may enter into futures
contracts (Fixed Income and Equity Funds). The Funds will not borrow
money or engage in reverse repurchase agreements for investment leverage,
but rather as a temporary, extraordinary, or emergency measure to
facilitate management of the portfolio by enabling a Fund to, for
example, meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. In addition,
the Municipal Income Fund reserves the right to purchase municipal
securities which the Fund has the right or obligation to sell to a third
party (including the issuer of a participation interest). A Fund will not
purchase any securities while any borrowings in excess of 5% of its total
assets are outstanding.

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SELLING SHORT AND BUYING ON MARGIN

The Funds will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as are necessary for
clearance of purchases and sales of securities.

With regard to the Fixed Income and Equity Funds, the deposit or payment
by the Funds of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.

LENDING CASH OR SECURITIES

The Funds will not lend any of their respective assets except portfolio
securities up to one-third of the value of total assets. The Municipal
Income Fund may acquire publicly or non-publicly issued municipal bonds
or temporary investments or enter into repurchase agreements in
accordance with its investment objective, policies, and limitations or
its Declaration of Trust. The Funds shall not be prevented from
purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by a Fund's investment objective, policies, and limitations.

INVESTING IN COMMODITIES

None of the Funds will purchase or sell commodities, commodity contracts,
or commodity futures contracts except to the extent that the Fixed Income
and Equity Funds may engage in transactions involving financial futures
contracts or options on financial futures contracts.

INVESTING IN REAL ESTATE

None of the Funds will purchase or sell real estate, including limited
partnership interests, although the Funds may invest in securities of
issuers whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or which represent interests
in real estate.

DIVERSIFICATION OF INVESTMENTS

With respect to 75% of the value of their respective total assets, a Fund
will not purchase securities issued by any one issuer (other than cash,
cash items or securities issued or guaranteed by the government of the
United States or its agencies or instrumentalities and repurchase
agreements collateralized by such securities), if as a result more than
5% of the value of their total assets would be invested in the securities
of that issuer. The Funds will not acquire more than 10% of the
outstanding voting securities of any one issuer.

For the Municipal Income Fund, under this limitation, each governmental
subdivision, including states and the District of Columbia, territories,
possessions of the United States, or their political subdivisions,
agencies, authorities, instrumentalities, or similar entities, will be
considered a separate issuer if its assets and revenues are separate from
those of the governmental body creating it and the security is backed
only by its own assets and revenues.

Industrial development bonds backed only by the assets and revenues of a
nongovernmental user are considered to be issued solely by that user. If
in the case of an industrial development bond or government-issued
security, a governmental or some other entity guarantees the security,
such guarantee would be considered a separate security issued by the
guarantor, subject to a limit on investments in the guarantor of 10% of
total assets.

CONCENTRATION OF INVESTMENTS

A Fund will not invest 25% or more of the value of its respective total
assets in any one industry. However, a Fund may invest more than 25% of
the value of its total assets in cash or certain money market instruments
(including instruments issued by a U.S. branch of a domestic bank or
savings and loan having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment), securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities and
repurchase agreements collateralized by such securities.

The Municipal Income Fund does not intend to purchase securities (other
than securities guaranteed by the U.S. government or its agencies or
direct obligations of the U.S. government) if, as a result of such
purchases, 25% or more of the value of its total assets would be invested
in a governmental subdivision in any one state, territory, or possession
of the United States. This policy applies to securities which are related
in such a way that an economic, business, or political development
affecting one security would also affect the other securities (such as
securities paid from revenues from selected projects in transportation,
public works, education, or housing).

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UNDERWRITING

A Fund will not underwrite any issue of securities, except as a Fund may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.

The above limitations cannot be changed with respect to a Fund without approval
of the holders of a majority of that Fund's shares. The following limitations
may be changed by the Trustees without shareholder approval. Shareholders will
be notified before any material change in these limitations becomes effective.

PLEDGING ASSETS

The Funds will not mortgage, pledge, or hypothecate any assets, except to
secure permitted borrowings. In these cases, the Funds may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets of a Fund at the time of the
pledge. The purchase of securities on a when-issued basis will not be
deemed to be a pledge of a Fund's assets. For purposes of this
limitation, with respect to the Fixed Income and Equity Funds, the
following will not be deemed to be pledges of a Fund's assets: (a) the
deposit of assets in escrow in connection with the writing of covered put
or call options and (b) collateral arrangements with respect to (i) the
purchase and sale of stock options (and options on stock indexes) and
(ii) initial or variation margin for futures contracts.

INVESTING IN ILLIQUID SECURITIES

The Funds will not invest more than 15% of the value of their respective
net assets in illiquid securities, including repurchase agreements
providing for settlement more than seven days after notice,
over-the-counter options, certain restricted securities not determined by
the Trustees to be liquid, and non-negotiable time deposits with
maturities over seven days. For the Municipal Income Fund, illiquid
securities may also include participation interests and variable rate
municipal securities without a demand feature or with a demand feature of
longer than seven days and which the adviser believes cannot be sold
within seven days.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Funds will limit their respective investment in other investment
companies to no more than 3% of the total outstanding voting stock of any
investment company, invest no more than 5% of their respective total
assets in any one investment company, and invest no more than 10% of
their respective total assets in investment companies in general. The
Funds will purchase securities of closed-end investment companies only in
open market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization, or acquisition of
assets. It should be noted that investment companies incur certain
expenses such as management fees and, therefore, any investment by a Fund
in shares of another investment company would be subject to such
duplicate expenses.

INVESTING IN RESTRICTED SECURITIES

A Fund will not invest more than 10% of the value of its total assets in
securities subject to restrictions on resale under the Securities Act of
1933.

INVESTING IN PUT OPTIONS

The Equity and Fixed Income Funds will not purchase put options on
securities, unless the securities are held in a Fund's portfolio and not
more than 5% of the value of a Fund's total assets would be invested in
premiums on open put option positions.

WRITING COVERED CALL OPTIONS

The Equity and Fixed Income Funds will not write call options on
securities unless the securities are held in a Fund's portfolio or unless
a Fund is entitled to them in deliverable form without further payment or
after segregating cash in the amount of any further payment.

INVESTING IN NEW ISSUERS

A Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor. The
Fixed Income Fund will apply this limitation by reference to the issuer
of a CMO (or other mortgage-related asset-backed security) rather than
requiring that the CMO (or other mortgage-related asset-backed security)
itself have at least three years of continuous operations.

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

INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST

A Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.

INVESTING IN MINERALS

A Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except they may purchase
the securities of issuers which invest in or sponsor such programs.

PURCHASING SECURITIES TO EXERCISE CONTROL

The Equity Fund will not purchase securities of a company for the purpose
of exercising control or management.

INVESTING IN WARRANTS

The Equity Fund will not invest more than 5% of its net assets in
warrants, including those acquired in units or attached to other
securities. To comply with certain state restrictions, the Fund will
limit its investment in such warrants not listed on the New York or
American Stock Exchanges to 2% of its net assets. (If state restrictions
change, this latter restriction may be revised without notice to
shareholders.) For purposes of this investment restriction, warrants will
be valued at the lower of cost or market, except that warrants acquired
by the Fund in units with or attached to securities may be deemed to be
without value.

Except with respect to the Funds' policy of borrowing money, if a percentage
limitation is adhered to at the time of investment, a later increase or decrease
in percentage resulting from any change in value or net assets will not result
in a violation of such restriction.

To comply with registration requirements in certain states, the Equity and Fixed
Income Funds (1) will limit the aggregate value of the assets underlying covered
call options or put options written by a Fund to not more than 25% of its net
assets, (2) will limit the premiums paid for options purchased by a Fund to 5%
of its net assets and (3) will limit the margin deposits on futures contracts
entered into by a Fund to 5% of its net assets. In addition, to comply with
restrictions in certain states, the Equity Fund will limit its investment in
restricted securities to 5% of its net assets. (If state requirements change,
these restrictions may be revised without shareholder notification.)

The Fund does not expect to borrow money in excess of 5% of the value of its net
assets during the coming fiscal year.

For purposes of their policies and limitations, the Funds consider certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings and loan having capital, surplus and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."

ARROW FUNDS MANAGEMENT
- --------------------------------------------------------------------------------

OFFICERS AND TRUSTEES

Officers and Trustees are listed with their addresses, present positions with
Arrow Funds, and principal occupations.
- --------------------------------------------------------------------------------

John F. Donahue+*
Federated Investors Tower
Pittsburgh, PA

Chairman and Trustee

Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue, Vice
President and Trustee.
- --------------------------------------------------------------------------------

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

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL

Trustee

President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
- --------------------------------------------------------------------------------

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA

Trustee

Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank
Corp. and Director,
Ryan Homes, Inc.
- --------------------------------------------------------------------------------

James E. Dowd
571 Hayward Mill Road
Concord, MA

Trustee

Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- --------------------------------------------------------------------------------

Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA

Trustee

Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Professor of Medicine and Trustee, University of Pittsburgh; Director of
Corporate Health, University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
- --------------------------------------------------------------------------------

Edward L. Flaherty, Jr.+
5916 Penn Mall
Pittsburgh, PA

Trustee

Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park Restaurants,
Inc., and Statewide Settlement Agency, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A.,
Western Region.
- --------------------------------------------------------------------------------

Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA

Vice President and Treasurer and Trustee

Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------

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

Peter E. Madden
225 Franklin Street
Boston, MA

Trustee

Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------

Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA

Trustee

Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A.
- --------------------------------------------------------------------------------

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA

Trustee

Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for International Peace, RAND Corporation, Online Computer Library Center, Inc.,
and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
- --------------------------------------------------------------------------------

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA

Trustee

Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA

Vice President

President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing General
Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue,
Chairman and Trustee of the Trust.
- --------------------------------------------------------------------------------

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA

Vice President

Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------

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

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA

Vice President and Secretary

Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated Administrative
Services; Secretary and Trustee, Federated Shareholder Services; Executive Vice
President and Director, Federated Securities Corp.; Vice President and Secretary
of the Funds.
- --------------------------------------------------------------------------------

Charles L. Davis, Jr.
Federated Investors Tower
Pittsburgh, PA

Vice President and Assistant Treasurer

Vice President, Federated Administrative Services; Vice President and Assistant
Treasurer of some of the Funds; formerly, Vice President and Director of
Investor Relations, MNC Financial, Inc. and Vice President, Product Management,
MNC Financial, Inc.
- --------------------------------------------------------------------------------

* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.

+ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board of Trustees between meetings
of the Board.

THE FUNDS

"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated
Intermediate Government Trust; Federated Master Trust; Federated Municipal
Trust; Federated Short-Intermediate Government Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated
U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund,
Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money
Market Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid
Cash Trust; Managed Series Trust; The Medalist Funds; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut
Funds; Short-Term Municipal Trust; Star Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.

FUND OWNERSHIP

Officers and Trustees own less than 1% of the outstanding shares of each Fund.

TRUSTEE LIABILITY

The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.

INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------

ADVISER TO THE FUNDS

The Trust's investment adviser is Mark Twain Bank, the Funds' adviser (the
"Adviser"), which is a wholly owned subsidiary of Mark Twain Bancshares, Inc.

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

Because of internal controls maintained by Mark Twain Bank to restrict the flow
of non-public information, investments by a Fund are typically made without any
knowledge of Mark Twain Bank's or its affiliates' lending relationship with an
issuer.

The Adviser shall not be liable to the Trust, a Fund, or any shareholder of any
of the Funds for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the Trust.

ADVISORY FEES

For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.

For the fiscal year ended September 30, 1994, the Funds' Adviser earned advisory
fees of $234,468, $228,546, and $172,640 for the Equity Fund, the Fixed Income
Fund and the Municipal Income Fund, respectively, of which $9,037, $2,736 and
$136,730 was waived. For the period from January 4, 1993 (date of initial public
investment) to September 30, 1993 for the Equity Fund and Fixed Income Fund and
from February 1, 1993 (date of initial public investment) to September 30, 1993
for the Municipal Income Fund, the Adviser earned advisory fees from the Equity
Fund, the Fixed Income Fund, and the Municipal Income Fund of $154,818,
$167,645, and $98,501, of which $10,480, $4,430 and $84,267 was waived,
respectively.

STATE EXPENSE LIMITATIONS

The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If a Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.

If a Fund's monthly projected operating expenses exceed this limitation,
the investment advisory fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.

This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.

ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------

Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Funds for the fees set forth in the
prospectus. For the fiscal year ended September 30, 1994, the Equity Fund, Fixed
Income Fund and Municipal Income Fund , respectively, incurred costs for
administrative services of $50,000, $57,055 and $50,000. For the period from
January 4, 1993 (date of initial public investment) to September 30, 1993 for
the Equity Fund and Fixed Income Fund and from February 1, 1993 (date of initial
public investment) to September 30, 1993 for the Municipal Income Fund, the
Funds incurred costs for administrative services of $36,849, $41,822, and
$21,064 respectively.

CUSTODIAN
- --------------------------------------------------------------------------------

Under the Custodian Agreement, Mark Twain Bank holds the Funds' portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. For its services, the custodian receives an annual fee equal to
0.025 of 1% of each Fund's average daily net assets subject to a minimum fee of
$2,000 per month.

SHAREHOLDER SERVICING ARRANGEMENTS
- --------------------------------------------------------------------------------

The distributor pays fees to brokers and dealers for distribution and
administrative services and to administrators for administrative services. The
administrative services include, but are not limited to, providing office space,
equipment, telephone facilities, and various personnel, including clerical,
supervisory, and computer, as is necessary or beneficial to establish and
maintain shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding a Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such other
services as a Fund may reasonably request.

BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Trustees.

The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Funds or to the
Adviser and may include:

- - advice as to the advisability of investing in securities;

- - security analysis and reports;

- - economic studies;

- - industry studies;

- - receipt of quotations for portfolio evaluations; and

- - similar services.

The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.

Research services provided by brokers may be used by the Adviser in advising the
Funds and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.

Although investment decisions for the Funds are made independently from those of
the other accounts managed by the Adviser, investments of the type a Fund may
make may also be made by those other accounts. When a Fund and one or more other
accounts managed by the Adviser are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained or disposed of by a Fund. In other cases,
however, it is believed that coordination and the ability to participate in
volume transactions will be to the benefit of the Funds.

The Trustees of the Trust have determined that portfolio transactions for the
Equity Fund may be executed through Mark Twain Brokerage Services, Inc. and
other affiliated broker/dealers if, in the judgment of Mark Twain Bank, the use
of Mark Twain Brokerage Services, Inc. or an affiliated broker is likely to
result in prices and execution at least as favorable as those of other qualified
broker/dealers and if, in such transactions, the affiliated broker/dealer
charges the Equity Fund a rate consistent with that charged to comparable
unaffiliated customers in similar transactions. Mark Twain Brokerage Services,
Inc. will not participate in commissions from brokerage given by the Equity Fund
to other brokers or dealers. In addition, pursuant to an exemption granted by
the SEC, the Equity Fund may engage in transactions involving certain money
market instruments with Mark Twain Brokerage Services, Inc. or particular
affiliates acting as principal. Over-the-counter purchases and sales are
transacted directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere.

Under rules adopted by the SEC, Mark Twain Brokerage Services, Inc. may not
execute transactions for the Equity Fund on the floor of any national securities
exchange, but may effect transactions for the Equity Fund by transmitting orders
for execution, providing for clearance and settlement, and arranging for the
performance of those functions by members of the exchange not associated with
Mark Twain Brokerage Services, Inc. Mark Twain Brokerage Services, Inc. will be
required to pay fees charged by those persons performing the floor brokerage
elements out of the brokerage compensation it receives from the Equity Fund. The
Equity Fund has been advised by Mark Twain Brokerage Services, Inc. that on most
transactions, the floor brokerage generally constitutes from between three-
quarters of a cent and one cent per share, which may be as high as 20% of the
total commissions paid.

For the fiscal year ended September 30, 1994, the Equity Fund paid $111,324 in
brokerage commission on brokerage transactions and for the period from January
4, 1993 (date of initial public investment) to September 30, 1993, the Equity
Fund paid $50,423 in brokerage commissions on brokerage transactions.

For the fiscal year ended September 30, 1994 and for the period from January 4,
1993 (date of initial public investment) to September 30, 1993, the Equity Fund
did not execute any portfolio transactions through Mark Twain Brokerage
Services, Inc.

PURCHASING SHARES
- --------------------------------------------------------------------------------

Except under certain circumstances as described in the prospectus, shares of the
Funds are sold at their net asset value with a sales charge on days the New York
Stock Exchange is open for business. The procedure for purchasing shares of the
Funds is explained in the prospectus under "Investing in the Funds."

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

DISTRIBUTION PLAN

With respect to the Funds, the Trust has adopted a Plan pursuant to Rule 12b-1
(the "Plan") which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940. The Plan provides for payment of
fees to Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of a Fund's shares subject to the Plan. Such
activities may include the advertising and marketing of shares of a Fund;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, Federated Securities Corp. may pay
fees to brokers for distribution and administrative services and to
administrators for administrative services provided to a Fund. The
administrative services are provided by a representative who has knowledge of
the shareholder's particular circumstances and goals, and include, but are not
limited to: communicating account openings; communicating account closings;
entering purchase transactions; entering redemption transactions; providing or
arranging to provide accounting support for all transactions, wiring funds and
receiving funds for purchases and redemptions of a Fund's shares, confirming and
reconciling all transactions, reviewing the activity in Fund accounts and
providing training and supervision of broker personnel; posting and reinvesting
dividends to Fund accounts or arranging for this service to be performed by the
Fund's transfer agent; and maintaining and distributing current copies of
prospectuses and shareholder reports to the beneficial owners of a Fund's shares
and prospective shareholders.

The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow a Fund to achieve economic viability.
It is also anticipated that an increase in the size of a Fund will facilitate
more efficient portfolio management and assist a Fund in seeking to achieve its
investment objectives.

For the fiscal year ended September 30, 1994, brokers and administrators
(financial institutions) received fees on behalf of the Equity Fund, the Fixed
Income Fund, and the Municipal Income Fund, respectively, of $78,171, $95,223,
and $61,650, pursuant to the Plan, all of which was voluntarily waived. For the
period from January 4, 1993 (date of initial public investment) to September 30,
1993 for the Equity Fund and Fixed Income Fund and from February 1, 1993 (date
of initial public investment) to September 30, 1993 for the Municipal Income
Fund, brokers and administrators (financial institutions) received fees on
behalf of the Equity Fund, the Fixed Income Fund, and the Municipal Income Fund,
of $51,605, $69,858, and $35,179, pursuant to the Plan, all of which was
voluntarily waived.

CONVERSION TO FEDERAL FUNDS

It is the Funds' policy to be as fully invested as possible so that maximum
interest or dividends may be earned. To this end, all payments from shareholders
must be in federal funds or be converted into federal funds. Mark Twain Bank and
Federated Services Company act as the shareholder's agents in depositing checks
and converting them to federal funds.

DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------

Net asset values of the Funds generally change each day. The days on which the
net asset value is calculated by these Funds are described in the prospectus.

DETERMINING MARKET VALUE OF SECURITIES

The market value of the Funds' portfolio securities are determined as follows:

- - for equity securities, according to the last sale price on a national
securities exchange, if available;

- - in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;

- - for unlisted equity securities, the latest bid prices;

- - for bonds and other fixed income securities, as determined by an independent
pricing service;

- - for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service or for short-term obligations
with remaining maturities of less than 60 days at the time of purchase, at
amortized cost; or

- - for all other securities, at fair value as determined in good faith by the
Trustees.

Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.

The Funds will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Trustees determine in good faith
that

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

another method of valuing option positions is necessary to appraise their fair
value. Over-the-counter put options will be valued at the mean between the bid
and the asked prices.

REDEEMING SHARES
- --------------------------------------------------------------------------------

Shares are redeemed at the next computed net asset value after a Fund receives
the redemption request. Redemption procedures are explained in the prospectus
under "Redeeming Shares."

REDEMPTION IN KIND

The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which a Fund is obligated to redeem shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of a Fund's net asset value
during any 90-day period.

Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.

Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.

TAX STATUS
- --------------------------------------------------------------------------------

THE FUNDS' TAX STATUS

The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:

- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;

- - derive less than 30% of its gross income from the sale of securities held less
than three months;

- - invest in securities within certain statutory limits; and

- - distribute to its shareholders at least 90% of its net income earned during
the year.

SHAREHOLDERS' TAX STATUS

Shareholders of the Equity and Fixed Income Funds are subject to federal income
tax on dividends received as cash or additional shares. These dividends, and any
short-term capital gains, are taxable as ordinary income. With respect to the
Fixed Income Fund, no portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations.

CAPITAL GAINS

Long-term capital gains distributed to shareholders will be treated as long-term
capital gains regardless of how long shareholders have held shares.

TOTAL RETURN
- --------------------------------------------------------------------------------

The Equity Fund's average annual total return for the one-year period ended
September 30, 1994 and for the period from January 4, 1993 (date of initial
public investment) to September 30, 1994 were (5.24)% and (2.71)%, respectively.
The Fixed Income Fund's average annual total return for the one year period
ended September 30, 1994 and for the period from January 4, 1993 (date of
initial public investment) to September 30, 1994 were (11.08)% and (0.17)%,
respectively.

The Municipal Income Fund's average annual total return for the one year period
ended September 30, 1994 and for the period from February 1, 1993 (date of
initial public investment) to September 30, 1994 were (5.78)% and 1.83%,
respectively.

The average annual return for a Fund is the average compounded rate of return
for a given period that would equate a $1,000 initial investment to the ending
redeemable value of that investment. The ending redeemable value is computed by
multiplying the number of shares owned in such Fund at the end of the period by
the net asset value per share for such Fund at the end of the period. The number
of shares owned in a Fund at the end of the period is based on the number of
shares purchased in such Fund at the beginning of the period with $1,000, less
any

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

applicable sales load, adjusted over the period by any additional shares,
assuming monthly or quarterly reinvestment, as applicable, of all dividends and
distributions.

YIELD
- --------------------------------------------------------------------------------

The yield for the Equity Fund, the Fixed Income Fund, and the Municipal Income
Fund for the thirty-day period ended September 30, 1994 was 0.68%, 6.30%, and
4.74%, respectively.

The yield for the Funds is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a 12-month period
and is reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments required by
the Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.

To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders paying those fees.

TAX-EQUIVALENT YIELD
- --------------------------------------------------------------------------------

The tax-equivalent yield for the Municipal Income Fund for the thirty-day period
ended September 30, 1994 was 7.85%. The tax-equivalent yield of the Municipal
Income Fund is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that the Fund would have had to earn to equal its actual yield,
assuming a 39.60% tax rate (the maximum effective federal rate for individuals)
and assuming that income is 100% tax-exempt.

TAX-EQUIVALENCY TABLE

The Municipal Income Fund may also use a tax-equivalency table in advertising
and sales literature. The interest earned by the municipal bonds in the Fund's
portfolio generally remains free from federal regular income tax,* and is often
free from state and local taxes as well. As the table below indicates, a
"tax-exempt" investment is an attractive choice for investors, particularly in
times of narrow spreads between tax-free and taxable yields.

TAXABLE YIELD EQUIVALENT FOR 1994
MULTISTATE MUNICIPAL FUND

FEDERAL INCOME TAX BRACKET:

<TABLE>
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
- ----------------------------------------------------------------------------------------------------------------
Joint Return: $1-38,000 $38,001-91,850 $91,851-140,000 $140,001-250,000 Over $250,000
Single Return: $1-22,750 $22,751-55,100 $55,101-115,000 $115,001-250,000 Over $250,000
- ----------------------------------------------------------------------------------------------------------------
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50 1.76 2.08 2.17 2.34 2.48
2.00 2.35 2.78 2.90 3.13 3.31
2.50 2.94 3.47 3.62 3.91 4.14
3.00 3.53 4.17 4.35 4.69 4.97
3.50 4.12 4.86 5.07 5.47 5.79
4.00 4.71 5.56 5.80 6.25 6.62
4.50 5.29 6.25 6.52 7.03 7.45
5.00 5.88 6.94 7.25 7.81 8.28
5.50 6.47 7.64 7.97 8.59 9.11
6.00 7.06 8.33 8.70 9.38 9.93
6.50 7.65 9.03 9.42 10.16 10.76
7.00 8.24 9.72 10.14 10.94 11.59
7.50 8.82 10.42 10.87 11.72 12.42
8.00 9.41 11.11 11.59 12.50 13.25
</TABLE>

Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent.

The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of the Fund.

* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.

PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------

Each Fund's performance depends upon such variables as:

- - portfolio quality;

- - average portfolio maturity;

- - type of instruments in which the portfolio is invested;

- - changes in interest rates and market value of portfolio securities;

- - changes in each Fund's expenses; and

- - various other factors.

Each Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.

Investors may use financial publications and/or indices to obtain a more
complete view of a Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which a Fund uses in advertising may include:

- - LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) index is comprised of
approximately 5,000 issues which include non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine years. Tracked
by Shearson Lehman Brothers, Inc., the index calculates total returns for one
month, three month, twelve month and ten year periods and year-to-date.

- - LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time.
From time to time, the Fund will quote its Lipper ranking in the applicable
funds category in advertising sales literature.

- - DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations. The DJIA indicates daily changes in the
average price of stock of these corporations. Because it represents the top
corporations of America, the DJIA index is a leading economic indicator for
the stock market as a whole.

- - STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, is a composite
index of common stocks in industry, transportation, and financial and public
utility companies. In addition, the Standard & Poor's index assumes
reinvestment of all dividends paid by stocks listed on the index. Taxes due on
any of these distributions are not included, nor are brokerage or other fees
calculated in the Standard & Poor's figures.

- - LEHMAN BROTHERS FIVE-YEAR STATE GENERAL OBLIGATION BONDS is an index comprised
of all state general obligation debt issues with maturities between four and
six years. These bonds are rated A or better and represent a variety of coupon
ranges. Index figures are total returns calculated for one, three, and twelve
month periods as well as year-to-date. Total returns are also calculated as of
the index inception, December 31, 1979.

- - LEHMAN BROTHERS TEN-YEAR STATE GENERAL OBLIGATION BONDS is an index comprised
of the same issues noted above except that the maturities range between nine
and eleven years. Index figures are total returns calculated for the same
periods as listed above.

Advertisements and other sales literature for the Funds may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Funds based
on monthly/quarterly reinvestment of dividends over a specified period of time.

From time to time, the Fund may advertise its performance, using charts, graphs,
and descriptions, compared to federally insured bank products including
certificates of deposit and time deposits and to money market funds using the
Lipper Analytical Services, Inc. money market instruments average.

Advertisements may quote performance information which does not reflect the
effect of the sales load.

FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

The financial statements for the Arrow Equity Portfolio, the Arrow Fixed Income
Portfolio, and the Arrow Municipal Income Portfolio for the fiscal year ended
September 30, 1994 are incorporated herein by reference to the Combined Annual
Report to Shareholders of the Arrow Funds dated September 30, 1994.

APPENDIX
- --------------------------------------------------------------------------------

STANDARD & POOR'S RATINGS GROUP CORPORATE AND MUNICIPAL BOND RATING DEFINITIONS

AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.

A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits 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.

NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy. S&P's may apply a plus (+)
or minus (-) to the above rating classifications to show relative standing
within the classifications.

MOODY'S INVESTORS SERVICE, INC. CORPORATE AND MUNICIPAL BOND RATING DEFINITIONS

AAA--Bonds which are rated Aaa 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 which are rated Aa 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 which are rated A 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 which are rated Baa 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.

NR--Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.

FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS

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 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.

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

STANDARD AND POOR'S RATINGS GROUP MUNICIPAL NOTE RATINGS

SP-1--Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
sign (+) designation.

SP-2--Satisfactory capacity to pay principal and interest.

MOODY'S INVESTORS SERVICE SHORT-TERM LOAN RATINGS

MIG1/VMIG1--This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad based access to the market for refinancing.

MIG2/VMIG2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.

FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS

F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated
"F-1+".

F-2--Good Credit Quality. Issues carrying 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-2" categories.

STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS

A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).

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".

MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS

P-1--Issuers (or supporting institutions) rated Prime-1 (P-1) have a superior
capacity for repayment of senior short-term promissory obligations. P-1
repayment capacity will often be evidenced by many of the following
characteristics:

- - Leading market positions in well-established industries.

- - High rates of return on funds employed.

- - Conservative capitalization structure with moderate reliance on debt and ample
asset protection.

- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

Well-established access to a range of financial markets and assured sources of
alternate liquidity.

P-2--Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
capacity for repayment of senior short-term debt 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 alternate liquidity is maintained.

AEP 042749101
AFIP 042749200
AMIP 042749309
2110904B (11/93)

ARROW GOVERNMENT MONEY MARKET PORTFOLIO

(A PORTFOLIO OF ARROW FUNDS)
STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information for the Arrow Government Money Market
Portfolio should be read with the prospectus for the Fund dated November 30,
1994. This Statement is not a prospectus itself. To receive a copy of the
prospectus, write or call the Fund.

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated November 30, 1994

FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------

Distributor

A subsidiary of FEDERATED INVESTORS

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------

INVESTMENT OBJECTIVE 1
- ---------------------------------------------------------------

Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Repurchase Agreements 1
Reverse Repurchase Agreements 1
Investment Limitations 2

ARROW FUNDS MANAGEMENT 3
- ---------------------------------------------------------------

Officers and Trustees 3
The Funds 5
Fund Ownership 6
Trustee Liability 6

INVESTMENT ADVISORY SERVICES 6
- ---------------------------------------------------------------

Adviser to the Fund 6
Advisory Fees 6

ADMINISTRATIVE SERVICES 6
- ---------------------------------------------------------------

CUSTODIAN 7
- ---------------------------------------------------------------

SHAREHOLDER SERVICING ARRANGEMENTS 7
- ---------------------------------------------------------------

BROKERAGE TRANSACTIONS 7
- ---------------------------------------------------------------

PURCHASING SHARES 7
- ---------------------------------------------------------------

Conversion to Federal Funds 7

DETERMINING NET ASSET VALUE 8
- ---------------------------------------------------------------

Use of the Amortized Cost Method 8

REDEEMING SHARES 8
- ---------------------------------------------------------------

Redemption in Kind 9

TAX STATUS 9
- ---------------------------------------------------------------

The Fund's Tax Status 9
Shareholders' Tax Status 9

YIELD 9
- ---------------------------------------------------------------

EFFECTIVE YIELD 9
- ---------------------------------------------------------------

PERFORMANCE COMPARISONS 10
- ---------------------------------------------------------------

GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------

Arrow Government Money Market Portfolio (the "Fund") is a portfolio in Arrow
Funds (the "Trust"), which was established as a Massachusetts business trust
under a Declaration of Trust dated July 1, 1992, under the name Mark Twain
Funds. Effective October 1, 1994, the Trust changed its name to Arrow Funds and
the Fund changed its name to Arrow Government Money Market Portfolio.

INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------

The Fund's investment objective is current income consistent with stability of
principal and liquidity. The investment objective cannot be changed without
approval of shareholders.

TYPES OF INVESTMENTS

The Fund invests primarily in short-term U.S. government securities.

VARIABLE RATE U.S. GOVERNMENT SECURITIES

Some of the short-term U.S. government securities the Fund may purchase
carry variable interest rates. These securities have a rate of interest
subject to adjustment at least annually. This adjusted interest rate is
ordinarily tied to some objective standard, such as the 91-day U.S.
Treasury bill rate.

Variable interest rates will reduce the changes in the market value of
such securities from their original purchase prices. Accordingly, the
potential for capital appreciation or capital depreciation should not be
greater than the potential for capital appreciation or capital
depreciation of fixed interest rate U.S. government securities having
maturities equal to the interest rate adjustment dates of the variable
rate U.S. government securities.

The Fund may purchase variable rate U.S. government securities upon the
determination by the Board of Trustees ("Trustees") that the interest
rate as adjusted will cause the instrument to have a current market value
that approximates its par value on the adjustment date.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund.

No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and maintained until the transaction has been
settled. The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20% of
the total value of its assets.

REPURCHASE AGREEMENTS

The Fund or its custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Trustees.

REVERSE REPURCHASE AGREEMENTS

The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future it will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.

When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction is settled.

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

INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN

The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of transactions.

ISSUING SENIOR SECURITIES AND BORROWING MONEY

The Fund will not issue senior securities, except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amounts
borrowed. The Fund will not borrow or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to, for example, meet redemption requests
when the liquidation of portfolio securities is deemed to be inconvenient
or disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.

PLEDGING ASSETS

The Fund will not mortgage, pledge or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
10% of the value of total assets at the time of the borrowing.

LENDING CASH OR SECURITIES

The Fund will not lend any of its assets except that it may purchase or
hold U.S. government securities, including repurchase agreements,
permitted by its investment objective and policies.

UNDERWRITING

The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and limitations.

INVESTING IN REAL ESTATE

The Fund will not buy or sell real estate, including limited partnership
interests in real estate, although it may invest in securities of
companies whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or interests in real
estate.

INVESTING IN RESTRICTED SECURITIES

To comply with requirements of a particular state, the Fund will limit
its investment in restricted securities to 5% of the value of its total
assets in securities subject to restrictions on resale under the Security
Act of 1933. The Fund does not intend to invest in any restricted
securities in the next fiscal year.

INVESTING IN COMMODITIES

The Fund will not purchase or sell commodities.

CONCENTRATION OF INVESTMENTS

The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry.

However, the Fund may at times invest 25% or more of the value of its
total assets in cash or cash items (not including certificates of
deposit), securities issued or guaranteed by the U.S. government, its
agencies, or instrumentalities, or repurchase agreements secured by such
instruments.

The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.

INVESTING IN ILLIQUID SECURITIES

The Fund will not invest more than 10% of the value of its net assets in
securities which are illiquid, including certain restricted securities.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any one
investment company, and will not invest more than 10% of its total assets
in investment companies in

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

general. The Fund will limit its investments in the securities of other
investment companies to those of money market funds having investment
objectives and policies similar to its own. The Fund will purchase
securities of closed-end investment companies only in open market
transactions involving only customary broker's commissions. However,
these limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization or acquisition of assets. It should
be noted that investment companies incur certain expenses such as
management fees, and, therefore any investment by the Fund in shares of
another investment company would be subject to such duplicate expenses.

The Fund does not expect to borrow money in excess of 5% of the value of its net
assets during the coming fiscal year.

For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."

ARROW FUNDS MANAGEMENT
- --------------------------------------------------------------------------------

OFFICERS AND TRUSTEES

Officers and Trustees are listed with their addresses, present positions with
Federated Government Trust, and principal occupations.
- --------------------------------------------------------------------------------

John F. Donahue+*
Federated Investors Tower
Pittsburgh, PA

Chairman and Trustee

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL

Trustee

President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in
Southwest Florida; Director, Trustee, or Managing General Partner of the Funds;
formerly, President, Naples Property Management, Inc.
- --------------------------------------------------------------------------------

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA

Trustee

James E. Dowd
571 Hayward Mill Road
Concord, MA

Trustee

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

Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA

Trustee

Edward L. Flaherty, Jr.+
5916 Penn Mall
Pittsburgh, PA

Trustee

Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA

Vice President and Treasurer and Trustee

Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------

Peter E. Madden
225 Franklin Street
Boston, MA

Trustee

Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA

Trustee

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA

Trustee

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA

Trustee

Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------

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

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA

Vice President

President and Trustee, Federated Investors; Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing General
Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue,
Chairman and Trustee of the Trust.
- --------------------------------------------------------------------------------

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA

Vice President

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA

Vice President and Secretary

Charles L. Davis, Jr.
Federated Investors Tower
Pittsburgh, PA

Vice President and Assistant Treasurer

* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.

+ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.

THE FUNDS

"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated
Intermediate Government Trust; Federated Master Trust; Federated Municipal
Trust; Federated Short-Intermediate Government Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated
U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund,
Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money
Market Trust; Liberty Term Trust, Inc. -- 1999; Liberty Utility Fund, Inc.;
Liquid Cash Trust; Managed Series Trust; The Medalist Funds: Money Market
Management, Inc.; Money Market Obligations Trust;

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

Money Market Trust; Municipal Securities Income Trust; New York Municipal Cash
Trust; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; Portage Funds;
RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Star Funds;
The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; and
World Investment Series, Inc.

FUND OWNERSHIP

Officers and Trustees own less than 1% of the Fund's outstanding Shares.

TRUSTEE LIABILITY

INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------

ADVISER TO THE FUND

The Fund's investment adviser is Mark Twain Bank (the "Adviser"). Mark Twain
Bank is a wholly-owned subsidiary of Mark Twain Bancshares, Inc.

The Adviser shall not be liable to the Trust, the Fund or any shareholder of the
Fund for any losses that may be sustained in the purchase, holding, or sale of
any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.

Because of internal controls maintained by Mark Twain Bank to restrict the flow
of non-public information, Fund investments are typically made without any
knowledge of Mark Twain Bank's or its affiliates' lending relationship with an
issuer.

ADVISORY FEES

For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.

For the fiscal year ended September 30, 1994, the Fund's Adviser earned advisory
fees of $788,681, none of which was waived. For the period from November 9, 1992
(start of business) to September 30, 1993, the Fund's Adviser earned advisory
fees of $613,973, of which $2,645 was voluntarily waived.

STATE EXPENSE LIMITATIONS

The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.

If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.

This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.

ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------

Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
prospectus. For the fiscal year ended September 30, 1994, the Fund incurred
costs for administrative services of $236,784, none of which was waived. For the
period from November 9, 1992 (start of business) to September 30, 1993, the Fund
incurred costs for administrative services of $183,509, none of which was
waived.

CUSTODIAN
- --------------------------------------------------------------------------------

Under the Custodian Agreement, Mark Twain Bank holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. For its services, the custodian receives an annual fee equal to
0.025 of 1% of the Fund's average daily net assets subject to a minimum fee of
$2,000 per month.

SHAREHOLDER SERVICING ARRANGEMENTS
- --------------------------------------------------------------------------------

BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Trustees.

The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:

- - advice as to the advisability of investing in securities;

- - security analysis and reports;

- - economic studies;

- - industry studies;

- - receipt of quotations for portfolio evaluations; and

- - similar services.

Research services provided by brokers may be used by the Adviser in advising the
Fund and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.

Although investment decisions for the Fund are made independently from those of
the other accounts managed by the Adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.

PURCHASING SHARES
- --------------------------------------------------------------------------------

Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange is open for business. The procedure for purchasing shares of
the Fund is explained in the prospectus under "Investing in the Fund."

CONVERSION TO FEDERAL FUNDS

It is the Fund's policy to be as fully invested as possible so that maximum
interest or dividends may be earned. To this end, all payments from shareholders
must be in federal funds or be converted into federal funds. Mark Twain Bank and
Federated Services Company act as the shareholder's agents in depositing checks
and converting them to federal funds.

DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------

The Fund attempts to stabilize the value of a share at $1.00. The days on which
the net asset value is calculated by the Fund are described in the prospectus.

USE OF THE AMORTIZED COST METHOD

The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.

The Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under that Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per share, taking into account
current market conditions and the Fund's investment objective.

Under the Rule, the Fund is permitted to purchase instruments which are subject
to demand features or standby commitments. As defined by the Rule, a demand
feature entitles the Fund to receive the principal amount of the instrument from
the issuer or a third party on (1) no more than 30 days' notice or (2) at
specified intervals not exceeding one year on no more than 30 days' notice. A
standby commitment entitles the Fund to achieve same day settlement and to
receive an exercise price equal to the amortized cost of the underlying
instrument plus accrued interest at the time of exercise.

MONITORING PROCEDURES

The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.

INVESTMENT RESTRICTIONS

The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risk and
that, if rated, meet minimum rating standards set forth in the Rule. If
the instruments are not rated, the Trustees must determine that they are
of comparable quality. Shares of investment companies purchased by the
Fund will meet these same criteria and will have investment policies
consistent with Rule 2a-7. The Rule also requires the Fund to maintain a
dollar weighted average portfolio maturity (not more than 90 days)
appropriate to the objective of maintaining a stable net asset value of
$1.00 per share. In addition, no instrument with a remaining maturity of
more than thirteen months can be purchased by the Fund.

Should the disposition of a portfolio security result in a dollar
weighted average portfolio maturity of more than 90 days, the Fund will
invest its available cash to reduce the average maturity to 90 days or
less as soon as possible.

The Fund may attempt to increase yield by trading portfolio securities to
take advantage of short-term market variations. This policy may, from
time to time, result in high portfolio turnover. Under the amortized cost
method of valuation, neither the amount of daily income nor the net asset
value is affected by any unrealized appreciation or depreciation of the
portfolio.

In periods of declining interest rates, the indicated daily yield on
Shares of the Fund computed by dividing the annualized daily income on
the Fund's portfolio by the net asset value computed as above may tend to
be higher than a similar computation made by using a method of valuation
based upon market prices and estimates.

In periods of rising interest rates, the indicated daily yield on Shares
of the Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market
prices and estimates.

REDEEMING SHARES
- --------------------------------------------------------------------------------

The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares."

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

REDEMPTION IN KIND

The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.

TAX STATUS
- --------------------------------------------------------------------------------

THE FUND'S TAX STATUS

The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:

- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;

- - derive less than 30% of its gross income from the sale of securities held less
than three months;

- - invest in securities within certain statutory limits; and

- - distribute to its shareholders at least 90% of its net income earned during
the year.

SHAREHOLDERS' TAX STATUS

Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.

CAPITAL GAINS

Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them once every 12 months.

YIELD
- --------------------------------------------------------------------------------

The Fund's yield for the seven-day period ended September 30, 1994 was 3.87%.
The Fund calculates the yield daily, based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:

- - determining the net change in the value of a hypothetical account with a
balance of one share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional shares
purchased with dividends earned from the original one share and all dividends
declared on the original and any purchased shares;

- - dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and

- - multiplying the base period return by (365/7).

To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
the performance will be reduced.

EFFECTIVE YIELD
- --------------------------------------------------------------------------------

The Fund's effective yield for the seven-day period ended September 30, 1994 was
3.94%. The Fund's effective yield is computed by compounding the unannualized
base period return by:

- - adding 1 to the base period return;

- - raising the sum to the 365/7th power; and

- - subtracting 1 from the result.

PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------

The performance of the Fund depends upon such variables as:

- - portfolio quality;

- - average portfolio maturity;

- - type of instruments in which the portfolio is invested;

- - changes in interest rates on money market instruments;

- - changes in the Fund's expenses; and

- - the relative amount of Fund cash flow.

Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:

- - LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time.
From time to time, the Fund will quote its Lipper ranking in the "U.S.
government funds" category in advertising and sales literature.

- - IBC/DONOGHUE'S MONEY FUND REPORT publishes annualized yields of hundreds of
money market funds on a weekly basis and through its Money Market Insight
publication reports monthly and 12-month-to-date investment results for the
same money funds.

Advertisements and other sales literature for the Fund may refer to total
return. Total return is the historic change in the value of an investment in the
Fund based on monthly reinvestment of dividends over a specified period of time.

042749408
2110905B (11/94)

ARROW GOVERNMENT MONEY MARKET PORTFOLIO

(A PORTFOLIO OF ARROW FUNDS)
PROSPECTUS

Arrow Funds (the "Trust") is an open-end management investment company (a mutual
fund). This prospectus offers investors interests in the diversified portfolio
known as Arrow Government Money Market Portfolio (the "Fund").

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF MARK
TWAIN BANK, ARE NOT GUARANTEED BY MARK TWAIN BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE; THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.

This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference. The Fund has also
filed a Statement of Additional Information dated November 30, 1994 with the
Securities and Exchange Commission.

The information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information free of charge, obtain other information, or
make inquiries about the Fund by writing or calling the Fund.

Prospectus dated November 30, 1994

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------

GENERAL INFORMATION 3
- ------------------------------------------------------

INVESTMENT INFORMATION 3
- ------------------------------------------------------

Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Repurchase Agreements 4
When-Issued and Delayed
Delivery Transactions 4
Investing in Securities of Other
Investment Companies 4
Investment Limitations 4
Regulatory Compliance 5

ARROW FUNDS INFORMATION 5
- ------------------------------------------------------

Management of Arrow Funds 5
Board of Trustees 5
Investment Adviser 5
Advisory Fees 5
Adviser's Background 5
Distribution of Fund Shares 6
Shareholder Servicing Arrangements 6

ADMINISTRATION OF THE FUND 6
- ------------------------------------------------------
Administrative Services 6
Custodian 6
Transfer Agent, Dividend Disbursing
Agent and Portfolio Recordkeeping 6
Legal Counsel 6
Independent Auditors 6
Expenses of the Fund 6

NET ASSET VALUE 7
- ------------------------------------------------------

INVESTING IN THE FUND 7
- ------------------------------------------------------

Minimum Investment Required 7
What Shares Cost 7
Share Purchases 7
Through Mark Twain 7
Systematic Investment Plan 8
Certificates and Confirmations 8
Dividends 8
Capital Gains 8

EXCHANGE PRIVILEGE 9
- ------------------------------------------------------

REDEEMING SHARES 9
- ------------------------------------------------------

Through Mark Twain 9
By Telephone 9
By Mail 10
Receiving Payment 11
Checkwriting 11
Systematic Withdrawal Program 11
Accounts with Low Balances 11

SHAREHOLDER INFORMATION 11
- ------------------------------------------------------

Voting Rights 11
Massachusetts Partnership Law 12

EFFECT OF BANKING LAWS 12
- ------------------------------------------------------

TAX INFORMATION 13
- ------------------------------------------------------

Federal Income Tax 13

PERFORMANCE INFORMATION 13
- ------------------------------------------------------

FINANCIAL STATEMENTS 14
- ------------------------------------------------------

INDEPENDENT AUDITORS' REPORT 22
- ------------------------------------------------------

ADDRESSES 23
- ------------------------------------------------------

SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)........................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable)........................................... None
Exchange Fee.................................................................... None

ANNUAL FUND OPERATING EXPENSES*
(As a percentage of average net assets)
Management Fee ................................................................ 0.50%
12b-1 Fees...................................................................... None
Total Other Expenses(1) ........................................................ 0.30%
Total Fund Operating Expenses............................................... 0.80%
</TABLE>

(1) The maximum administrative fee is the greater of $50,000, or the charges
based upon a sliding fee scale ranging from 0.075% to 0.15% of the fund's
average daily net assets. Total other expenses include a fixed fee plus a
charge based on assets and accounts for transfer agent and dividend
disbursing agent and portfolio accounting services.

* EXPENSES IN THIS TABLE ARE BASED ON EXPENSES INCURRED DURING THE FISCAL YEAR
ENDED SEPTEMBER 30, 1994. DURING THE COURSE OF THIS PERIOD, EXPENSES MAY HAVE
BEEN MORE OR LESS THAN THE AMOUNT SHOWN.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "THE ARROW FUNDS INFORMATION" AND "INVESTING IN THE FUND."
WIRE-TRANSFERRED REDEMPTIONS MAY BE SUBJECT TO AN ADDITIONAL FEE.

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end
of each time period. The Fund charges no redemption fees... $8 $26 $44 $ 99
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON THE FUND'S FISCAL YEAR ENDING SEPTEMBER 30, 1994.

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
(FORMERLY, MARK TWAIN GOVERNMENT MONEY MARKET PORTFOLIO)

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Independent Auditors' Report on page 22.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------
1994 1993*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.03 0.02
- ---------------------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.02)
- ---------------------------------------------------------------------- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00
- ----------------------------------------------------------------------
TOTAL RETURN** 2.90% 1.86%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.80% 0.73%(a)
- ----------------------------------------------------------------------
Net investment income 2.86% 2.40%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $154,170 $151,311
- ----------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from December 21, 1992 (date of initial
public investment) to September 30, 1993.

** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.

(a) Computed on an annualized basis.

(See Notes which are an integral part of the Financial Statements)

GENERAL INFORMATION
- --------------------------------------------------------------------------------

Arrow Funds was established as a Massachusetts business trust under a
Declaration of Trust dated July 1, 1992.

The Declaration of Trust permits Arrow Funds to offer separate series of shares
of beneficial interest representing interests in separate portfolios of
securities. The shares in any one portfolio may be offered in separate classes.
Prior to August 25, 1994, the Fund was offered in both a Trust Shares class and
an Investment Shares class. As of August 25, 1994, the Investment Shares of the
Fund were no longer offered. This prospectus relates only to the Arrow
Government Money Market Portfolio. In addition, the Trust offers three other
investment portfolios, Arrow Equity Portfolio, Arrow Fixed Income Portfolio and
Arrow Municipal Income Portfolio.

The Fund is designed as a convenient means of accumulating an interest in a
professionally managed portfolio limited to short-term U.S. government
securities. A minimum initial investment of $1,000 is required. Subsequent
investments may be made in any amounts.

The Fund attempts to stabilize the value of a share at $1.00. Shares are
currently sold and redeemed at that price.

INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The investment objective of the Fund is current income consistent with stability
of principal and liquidity. The Fund pursues this investment objective by
investing in a portfolio of short-term U.S. government securities. The average
maturity of the U.S. government securities in the Fund's portfolio, computed on
a dollar weighted basis, will be 90 days or less. While there is no assurance
that the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus. The investment
objective cannot be changed without approval of shareholders. Unless indicated
otherwise, the investment policies of the Fund may be changed by the Trustees
without the approval of shareholders. Shareholders will be notified before any
material change in these policies becomes effective.

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS. The U.S. government securities in which the Fund invests
are either issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities include, but are not limited to:

- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and

- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the Federal Home Loan Bank, Federal Farm
Credit Bank, and Student Loan Marketing Association.

support to other agencies or instrumentalities, since it is not obligated to do
so. These instrumentalities are supported by:

- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;

- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or

- the credit of the agency or instrumentality.

REPURCHASE AGREEMENTS. The U.S. government securities in which the Fund
invests may be purchased pursuant to repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at
a mutually agreed upon time and price. To the extent that the original
seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
value of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of these
securities on the settlement date.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will only
invest in other investment companies that are money market funds having
investment objectives and policies similar to its own, and primarily for the
purpose of investing short-term cash which has not yet been invested in other
portfolio instruments. The adviser will waive its investment advisory fee on
assets invested in securities of open-end investment companies.

INVESTMENT LIMITATIONS

The Fund will not borrow money or pledge securities except, under certain
circumstances, the Fund may borrow up to one-third of the value of its total
assets and pledge up to 10% of the value of those assets to secure such
borrowings.

The above investment limitation cannot be changed without shareholder approval.

The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.

The Fund will not invest more than 10% of the value of its net assets in
illiquid securities, including certain restricted securities.

REGULATORY COMPLIANCE

The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in this
prospectus and its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940, as amended. In particular, the Fund
will comply with the various requirements of Rule 2a-7, which regulates money
market mutual funds. The Fund will determine the effective maturity of its
investments according to Rule 2a-7. The Fund may change these operational
policies to reflect changes in the laws and regulations without approval of its
shareholders.

ARROW FUNDS INFORMATION
- --------------------------------------------------------------------------------

MANAGEMENT OF ARROW FUNDS

BOARD OF TRUSTEES. The Board of Trustees is responsible for managing the
business affairs of the Trust and for exercising all of the powers of the Trust
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.

INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Mark Twain Bank, the Fund's
adviser (the "Adviser"), subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the assets of the Fund.

ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to 0.50 of 1% of the Fund's average daily net assets. The investment
advisory contract provides for the voluntary waiver of expenses by the
Adviser from time to time. The Adviser has undertaken to waive up to the
amount of the advisory fee, for operating expenses, in excess of limitations
established by certain states. The Adviser may voluntarily choose to waive a
portion of its fees or reimburse the Fund for certain other expenses, but
reserves the right to terminate such waiver or reimbursement at any time at
its sole discretion.

ADVISER'S BACKGROUND. Mark Twain Bank, a Missouri state chartered bank, is a
wholly-owned subsidiary of Mark Twain Bancshares, Inc., a bank holding
company organized under the laws of the state of Missouri. Mark Twain Bank
is a commercial bank offering a wide range of banking services to its
customers. As of September 30, 1994, Mark Twain Bank managed assets in
excess of $1.3 billion on a discretionary basis and provided custody
services for additional assets in excess of $1.4 billion. Mark Twain Bank
has advised the Trust since 1992. In addition to the Mark Twain Funds, the
Trust Division of Mark Twain Bank manages two commingled funds with total
assets of over $18 million. As part of their regular banking operations,
Mark Twain Bank may make loans to public companies. Thus, it may be
possible, from time to time, for a Fund to hold or acquire the securities of
issuers which are also lending clients of Mark Twain Bank. The lending
relationship will not be a factor in the selection of securities.

DISTRIBUTION OF FUND SHARES

Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.

SHAREHOLDER SERVICING ARRANGEMENTS. The distributor may pay administrators a fee
for providing distribution or administrative services. This fee, if paid, will
be reimbursed by the Adviser and not the Fund.

ADMINISTRATION OF THE FUND
- --------------------------------------------------------------------------------

ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate as follows:

<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- --------------------------------------------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse or waive a
portion of its fee.

CUSTODIAN. Mark Twain Bank, St. Louis, Missouri, is custodian for the securities
and cash of the Fund.

TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO RECORDKEEPING. Federated
Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated Investors,
is transfer agent for the shares of the Fund, and dividend disbursing agent for
the Fund. Federated Services Company also provides certain accounting and
recordkeeping services with respect to the portfolio investments of the Fund.

LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro and Morin, L.L.P., Washington,
D.C.

INDEPENDENT AUDITORS. The independent auditors for the Fund are KPMG Peat
Marwick LLP, Pittsburgh, Pennsylvania.

EXPENSES OF THE FUND

The Fund pays all of its own expenses and its allocable portion of Trust
expenses.

The expenses for the Fund include, but are not limited to, the cost of:
organizing the Trust and continuing its existence; Trustees' fees; investment
advisory and administrative services; printing prospectuses and other Fund
documents for shareholders; registering the Trust, the Fund and shares of the
Fund; taxes and commissions; issuing, purchasing, repurchasing, and redeeming
shares; fees for

custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing, mailing, auditing, accounting and legal
expenses; reports to shareholders and governmental agencies; meetings of
Trustees and shareholders and proxy solicitations therefor; insurance premiums;
association membership dues; and such non-recurring and extraordinary items as
may arise. It should be noted that investment companies incur certain expenses
such as management fees, and, therefore, any investment by the Fund in shares of
another investment company would be subject to such duplicate expenses. To the
extent that the Fund invests in the securities of other investment companies,
the Adviser will waive its advisory fee on assets invested in open-end
management companies.

NET ASSET VALUE
- --------------------------------------------------------------------------------

The Fund attempts to stabilize the net asset value of its shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net asset
value per share is determined by subtracting total liabilities from total assets
and dividing the remainder by the number of shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.

INVESTING IN THE FUND
- --------------------------------------------------------------------------------

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in the Fund by an investor is $1,000. Subsequent
investments may be made in any amounts. An institutional investor's minimum
investment will be calculated by combining all accounts it maintains with the
Fund.

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.

The net asset value is determined at 12:00 noon, 3:00 p.m. and 4:00 p.m.
(Eastern time), Monday through Friday, except on: (i) days on which there are
not sufficient changes in the value of the Fund's portfolio securities that its
net asset value might be materially affected; (ii) days during which no shares
are tendered for redemption and no orders to purchase shares are received; or
(iii) the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business. A trust customer may purchase shares
through Mark Twain Bank Trust Division. Retail customers may purchase shares
through Mark Twain Brokerage Services, Inc. In connection with the sale of
shares, the distributor may from time to time offer certain items of nominal
value to any shareholder or investor. The Fund reserves the right to reject any
purchase request.

THROUGH MARK TWAIN. To place an order to purchase shares, a trust customer may
contact the Mark Twain Bank Trust Division by telephone at 314-889-0715.
Customers of Mark Twain Brokerage

Services, Inc. should contact their individual Mark Twain broker. Other
customers should telephone Mark Twain Brokerage Services, Inc. at
1-800-866-6040. Texas residents may telephone Federated Services Company at
1-800-618-8573.

Purchase orders must be received by 11:00 a.m. (St. Louis time) in order to be
credited on the same day. Payment is required on the same business day in order
to earn dividends for that day. Payment may be made by either check or federal
funds or by debiting a customer's account at Mark Twain Bank. Purchases by check
are considered received after payment by check is converted into federal funds
and received by Mark Twain Bank. When payment is made with federal funds, the
order is considered received when federal funds are received by Mark Twain Bank.

SYSTEMATIC INVESTMENT PLAN

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund in writing.

Monthly confirmations are sent to report transactions such as purchases and
redemptions as well as dividends paid during the month.

DIVIDENDS

Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional shares on payment dates unless cash payments are requested by writing
to the Fund or Mark Twain, as appropriate. Share purchase settlements received
by the Fund before 2:00 p.m. (St. Louis time) earn dividends that day.

CAPITAL GAINS

Capital gains, if any, could result in an increase in dividends. Capital losses
could result in a decrease in dividends. If, for some extraordinary reason, the
Fund realizes net long-term capital gains, it will distribute them at least once
every 12 months.

EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------

A shareholder may exchange shares of the Fund for shares of any of the other
funds in the Trust by calling or sending a written request to Mark Twain.

Orders to exchange shares of one fund for shares of any of the other funds will
be executed by redeeming the shares owned at net asset value and purchasing
shares of any of the other funds at the net asset value determined after the
exchange request is received, plus any applicable sales charge. Orders for
exchanges received by the Fund prior to 3:00 p.m. (St. Louis time) on any day
that the Fund is open for business will be executed as of the close of business
that day. Orders for exchanges received after 3:00 p.m. (St. Louis time) on any
business day will be executed at the close of the next business day. Telephone
exchange instructions may be recorded.

When exchanging into and out of shares of the funds in the Trust, shareholders
who have paid a sales load once upon purchasing shares of any fund, including
those shares obtained through the reinvestment of dividends, will not have to
pay a sales load again on an exchange.

An excessive number of exchanges may be disadvantageous to the Trust. Therefore
the Trust, in addition to its right to reject any exchange, reserves the right
to modify or terminate the exchange privilege of any shareholder who makes more
than six exchanges of shares of the funds in a year, or three in a calendar
quarter. Shareholders would be notified prior to any modification or
termination.

An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial investment requirement
of the fund being acquired. An exchange constitutes a sale for federal income
tax purposes.

The exchange privilege is only available in states where shares of the fund
being acquired may legally be sold. Before the exchange, a shareholder must
receive a prospectus of the fund for which the exchange is being made.

If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.

REDEEMING SHARES
- --------------------------------------------------------------------------------

The Fund redeems shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Telephone or written requests for redemption
must be received in proper form as described below and can be made through Mark
Twain by its respective customers or directly through the Fund by all other
investors.

THROUGH MARK TWAIN

BY TELEPHONE. A shareholder who is a customer of the Mark Twain Bank Trust
Division may telephone their Mark Twain Bank Trust Officer. Customers of Mark
Twain Brokerage Services, Inc.

should contact their individual Mark Twain broker. Other shareholders may
telephone Mark Twain Brokerage Services, Inc. at 1-800-866-6040. Telephone
redemption instructions may be recorded.

For calls received before 11:00 a.m. (St. Louis time), proceeds will normally be
wired the same day to the shareholder's account at Mark Twain Bank or a check
will be sent to the address of record. Those Shares will not be entitled to a
dividend declared on the day the redemption request was received. In no event
will proceeds be wired or a check sent more than seven days after a proper
request for redemption has been received. An authorization form permitting the
Fund to accept telephone requests must first be completed. Authorization forms
and information on this service are available from Mark Twain Bank.

If at any time, the Fund shall determine it necessary to terminate or modify
this method of redemption, shareholders shall be promptly notified.

If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.

BY MAIL. A shareholder who is a customer of Mark Twain Brokerage Services, Inc.,
may redeem shares by sending a written request to:

Mark Twain Brokerage Services, Inc.
Attn: Arrow Funds
1630 South Lindebergh
St. Louis, MO 63131

Shareholders requesting a redemption of $50,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to the shareholder of record must have signatures
on written redemption requests guaranteed by:

- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");

- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;

- a savings and loan association or a savings bank whose deposits are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC; or

- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.

The Fund does not accept signatures guaranteed by a notary public.

The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.

RECEIVING PAYMENT. Normally, a check for the proceeds is mailed to the
shareholder within one business day, but in no event more than seven days, after
receipt of a proper written redemption request.

CHECKWRITING. At the shareholder's request, a checking account may be
established for redeeming shares. For information on the availability of
checkwriting and related matters, contact Mark Twain Brokerage Services, Inc.

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments, the
amount of dividends paid and capital gains distributions with respect to Fund
shares, and the fluctuation of the net asset value of Fund shares redeemed under
this program, redemptions may reduce, and eventually deplete, the shareholder's
investment in the Fund. For this reason, payments under this program should not
be considered as yield or income on the shareholder's investment in the Fund. To
be eligible to participate in this program, a shareholder must have an account
value of at least $10,000. A shareholder may apply for participation in this
program through Mark Twain Brokerage Services, Inc. Due to the fact that shares
are sold with a sales charge, it is not advisable for shareholders to be
purchasing shares while participating in this program.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if, due to
shareholder redemptions, the account balance falls below the required minimum
value of $1,000. Before redeeming shares to close an account, the Fund will
notify the shareholder in writing and allow the shareholder 30 days to purchase
additional shares to meet the minimum requirement.

SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each Fund in the
Trust have equal voting rights, except that in matters affecting only a
particular Fund, only shares of that Fund are entitled to vote. As a
Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances. As of November 14, 1994, the Trust Division of Mark
Twain Bank, acting in various capacities for numerous accounts, was the owner of
record of 157,755,984 shares (100%) of the Fund, and therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders.

Trustees may be removed by a two-thirds vote of the number of Trustees prior to
such removal or by shareholders at a special meeting. The Trustees shall call a
special meeting of the shareholders upon the written request of shareholders
owning at least 10% of the Trust's outstanding shares of all series entitled to
vote.

MASSACHUSETTS PARTNERSHIP LAW

EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------

The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
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 their customers. The Fund's Adviser, Mark Twain Bank, is
subject to such banking laws and regulations.

Mark Twain Bank believes that it may perform the investment advisory services
for any Fund contemplated by its advisory agreement with the Trust without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent
Mark Twain Bank from continuing to perform all or a part of the above services
for its customers and/or a Fund. In such event, changes in the operation of a
Fund may occur, including the possible alteration or termination of any
automatic or other Fund share investment or redemption services then being
provided by Mark Twain Bank, and the Trustees would consider alternative
investment advisers and other means of continuing available investment services.
It is not expected that a Fund's shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to Mark Twain Bank is
found) as a result of any of these occurrences.

TAX INFORMATION
- --------------------------------------------------------------------------------

FEDERAL INCOME TAX

The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.

The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Fund will not be combined for tax purposes with those realized by any of the
other funds of the Trust.

Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time, the Fund advertises its yield and effective yield.

The yield of the Fund represents the annualized rate of income earned on an
investment in the Fund over a seven-day period. It is the annualized dividends
earned during the period on the investment, shown as a percentage of the
investment. The effective yield is calculated similarly to the yield, but, when
annualized, the income earned by an investment in the Fund is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.

Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specific period of time, in the value of an
investment in the Fund after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.

From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
(FORMERLY, MARK TWAIN GOVERNMENT MONEY MARKET PORTFOLIO)

PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
- ------------ ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
SHORT-TERM OBLIGATIONS--53.0%
- ------------------------------------------------------------------------------------
* FEDERAL FARM CREDIT BANK--9.7%
----------------------------------------------------------------
$ 15,000,000 4.45%-4.83%, 10/3/94-12/1/94 $ 15,000,000
----------------------------------------------------------------
* FEDERAL HOME LOAN BANK, DISCOUNT NOTES--6.5%
----------------------------------------------------------------
10,000,000 4.51%-4.74%, 10/20/94-12/7/94 9,943,990
----------------------------------------------------------------
* FEDERAL HOME LOAN MORTGAGE CORPORATION, DISCOUNT NOTES--11.0%
----------------------------------------------------------------
17,000,000 4.51%-4.74%, 10/11/94-11/21/94 16,923,256
----------------------------------------------------------------
* FEDERAL NATIONAL MORTGAGE ASSOCIATION, DISCOUNT NOTES--4.5%
----------------------------------------------------------------
7,000,000 4.81%-4.84%, 12/12/94-12/19/94 6,928,656
----------------------------------------------------------------
U.S. TREASURY BILLS--21.3%
----------------------------------------------------------------
33,000,000 10/13/94-12/1/94 32,861,909
---------------------------------------------------------------- ------------
TOTAL SHORT-TERM OBLIGATIONS 81,657,811
---------------------------------------------------------------- ------------
MUTUAL FUND SHARES--0.0%
- ------------------------------------------------------------------------------------
50,017 SEI Government Portfolio (at net asset value) 50,017
---------------------------------------------------------------- ------------
**REPURCHASE AGREEMENTS--47.2%
- ------------------------------------------------------------------------------------
36,800,000 Morgan Stanley & Co., Inc., 4.83%, dated 9/30/94, due 10/3/94 36,800,000
----------------------------------------------------------------
36,000,000 Sanwa-BGK Securities, Co., 4.60%, dated 9/30/94, due 10/3/94 36,000,000
---------------------------------------------------------------- ------------
TOTAL REPURCHASE AGREEMENTS 72,800,000
---------------------------------------------------------------- ------------
TOTAL INVESTMENTS, AT AMORTIZED COST AND VALUE $154,507,828+
---------------------------------------------------------------- ------------
</TABLE>

* Each issue shows the rate of discount at the time of purchase.

** The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.

+ Also represents cost for federal tax purposes.

Note: The categories of investments are shown as a percentage of net assets
($154,170,182) at September 30, 1994.

(See Notes which are an integral part of the Financial Statements)

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
(FORMERLY, MARK TWAIN GOVERNMENT MONEY MARKET PORTFOLIO)

STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in repurchase agreements $72,800,000
- ------------------------------------------------------------------
Investments in other securities 81,707,828
- ------------------------------------------------------------------ -----------
Total investments, at amortized cost and value $154,507,828
- --------------------------------------------------------------------------------
Cash 101
- --------------------------------------------------------------------------------
Interest receivable 124,834
- --------------------------------------------------------------------------------
Deferred expenses 37,156
- -------------------------------------------------------------------------------- ------------
Total assets 154,669,919
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Dividends payable 486,531
- ------------------------------------------------------------------
Accrued expenses 13,206
- ------------------------------------------------------------------ -----------
Total liabilities 499,737
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 154,170,182 shares of beneficial interest outstanding $154,170,182
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price, and Redemption Proceeds Per Share:
- --------------------------------------------------------------------------------
($154,170,182 / 154,170,182 shares of beneficial interest outstanding) $1.00
- -------------------------------------------------------------------------------- ------------
</TABLE>

(See Notes which are an integral part of the Financial Statements)

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
(FORMERLY, MARK TWAIN GOVERNMENT MONEY MARKET PORTFOLIO)

STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------
Interest income $5,788,418
- ---------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------
Investment advisory fee $788,681
- ----------------------------------------------------------------------
Trustees' fees 2,886
- ----------------------------------------------------------------------
Administrative personnel and services fees 236,784
- ----------------------------------------------------------------------
Custodian fees 39,463
- ----------------------------------------------------------------------
Portfolio accounting fees 59,452
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 55,248
- ----------------------------------------------------------------------
Fund share registration costs 38,232
- ----------------------------------------------------------------------
Auditing fees 12,013
- ----------------------------------------------------------------------
Legal fees 2,301
- ----------------------------------------------------------------------
Printing and postage 11,080
- ----------------------------------------------------------------------
Insurance premiums 8,174
- ----------------------------------------------------------------------
Miscellaneous 3,338
- ---------------------------------------------------------------------- --------
Total expenses 1,257,652
- ---------------------------------------------------------------------- ----------
Net investment income $4,530,766
- --------------------------------------------------------------------------------- ----------
</TABLE>

(See Notes which are integral part of the Financial Statements)

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
(FORMERLY, MARK TWAIN GOVERNMENT MONEY MARKET PORTFOLIO)

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1994 1993*
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------
Net investment income $ 4,530,766 $ 2,947,911
- --------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------
Dividends to shareholders from net investment income:
- ---------------------------------------------------------------
Trust shares (4,530,766) (2,947,815)
- ---------------------------------------------------------------
Investment shares 0 (96)
- --------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (4,530,766) (2,947,911)
- --------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ---------------------------------------------------------------
Proceeds from sale of shares 549,781,518 486,456,340
- ---------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 57 86
- ---------------------------------------------------------------
Cost of shares redeemed (546,931,468) (335,236,351)
- --------------------------------------------------------------- ------------- -------------
Change in net assets from Fund share transactions 2,850,107 151,220,075
- --------------------------------------------------------------- ------------- -------------
Change in net assets 2,850,107 151,220,075
- ---------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------
Beginning of period 151,320,075 100,000
- --------------------------------------------------------------- ------------- -------------
End of period $ 154,170,182 $ 151,320,075
- --------------------------------------------------------------- ------------- -------------
</TABLE>

* For the period from November 9, 1992 (start of business) to September 30,
1993.

(See Notes which are an integral part of the Financial Statements)

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
(FORMERLY, MARK TWAIN GOVERNMENT MONEY MARKET PORTFOLIO)

NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION

Arrow Funds (the "Trust"), is registered under the Investment Company Act of
1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists
of four, diversified portfolios. The financial statements included herein are
only those of Arrow Government Money Market Portfolio (the "Fund"). The
financial statements of the other portfolios are presented separately. The
assets of each portfolio are segregated and a shareholder's interest is limited
to the portfolio in which shares are held.

Effective October 1, 1994, the Fund changed its name to Arrow Government Money
Market Portfolio.

Previously, the Fund provided two classes of shares ("Trust Shares" and
"Investment Shares"). As of August 25, 1994, the "Investment Shares" were no
longer offered and the designation "Trust Shares" was rescinded for the
remaining class.

(2) SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.

<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--The Fund's use of the amortized cost method to value its portfolio
securities is in accordance with Rule 2a-7 under the Act.

B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System, or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's underlying collateral to ensure that the value of collateral at least equals
the principal amount of the repurchase agreement, including accrued interest.

The Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to the guidelines established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
</TABLE>

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
(FORMERLY, MARK TWAIN GOVERNMENT MONEY MARKET PORTFOLIO)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.

D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its taxable income. Accordingly, no provisions for federal tax are
necessary.

E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.

F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.

G. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
(FORMERLY, MARK TWAIN GOVERNMENT MONEY MARKET PORTFOLIO)
- --------------------------------------------------------------------------------

(3) SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. At September 30, 1994, capital paid-in aggregated $154,170,182.
Transactions in Fund shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
TRUST SHARES 1994 1993*
- ----------------------------------------------------------- -------------- --------------
<S> <C> <C>
Shares sold 549,781,518 486,443,490
- -----------------------------------------------------------
Shares issued to shareholders in payment of dividends
declared -- --
- -----------------------------------------------------------
Shares redeemed (546,922,476) (335,232,351)
- ----------------------------------------------------------- -------------- --------------
Net change resulting from Trust share transactions 2,859,042 151,211,139
- ----------------------------------------------------------- -------------- --------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
INVESTMENT SHARES 1994 1993**
- ----------------------------------------------------------- -------------- --------------
<S> <C> <C>
Shares sold -- 12,850
- -----------------------------------------------------------
Shares issued to shareholders in payment of dividends
declared 57 86
- -----------------------------------------------------------
Shares redeemed (8,992) (4,000)
- ----------------------------------------------------------- -------------- --------------
Net change resulting from Investment share transactions (8,935) 8,936
- ----------------------------------------------------------- -------------- --------------
Net change resulting from Fund share transactions 2,850,107 151,220,075
- ----------------------------------------------------------- -------------- --------------
</TABLE>

* For the period from December 21, 1992 (date of initial public investment) to
September 30, 1993.

** For the period from April 8, 1993 (date of initial public investment) to
September 30, 1993.

(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE--Mark Twain Bank, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.50 of 1% of the Fund's average daily net assets.

ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Trust for the period. FAS may
voluntarily choose to waive a portion of its fee.

DISTRIBUTION SERVICES FEE--The Fund adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund
compensated Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Investment Shares. The Plan provided that the Fund could incur

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
(FORMERLY, MARK TWAIN GOVERNMENT MONEY MARKET PORTFOLIO)
- --------------------------------------------------------------------------------

distribution expenses up to 0.40 of 1% of the average daily net assets of the
Investment Shares, annually, to compensate FSC.

TRANSFER AND DIVIDEND DISBURSING AGENT, ACCOUNTING AND CUSTODY FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.

FServ also maintains the Fund's accounting records. The fee is based on the
level of the Fund's average net assets for the period plus, out-of-pocket
expenses.

Mark Twain Bank is the Fund's custodian. The fee is based on the level of the
Fund's average net assets for the period plus, out-of-pocket expenses.

ORGANIZATIONAL EXPENSES--Organizational expenses of $34,683 were borne initially
by FAS. The Fund has agreed to reimburse FAS for the organizational expenses
during the five year period following November 24, 1992 date the Fund first
became effective. For the year ended September 30, 1994, the Fund paid $2,808,
pursuant to this agreement.

Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.

INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

The Board of Trustees and Shareholder of

ARROW FUNDS:

We have audited the statement of assets and liabilities, including the portfolio
of investments of the Arrow Government Money Market Portfolio (formerly, "Mark
Twain Government Money Market Portfolio"), a portfolio within Arrow Funds, as of
September 30, 1994, and the related statement of operations for the year then
ended, the statement of changes in net assets and the financial highlights,
which are presented on page 2 of this prospectus, for the year ended September
30, 1994 and period from December 9, 1992 (commencement of operations) to
September 30, 1993. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audit.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Investment securities held in custody are
confirmed to us by the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
Arrow Government Money Market Portfolio at September 30, 1994 and the results of
its operations for the year then ended, the changes in net assets and the
financial highlights for the year-ended September 30, 1994 and for the period
from December 9, 1992 to September 30, 1993, in conformity with generally
accepted accounting principles.

KPMG PEAT MARWICK LLP

Pittsburgh, Pennsylvania
November 11, 1994

ADDRESSES
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<TABLE>
<S> <C> <C>
Arrow Government Federated Investors Tower
Money Market Portfolio Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Mark Twain Bank 8820 Ladue Road
St. Louis, Missouri 63124
- ------------------------------------------------------------------------------------------------
Custodian
Mark Twain Bank 8820 Ladue Road
St. Louis, Missouri 63124
- ------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent
and Portfolio Recordkeeper
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick LLP One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>

ARROW GOVERNMENT
MONEY MARKET PORTFOLIO

Prospectus

A Diversified Portfolio of
the Arrow Funds, an Open-End,
Management Investment Company

NOVEMBER 30, 1994

Federated Securities Corp., Distributor.
042749309
2110905A (11/94)